Which is true about earnings on assets in a Section 457 plan?

Which is true about earnings on assets in a Section 457 plan?

• A. Earnings are taxed immediately
• B. Earnings grow tax-deferred until withdrawn
• C. Earnings are limited to the rate of inflation
• D. Earnings can only be withdrawn at retirement age

Answer: (B)

Earnings on assets in a Section 457 plan grow tax-deferred until they are withdrawn. This means that while the money remains within the plan, it is not subject to immediate taxation, allowing it to compound without the impact of taxes. When assets are eventually withdrawn, usually during retirement or upon separation from service, that is when the individual is responsible for paying taxes on the earnings. This tax-deferred growth is a significant advantage, as it can result in a larger accumulation of retirement savings over time compared to taxable accounts where earnings are taxed annually. This feature encourages long-term saving and investment within the plan, making it an effective retirement savings tool.

Earnings on assets in a Section 457 plan grow tax-deferred until they are withdrawn. This means that while the money remains within the plan, it is not subject to immediate taxation, allowing it to compound without the impact of taxes. When assets are eventually withdrawn, usually during retirement or upon separation from service, that is when the individual is responsible for paying taxes on the earnings. This tax-deferred growth is a significant advantage, as it can result in a larger accumulation of retirement savings over time compared to taxable accounts where earnings are taxed annually. This feature encourages long-term saving and investment within the plan, making it an effective retirement savings tool.