Every year, municipal employees—firefighters, police officers, teachers, and other government workers—watch a big chunk of their paycheck disappear to taxes.
You work tirelessly, putting your life on the line, educating the next generation, and keeping your communities running smoothly—only to see Uncle Sam take a significant portion of your earnings before you even get paid.
But what if there was a way to keep more of your hard-earned money while still saving for retirement?
Using Your 457(b) Plan To Your Advantage
A 457(b) deferred compensation plan is one of the most powerful, yet underutilized, tools municipal employees have to reduce their tax burden.
The 457(b) plan is constantly mistaken for the State Retirement System. We get calls weekly from municipal employees eager to check their account balance—only to be blindsided when they learn that their mandatory contributions are funding their pension, not their 457(b).
This misunderstanding can cost them valuable time and financial opportunities Many participants don’t fully capitalize on its benefits, leaving money on the table.
Here’s How To Save An Extra Few Dollars From Uncle Sam…
1. Contribute Pre-Tax to Lower Your Taxable Income
- Every dollar you contribute to a traditional 457(b) plan reduces your taxable income for the year, potentially dropping you into a lower tax bracket.
- Example: If you earn $75,000 and contribute $23,500 (in 2024), your taxable income drops to $52,500—resulting in rough tax savings of $5,170 assuming a 22% tax bracket.
2. Take Advantage of the Special Catch-Up Contributions
- The 3 Year Catch-Up provision, also known as the special 457(b) catch-up, is used in the three years before your declared normal retirement age.
- This means in 2025, instead of $23,500, you could contribute $47,000, drastically reducing your taxable income. Important: If your income exceeds a certain threshold, these special three-year catch-up contributions must be made as Roth contributions.
- This catch-up provision is particularly useful for accrued sick time, comp time, and vacation payouts, allowing you to defer a substantial amount of taxable income. In addition, there is the age 50+ catch-up & age 60-63 catchup. This will allow you to put more money into your deferred compensation plan.
3. Optimize Roth 457(b) Contributions for Future Tax-Free Withdrawals
- If you anticipate being in a higher tax bracket in retirement, Roth contributions allow you to pay taxes now at a lower rate and enjoy tax-free withdrawals later.
- This is especially important if you plan on taking large, lump-sum withdrawals in retirement.
- Younger municipal employees who expect salary growth over time can benefit tremendously from this strategy.
4. Coordinate with Your Pension to Avoid Unexpected Tax Brackets
- Many municipal employees will receive a pension in retirement. Without careful planning, pension income combined with Social Security and 457(b) withdrawals could push you into a higher tax bracket than expected.
- A well-planned withdrawal strategy—balancing pre-tax and Roth funds—can help minimize tax liabilities and maximize retirement income.
- New York Pension Taxation: Exempt from New York State income tax if you are receiving a NYS public pension. Not subject to Social Security or Medicare taxes in retirement. Partial taxation may apply depending on additional income sources—making careful planning essential.
5. Use 457(b) Funds for Early Retirement Without Penalty
- Unlike 401(k)'s and IRAs, the 457(b) plan allows penalty-free withdrawals before age 59? if you separate from service. Yes, there are age 55+ provisions and 72(t) distributions for 401(k)'s, but we are speaking generally.
- If you plan to retire early, this feature provides flexibility and control over how and when you access your funds—without incurring unnecessary penalties.
6. Take Advantage of the HELPS Act for Public Safety Officers
- The HELPS Act allows eligible retired public safety officers, including firefighters and police officers, to withdraw up to $3,000 per year tax-free from their 457(b) plan to pay for health insurance premiums.
- This can be a lifeline for retirees, reducing healthcare costs and easing the burden of out-of-pocket medical premiums.
7. Other Tax Strategies for Municipal Employees
- State Tax Exemptions 457(b) Withdrawals: The first $20,000 annually, over the age of 59.5, is exempt from NYS tax.
- Backdoor Roth IRA: If you already max out your 457(b) and your income is too high for direct Roth IRA contributions, you may be able to contribute via a backdoor Roth strategy to create additional tax-free retirement savings.
Keep More of Your Hard-Earned Money
By leveraging these powerful strategies, you can:
- Reduce your tax bill by making pre-tax contributions.
- Avoid unnecessary tax penalties with smart withdrawal planning.
- Build tax-free wealth for retirement through Roth contributions and strategic savings vehicles.
- Maximize retirement savings while still maintaining a strong paycheck throughout their career.
The Best Time to Start is Now
The longer you delay, the more money you leave on the table for Uncle Sam. Don’t wait until it’s too late—start optimizing your 457(b) contributions today, secure your financial future, and keep more of what you’ve rightfully earned.
