Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, July 19, 1993 TAG: 9307170006
SECTION: BUSINESS PAGE: A8 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Medium
That's because most of them participate in so-called 457 deferred compensation plans designed to allow them to save for their own retirement pensions.
But those plans are less flexible and generally not as well publicized as the popular 401(k) pension plans used by private companies.
In both cases, the plans are named for the sections of the federal tax code that created them.
Locally, the Commonwealth of Virginia and the city of Roanoke are among those who offer their employees the option of participating in 457 plans.
So do many hospitals and most colleges and universities.
Andrew Hudick of Fee-Only Financial Planning Inc. of Roanoke said 457 and 401(k) plans are a lot alike.
Salary can be deferred into a Section 457 plan and is not currently taxed, he said. That feature makes investing in them worthwhile regardless of any problems.
Taxes are paid by the employee, or by his designated beneficiary, only when the money is drawn out of the fund during retirement.
During the working years, he said, the 457 plans works similarly to a 401(k) or profit-sharing plan.
Contributions are made from salary through payroll deductions.
People manage their own account investments as they would in a 401(k), and most sponsors offer a variety of investment choices.
Participants are eligible to invest up to one-third of their compensation but with an annual maximum contribution of $7,500.
Participants can begin making withdrawals without a penalty after the age of 59 1/2. People must begin withdrawals at the age of 70 1/2.
Hudick said the main difference between a Section 457 plan and other salary deferral plans comes into play when distributions are requested, most often at retirement.
The money received under a Section 457 plan cannot be transferred into an Individual Retirement Account, he explained.
In other words, there is no roll-over provision that people can use to protect the retirement money from taxes if they leave the job before retirement.
Nor can a retiree elect lump-sum distribution in order to qualify for special five or 10-year forward averaging that eases the tax impact, Hudick said. That right can provide significant tax advantages for many people with 401(k) money, especially those who are old enough to qualify for 10-year forward averaging.
In addition, Hudick said, a distribution from a 457 plan is not eligible for any death benefit exclusion.
"My experience with the Section 457 plans is that they are more restrictive than other salary deferral plans," Hudick said.
For planning purposes, he would use a 457 plan only after taking maximum advantage of other salary deferral methods.
"In many cases, both spouses have retirement plan salary deferral options," he pointed out, "and we would use a more flexible plan before using the 457."
Also, he said, many tax-exempt organizations in Virginia offer a choice between a 457 plan and a Section 403(b) plan. Virginia Western Community College is one example.
A 403(b) option is a tax-sheltered annuity plan for employees of government and nonprofit organizations.
"Since the 403(b) can be moved into an IRA, which offers more investment flexibility," he said, "we would take advantage of it first before looking to the 457 plan."
Yet the 403(b), like the 457, is not eligible for the forward averaging provision allowing favorable tax treatment at the time of the distribution.
Hudick, however, stressed the importance of using some type of tax-deferred compensation plan in order to save for retirement.
If the 457 plan is the only option at work, he said, people should participate for its other benefits.
Yet this is something not many people do.
Doris Peters, retirement plan administrator in the finance office of the city of Roanoke, said about 350 of the city's 2,000 employees contribute to its 457 plan.
That means about 17.5 to 18 percent of those eligible who contribute. Hudick had no comparable figures for 401(k) participation, but he said the city's record is not bad because so few workers plan for their retirement.
Those who leave the city can transfer the money only to another employer's 457 retirement plan, Peters said.
People who retire have 60 days to take out the money and pay taxes or to begin withdrawing.
If municipal retirees want to hold the money longer, Peters said, they can transfer to a new trustee - the International City Managers Association.
Although people can no longer contribute after retirement, she said, the money will earn interest while it is held. The association can keep the account until the mandatory withdrawal age.
by CNB