Penn State University 457(b)

[Coco]

I have access to both a 403(b) and 457(b) at Penn State University.  I would like to prioritize maxing out the 457(b) since you can withdraw early without penalty.  However, my husband and I are both paranoid about losing my deferred compensation in the event of bankruptcy.  We doubt that a large university will go under in the next 20 years, but we don't want to take any chances.  My understanding is that a 457(b) is only held in trust if it's a governmental plan.  We're concerned because Penn State is technically not a "public" university.  It is a "state-related" university.

This is the only information that I've been able to find online:  http://www1.tiaa-cref.org/tcm/psu/plans/plan3/plan-details/index.htm

We met with a TIAA-CREF consultant yesterday and asked her "Are the 457(b) plan's assets the property of Penn State and subject to creditors, or are the plan's assets held in trust for the participants?"  She claims that the 457(b) plan is safe because it's "public."  We asked for this in writing, and she sent us to the following link, which is not specific to my plan:  https://www.tiaa-cref.org/public/advisors/products/eligible-investors/457b/index.html#PublicvPrivate

Does anyone have more information regarding the security of Penn State's 457(b)?

Even if the assets of Penn State's 457(b) are held in trust, do you think it's safe to defer compensation?  Who is the custodian of the trust?  If we don't use the 457(b) at all, we will probably reach the point where we've maxed out the 403(b) and our IRAs, and we'll have to start using taxable accounts.

I really appreciate any help you can provide.  We're excited to start saving more this year!  (Just found MMM a few months ago.)

[sol]

Penn State is a 150+ year old institution with 100k paying students.  I think they're probably safe for the near term future.

[MooseOutFront]

Interesting distinction you've found, but I would still prioritize the 457b as the one to fill first.  And I wouldn't lose any sleep over it.

[hodedofome]

http://www.amazon.com/dp/1594036659/ref=wl_it_dp_o_pC_S_ttl?_encoding=UTF8&colid=3H8BG97DDL8TQ&coliid=I2BUG4KJPFKT6Q

I haven't done enough research into the topic but I too would share your concern about the sustainability of higher education as a whole. Although I don't know the specifics of Penn State and the 457b and if that would ever be at risk. The pensions of private corporations have certainly been at risk for some time.

[Coco]

Thank you for the feedback.  I feel a bit ridiculous worrying about the future of Penn State, but I also believe that higher ed is unsustainable in its current form.  I found the email address for a manager in the retirement benefits office, and I asked for the 457(b) plan document.  We'll see what he says.  In the meantime, I put my March paycheck into the 403(b) because doing something is better than nothing.  I was starting to become paralyzed by indecision!

[forummm]

Just max them both out :)

And if the university starts to have big financial problems where you feel your account is at risk, all you have to do is quit your job and roll it over into an IRA anywhere. If the university is having such financial trouble, quitting your job would likely be just before you were getting laid off anyway.

[greatrussian]

No need to worry, Penn State is a governmental employer - otherwise the plan would only be available to a select group of highly compensated individuals.

[Coco]

Good news!  Received confirmation in writing that my 457(b) is governmental, which leads me to my next questions:

I only make about $40,000 gross, so I don't think it's possible for me to max out both the 457(b) and 403(b) after health insurance, state and local taxes, etc.  Ideally, I want to get my take-home pay down to $0 by putting money into tax deferred accounts.  This should get our joint taxable income down to the 15% bracket, so then it will make sense to max out Roth IRAs.

Can I make my federal withholding $0?  Does the withholding automatically decrease as my paycheck taxable income decreases, or do I have to talk to someone in payroll?  I think I should be able to put more than my current net pay into tax deferred accounts, but the form I have to submit says I'm responsible for the amount.  I don't want to "overdraft" my paycheck.

Also, when do you pay FICA taxes on 403(b) and 457(b) contributions?

