Author Topic: To open or not to open? A 457b with TIAA  (Read 701 times)

FIREeh?

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To open or not to open? A 457b with TIAA
« on: January 08, 2021, 02:51:54 PM »
Hi all--I've been lurking all year and absorbing whatever I can like crazy, but this is my first post! I need some help on pre-tax retirement options at work. Thanks to this community, I've realized how lucky I am to have access to a 403b and a 457b, each with separate 19.5k employee contribution limits.

403b. I already max out my 403b, which as far as I understand is basically the same as a 401k. I don't plan to stay with my company until retirement, and so plan to roll this over into a personal tIRA when I leave. The account is administered by TIAA, but they allow me to invest in VFIAX, which appears to be the lowest-fee, most Mustachian fund. As far as I know, I'm happy with this account.

457b. Since I live in a HCOL with reasonably high income, I'm considering opening one of these for more tax-advantaged growth. This effort would be redirecting my current taxable cash savings each month and lowering my AGI in the 24% bracket closer to the 22% bracket. For the 457b, I seem to be limited to TIAA investment options. If I ignore real estate, fixed income, money market, I'm left with equity options that include: CREF Equity Index Account R2 (.29% fee), CREF Global Equities Account R2 (.36% fee), CREF Growth Account R2 (.32% fees), and CREF Stock Account R2 (.39% fee).

I don't trust my corporate TIAA rep, because he has been demonstrably wrong a few times and continues to try to push annuities and high-cost TIAA products despite my non-interest. I've also been unable to acquire any paperwork that can definitely tell me rules about my specific accounts.

Part of my concern stems from my third, entirely employer-funded retirement account at this same company. It is a 401a that has (changing) ratio rules about what percentage can be rolled over upon separation and what percentage must remain with TIAA as an annuity. Based on that, I'm afraid of dumping a lot of money into the 457b and learning that I have limited flexibility to roll it over upon separation and it's stuck in relatively high-fee investments. It's been remarkably difficult to get transparent answers so I don't trust TIAA or their stated fees.

Any advice on whether to open the 457b and which investment to choose? Do my options feel incorrect based on anyone else's experience (i.e., is my TIAA rep not presenting all investment options?) Does anyone know how 457s well, and whether some rules are universal vs. company-specific?

Thank you all in advance!

uniwelder

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Re: To open or not to open? A 457b with TIAA
« Reply #1 on: January 08, 2021, 04:55:43 PM »
I'm not an expert, but I do also have a 457b plan at work, as well as TIAA for my 403b.  TIAA does not administer my 457b.

Regarding option with TIAA, you should take a look at their real estate fund QREARX.  It has a high fee, something like 0.8%, but it is for real estate owned by TIAA.  It doesn't act like a typical REIT fund that fluctuates like stocks.  The fund value is based on their physical buildings, so it has a very slow moving curve.  Returns have been something like 4-7% and it lags big drops in the stock market like in 2008 by several months.  It can serve as a replacement or supplement for bonds and act as a good rebalancing tool.

Also, I suppose it depends on how big your employer is, but I just got a notice that TIAA will be offering some Vanguard funds as an option for me.  Don't lose hope that maybe lower cost funds will become available.
« Last Edit: January 08, 2021, 04:58:25 PM by uniwelder »

uniwelder

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Re: To open or not to open? A 457b with TIAA
« Reply #2 on: January 09, 2021, 02:06:27 PM »
Part of my concern stems from my third, entirely employer-funded retirement account at this same company. It is a 401a that has (changing) ratio rules about what percentage can be rolled over upon separation and what percentage must remain with TIAA as an annuity. Based on that, I'm afraid of dumping a lot of money into the 457b and learning that I have limited flexibility to roll it over upon separation and it's stuck in relatively high-fee investments. It's been remarkably difficult to get transparent answers so I don't trust TIAA or their stated fees.

I don't understand what you mean in this part.  Can you explain?  Unless you happen to leave your current employer and go to another one with a 457b available, I don't think there is any way to roll over the account funds.  Even then, I'm not sure this is possible.  The 457b is considered 'deferred compensation' so your funds are completely available to you when you are no longer working for your current employer, but generally speaking, I was under the impression it stays with the original administrator until you pull it out.

Are you asking whether you can move the funds from TIAA to Vanguard/Fidelity/etc and still have it considered a 457b so you're not yet taxed on the money until later?  I don't have the answer, but I feel like it is no.

cool7hand

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Re: To open or not to open? A 457b with TIAA
« Reply #3 on: January 09, 2021, 02:55:46 PM »
My wife and I made use of her 457 after we maxed out other accounts. It worked for us.

With most ERISA plans, if memory serves, if you make a written request for the summary plan descriptions from the plan administrator, they must provide a copy within 30 days. I didn't review this link in detail. I leave that for you, but I think it should back me up: https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/how-to-obtain-employee-benefit-plan-documents-from-dol.pdf. There might even be a statutory penalty for delay.

Good luck!

FIREeh?

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Re: To open or not to open? A 457b with TIAA
« Reply #4 on: January 09, 2021, 09:57:19 PM »
Thanks for your response uniwelder. I think I understand what youíre saying, and it held with what Iíve read. The confusing part is my TIAA rep told me the ďrolloverĒ options are the same as my 403b, which CAN be rolled over into a Vanguard IRA as I understand it.

