Author Topic: Should I contribute to this 457b in my situation?  (Read 319 times)

Jagnole

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Should I contribute to this 457b in my situation?
« on: December 04, 2017, 06:40:49 PM »
Hi all- Looking for some advise on my 457b decision. I am struggling with this decision because of the post employment distribution rules and possible tax consequences. (rules of the 457 are copied below)
 
My situation:
I am 35 and will probably not be with this employer for my entire career, probably 5-7 more years. I will probably leave for a similar or higher paying job in another city. At that point I will have to make a decision on distribution options and fear the tax consequences of the distribution. I believe I can choose the timing of the distribution but have to decide within 90 days of separation and can not be changed! I am already maxing out my 403b and close to paying off student loan debt. My goal is FI by 50 and hopefully retirement by 55. I fear that if i start maxing out the 457b I will feel the need to stay with the employer and will start losing my flexibility to move on.

What would you do in this situation after the loans are paid off? Max the 457b as well and just estimate when a good date for distributions will be? if so which of the distribution options below would you choose? or invest in after tax or somewhere else?

457(b): Under the 457(b) Deferred Compensation Plan, you have 90 days after your
employment is severed to make a one time, irrevocable decision on the distribution
option and timing. In the event an election is not made during the 90-day period
following severance from employment, the participant shall be paid in 5 equal annual
installment payments. The payments will begin as soon as administratively possible after
the 90-day period.
Distribution Options:*
Lump sum, or
Installment payments (monthly, quarterly, semi-annual, or annual), or
Single Life Annuity, or
Joint Life Annuity
* Federal law does not allow 457(b) money to be rolled to an IRA.



Thanks for any input.
« Last Edit: December 04, 2017, 06:44:32 PM by Jagnole »

MDM

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Re: Should I contribute to this 457b in my situation?
« Reply #1 on: December 04, 2017, 10:39:09 PM »
I am 35 and will probably not be with this employer for my entire career, probably 5-7 more years. I will probably leave for a similar or higher paying job in another city...and fear the tax consequences of the distribution.
...
* Federal law does not allow 457(b) money to be rolled to an IRA.
This appears to be a non-governmental 457b, and thus your fear is reasonable.  Being forced to take a distribution on top of another income is a recipe for high taxes.

Chrissy

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Re: Should I contribute to this 457b in my situation?
« Reply #2 on: December 05, 2017, 01:20:16 PM »
I would avoid the 457b unless I was retiring at separation, or going down to a one-income household.

With only 5-7 years to participate, the tax-advantaged dollars don't have a very long timeline to do a lot of growing.

Other options:

Have you maxed out the wife's 403b?
Do you have access to a HSA?
I think you're probably prime candidates for Backdoor ROTH or Mega Backdoor ROTH.
Nothing wrong with investing outside of retirement either.

headwinds

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Re: Should I contribute to this 457b in my situation?
« Reply #3 on: December 05, 2017, 08:35:42 PM »
It's strange how big of a difference there is between the rules for governmental and non-governmental 457(b) plans. I decided to use my (governmental) 457(b) plan, if I only had access to a non-governmental 457(b) I would have refrained from using it. The rules of the non-governmental version are not favorable to the investor, and the high fees and poor choices of funds within the plan nearly swayed me away from my governmental plan despite the tax advantage. The prospect of having to pay tax on a lump sum disbursement at time of severance would have clinched the matter in favor of not using it, for me. YMMV