By Dr. James M. Dahle, WCI Founder
Section 457 of the Internal Revenue Code (IRC) is all about deferred compensation plans for state and local governments and tax-exempt organizations. The most common type of plan seen under this section is a 457(b) plan. The key point to understand about 457(b) plans is that they are deferred compensation from your employer to you. That means that it is money the employer owes you but that the employer has not yet paid you.
Why in the world would anyone be willing to let employers keep the money they owe to the employee? Well, there are two very big reasons:
- Tax Benefits
- Asset Protection
In the first case, a 457(b) functions as another retirement plan, shielding your investments from any tax drag as they grow. There are both tax-deferred (traditional) and tax-free (Roth) versions. In the second case, the 457(b) shields your assets from your creditors. It isn't your money (yet), so your creditors can't take it. Of course, it may be available to your employer's creditors. More details about that below.
Here's what you need to know about 457 retirement plans.
What Is a 457 Deferred Compensation Plan?
A 457 plan simply refers to any plan that operates under section 457 of the IRC. Subsection (a) of the code really defines all 457 plans when it says that this plan is only taxable to the participant in the year the money is paid to the participant, i.e. it is deferred compensation. Subsection (b) gives further details for the plans we're really discussing in this post. Interestingly, subsection (f) is also relevant.
What Is a 457(f) Plan?
A 457(f) plan is a non-qualified deferred compensation plan where all contributions are made by the employer and none by the employee. It is usually just for a select management group or highly compensated employees, and it involves money that is paid to the employee at the time of retirement. It is sometimes called a Supplemental Executive Retirement Plan (SERP). With a 457(f) plan, the benefits are taxed when they vest, NOT when they are paid out. This makes it an “ineligible” 457 plan. 457(f) plans may have higher contributions than a 457(b) plan. In the remainder of this post, we will not be discussing 457(f) plans, only 457(b) plans.
What Is a 457(b) Plan?
The more commonly used 457 plan is the 457(b) or 457B. These plans are eligible (meaning no taxes due until the money is actually paid out), non-qualified (by the IRS, meaning the employee doesn't own the assets) retirement plans. They are typically offered by government employers or nonprofits, often in conjunction with a 403(b) and/or a 401(a) plan.
Governmental vs. Non-Governmental 457(b)s
The most important thing to know about your 457(b) plan is whether it is a “governmental” plan or a “non-governmental” plan. In this particular case, a governmental plan is better in all respects than a non-governmental plan.
Your asset protection and, probably more importantly, your distribution options are significantly better with a governmental 457(b). A governmental 457(b) can just be rolled over into a 401(k) or IRA when you leave the employer. That makes using a governmental 457(b) a “no-brainer” most of the time.
How Does a 457 Plan Work?
For the most part, a 457(b) plan works just like your 401(k) or 403(b). It's an “extra” retirement account. You put money in and then select which investments in the plan to invest the money into. Once you finish working, you take the money out and use it for your expenses.
How Much Can I Put in My 457 Plan?
The annual contribution limit for a 457(b) plan mirrors that of a 401(k) or 403(b)—$20,500 in 2022. However, the catch-up contributions work differently. Read your plan document carefully to understand if your plan allows catch-up contributions at all and, if so, how they work. The IRS allows a governmental 457(b) plan to do the same 50-year-old-plus extra $6,500 catch-up contributions that 401(k)s and 403(b)s allow.
However, they also allow both governmental and non-governmental 457(b) plans to have “special catch-up contributions” in the last three years before retirement age where you can either double your contributions ($41,000 per year in 2022) or make up for any years that you didn't put in the maximum $20,500 [2022]. Unfortunately, it's whichever of those two is less. So, total catch-up contributions are never going to be more than $20,500 x 3 = $61,500 [2022]. If your plan offers both the 50+ catch-up and a type of special catch-up, you can only do the one that allows the larger contribution, not both. So if your plan's retirement age is 65, you can do $6,500 [2022] extra from 50 to 62 and then possibly $20,500 [2022] extra from 63 to 65. I know, it's complicated. I don't write the rules, I just tell you what they are.
When Can You Withdraw from a 457 Plan Without Penalty?
There is no early withdrawal penalty from a 457(b), at least if you are allowed to make a withdrawal. While taxes may be due, there is no extra 10% tax for withdrawing prior to age 59 1/2. This can be both an advantage and a disadvantage.
