Because of Internal Revenue Code Section 457, your 457 plan contributions are on a before-tax basis, and your 457 plan values are not taxed until it is distributed.
If youíre like most participants, that means your money wonít be taxed before you retire. This can benefit you in several important ways.
A. Pre-Tax Dollars Go Farther
The math is pretty simple. Say you have $2,000 youíd like to set aside for retirement this year.
If youíre in the 28% federal income tax bracket and use a non-qualified plan, taxes take $560 right off the top. If youíre in the 33% bracket, the news is worse; the tax bill climbs to $660.
But, contribute $2,000 to your 457 Plan and no federal income tax is payable until money is distributed from your plan.
B. Over Time, Those Dollars Can Go A Lot Farther
Under a 457 Plan, the $560 that might otherwise be paid to the government as a tax can earn interest for you, instead.
In addition, if you make the same contribution next year, you will be be putting another $560 to work instead of paying it out in taxes up front.
Under current law, the interest this money earns is tax deferred, too. The power of before-tax savings, earning tax-deferred interest, compouding over many years, can make an enormous difference in the value of your retirement plan.
C. You May Be In A Lower Tax Bracket When The Taxes Come Due.
Everything has a catch and, a 457 Plan is no different. Distribution day is the day of reckoning with respect to deferred taxes. Surrender values or death benefits would be taxed as ordinary income at that time and Uncle Samís share may be significant.
While itís impossible to predict what the tax structure will be in the future, you may find yourself in a lower tax bracket, paying a lower rate, after you retire.
Regardless of the tax rate, the additional value that accumulates over time by virtue of deferring taxes may substantially offset the taxes due at distribution.
Income and growth on accumulated cash values has been held by the Tax Court to be generally taxable only upon withdrawal. (T.H. Cohen, 39 TC 1055 1963), acq. 1964-I CB 4 also, IRC 72). Consult your tax advisor or attorney on your specific situation.
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