Author Topic: 457b Plan  (Read 12004 times)

DenverStache

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457b Plan
« on: May 09, 2013, 06:24:36 PM »
Hello!

I just found out that may wife has access to a 457b plan through her work at the Hospital.  Does anyone know about this plan?  It seems to me that this is basically a 401k that you can withdraw from prior to 59.5 with no penalty.  Am I correct?  Why would anyone contribute to a 401k or 403b if they had access to this?  Am I missing something?

Thank you for your guidance.

icefr

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Re: 457b Plan
« Reply #1 on: May 09, 2013, 07:21:40 PM »
I think that the fees are often worse on the funds in 457 plans? It's definitely worth investigating though.

Another Reader

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Re: 457b Plan
« Reply #2 on: May 09, 2013, 07:38:14 PM »
There are a couple of problems with 457 plans.  First, read the fine print.  These are not qualified retirement plans.  They are deferred compensation plans, and different rules apply.  Are the assets held in trust for the employees or are they considered assets of the employer, subject to potential claims by creditors?  IIRC, most or all government 457 plans are trust accounts and can no longer be attached as assets of the entity.  If the hospital is a non-profit, I'm not sure about the status of the assets.

Second, most companies and government entities contract with different providers for the various retirement plans.  Many fewer providers exist for the 457 plans.  Often the options are very expensive, poor quality mutual funds, or worse, annuity products.  In my last stint as a government employee, I had to hold my nose and invest, thanks to Prudential's awful fund choices plus the entity's monthly administrative fee on top of the fund fees.

What will likely make the 457 worthwhile is the flexibilty you likely have after you separate service.  In most cases, you can roll the money into an IRA.  You may be able to withdraw the funds as you see fit, allowing you effectively to annuitize the money.  Again, read the fine print of your plan provider's material.

The really neat thing is you can fully fund a 403b/401k AND a 457b plan.  That's $34k you can save tax deferred every year, lowering your AGI.  More when you are over 50.

DenverStache

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Re: 457b Plan
« Reply #3 on: May 10, 2013, 07:58:21 AM »
Thank you for the info!  I was looking more at her plan this morning and it  is managed through Fidelity and it appears to have all of your standard Fidelity funds to choose from.  I believe it is very similar to the choices she has through her 401K.  It looks like we may be able to choose Spartan Index Funds.  Knowing this it seems like a "no-brainer".  Thoughts?

Hamster

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Re: 457b Plan
« Reply #4 on: May 10, 2013, 08:28:49 AM »
A 457 plan is just deferred compensation. You tell the employer to hold the money and pay you later. Since you are being paid later, you don't pay income tax on that income until you get paid.

As another reader said, unless it is a government institution, the money you leave in the 457 belongs to the employer, not you, until you actually receive the disbursements. So, if the hospital becomes insolvent, you must get in line like any other creditor to get the money.

When you terminate employment, you may need to decide at that time how and when to receive your disbursements. If you take a lump sum, you could end up increasing your tax burden significantly at that point, defeating the purpose of the tax deferral altogether.

I would personally still have her max out her qualified plans first. You can always do a backdoorRoth. That is safer than money in a private 457 plan. others may disagree. With all the disruption in healthcare and hospitals being bought, sold, and merging, I am leary of the 457 although I leave a little money in mine.

DenverStache

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Re: 457b Plan
« Reply #5 on: May 10, 2013, 10:11:04 AM »
Hi Hamster,

You are scaring the sh*t out of me now. I thought under the 457B plan that you could invest the deferred income.  So are you saying that technically the hospital would own all of the stock that you bought with the deferred income?  And if something were to happen prior to you leaving the company then they could keep it?  I think this is very unlikely, but I do not like the sound of that.  It is a very large hospital, but Enron was a very large company :)  I really thought that I find the holy grail of early retirement.  Would you feel comfortable maxing this thing out or not?  I wanted to use it for our "young" money as opposed to a standard taxable account.

Thoughts?

Thank you.

Hamster

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Re: 457b Plan
« Reply #6 on: May 10, 2013, 01:23:27 PM »
I would suggest talking to your HR department, and reading the fine print on the plan info. You do choose where the money is invested, but that doesn't mean it is your money (yet).

Here is what my plan states.
Quote
The 457(b) Savings Plan is considered a non-qualified plan by the IRS. This means that while your contributions and any investment earnings are credited to your individual account, the 457(b) Savings Plan assets remain the property of ******* and are subject to the claims of ****** creditors. You are relying solely on the unsecured promise of ****** to pay the benefits when they become due. If ******* should become insolvent (unable to pay its obligations), you would have the rights of an unsecured creditor. You may or may not receive your benefits under the 457(b) Savings Plan in that circumstance.