However, plans generally require you to either separate from the employer first or, at least, have a hardship before you can make a withdrawal. This is beneficial in that you can tap your 457(b) first as an early retiree, leaving your 401(k) or 403(b) to cover spending after you are 59 1/2. This is usually a good idea anyway with a non-governmental 457(b), given the asset protection concerns. The disadvantage comes in with some non-governmental plans that have relatively poor distribution options, such as requiring you to withdraw the entire 457(b) balance in the year you leave the employer. This can result in withdrawals being taxed at the same or even higher tax rate than you had at the time of contribution!
Do 457 Plans Have Required Minimum Distributions?
Like 403(b)s, 401(k)s, Roth 401(k)s, Roth 403(b)s, and traditional IRAs, 457 plans have required minimum distributions (RMDs). If you have not already depleted the account, beginning at age 72, you will be required to take a certain amount of money out of your account each year or pay a massive tax (50% of the amount you should have withdrawn). You don't have to spend the money, but you do have to remove it from the retirement account and reinvest it elsewhere.
How Are 457 Distributions Taxed?
The taxation of a 457 plan is identical to that of a 401(k) or 403(b). If you made tax-deferred (traditional) contributions, you get an upfront tax break at your marginal tax rate. The investments then grow in a tax-protected way without the tax drag you would see in a taxable account. At the time of withdrawal, all money taken out is taxed at ordinary income tax rates. However, if you have minimal other taxable income, you can use the 457(b) withdrawals to “fill the brackets,” resulting in a much lower effective tax rate on withdrawals than you saved at the time of contribution. This arbitrage of tax rates is a major benefit of using retirement accounts to save for retirement.
Are There Roth 457s?
Some 457(b) plans allow Roth contributions. These work precisely the same way as in a 401(k) or 403(b). While you do not get an upfront tax deduction, the investments grow tax-free and will be completely tax-free at the time of withdrawal. If you roll the money into a Roth IRA eventually, you can even avoid having to take RMDs.
Can I Withdraw from My 457 While Still Employed?
While every plan may be different, 457(b) plans generally do not permit in-service withdrawals except in the case of hardship. The IRS has this to say about what qualifies as a hardship and what does not:
“Under a 457(b) plan, a hardship distribution can only occur when the participant is faced with an unforeseeable emergency. (Code Section 457(d)(1)(iii))
An unforeseeable emergency is a severe financial hardship resulting from an illness or accident, loss of property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant or beneficiary. Examples of events that may be considered unforeseeable emergencies include imminent foreclosure on, or eviction from, the employee's home, medical expenses, and funeral expenses. Generally, the purchase of a home and the payment of college tuition are not unforeseeable emergencies.
(Reg. Section 1.457-6(c)(2)(i))Whether a participant or beneficiary is faced with an unforeseeable emergency depends on the facts and circumstances. However, a distribution is not on account of an unforeseeable emergency to the extent that the emergency can be relieved through reimbursement or compensation from insurance, liquidation of the participant's assets, or cessation of deferrals under the plan. (Reg. Section 1.457-6(c)(2)(ii))
A distribution on account of an unforeseeable emergency must not exceed the amount reasonably necessary to satisfy the emergency need. (Reg. Section 1.457-6(c)(2)(iii))”
Severe financial hardship is the key. You'll need to convince your employer, but that shouldn't be too hard in a legitimate situation.
What to Do with Your 457 After Leaving a Job 457 b Rollover
What you do with your 457(b) after you quit, retire, or are fired depends heavily on whether it is a governmental or non-governmental 457(b). If it is a governmental plan, you have all kinds of options. You can
- Roll it into a traditional IRA (or Roth IRA if it is a Roth 457(b))
- Convert it to a Roth IRA
- Roll it into your new employer's 401(k) or 403(b)
- Roll it into an individual 401(k) if you qualify to have one
- Roll it into your new employer's governmental 457(b)
- Leave it in the 457(b) plan
- Pull it out gradually or all at once and pay taxes on it (no taxes due if a Roth 457(b))
If your 457(b) is a non-governmental plan, your options are far more limited but include:
- Roll it into your new employer's non-governmental 457(b) (if both plans permit rollovers)
- Leave it in the 457(b) plan
- Pull it out according to the options provided by the plan and pay any taxes due (no taxes due if a Roth 457(b))
457 Account Rollover Rules
Can You Roll Over a 457(b) to an IRA?