So, Iím 35 now, and expect to leave my employer before 40. At separation, at age 40 for example, would the 457b become entirely available to me to withdraw? My understanding is that it would, without any penalty, though obviously Iíd likely move into a higher marginal tax bracket that year. The benefit then, would be a few years of growth on pre-tax funds, though they would be in higher fee and lower return investments than Iíd ideally want. If thatís all correct, does it feel like a worthwhile move?

Cool7hand, thank you. Iíll investigate further. Obviously this would all be a lot easier if details would be shared clearly with me via written documents.

uniwelder

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Re: To open or not to open? A 457b with TIAA
« Reply #5 on: January 10, 2021, 06:20:20 AM »
The confusing part is my TIAA rep told me the ďrolloverĒ options are the same as my 403b, which CAN be rolled over into a Vanguard IRA as I understand it.

So, Iím 35 now, and expect to leave my employer before 40. At separation, at age 40 for example, would the 457b become entirely available to me to withdraw? My understanding is that it would, without any penalty, though obviously Iíd likely move into a higher marginal tax bracket that year. The benefit then, would be a few years of growth on pre-tax funds, though they would be in higher fee and lower return investments than Iíd ideally want. If thatís all correct, does it feel like a worthwhile move?

Sorry, I have no clue about the first part, only what I'm finding online right now.  For the second, yes, that I'm sure of--- the entire 457b is available to withdraw, but you'll be taxed at your higher rate.  There are definitely smarter people than me here that might be able to address your situation better.  I just looked up "457b rollover" and found the following two IRS tables.  Seems like it also depends on whether you're a state/local employee or non-profit, but looks like you could roll over into a 403b or IRA or 457b if you go work for another eligible position.

https://www.irs.gov/pub/irs-tege/rollover_chart.pdf
https://www.irs.gov/retirement-plans/comparison-of-tax-exempt-457b-plans-and-governmental-457b-plans

For the third part--- is opening the 457b worthwhile?  I guess it depends on your situation.  How long do you plan to keep working?  For me, its definitely worthwhile and I would chose maxing out the 457b before contributing to the 403b.  I don't think 0.3-0.4% fees are that high to keep me from participating. 

Also, what did you mean by 'lower return investment than I'd want'?  What did you have in mind that might return better than the various stock index funds you originally mentioned?

clarkfan1979

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Re: To open or not to open? A 457b with TIAA
« Reply #6 on: January 10, 2021, 06:44:58 AM »
If you are currently in the 22% tax bracket and get yourself into the 12% tax bracket by contributing to the 403b and 457b, it's a no brainer.


I currently contribute 13% and my employer contributes 13.4% to a 401a. I have a 457 available, but I currently do not contribute to it because we are currently in the 12% federal tax bracket.

My wife currently works part-time and makes 11K/year. If she ever decided to go back to work full-time, that would immediately put us into the 22% federal tax bracket and I would max out my 457 to shelter some of the increased income.


FIREeh?

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Re: To open or not to open? A 457b with TIAA
« Reply #7 on: January 10, 2021, 07:09:32 PM »
Uniwelder -- thanks for these great links. My plan is a tax-exempt 457b (not gov) so it looks like there are no rollover options. I hear you on the fees not being overly bad, and to your question about my point on "lower return investments": I trust VTSAX to get me the average 7% return, I just don't trust the TIAA funds I mentioned. Someone smarter than I could reassure me here, and I can do some more research, but the salesmanship of my corporate rep is just really throwing me off.

I'm planning to separate from this employer within the next few years, but not planning to RE at the moment. Just looking to keep my options open and hit FI soon enough to give me some options in 10-20 years. So, no 457b rollovers (for me) strikes me as another reason this may not be worth it for me. For you, may I ask why you prioritize your 457b over your 403b?

Clarkfan1979 -- thanks for weighing in! I'm fortunate to be working from the 24% bracket to the 22%. In a HCOL area with a correspondingly higher salary, 12% won't be attainable for me. That's part of why I'm unsure if this is worth all the trouble. If it was 22>12 I totally understand that it would be.

Update. Investopedia references my type of plan and mentions that the assets "remain with the employer until they are distributed. The rollover privileges are much more restricted, too." "Funds in such a plan can only be rolled over into another non-governmental 457 plan," and I expect it's unlikely I'll move to another organization with one of these. I'm leaning toward not bothering, and dropping the equivalent savings into my taxable Vanguard funds, though still wouldn't be surprised if someone on here explains why I'd be wrong to do so.
« Last Edit: January 10, 2021, 07:14:32 PM by FIREeh? »

uniwelder

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Re: To open or not to open? A 457b with TIAA
« Reply #8 on: January 11, 2021, 05:19:01 AM »
As I understand, the 457b as a state employee gives me all the benefits of the 403b without making access to the money tedious (roth conversions or SEPP to avoid 10% penalty) in the case of early retirement.  There's no penalty for using it before traditional retirement age.  The administrator also happens to have some very low fee options.  In a few years when I start using the 457 funds, I expect our (married) income to be low enough that we'll be in the lowest (10% right now) tax bracket.

In your case, perhaps the 457 is not so great.  It looks like government vs non-government 457's have some distinct differences.