Author Topic: Shifting from 403b->457b for ER purposes?  (Read 1066 times)

Bird In Hand

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Shifting from 403b->457b for ER purposes?
« on: February 14, 2018, 08:18:55 AM »
My employer has a 403b plan that I've been maxing out for many years.

My wife just became eligible for her employer's 403b and 457b.  Unfortunately we don't have enough cashflow to fully fund everything ($18,500 x 3).  We can afford to contribute somewhere around $25,000 this year.

I can get the max employer match on my 403b with a relatively small contribution ($5k or so), so we could max out her 457b if we wanted to.

On the surface a 457b sounds like an ideal choice for potential ER.  I _think_ it would allow us to withdraw post-ER/separation, and before 59.5 without the 10% early withdrawal penalty.  Along with some Roth IRAs and taxable accounts, this should give us some flexibility in accessing our funds without jumping through a lot of hoops like 72(t).  The brief description of the plan does say this, however:

Quote
If you are under age 59½, the taxable portion of your withdrawal is also subject to a 10% early withdrawal penalty, unless you qualify for an exception to this rule.

I think the "exception" clause would include retirement/separation from service.  I've been trying to get my hands on the actual plan document so that I can verify this, but with no luck so far.

All our plans (including the 457b) include low-fee Vanguard and Fidelity index funds.  So unless there's something onerous lurking in the 457b's plan document, it seems like a no-brainer to focus our contributions there rather than our 403b's.

Can anyone think of a "gotcha" that we might not have considered?  The only thing I can think of is the potential for a 457b to simply vanish, which admittedly sounds really bad.  :D  But this is through a public/state university system and Fidelity; we're willing to take it on faith that the money will still be there when we're approaching ER in 10 years or so.

Bird In Hand

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Re: Shifting from 403b->457b for ER purposes?
« Reply #1 on: February 16, 2018, 06:22:28 AM »
Alright, I think I'm going to take the 67 views/no responses as an implied "Right on, man!"  :D

thd7t

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Re: Shifting from 403b->457b for ER purposes?
« Reply #2 on: February 16, 2018, 02:11:54 PM »
I haven't been to this forum in about a year, but followed it really closely for several.  The general consensus was that the 457 is second only to an HSA as an ER device. 

MDM

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Re: Shifting from 403b->457b for ER purposes?
« Reply #3 on: February 16, 2018, 05:21:15 PM »
See IRC 457b Deferred Compensation Plans | Internal Revenue Service and the link therein to Pub. 4484, in which "subject to 10% additional tax if before age 59½" does not appear in the 457b withdrawal section.

Bird In Hand

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Re: Shifting from 403b->457b for ER purposes?
« Reply #4 on: February 16, 2018, 07:46:57 PM »
I haven't been to this forum in about a year, but followed it really closely for several.  The general consensus was that the 457 is second only to an HSA as an ER device.

I did end up finding some older threads indicating the same.  And I missed it initially, but it’s also mentioned in the “investment order” sticky thread.  There aren’t any obvious downsides, or at least none that Mustachians have managed to uncover!

Bird In Hand

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Re: Shifting from 403b->457b for ER purposes?
« Reply #5 on: February 16, 2018, 07:51:21 PM »
See IRC 457b Deferred Compensation Plans | Internal Revenue Service and the link therein to Pub. 4484, in which "subject to 10% additional tax if before age 59½" does not appear in the 457b withdrawal section.

Yeah, that was my understanding, which is why I’m really perplexed by the language I quoted above.  That language comes from the Fidelity site.  I should just call them up and ask.  A good opportunity to try out Fidelity’s supposedly excellent customer service.

bortman

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Re: Shifting from 403b->457b for ER purposes?
« Reply #6 on: February 17, 2018, 09:00:51 AM »
This was confusing to me too. There's a lot of good information in this thread ...

https://forum.mrmoneymustache.com/investor-alley/457b-plan/msg1740289/#msg1740289

The wording in my plan's FAQ leaves some room for interpretation, but I'm taking the IRS's word and believe that if you leave your employer then you can access the money without penalty.

hth

Bird In Hand

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Re: Shifting from 403b->457b for ER purposes?
« Reply #7 on: February 17, 2018, 01:23:22 PM »
bortman,

I read through your earlier thread, and checked the link you provided to the state of WI's deferred compensation information.  Although the wording is a bit confusing, it does appear +/- clear to me that the language is consistent with the IRS's rules -- once you terminate employment the $$ is yours.  Fortunately you can choose to take periodic payments to control income tax, rather than a lump sum.