I have thought a lot about this, and I don't have a good answer.

It's really weighing the risk of insolvency vs the benefit of tax deferral.

A lot of the teachers and public employees here use their 457 plans aggressively, but they have the backing of the government, so it is safer.

Personally, I've put a pretty small amount into my 457, as I waffle on this issue of risk vs value.

arebelspy

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Re: 457b Plan
« Reply #7 on: May 10, 2013, 07:02:50 PM »
A 457 is amazing.  There are some risks, yes, but the benefits to an early retiree are pretty amazing.

I'd max in order: Roth, 457, 403. (And obviously in there start with anything with a match, contributing the minimum to get the max match, then that order).

YMMV.

Do keep in mind the caveats posted above, but don't let them scare you off.  The 457 is such a useful tool.
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Hamster

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Re: 457b Plan
« Reply #8 on: May 10, 2013, 10:56:44 PM »
I would fully agree with arebelspy if talking about a government job and a mid-range salary. If your wife is an employed physician, making $250k per year at a private not-for-profit hospital, then maxing the 403 is a no brainer, the Roth is not an option, and the 457 decision would depend on the financial state of the institution and your time horizon and plans.

For example, if I planned to quit in 2 years and travel the world, then would definitely max the 457, invested in a money market, quit my job on Dec 31 2015, then take a lump sum in 2016 at a low tax rate and use it for travel and living expenses.

If he hospital was on shaky financial footing I wouldn't go near the 457.

arebelspy

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Re: 457b Plan
« Reply #9 on: May 11, 2013, 08:09:10 AM »
Yes, that's a great counter example. 

I would guess most people that have access to a 457 looking to FIRE should contribute to the 457 before a 403.  But as Hamster points out, it's not a blanket thing, as there are niche examples (company that may go insolvent before you FIRE), but in general it's a quite useful tool that most who can utilize it should.

But very good point Hamster.
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Honest Abe

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Re: 457b Plan
« Reply #10 on: May 11, 2013, 12:09:28 PM »
My 457 is through a school district. I think (Hope!) it's safe.

WD

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Re: 457b Plan
« Reply #11 on: May 12, 2013, 10:39:28 AM »
A 457 plan is just deferred compensation. You tell the employer to hold the money and pay you later. Since you are being paid later, you don't pay income tax on that income until you get paid.

As another reader said, unless it is a government institution, the money you leave in the 457 belongs to the employer, not you, until you actually receive the disbursements. So, if the hospital becomes insolvent, you must get in line like any other creditor to get the money.

When you terminate employment, you may need to decide at that time how and when to receive your disbursements. If you take a lump sum, you could end up increasing your tax burden significantly at that point, defeating the purpose of the tax deferral altogether.

I would personally still have her max out her qualified plans first. You can always do a backdoorRoth. That is safer than money in a private 457 plan. others may disagree. With all the disruption in healthcare and hospitals being bought, sold, and merging, I am leary of the 457 although I leave a little money in mine.

I had no idea that was how deferred compensation worked! I have always been leery that my pension will actually be there as more and more legislation are introduced to change pensions and as more local governments are filing for bankruptcy (Vallejo, San Bernardino, Stockton).

Because of my concern, I have been putting in my 457b and my Roth IRA as much as I can. The people in my HR had represented the 457b like a 401k account but better.  Now that I know the money may not be there if the city becomes insolvent... I think I may contribute less to my 457b and put more into my regular investment account.

Another Reader

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Re: 457b Plan
« Reply #12 on: May 12, 2013, 12:19:27 PM »
Government 457(b) plans are generally not subject to creditor claims.  The rules were changed so the 457(b) assets may be held in a trust account(s) for the benefit of the employees.  Verify with your agency that the assets are held in trust and are not assets of the agency.  If that's the case, continue to invest without reservation.

Rural

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Re: 457b Plan
« Reply #13 on: May 22, 2013, 02:33:52 PM »
A slightly late follow up question here: I've just had a meeting with the plan representative at my employer, and the 457 here is all in annuities. There are a couple of Vanguard annuities available, and the employer is a government entity.

Should I invest in an annuity-only 457, do you think?

