A 457 retirement plan is a tax-advantaged account offered by governmental and certain non-profit employers to help employees save for retirement. While contributions to a 457 plan are typically made with pre-tax dollars, reducing taxable income in the year of contribution, using it specifically to eliminate an individual tax bill entirely is not directly possible due to contribution limits and IRS regulations.
However, there are strategies that can minimize your tax liability using a 457 plan:
- Maximize Contributions: By contributing the maximum allowable amount to your 457 plan, you can significantly reduce your taxable income for the year. As of 2022, the annual contribution limit for a 457 plan is $20,500. Those aged 50 or older may contribute an additional catch-up amount.
- Tax Deferral: Contributions to a 457 plan grow tax-deferred, meaning you won’t pay taxes on the gains until you withdraw the funds in retirement. This deferral can potentially lower your current tax bill.
- Lowering Tax Bracket: By reducing your taxable income through 457 contributions, you may drop into a lower tax bracket, thereby decreasing your tax liability.
- Roth 457 Option: A Roth 457 plan, which allows for after-tax contributions and tax-free retirement withdrawals for eligible individuals, is provided by certain businesses. Managing future tax obligations may be made easier by using a Roth 457.
While a 457 plan provides substantial tax advantages and can significantly reduce current tax bills, eliminating your entire tax liability solely through this plan might not be feasible. Consulting with a financial advisor or tax professional can help create a comprehensive retirement and tax strategy tailored to your specific situation.
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