Roth IRA vs. 457

Both the Roth IRA and 457 are retirement accounts. However, they are not similar in the way they work. Therefore, you need to understand these differences if you consider either of them as a vehicle for saving for your retirement.

One of the ways in which a Roth IRA differs from a 457 plan is in whom gets access to the retirement plans.

A Roth IRA is usually available for most people who earn an income of some kind, provided they meet the requirements concerning the maximum income amounts. That includes those who are freelancers, self-employed or working for a salary. Typically, individuals who earn less than ​$140,000​ and couples filing jointly and earning ​$208,000​ or less can contribute to a Roth IRA account.

On the other hand, a 457 plan is not available to just anyone. The plan is limited to governmental employers and some qualified non-governmental employees. These include public school teachers, civil servants, public safety personnel and law enforcement officers.

While the 457(b) plan is available to all those that qualify, the 457(f) version is not. The latter is mainly available to highly compensated executives working for the government and qualifying non-governmental organizations.

The 457 and Roth IRA also vary in terms of how you can contribute to them.

You can only fund Roth IRAs with after-tax money, which will then be allowed to grow tax-free so long as the funds are left in them for at least ​five years​. As a result, it is a good investment vehicle for anyone who intends to leave the account as a form of inheritance because it reduces the taxes the beneficiaries would have paid otherwise.

In addition, the maximum contribution you can pay to a Roth IRA is limited. For 2021, you can contribute a maximum of ​$6,000​ and an additional ​$1,000​ if you are ​50 years​ or older.

On the other hand, typical 457 plans are usually funded by pre-tax income. So, they enable you to reduce your taxable income. However, the plans also offer a Roth option that after-tax monies can fund.

For 457(b) plans, you can contribute up to ​$19,500​ in annual elective deferrals. You may also be allowed to save an additional ​$6,500​ as a catch-up contribution if you are 50 years or older. But in the case of 457(f) plans, there are virtually no limits on how much you can save, and the employer is typically the one responsible for making the discretionary contributions. However, employees can invest their entire compensation in this account.

How you withdraw your monies will vary depending on whether you have the Roth IRA or 457 plan retirement account.

You can withdraw your contributions for the Roth IRA at any given time. And you will neither pay taxes nor the early withdrawal penalty. However, you must be ​59.5 years​ to withdraw the investment earnings penalty-free. And in both cases, you must have had the account for at least ​five years​.

It’s worth noting that Roth IRAs have no age limits as far as the required minimum distribution is concerned. But someone must withdraw the money upon the death of the account owner.

As for the 457 plan, you can make withdrawals penalty-free from the plan before reaching the age of ​59.5​ years. But you will have to pay taxes on the withdrawals. And from the age of​ 72​, you must take the required minimum distributions.

In the case of 457(f) plans, multiple taxes will be due upon withdrawal. And the taxation rate can be punitive.

It is possible to transfer funds across various retirement accounts. But there can be limitations.

Generally, it is only possible to do a rollover from one Roth IRA to another. However, you have a bit more flexibility concerning 457 plans. In the case of 457 plans, you can do rollovers to both traditional and Roth IRAs, another 457 plan, a 401(k), SEP IRA and a SIMPLE IRA after two years.

Whether a Roth IRA is better than a 457 plan depends on your financial needs now and during your retirement. If you anticipate having a much higher income at retirement or want to leave your retirement funds to your loved ones after death, a Roth IRA is the best option.

However, suppose you currently have a high taxable income, work for the government or qualifying non-governmental organizations and want to reduce your tax burden now. In that case, the 457 plan is probably the best option. And you may be able to reduce your retirement taxes by moving to a state with low or no income taxes. So, choose the account that works for you and save for retirement through it.