ManyMountains

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Re: 457b Plan
« Reply #14 on: May 24, 2013, 01:39:54 PM »
My wife works for a research lab that is run by the University of California but partially funded by the fed gov't. So she can invest in a 403 b (non profit / edu) and 457 b (gov't). Until recently (ie prior to finding MMM), we had been putting money equally into the accounts. Knowing that the 457 does not have an early withdrawal penalty, I think we will change our deductions to make sure we fill up the 457 first and then the 403. Both funds are managed by Fidelity and offer the same investment options.

As commentators have said above, each plan is slightly different so read the fine print.

My wife has a 401k at Intel, leftover from a previous employer. We asked Fidelity about rolling that over to the 403 or 457 plan. They recommended the 403 because it has less restrictions. At the time, we didn't know to ask more. Now I will make sure we ask what they mean by that, because the 457 seems more appealing to us.

Note, that if you too are thinking of consolidating accounts like we are, the money that comes from your 401k will still be subject to the same stipulations as the 401k,  even if it is now sitting in a 457. For example, say you have $20k in your 401k that you roll into your 457, which already had $30k in it. If you want to take money out at age 50 for an early retirement or a year of traveling, you can withdraw the $30k without any penalty, but the $20k will have the standard early withdrawal penalty, even though it's technically in a 457 account.

So, for our case, it might make the most sense to rollover the old 401k into my 401k, so that in the future we don't have to wonder which funds from which accounts applies to which rules.

Your thoughts? Am I missing something?

Oh, and yes it is awesome that my wife can fill up a 403 and 457 and I can fill up my 401k - that's $52,500 we can put away pre-tax. This is the first year we've been able to take advantage of three pre-tax plans and it could really ratchet up the retirement savings (assuming we can put a full $52,500 away every year).






jfer_rose

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Re: 457b Plan
« Reply #15 on: May 24, 2013, 04:00:39 PM »
Is it November yet?? That's when I can change my contribution for my 457 plan. Reading this, I am super excited to max mine out! I didn't realize they don't have a penalty for withdrawal before age 59.5 and now that I'm exploring early retirement that means this is a great place to stash money I may want to use before then! I think my 457 fees are higher than they would be for a taxable Vanguard account-- and although I haven't yet done the calculations, I can't see the fees being higher than the tax benefit I'm getting by contributing to my 457.

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fdubz

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Re: 457b Plan
« Reply #16 on: December 03, 2015, 01:09:18 PM »

I'd max in order: Roth, 457, 403. (And obviously in there start with anything with a match, contributing the minimum to get the max match, then that order).



My DH and I work for a State University and are both maxing our 457s (in addition to state pension contributions).  This leaves a fairly small amount for additional investments, though we both do $50 a paycheck towards the 403b accounts.  My question for arebelspy is, why max Roth before 457?  Our gross income together is about $80k, so it's been nice to reduce with our 457s.  We both have Roths (mine I've been contributing steadily for 8 years, we just opened his last year), but to be honest we're only able to contribute $50/month each with the amount we take home.  Should we reduce 457 contributions in order to max the Roths?  Thanks in advance!

mammothunder

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Re: 457b Plan
« Reply #17 on: December 04, 2015, 07:20:35 AM »
fdubz - We're in a similar situation.  Both work for a state university with governmental 457(b)s.  Make about $110k gross.  After receiving some guidance from this forum, we ultimately decided to go all out with the 457(b)s before contributing to our Roth IRAs.  Maybe this discussion will be helpful to you?  http://forum.mrmoneymustache.com/ask-a-mustachian/too-many-tax-advantaged-accounts-need-help-prioritizing/

That being said, we are currently debating whether to dump our emergency fund into our Roth IRAs.  My husband doesn't like having $12k sitting around in a savings account.


steadyclimb

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Re: 457b Plan
« Reply #18 on: December 05, 2015, 07:33:32 AM »
Quote
My DH and I work for a State University and are both maxing our 457s (in addition to state pension contributions).  This leaves a fairly small amount for additional investments, though we both do $50 a paycheck towards the 403b accounts.  My question for arebelspy is, why max Roth before 457?  Our gross income together is about $80k, so it's been nice to reduce with our 457s.  We both have Roths (mine I've been contributing steadily for 8 years, we just opened his last year), but to be honest we're only able to contribute $50/month each with the amount we take home.  Should we reduce 457 contributions in order to max the Roths?  Thanks in advance!

The advantage to contributing to an IRA (Traditional/ROTH) is that you can pick who your IRA is with (Vanguard, Betterment, Fidelity) which means your fees are probably lower on that account and you have more fund options to invest in. If either your 457 or 403b offer a match then do that first. Once you've done that you should look at the costs involved/fund available with both of those accounts and compare them with your IRA. My wife's 457 and 403b have a quite a bit of fees and don't offer a match. We chose to max out these accounts in the order of IRA/457/403b. I think for early retirement goals someone could argue that could also be 457/IRA/403b since you can pull out from 457 before 59.5 without a penalty.

