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jsnyder

What Are The Catch-up Provisions In A 457(b)?

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I recently read the 457(B) FAQs.

 

Under "What are the catch-up provisions in a governmental 457(b) plan?", the response below was given. Can a participant eligible for the "final three year" catch-up contribute $36,000 in 2003?

 

If you are age 50 or older in year 2003, you may contribute an additional $2,000 above the 2003 elective deferral limit of $12,000 (this catch-up is scheduled to increase at a rate of $1,000 per year through 2006). Employers are not required to offer this provision. This catch-up option is only available in public (governmental) 457(b) plans.

 

The 457(b) plan contains a special "catch-up" provision called the "final three year" provision for those approaching retirement (assuming they haven't contributed the maximum amount in prior years). This provision, which used to limit participants to an additional $15,000 over a 3-year period, now permits up to 200% of the elective deferral limit, or $24,000 in 2003 This "catch-up" provision kicks in during the three years prior to "normal" retirement age (as defined in the plan). Example: If a worker is to reach "normal" retirement age in 2009, he or she can take advantage of the "final three year" provision in years 2006, 2007, and 2008. Employers are not required to offer this provision.

Note: to determine the underutilized amounts in prior years all of the prior coordination rules apply.

 

 

 

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A participant contributing only to a 457(b) can contribute $24,000 in year 2003 via the "final three year" provision (200% of elective deferral limit, which is $12,000 for 2003). Participants who take advantage of the "final three year" provision cannot also take advantage of the "Age 50 catch-up" provision under the 457(b) plan.

 

But if a participant also has access to a 403(b) they can contribute much more. Those eligible for certain catch up contributions can actually contribute $41,000. Take a look at the story "Contribute to both a 403(b) and a governmental 457(b)" from 403(b)wise: http://www.403bwise.com/wisemoves/403band457.html

 

It is highly recommended that you consult a tax or investment professional before taking advantage of any of these provisions.

 

 

Dan Otter

 

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To add to Dan's response, there are a couple of other limitations to the final three year rule.

 

First, you have to take advantage of the catch up in the final three years ending before the year in which you attain normal retirement age as defined in the plan. You can't use them for the year in which normal retirement age is attained.

 

Second, there is a second limit used to determine the catch up amount. It is the lesser of:

 

1. Two times the regularly applicable dollar limit, or,

2. The "underutilized limitation."

 

The underutilized limit is the plan limit for the year plus the amount by which the dollar limit in preceding years exceeded actual deferals in those years. Therefore, if you've contributed the maximum allowable in prior years, there is no catch up allowed, other than the age 50 catch up.

 

Hope this is of some benefit to you.

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