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WHAT IS A 457 PLAN?

A 457 plan is a retirement plan established for the benefit of state and local government employees or the employees of tax-exempt organizations. The contribution limits are as follows:

2002: $11,000

2003: $12,000

2004: $13,000

2005: $14,000

2006: $15,000

In 2007 and thereafter, the $15,000 limit will increase in $500 increments whenever the cumulative effects of inflation indicate such a rise is needed.

In addition to the normal contribution limits outlined above, starting in 2004 those over the age of 50 in a governmental 457 plan may make an additional "catch-up" contribution in the following amounts:

2002: $1,000

2003: $2,000

2004: $3,000

2005: $4,000

2006: $5,000

In 2007 and thereafter, the $5,000 "catch-up" limit will increase in $500 increments whenever the cumulative effects of inflation indicate such a rise is needed.

While governmental 457 plans have special catch-up provisions for those age 50 or older as noted above, they enjoy an additional contribution amount in the three years before retirement. The catch-up limit is  available in the three years prior to retirement, and can be as much as double the regular contribution limit, depending on how much you contributed in prior years. This means that in 2006, if you're planning retirement in 2009 or earlier, your maximum contribution to a governmental 457 plan could total $30,000. If you are eligible for both the age 50 catch-up and the three years before retirement catch-up, you can use whichever limit is greater, but not both.

Until withdrawn, 457 plan contributions and all earnings remain untaxed. The 457 plan assets of tax-exempt employers are subject to the claims of the employer's creditors, but those of plans sponsored by governmental entities are not. Plan distributions may occur at retirement; on separation from employment; as the result of an unforeseeable emergency; and at death. Distributions may be taken as a lump sum, in annual installments, or as an annuity, depending on the terms of the plan. In 2004 and later years, proceeds from a governmental 457 plan may be rolled over to an IRA or a new employer's qualified plan like a defined benefit or 401(k), 403(b) or 457 plan that accepts transfers from a previous employer's plan. On withdrawal from an IRA or from the new plan, the distribution will be subject to immediate taxation at ordinary income tax rates.

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