I still need to call Fidelity, because I found even more confusing information on the website.  I went to the 457(b) portion of the plan online and clicked a link to 'Request a Withdrawal'.  It warned me that there could be tax implications, and presented a bunch of information including the following:

Quote
If I don’t do a rollover, will I have to pay the 10% additional income tax on early distributions?

This tax is in addition to the regular income tax on the payment not rolled over.  The 10% additional income tax does not apply to the following payments from the Plan:

· Payments made after you separate from service if you will be at least age 55 in the year of the separation
· Payments that start after you separate from service if paid at least annually in equal or close to equal amounts over
your life or life expectancy (or the lives or joint life expectancy of you and your beneficiary)
· Payments from a governmental plan made after you separate from service if you are a qualified public safety employee
and you are at least age 50 in the year of the separation
· Payments made due to disability
· Payments after your death
· Payments of ESOP dividends
· Corrective distributions of contributions that exceed tax law limitations
· Cost of life insurance paid by the Plan
· Contributions made under special automatic enrollment rules that are withdrawn pursuant to your request within 90
days of enrollment
· Payments made directly to the government to satisfy a federal tax levy
· Payments made under a qualified domestic relations order (QDRO)
· Payments up to the amount of your deductible medical expenses
· Certain payments made while you are on active duty if you were a member of a reserve component called to duty after
September 11, 2001 for more than 179 days
· Payments of certain automatic enrollment contributions requested to be withdrawn within 90 days of the first
contribution.

Not a Designated Roth Account:
     If you are under age 59½, you will have to pay the 10% additional income tax on early distributions for any payment from the Plan (including amounts withheld for income tax) that you do not roll over, unless one of the exceptions listed above applies.

Designated Roth Account:
     If a payment is not a qualified distribution and you are under age 59½, you will have to pay the 10% additional income tax on early distributions with respect to the earnings allocated to the payment that you do not roll over (including amounts withheld for income tax), unless one of the exceptions listed above applies.

This totally contradicts the IRS rules for 457(b).  What is especially annoying is the first bullet, which mentions an exclusion from the 10% penalty if separating from the employer when age 55 or greater.  AFAIK that has nothing to do with 457(b) plans, and is an option for 401(k) and 403(b) plans.

My guess is that Fidelity is displaying the wrong document, and/or simply has an error in the document.  I can't think of any other explanation at the moment.

bacchi

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Re: Shifting from 403b->457b for ER purposes?
« Reply #8 on: February 17, 2018, 05:55:32 PM »
Fidelity calls their solo 401k plans "Keogh" plans, which isn't exactly accurate any more. Their web documentation is lacking.

chasesfish

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Re: Shifting from 403b->457b for ER purposes?
« Reply #9 on: February 18, 2018, 05:26:32 AM »
There's more factors that go into which plan to use, such as age, how much you have saved in a regular brokerage, and when you need how much cash.  All that being said, I'm a huge fan of the 457 as long as you have enough liquidity otherwise.

That being said, I am making massive contributions to my private-sector version of a 457 (Supplemental Executive Retirement Plan, or SERP).   Mine is setup as a 15 year monthly payout 90 days after separating from service.   I should have between $200,000 and $260,000 in it when I retire in the next twelve months, it'll pay me between $1,900 and $2,400/mo depending on the balances and returns.