Yes, but only if it is a governmental 457(b) and you have separated from the employer.
Can You Contribute to a 457 After Retirement?
No. Only income earned from that employer can go into a 457(b). Once you have left the employer, no additional contributions can be made.
Additional Information
Can a 403(b) Be Rolled Into a 457(b)?
Benefits of a 457 Plan
#1 Additional Savings
The main benefit of using a 457(b) plan is you basically get another retirement plan similar to your 403(b). You can double your tax deduction and double your savings.
#2 No Early Withdrawal Penalty
457(b) plans are not subject to the Age 59 1/2 rule, meaning you can access the money without penalty as soon as you leave the employer. They're a great option to spend during early retirement. You just withdraw from the 457(b) first and leave your other retirement accounts until your 60s and later.
#3 Asset Protection
Like most retirement plans, 457(b) plans are good asset protection vehicles since they are generally protected from YOUR creditors. Governmental 457(b) plans are held in trust. Non-governmental 457(b) plans are subject to the creditors of your employer.
Downsides of a 457(b) Plan
It's not all rainbows and unicorns. These plans have downsides, too.
#1 Limited Investment Options
Like with most employer-provided retirement accounts, the employer gets to choose the investments. They might not have done a very good job. While you can remind them of their fiduciary duty to their employees, employees are rarely able to change the options. Alternative investments (precious metals, private businesses, real estate, cryptocurrency) that you might be able to invest in with a self-directed 401(k) or self-directed IRA are also generally not an option.
#2 Fees
It costs something to run the plan, and that cost is often passed along to the employees. Read your plan document and understand what fees you will be responsible for.
#3 Withdrawal Restrictions
This is retirement money, and in order to get the tax benefits the government is offering you to save for retirement, you must put up with some restrictions on accessing your money. You generally can't get it before you leave the employer. If you roll the money into an IRA, 401(k), or 403(b) after separation, the Age 59 1/2 rule will apply. Non-governmental 457(b) plans are also notorious for providing limited withdrawal options. Make sure you understand what they are and find them acceptable before investing.
#4 Asset Protection Concerns
With a non-governmental plan, the 457(b) money still belongs to the employer and is subject to their creditors. If they go bankrupt, you could lose your money.
Should You Use Your 457 Account?
Naturally, once an investor understands the downsides of a 457(b) account, they are often hesitant to use it. Here is how to decide.
457 Tax Savings vs. Risk of Loss
You are really weighing the tax savings of using the account against the restricted investments, limited withdrawal options, and, especially, the risk of loss. However, most doctors with access to a governmental 457(b) should consider it just another retirement account like their 403(b). In fact, some people aiming for early retirement actually fund it in preference to a 401(k) or 403(b). If the fees and investments are absolutely horrendous, you might want to give it a second thought, but even then, it often makes sense to use the plan, as you can probably roll it into a good 401(k) or IRA in just a few years when you separate from the employer. That still leaves you decades to enjoy the additional tax and asset protection benefits of retirement account investing.
However, if you have a non-governmental plan, you'll need to spend a little more time on your decision. If the fees and investments stink, you might be stuck with them for a much longer period of time. The withdrawal options might also be terrible. I have seen plans that require you to withdraw the entire amount as soon as you leave the employer. That could result in a “reverse tax arbitrage,” where you actually pay a higher tax rate on withdrawals than you saved on contributions. It is not uncommon to have to withdraw the money over just five or 10 years after separating, whether you are retired or not.
More importantly, you have to look at the employer. If your hospital is on shaky financial ground, you might want to limit how much of your compensation you want to defer. A bird in the hand may beat two in the bush. Some doctors avoid maxing out their 457(b), stop contributing after a few years, or avoid using it altogether due to this concern. While the tax savings are nice, the return of principal matters more than the return on principal. Talking to the hospital CFO about future expectations might help you decide whether to use the 457(b).
