Author Topic: Mustachian view of 457s?  (Read 2019 times)

SavinMaven

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Mustachian view of 457s?
« on: September 21, 2017, 12:12:24 PM »
I have access to a 457(b) at work and am wondering if this could prove to a be a good vehicle to park funds needed to FIRE before the age at which I can withdraw from my 403(b) without penalty.

(my most vexing obstacle to FIRE is that the vast majority of my NW is in either the house - which I plan to still live in - or retirement accounts I can't access without penalty until I'm older than I hope to FIRE).

Interested in knowing whether others have/are utilizing these and what their thoughts and experience have been?

dandarc

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Re: Mustachian view of 457s?
« Reply #1 on: September 21, 2017, 12:23:05 PM »
. . . before the age at which I can withdraw from my 403(b) without penalty.
See the sticky at the top of Investor Alley to see how to withdraw early without penalty.

That being said, a 457(b), assuming it has good investment options is certainly a good place to invest for your early retirement.  Ideally, max both the 457B and the 403B.

Make sure it is a government 457 - those are mostly like 401K/403B's, but better.  457 + 403 screams "public school or university" to me, which generally would be a governmental plan, but good to check because non-governmental 457 plans have some peculiarities around who owns the funds and when taxes are due that you'd want to consider.

And if the 457 has a Roth option - don't do it without first reading up on it.  An early withdrawal from a Roth 457 is not treated at all how I'd expect when adding what I know about "Roth" and "457".

seattlecyclone

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Re: Mustachian view of 457s?
« Reply #2 on: September 21, 2017, 01:57:15 PM »
And if the 457 has a Roth option - don't do it without first reading up on it.  An early withdrawal from a Roth 457 is not treated at all how I'd expect when adding what I know about "Roth" and "457".

It sort of makes sense. Early withdrawals from most traditional retirement accounts count as income plus a 10% penalty; a 457 just knocks off the 10% penalty. Early withdrawals from most Roth retirement accounts tax the earnings as taxable income plus a 10% penalty; a 457 knocks off the 10% penalty.

The advice to think twice about a Roth 457 still holds; the early withdrawal rules for the traditional are much more compelling in my opinion.

Babybalrog

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Re: Mustachian view of 457s?
« Reply #3 on: September 22, 2017, 07:43:18 AM »
I wish I had noticed the 457 at my work earlier. It's identical in cost to our 401k, but so much better on the withdraw rules. So i defiantly recommend using it, first. However, some places of work have terrible fees on their 457 for some reason, so do your homework. The 401k/403b may be a better place to start.

I have a little money in it as a Roth 457. Can you elaborate on the early withdraw issues?

dandarc

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Re: Mustachian view of 457s?
« Reply #4 on: September 22, 2017, 08:28:51 AM »
I wish I had noticed the 457 at my work earlier. It's identical in cost to our 401k, but so much better on the withdraw rules. So i defiantly recommend using it, first. However, some places of work have terrible fees on their 457 for some reason, so do your homework. The 401k/403b may be a better place to start.

I have a little money in it as a Roth 457. Can you elaborate on the early withdraw issues?
If you withdraw from the Roth 457 early, meaning before Age 59.5 but after your separation date, you avoid the penalty but you pay ordinary income rates on any earnings.  I believe the withdrawal will be pro-rated between basis and earnings, so you'll have tax to pay.

A traditional 457 is basically a traditional 401K/403B with a different "penalty free withdraw date" - the separation from employer date.  What I mean by that is the tax-treatment after the separation date is the same as withdrawing from a traditional 401K at 59.5.  We cannot say the same thing about a Roth 457 as it relates to a Roth 401K.

Babybalrog

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Re: Mustachian view of 457s?
« Reply #5 on: September 28, 2017, 01:38:28 PM »
I wish I had noticed the 457 at my work earlier. It's identical in cost to our 401k, but so much better on the withdraw rules. So i defiantly recommend using it, first. However, some places of work have terrible fees on their 457 for some reason, so do your homework. The 401k/403b may be a better place to start.