Bird In Hand

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Re: Shifting from 403b->457b for ER purposes?
« Reply #10 on: February 18, 2018, 08:24:26 AM »
There's more factors that go into which plan to use, such as age, how much you have saved in a regular brokerage, and when you need how much cash.  All that being said, I'm a huge fan of the 457 as long as you have enough liquidity otherwise.

We’re 40-ish and should be FI at our target retirement income (in the 4% SWR sense) in the next ~5 years.  We may work part time another ~5 years beyond that (or longer if we still like our jobs).

Actually we have low liquidity due to stuffing everything into pre-tax.  We were looking at 457b as a way to bolster liquidity in ER, along with Roth to help manage taxes.  Why do you feel that a certain amount of liquidity is a pre-condition before considering 457b?  Maybe I misunderstood you.

chasesfish

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Re: Shifting from 403b->457b for ER purposes?
« Reply #11 on: February 18, 2018, 08:28:02 AM »
Personally my spouse and I didn't feel comfortable ramping up our SERP contributions until we had $100,000 in after-tax accounts.  It was a personal comfort level giving us financial flexibility.  Every person is different here, but just my thoughts.  I now put 48% of my salary + bonus into tax deferred accounts.

Mine is setup where it fully funds the 401k first, then "spills over" into the SERP.  We will put almost $80,000 into the SERP over the next twelve months, which really juices our early retirement income

Bird In Hand

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Re: Shifting from 403b->457b for ER purposes?
« Reply #12 on: February 18, 2018, 10:31:22 AM »
Personally my spouse and I didn't feel comfortable ramping up our SERP contributions until we had $100,000 in after-tax accounts.  It was a personal comfort level giving us financial flexibility.  Every person is different here, but just my thoughts.  I now put 48% of my salary + bonus into tax deferred accounts.

Mine is setup where it fully funds the 401k first, then "spills over" into the SERP.  We will put almost $80,000 into the SERP over the next twelve months, which really juices our early retirement income

Got it — understood that everyone’s situation and personal preferences will lead to different choices.

I’m a little curious why you fund your 401k before the SERP.  Is that because of 401k matching, concerns about potential insolvency of the plan’s custodians, or something else?

terran

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Re: Shifting from 403b->457b for ER purposes?
« Reply #13 on: February 18, 2018, 10:43:53 AM »
Something I haven't seen mentioned is whether your wife is a government employee? A non-governmental 457 is subject to the creditors of the employer, so that adds the consideration of how financially sound her employer is. If given the option and the fees were similar I would prioritize a governmental 457 over a 403b, and I would prioritize a 403b over a non-governmental 457.

chasesfish

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Re: Shifting from 403b->457b for ER purposes?
« Reply #14 on: February 18, 2018, 11:26:06 AM »
@Bird In Hand SERPs are very flexible in plan design because the assets technically still belong to the employer until they are distributed.  In my case, they're essentially held in trust by the employer and invested at my discretion until distributed.  I'm not overly worried about the bankruptcy/creditor issue, but I work for a conservative company in a highly regulated industry.  It'll be a bad day if the economy gets to this point, but that's a calculated risk I'm taking to save a ton on taxes now.

My employer's plan is awesome, but it requires the 401k to fully fund first, then excess contributions go into the SERP.  This year the 401k will be fully funded by March and the excess goes into the SERP.  I continue to get my match regardless.  The plan is also capped at a 50% deferral rate and requires a projected salary over the FICA limit to qualify.

Bird In Hand

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Re: Shifting from 403b->457b for ER purposes?
« Reply #15 on: February 18, 2018, 12:06:22 PM »
Something I haven't seen mentioned is whether your wife is a government employee? A non-governmental 457 is subject to the creditors of the employer, so that adds the consideration of how financially sound her employer is. If given the option and the fees were similar I would prioritize a governmental 457 over a 403b, and I would prioritize a 403b over a non-governmental 457.

She works for a state university, so I think that means it's a governmental 457.  I agree with the order you listed above -- I'd be much more hesitant to put a big percent of our retirement savings into a plan that isn't more or less guaranteed.