One of a suite of individual retirement education modules created for Nationwide Financial, the Retirement Goals Education Module explains the difference between a traditional and a Roth 457 plan.
The module system gives retirement specialists the ability to create longer, fully customizable presentations by allowing them to mix, match and combine individual modules in the suite. This enables the sales force a greater flexibility in planning meetings and answering individual plan and participant needs.
2. Roth 457
2
*Contributions and earnings distributed from a Roth 457 account are not taxable if the distribution is made
after five consecutive tax years since the first Roth contribution was made to the Roth 457 account and the
distribution is made after age 591/2, or because of death, or disability.
3. Roth 457
3
Traditional
457 Plan
Roth
457
Roth
IRA
2013 contribution limit Combined $17,500 $5,500
Age 50+ catch-up limit Combined $5,500 $1,000
Contributions taxable in year contributed? No Yes Yes
Contributions taxable in year distributed? Yes No No
Earnings taxable in year distributed? Yes No* No*
Contribution amount determined by your income? No No Yes
*Contributions and earnings from a Roth are not taxable if the distribution is made after five consecutive tax
years since the first Roth contribution was made AND the distribution is made after age 591/2, or because of
death or disability, or a qualified first-time home purchase for Roth IRA.
Source: IRS Announces 2013 Pension Plan Limitations, IR-2012-77, Oct. 18, 2012
4. Roth 457
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Chart assumptions: This hypothetical illustration assumes an 8% annual rate of return over 20 years and a 25%
tax bracket at distribution. Investment return is not guaranteed and will vary depending upon the investments and
market experience.
Traditional
457 Plan
Roth 457 contributions
Employee A Employee B Employee C
Federal tax rate on contributions 0% 15% 35% 25%
Contribution amount $10,000 $10,000 $10,000 $10,000
Less taxes paid at contribution $0 $1,500 $3,500 $2,500
Net Contribution $10,000 $8,500 $6,500 $7,500
Value in 20 years $46,610 $39,618 $30,296 $34,957
Less taxes paid at distribution (25%) $11,652 $0 $0 $0
Net Distribution $34,957 $39,618 $30,296 $34,957
5. Roth 457
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Want to take
advantage
of potentially
tax-free
withdrawals
Are younger,
with many
working years
ahead of you
Are unable
to contribute
to a Roth IRA
Expect to be
in a higher
tax bracket
upon retirement
You’ve probably heard of Roth IRAs. You may have even set one up. As of fall 2010, there’s a new route you can choose: the Roth 457 option. It allows public sector employees participating in 457 plans to designate all or a portion of their contributions as Roth contributions. Here are the details…
There are now two ways to contribute to your 457 plan: traditional pre-tax contributions and new Roth after-tax contributions... Traditional 457 contributions use pre-tax money from your gross pay and offer tax-deferred growth. As the money in the account compounds, any earnings are reinvested in the account without taxes being assessed. However, when you withdraw the money in retirement, you will owe regular income tax on your contributions and any earnings. Roth 457 contributions use after-tax money from your take-home pay. And you have flexibility: you can designate some or all of your deferred comp contributions as after-tax Roth 457 contributions. These contributions will potentially earn interest and compound over time. And because you’ve already paid income taxes on the money you’ve contributed, you won’t owe taxes upon distribution – even on your earnings (as long as all contributions have been held in the Roth account for five consecutive years after the first Roth contribution is made AND the distribution is made after age 59½, or for death, or disability.
If you’re under age 50, you can designate up to $17,500 as a Roth 457 contribution (or designate a portion of your money as a traditional 457 contribution and some as a Roth 457 contribution). Then you can put another $5,500 into a Roth IRA, depending on your income.There are also two ways for older workers to make up for lost time:If you’re over age 50, you can “catch-up” by making a larger contribution each payday. This allows you to designate up to $23,000 as a Roth 457 contribution (or split it between traditional and Roth 457 contributions). Then you can put another $6,500 into a Roth IRA, depending on your income.ORIf you’re over age 50 and within three years of a planned retirement, you can make pre-retirement contributions that allow you to add up to an extra $35,000 in one year. You can’t use both the “age 50” contributions and the “pre-retirement” contributions in the same year.
This chart is intended to examine the tax impact of Roth contributions for employees in different tax brackets. For sake of this illustration, we've assumed a total contribution of $10,000 and a 25% income tax rate when the money is withdrawn in retirement. We've also assumed that each account grows at a steady 8% over a 20 year investment period.In the first column, we see that $10,000 contributed to a traditional 457 account would result in a payout of about $35,000 in retirement. To determine whether Roth contributions would be a better choice, we need to determine whether they would increase or decrease the total distribution in retirement.Employee A is currently in the 15% income tax bracket. If he chooses to make Roth contributions rather than traditional contributions, he will hypothetically end up with a larger payout in retirement. This is because he is pre-paying the taxes now at a lower rate.Employee B is currently in the 35% income tax bracket. If she chooses to make Roth contributions rather than traditional contributions, she will hypothetically end up with a smaller payout in retirement. She would therefore be better off making traditional contributions and deferring the income tax until retirement when she is in a lower tax bracket.Employee C is currently in the 25% income tax bracket (the same bracket he will be in at retirement). Hypothetically, he could choose either Roth or traditional contributions and end up with the same payout in retirement. Regardless of your current tax bracket, you may choose to diversify your tax obligation by splitting your money between Roth and traditional contributions. This would allow you to pay a portion of your income tax now and a portion of it later in retirement. Remember that, with either contribution type, any earnings in your account grow tax-deferred until they are withdrawn.
You may want to consider making Roth 457 contributions if you:• Expect to be in a higher tax bracket upon retirement• Want to take advantage of potentially tax-free withdrawals• Are younger, with many working years ahead of you• Are unable to contribute to a Roth IRAIt’s also a route to consider if you’re looking for an estate-planning tool that allows you to leave assets tax-free to your heirs.Remember, federal income tax laws are complex and subject to change. The information in this educational module was based on current interpretations of the law and is not guaranteed. Neither Nationwide nor its representatives give legal or tax advice. Please consult your attorney or tax advisor for answers to specific questions. Information provided by Retirement Specialists is for educational purposes only and is not intended as investment advice.