I have a little money in it as a Roth 457. Can you elaborate on the early withdraw issues?
If you withdraw from the Roth 457 early, meaning before Age 59.5 but after your separation date, you avoid the penalty but you pay ordinary income rates on any earnings.  I believe the withdrawal will be pro-rated between basis and earnings, so you'll have tax to pay.

A traditional 457 is basically a traditional 401K/403B with a different "penalty free withdraw date" - the separation from employer date.  What I mean by that is the tax-treatment after the separation date is the same as withdrawing from a traditional 401K at 59.5.  We cannot say the same thing about a Roth 457 as it relates to a Roth 401K.

Thanks, I found this on the web

Quote
"How can I be assured I’ll receive a Roth 457(b) distribution tax-free?

Generally, you must be separated from service to receive a distribution. In order to ensure the distribution is tax-free, it must be a ‘qualified’ distribution. A qualified distribution must meet the following two conditions:

Roth contributions must be held in the account for five consecutive years after the first contribution is made; and
You must be at least age 59½ the year you take the distribution.

How are Roth 457(b) distributions taxed if they are not qualified?


If a distribution is not ‘qualified’, the portion of the distribution attributable to the Roth contributions, termed ‘basis’ by the IRS, is not taxable since it was taxed at the time it was contributed to the Plan. The earnings portion (if any) is taxable. The allocation between the basis and taxable earnings is determined on a pro-rata basis when distributed. For example, if a non-qualified distribution of $5,000 is made from your Roth account when the account consists of $9,400 of Roth contributions and $600 of earnings, the distribution consists of $4,700 Roth contributions and $300 of earnings."

That makes it sound like a Roth IRA. I am however a little pissed, because one year I got my taxable income down so low that I made Roth contributions. So now I have a mix of contribution types in my 457, plus earnings. It could be a bear to pull money out. I wish I has just used my 401k as traditional and my 457 as Roth or the other way around.

dandarc

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Re: Mustachian view of 457s?
« Reply #6 on: September 28, 2017, 01:46:49 PM »
Roth 457 and Traditional 457 should be separate accounts.  I guess having 4 accounts instead of 2 is a little more complicated, but that read like you thought the pro-rata thing on the Roth 457 might have applied to the traditional money as well.

So one fix for the Roth 457 is to just roll it over to a Roth IRA - that can be done with Roth 401Ks too.  Since you've noted the thing is treated somewhat worse than a Roth IRA before 59.5, that's not too bad of an idea.  The basis should follow from the 457 to the IRA (keep good records!), so you can withdraw the contributions tax and penalty free at any time - not pro-rated when done from a Roth IRA.

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Re: Mustachian view of 457s?
« Reply #7 on: October 02, 2017, 10:41:22 PM »
I have access to a 457(b) at work and am wondering if this could prove to a be a good vehicle to park funds needed to FIRE before the age at which I can withdraw from my 403(b) without penalty.

(my most vexing obstacle to FIRE is that the vast majority of my NW is in either the house - which I plan to still live in - or retirement accounts I can't access without penalty until I'm older than I hope to FIRE).

Interested in knowing whether others have/are utilizing these and what their thoughts and experience have been?
I'm guessing you work for a government entity?

I contribute the max to a 403(b) and a 457(b), which in my case is 48K per year (I am over age 50). If you can contribute to both, and you have the funds, it's a great way to sock away some extra $$ pretax.

Also, if you have not been contributing to a 457 since the beginning of your employment, there is a provision to double your base contribution the last 3 years before retirement. That works out to 36K per year (the base contribution is 18K). Others have mentioned when you can withdraw from a 457, so I won't.

403 and 457 plans are not as tightly regulated as 401 plans, so be aware of the fees and potential crummy investments.