Author Topic: Questions on 457 plans  (Read 2591 times)

Terrestrial

  • Bristles
  • ***
  • Posts: 294
Questions on 457 plans
« on: February 08, 2015, 04:46:28 PM »
Hello all, I have some questions about 457 plans that I was hoping you could help with.  Its the only type of retirement plan I'm really not that knowledgable about and I'm a little confused about how the distribution feature works of not having an age restriction.  On the surface, this seems like a great plan for someone planning to FIRE and can provide bridge money to supplement my after tax savings until I get my rollover ladder in place.  I'll give a brief background of my situation then ask my questions.

Situation:
I am married and work for a private company, where I have access to a 401k which I max out.  My wife works for a school district, which she will receive a pension from.  Currently for tax defered/advantaged retirement savings, we max out my 401k, both Roth IRA's, and have a mandatory contribution to fund my wife's pension.  The rest of our savings I have been doing on a post-tax basis to a brokerage acct.  I recently hit the ammt I have calculated I need in my investment accts on a post tax basis for expected purchases and to float us until I can get my rollover ladder in place, plus some buffer.  Now I am trying to go back to maximize my tax advantaged prospects, since I noticed my wife has access to both a 403b and a 457.

Questions:
1.  The 457 seems preferable to the 403b for our situation because of the provision to access the money whenever you stop working for that employer with no penalty.  Am I correct in this?  The only downside seems to be that you can't draw that money while you work for your employer until 70.5...this should not be a concern for us.

2.  I understand I can contribute up to 18k to both of these accts for 36k total, is that correct?  That is a little more than my wife's income but I figure I will take the answer from question 1 and max that acct first then trickle the rest into the other plan.  I didn't see anything in her benefits package literature about limiting what % of your salary you can contribute to these plans.

3.  The main thing I am confused about is what to do with the 457 money when my wife stops working...ESPECIALLY if she stops working there to switch employers, but before we want to retire.  I see that you can roll over 457 plans to IRA's like you could with a 401k, but am curious if doing this eliminates your penalty free draw advantage regardless of age and reclassifies that money to be the same as a normal IRA with the same penalty rules.  Can someone shed light on this for me?

Thanks for any help you can give.



« Last Edit: February 08, 2015, 04:49:42 PM by Terrestrial »

johnny847

  • Magnum Stache
  • ******
  • Posts: 3196
    • My Blog
Re: Questions on 457 plans
« Reply #1 on: February 08, 2015, 05:22:46 PM »

Questions:
1.  The 457 seems preferable to the 403b for our situation because of the provision to access the money whenever you stop working for that employer with no penalty.  Am I correct in this?  The only downside seems to be that you can't draw that money while you work for your employer until 70.5...this should not be a concern for us.
Yes, so long as this is a governmental 457b. Since your wife works for a school, I would assume this is the case, but I would double check. This is important because governmental 457b funds are held in trust on the behalf of employees, whereas nongovernmental 457b funds are the property of the employer and can be subject to creditors in bankruptcy proceedings of the employer.


2.  I understand I can contribute up to 18k to both of these accts for 36k total, is that correct?  That is a little more than my wife's income but I figure I will take the answer from question 1 and max that acct first then trickle the rest into the other plan.  I didn't see anything in her benefits package literature about limiting what % of your salary you can contribute to these plans.
Yes. And is 36k more than her actual gross income (well I guess her gross income + 7.65% for FICA)? I ask because it doesn't matter who in the married couple pays the taxes if filing MFJ, so long as all the taxes get paid (as in, your wife could set her withholding to zero and you could set up your withholding to pay all the taxes for both of you, it makes no difference to the IRS).

3.  The main thing I am confused about is what to do with the 457 money when my wife stops working...ESPECIALLY if she stops working there to switch employers, but before we want to retire.  I see that you can roll over 457 plans to IRA's like you could with a 401k, but am curious if doing this eliminates your penalty free draw advantage regardless of age and reclassifies that money to be the same as a normal IRA with the same penalty rules.  Can someone shed light on this for me?
You can only rollover 457b plans to IRAs if it's a governmental 457b. Double check that it is in fact a governmental 457b.
And you are correct, that would remove the penalty free draw advantage regardless of age.


AMT rules are kinda whacky, but my understanding is you hit them if you have a high income and/or itemize a ton of deductions. I'm assuming you make a lot of money, especially considering you say that you've been investing in a taxable brokerage account. Based on this, I would definitely recommend your wife contributes to the max to a 403b, and also the max to the 457b so long as it is a governmental one. In fact, if it is governmental, I would max the 457b first (so long as the expense ratios of the funds available aren't terribly higher than the 457b's) because of the early withdrawal without penalty provision.

SeanTankarian

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Re: Questions on 457 plans
« Reply #2 on: February 09, 2015, 08:30:28 AM »
Governmental 457b plans can be rolled to most other types of retirement plans, not just IRAs.  You can transfer between a Gov. 457b plan and another 457b, a 401k, 403b, IRA, and Roth IRA (conversion).  As for which plan is better for your wife, it's likely the 457b because of the penalty-free distributions and her investment and plan administration costs could be lower.  A lot of 403b plans cost more than 457b plans but you would have to check and compare the costs.  Finally, let me suggest that you be careful about 'over-funding' these types of plans because it's possible to kick yourself into a higher tax bracket when you retire.  I've written an article about the 'overfunding' phenomena and way's to offset this potential problem and I'd be happy to direct you to it if you're interested. 

Terrestrial

  • Bristles
  • ***
  • Posts: 294
Re: Questions on 457 plans
« Reply #3 on: February 09, 2015, 09:42:26 AM »
Thanks all of you for the insights, this clears up alot of my uncertainty.

I've written an article about the 'overfunding' phenomena and way's to offset this potential problem and I'd be happy to direct you to it if you're interested.

Thanks! It would be great if you could pass this along.