Author Topic: 457K Conversion BEFORE retirement age question...  (Read 2667 times)

Rollin

  • Handlebar Stache
  • *****
  • Posts: 1191
  • Location: West-Central Florida - USA
457K Conversion BEFORE retirement age question...
« on: September 02, 2015, 12:18:12 PM »
I'm planning to be FI and RE at 54 (next April) and will be partially depending on income (4% SWR) from my 457K.  I plan on taking control of that fund (i.e., take it away from the current fund operator since they don't offer very good choices to invest).  Can anyone tell me how that works from a taxing perspective, and where that might go?  What I mean is will it go to a taxable account or can I keep it in something like the 457k - that is, tax free interest, but pay taxes on anything that I receive?  What kind of account would I place that in?

i know if I started withdrawing it at 59.5 it would remain tax free in the account and I would pay taxes on the "income."

BarkyardBQ

  • Pencil Stache
  • ****
  • Posts: 667
Re: 457K Conversion BEFORE retirement age question...
« Reply #1 on: September 02, 2015, 12:24:59 PM »
Following. I'm curious about this too, as we will have two 457's, and will probably want to harvest gains/income and move it to taxable funds at Vanguard for lower expenses.

I often see discussions like... harvest 70k in LTCG + 20k deduction and you can get 90k out tax free...??? I think our plan would be to first get the 457 funds into taxable, vs working a Roth IRA Conversion.
« Last Edit: September 02, 2015, 12:27:03 PM by BackyarBQ »

seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 4815
  • Age: 34
  • Location: Seattle, WA
Re: 457K Conversion BEFORE retirement age question...
« Reply #2 on: September 02, 2015, 12:28:25 PM »
I believe you're able to roll your 457 accounts into a traditional IRA. However by doing so, you lose the biggest benefit of the 457 plan compared to other retirement accounts: the ability to withdraw the money prior to age 59 without paying a 10% early withdrawal penalty. If you already have enough in your taxable accounts to last you until then, you might not care so much about this, and would benefit from moving to a lower-fee account. It's definitely something to be aware of though!

Rollin

  • Handlebar Stache
  • *****
  • Posts: 1191
  • Location: West-Central Florida - USA
Re: 457K Conversion BEFORE retirement age question...
« Reply #3 on: September 02, 2015, 12:51:33 PM »
I'll eventually get the answer after a meeting with my tax advisor, but that won't be for another month or so.  I'm doing as much preparation as possible before I meet with him so that we can spend our time (and my money) wisely :).

Yes, seattlycyclone I thought about that and you confirmed my suspicions.  I need to see if I have enough to live off without touching that until 59.5.  That brings up a related question that I am posing to my tax guy, and that is instead of taking a 4%SWR from my 457K (or whatever I roll it over to) and my taxed vanguard account equally (I should say proportionally), should I just eat up the taxable account first??  Even if I eat into the principal there (which I would surely do since it is 1/4th the size of my 457K).

seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 4815
  • Age: 34
  • Location: Seattle, WA
Re: 457K Conversion BEFORE retirement age question...
« Reply #4 on: September 02, 2015, 01:14:04 PM »
That brings up a related question that I am posing to my tax guy, and that is instead of taking a 4%SWR from my 457K (or whatever I roll it over to) and my taxed vanguard account equally (I should say proportionally), should I just eat up the taxable account first?

Maybe. Maybe not. It's complicated! A disadvantage of using up the taxable account first is that capital gains are taxed at a lower rate. By spending more from taxable now, you may be pushing yourself up into a higher tax bracket in future years because more of your money will be coming from the retirement accounts. However you may be able to get better Obamacare subsidies between now and when you go on Medicare if you get most of your spending money from your taxable accounts (since the principal withdrawals don't increase your MAGI, only the gains). You also avoid the possibility of early withdrawal penalties (though this won't be an issue if you just leave your 457 where it is until you're at least 59).

johnny847

  • Magnum Stache
  • ******
  • Posts: 3196
    • My Blog
Re: 457K Conversion BEFORE retirement age question...
« Reply #5 on: September 02, 2015, 01:22:49 PM »
I believe you're able to roll your 457 accounts into a traditional IRA. However by doing so, you lose the biggest benefit of the 457 plan compared to other retirement accounts: the ability to withdraw the money prior to age 59 without paying a 10% early withdrawal penalty. If you already have enough in your taxable accounts to last you until then, you might not care so much about this, and would benefit from moving to a lower-fee account. It's definitely something to be aware of though!

Yup, that's all correct, so long as this is a governmental 457b (OP, it's a 457b, not 457k).

The penalty free withdrawals from 457b's kick in once you leave your employer.

Hence, do not rollover your funds. Just withdraw from the 457b (or from your taxable, whatever floats your boat). This way you don't need to attempt the Roth pipeline (although the Roth pipeline is essentially useless to you anyway since you'd be 54 in April 2016 when you FIRE, and you'd be 59.5 in October 2021. You can withdraw from your traditional retirement accounts penalty free starting 1/1/2021 (it's the calendar year in which you turn 59.5, not when you literally turn 59.5). The Roth pipeline takes 5 years to prime. )

Rollin

  • Handlebar Stache
  • *****
  • Posts: 1191
  • Location: West-Central Florida - USA
Re: 457K Conversion BEFORE retirement age question...
« Reply #6 on: September 02, 2015, 02:18:42 PM »
I believe you're able to roll your 457 accounts into a traditional IRA. However by doing so, you lose the biggest benefit of the 457 plan compared to other retirement accounts: the ability to withdraw the money prior to age 59 without paying a 10% early withdrawal penalty. If you already have enough in your taxable accounts to last you until then, you might not care so much about this, and would benefit from moving to a lower-fee account. It's definitely something to be aware of though!

Yup, that's all correct, so long as this is a governmental 457b (OP, it's a 457b, not 457k).

The penalty free withdrawals from 457b's kick in once you leave your employer.

Hence, do not rollover your funds. Just withdraw from the 457b (or from your taxable, whatever floats your boat). This way you don't need to attempt the Roth pipeline (although the Roth pipeline is essentially useless to you anyway since you'd be 54 in April 2016 when you FIRE, and you'd be 59.5 in October 2021. You can withdraw from your traditional retirement accounts penalty free starting 1/1/2021 (it's the calendar year in which you turn 59.5, not when you literally turn 59.5). The Roth pipeline takes 5 years to prime. )

Crap - it is a 457b and for all these years I've been calling it a 457K!  (I just called the entity).  It is a government plan.