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Savings Plus: 401(k) and 457(b)

State of California Employees are eligible to participate in 401(k) or 457(b) plans administered by CalHR. Participation in these plans is optional. These retirement savings plans are a great way to save for retirement in addition to CalPERS. For both the 401(k) and 457 plans, normal IRS limits on contributions apply. However, State of California employees are eligible to participate in both plans. Additionally, there are Roth versions of each plan available.

Eligible employees may enroll in Savings Plus at any time. Employees are not limited to an open enrollment period. Participants can also change the amount of their contribution amount at any time. There is a $50 minimum for each plan. For each account you open there is a $1.50 monthly maintenance fee.

Who is Eligible?

Nearly all State of California employees are eligible to enroll in a Savings Plus 401(k) and/or 457(b) plan. This includes those working for the California State University system, State Legislators and Judges. State Employees that have retired and returned as a Retired Annuitant are also eligible.

The traditional 401(k) and 457 plans are deferred compensation plans. With these plans, your monthly contribution is deducted before the amount of taxes you pay is calculated. Everyone should be saving for retirement, and these plans are a simple, automated and tax-advantageous way to do it.

The Roth version of each of these is different in that it is considered after tax. With Roth plans, you won't reduce your total tax liability now, but your deductions won’t be taxed when you retire. But both the Traditional and Roth types are tax-advantageous in that they get to grow tax free until you retire.

For a more in-depth explanation of the differences between Roth and Traditional plans, check out this article in the Wall Street Journal

401(k) vs 457(b)

These plans are very similar, but there are some key differences. They share similar structures and treatment by the IRS, but 457 plans are only available to government employees and some non-profit organizations. For both plans, participants can contribute through payroll deductions only. You aren't able to transfer money into these types of accounts like you would a savings account or an IRA. Like with any investment, there is risk including potential loss of principle.

How Are They Different?

Structurally, they are nearly identical. At least as far as the IRS is concerned. The 457 plan is more advantageous for emergency withdrawals. If, for example, you had a medical emergency, the rules governing the 457 plans are more lenient for taking an unforeseen hardship withdrawal. Still, though, the rules can be very strict. The 457 plans also have some "catch up" advantages. These catch up options are for people over a certain age who want to stash away extra money for retirement

The contribution limits are identical, except for certain circumstances for people over age 50.

For 2022, the contribution limit is $20,500 for each plan. This is a $1,000 increase from the 2021 limits. It is possible to have both 457(b) and 401(k) accounts and contribute up $20,500 to each for a total of $41,000 per year. It is not possible, however, to contribute more than $20,500 combined between the Traditional and Roth version of either. You can open both a Roth 401(k) and a Traditional 401(k), but you can not contribute more than $20,500 combined between the 2 plans.

For both plans, if you are age 50 or older, you can contribute an additional $6,500 per year for a total of $27,000. This "catch up" contribution is the same as it was in 2021. With the 457 plan you can contribute double the annual limit for 3 years. This is called a Traditional Catch-Up deferral and would allow a participant to contribute up to $41,000 for a maximum of 3 years.

Contribution limits are set by the IRS and gradually increase, along with inflation. All participants should be very careful not to contribute amounts beyond the yearly limits because there can be some very stiff penalties for doing so.

Available Investment Options

The investment options available within your Savings Plus account are solid, although somewhat limited. Limiting options available to participants is one of the ways CalHR is able to keep the costs of the plan low.

State employees participating in these plans have 2 main choices. The first and simplest is a Target Date Fund. A Target Date Fund is a fund comprised of stocks, bonds and cash. There are multiple Target Date Funds, and each has a year attached to it. Investors should pick the year closest to when they plan to retire.

Funds will be more aggressive the farther from their target date they are, by investing more heavily in stocks. The fund will get progressively more conservative over time by reducing the percentage invested in stocks and increase the amount of cash and bonds. If you don’t individually select an investment option, the fund with a Target Date that most closely aligns with your estimated retirement year will be the default investment.

If you would like to decide on your own allocation there are a variety of options to choose from. Savings Plus has some self-directed guides, but the best advice would be to consult a financial planner to help decide on an appropriate allocation.

  1. Short Term Investment Funds – considered equivalent to cash.
  2. Bond Funds - Short, intermediate or long-term duration.
  3. Diversified Real Return Funds – multi-asset, lower risk, designed to protect against loss due to inflation.
  4. Stock Funds – Small Cap, Mid Cap, Large Cap and International.

Read more about the range of investment options here, at Savings Plus. For each of the previously listed funds, there are generally 2 options. Index or actively managed.

An index fund is not managed (passive). It imitates and tracks a certain index (like the S&P 500). The only buying and selling of individual stocks within the fund are when the composition of the index it tracks changes.

If a fund is not listed as an index fund, it is an actively managed fund. Actively managed funds have higher expense ratios than index funds because there is more buying and selling of individual stocks. Sometimes active funds beat index funds, and sometimes they don’t.

Lump Sum Separation Pay Deferral

Many state employees accrue a lot of leave benefits. Check out our post on vacation and paid time off State of California employees receive. Nearly all of the leave credits a State employee earns over his career have a cash-value. This means that at separation from state service, unused time is cashed out as a lump sum payment. There are a lot of factors involved, but this can end up being thousands of dollars. The IRS sees this payment as income and will tax it accordingly.

Through the Savings Plus plans an employee expecting a lump sum payment can have all or part of it deferred. Instead of receiving and payment and taking the hit on your income taxes, State employees can elect to have the payment deposited into their 401(k) or 457(b) account. There it will sit and grow until you start collecting in retirement.

You still aren’t able to go over the IRS maximum contribution limits, however. But, if you are expecting a very large payout, you could spread it across the 2 types of accounts and hopefully take advantage of any available catch-up options.

Thanks for reading!

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