 

[forummm]

Good news!  Received confirmation in writing that my 457(b) is governmental, which leads me to my next questions:

I only make about $40,000 gross, so I don't think it's possible for me to max out both the 457(b) and 403(b) after health insurance, state and local taxes, etc.  Ideally, I want to get my take-home pay down to $0 by putting money into tax deferred accounts.  This should get our joint taxable income down to the 15% bracket, so then it will make sense to max out Roth IRAs.

Can I make my federal withholding $0?  Does the withholding automatically decrease as my paycheck taxable income decreases, or do I have to talk to someone in payroll?  I think I should be able to put more than my current net pay into tax deferred accounts, but the form I have to submit says I'm responsible for the amount.  I don't want to "overdraft" my paycheck.

Also, when do you pay FICA taxes on 403(b) and 457(b) contributions?

FICA taxes are withheld from your wages first. Then your pre-tax health insurance premium and your contributions to retirement accounts. Then federal, state, and local taxes are assessed on the remainder, if any. So if you have your entire paycheck going to FICA, insurance, and contributions, you don't need to worry about your federal withholding--there shouldn't be any. As far as "overdrafting" your actual wages, I haven't had an employer allow that--they would cut off the optional contributions once the funds ran out. As far as whether you can write a check to the fund to pay even more than your salary--that would be up to your employer to say if that's OK.

[rightstuff]

Good news!  Received confirmation in writing that my 457(b) is governmental, which leads me to my next questions:

I only make about $40,000 gross, so I don't think it's possible for me to max out both the 457(b) and 403(b) after health insurance, state and local taxes, etc.  Ideally, I want to get my take-home pay down to $0 by putting money into tax deferred accounts.  This should get our joint taxable income down to the 15% bracket, so then it will make sense to max out Roth IRAs.

Can I make my federal withholding $0?  Does the withholding automatically decrease as my paycheck taxable income decreases, or do I have to talk to someone in payroll?  I think I should be able to put more than my current net pay into tax deferred accounts, but the form I have to submit says I'm responsible for the amount.  I don't want to "overdraft" my paycheck.

Also, when do you pay FICA taxes on 403(b) and 457(b) contributions?

FICA taxes are withheld from your wages first. Then your pre-tax health insurance premium and your contributions to retirement accounts. Then federal, state, and local taxes are assessed on the remainder, if any. So if you have your entire paycheck going to FICA, insurance, and contributions, you don't need to worry about your federal withholding--there shouldn't be any. As far as "overdrafting" your actual wages, I haven't had an employer allow that--they would cut off the optional contributions once the funds ran out. As far as whether you can write a check to the fund to pay even more than your salary--that would be up to your employer to say if that's OK.

Coco, I am experiencing exactly what forummm says above.  Best of luck to you!

[Genevieve]

Hi Coco -- I'm in the area. We should meet up!

[MooseOutFront]

You can just change your W-4 to 25 or so and the withholding will drop to zero.  That's what I do with mine.  But I also calculate mine exactly.  It's not hard once you find the correct tables on the IRS website.

[seattlecyclone]

So if you have your entire paycheck going to FICA, insurance, and contributions, you don't need to worry about your federal withholding--there shouldn't be any.

This isn't quite true. The amount of your paycheck that goes to FICA counts as taxable income for federal income tax purposes. Therefore you may have federal income tax withheld on this amount if the withholding formulas for your filing status and number of allowances say that you should have some tax withheld. At $40k salary you may find the withholding is zero, I know from experience that it's quite possible to put "100%" of your paycheck in pre-tax 401(k) and still have a nominal amount of federal income tax withheld.

Try it and see what happens!

[Coco]

Just wanted to post a followup:  I found out that state and local taxes in Pennsylvania must be paid on contributions to tax-deferred retirement accounts.  Then, you don't have to pay state and local taxes on withdrawals when you're retired.  After figuring out what taxes are paid when, it was pretty easy to calculate the amount of money I can dump into my 457(b) and 403(b).  My monthly taxable income for federal taxes ends up low enough that my federal withholding automatically drops to 0.

In other news, I negotiated a 13% pay raise to go into effect in July!  Maybe I'll be able to max out both accounts once I get my raise.  :)