DavidAnnArbor

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Re: 457b Plan
« Reply #19 on: December 05, 2015, 02:24:54 PM »
When you leave the employer with which you have the 457 plan, I believe you're allowed to roll it over to an IRA, and there's no tax penalty with a trustee to trustee roll over. However once it is in the IRA you have the IRA rules to follow.

fdubz

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Re: 457b Plan
« Reply #20 on: December 10, 2015, 07:14:33 AM »
mammothunder- Thanks so much!  It sounds like we are in very similar situations.  That thread was extremely helpful!  We have found that having $5k in a traditional savings account is our happy place.  Anything more makes me antsy at the opportunity cost of not having it earning interest!  I totally get that other folks' comfort level varies, though.  My mom's  is $20k in savings, anything less and she says she doesn't sleep well (My parents have been Mustachian since before is was such a well-recognized religion, ahem, lifestyle. ;-) )

steadyclimb- I do wish our 457 could be Vanguard, but we are lucky to have very low cost index funds in the company that is provided.  I realize from reading about this type of account on the forum, many aren't so lucky.  We also get a small match with the 457.

nawhite

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Re: 457b Plan
« Reply #21 on: September 11, 2017, 10:12:39 AM »
When you leave the employer with which you have the 457 plan, I believe you're allowed to roll it over to an IRA, and there's no tax penalty with a trustee to trustee roll over. However once it is in the IRA you have the IRA rules to follow.

Can someone walk me through the details here. It sounds like the benefit of no termination penalty isn't that great. Lets say I'm 35 and leave my company with a 457 plan that has 200k in it. When I do that, do I need to A) withdraw all 200k of my money in that year and either take it as income or roll over into an IRA that then has the IRA early withdrawl penalty or B) can I take 40k out each year for 5 years?
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robartsd

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Re: 457b Plan
« Reply #22 on: September 11, 2017, 10:43:43 AM »
My wife has a 401k at Intel, leftover from a previous employer. We asked Fidelity about rolling that over to the 403 or 457 plan. They recommended the 403 because it has less restrictions. At the time, we didn't know to ask more. Now I will make sure we ask what they mean by that, because the 457 seems more appealing to us.

Your thoughts? Am I missing something?
Roll the 401k into a traditional IRA (you pick the provider instead of going with whatever the employer picked).

DavidAnnArbor

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Re: 457b Plan
« Reply #23 on: September 12, 2017, 10:31:29 AM »
When you leave the employer with which you have the 457 plan, I believe you're allowed to roll it over to an IRA, and there's no tax penalty with a trustee to trustee roll over. However once it is in the IRA you have the IRA rules to follow.

Can someone walk me through the details here. It sounds like the benefit of no termination penalty isn't that great. Lets say I'm 35 and leave my company with a 457 plan that has 200k in it. When I do that, do I need to A) withdraw all 200k of my money in that year and either take it as income or roll over into an IRA that then has the IRA early withdrawl penalty or B) can I take 40k out each year for 5 years?

I think with a 457plan you can take out the contributions (but not the earnings) penalty free prior to age 59.5.  So if you want to just keep the 457 rather than rolling it over to an IRA you can do that and use the money to live on. The withdrawals of the contributions will be taxed as ordinary income tax rates.

arebelspy

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Re: 457b Plan
« Reply #24 on: September 12, 2017, 10:57:54 AM »
When you leave the employer with which you have the 457 plan, I believe you're allowed to roll it over to an IRA, and there's no tax penalty with a trustee to trustee roll over. However once it is in the IRA you have the IRA rules to follow.

Can someone walk me through the details here. It sounds like the benefit of no termination penalty isn't that great. Lets say I'm 35 and leave my company with a 457 plan that has 200k in it. When I do that, do I need to A) withdraw all 200k of my money in that year and either take it as income or roll over into an IRA that then has the IRA early withdrawl penalty or B) can I take 40k out each year for 5 years?

I think with a 457plan you can take out the contributions (but not the earnings) penalty free prior to age 59.5.  So if you want to just keep the 457 rather than rolling it over to an IRA you can do that and use the money to live on. The withdrawals of the contributions will be taxed as ordinary income tax rates.

Yep. Much more advantageous than rolling it over (aside from filling up a tax bracket with a Roth rollover or something).
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