Personally, I think the risk of loss due to your employer going bankrupt is pretty low. While I'm sure 457 dollars have been lost, I've never run into a doc that had it happen to them. It certainly isn't common. I don't think I'd be willing to give up a $5,000-$6,000 per year tax break (along with ongoing tax and asset protection) because of that worry. I'm much more worried about market risk than 457 risk. So, I'd go ahead and use the plan. But I'd be sure to max out my 401(k) and Backdoor Roth IRAs first. And I'd definitely spend that money first in retirement.
What Is the Difference Between a 403(b) and a 457(b)?
Many times, 457(b) plans are described online or by the HR representatives as another 403(b) account only available to the high-earning employees of the organization, like the physicians. In many regards, the 457(b) is quite similar to your available 403(b):
- Both have annual maximum savings of $20,500 [2022] per year
- Both are contributed to with pre-tax dollars providing a nice tax break
- Both can have a tax-free (Roth) option
- Both grow in a tax-deferred (or tax-free if Roth) manner
- Both are taxed as ordinary income upon distribution
- Oftentimes, the same investment options will be available in both
- Both require withdrawals to start at age 72 with required minimum distributions
In one important way, the 457(b) is even better than the 403(b). It has no penalty for withdrawing money prior to age 59 1/2. The lack of the 10% early withdrawal penalty makes it an excellent source of income for a physician planning an early retirement. However, a 403(b) is always your money and always has a plethora of distribution options. That is not the case for a non-governmental 457(b).
At the end of the day, a 457(b) is a wonderful option to enjoy some additional tax and asset protection. Learn about your account and use it. Just be aware of the potential downsides, particularly of a non-governmental 457(b).
What do you think? Do you have access to a 457(b)? Do you use it? Why or why not?
I have a governmental 457B plan that I have stoked with the maximum contributions plus catch-up (as I am over 50) since about 2015.
It had excellent investment options and low fees. The “life of account” average percentage return from 2015 to now has been about 20%. Lucky me.
I am dropping to one day a week in late 2022, “effectively retiring” from my employer as a full time person…but not completely.
In 2023, my income drops precipitously to locums coverage, one day a week, plus some call. Am I then “separated” from my former employer. I certainly won’t have any benefits other than perhaps malpractice insurance with a tail.
I had an idea that 2023 is the best time to use some of this 457B money, during a year in which I make only a third of my prior income.
If I will have the proceeds of the sale of my main home after this summer and this part time work, I don’t need this 457B money for living expenses for several years.
Should I use some of the one time windfall of cash from the sale of the McMansion to convert the 457B into a Roth IRA in 2023? Does it matter that I am not completely separated from the 457B employer? I have no Roth money anywhere else. It’s all in regular IRA’s.
The chunk from the sale of our main home could alternately be used as an investment in a group of real estate investments on YieldStreet or Fundrise to create income to pay the small 2.5% mortgage on the retirement home…or simply pay off the retirement home. I think I can earn more than 2.5% on these proceeds, but paying off the retirement home is a “sure thing” and reduces our expenses by 1/6 forever.
you should read the summary plan document of your 457b but in every case I’ve seen you need to FULLY separate from your employer if you want to use the funds. So if you cut back at your employer, even working just 1 hour a week, then you haven’t separated and therefore can’t use your 457 money. If you want to stay and have access to the 457b money the only idea I can think of is work for them as a 1099-contractor rather than a W2 employee. Of course you’ll get no benefits as a 1099
I agree. Huckleberry probably isn’t separated yet. Read the plan document as every one of them is different but that’s awfully common to not have access prior to separation.
I left a non-government job a few years ago and was told I could roll the 403-B but had to leave the 457 money, I couldn’t cash it out or roll it over. After reading this blog I wonder if that was accurate information. Is there anything I can do about now?
You can call them up and confirm that information. Every 457(b) has different distribution options. That might be the way yours is.
Is our US Govt DAC/military TSP sort of a 457b? Thanks!
I don’t know what DAC is, but TSP is more like a 401(k) than a 457(b).
Also nice in that 457b contributions don’t count against 415c tax limits. (Max total retirement plan contributions/yr; ~58k-ish). Our employer has a 10% match and 5% mandatory contributions. Getting to 58k using a 403b plus match and required is fairly easy on a median physician salary. 58k + maxing out a 457b get you near 80k/yr total retirement contributions which is nice.
$61K this year.
Just trying to game out for the future what do you think about timing of distributions?
My wife’s non-governmental 457B plan election has to be made within 60 days of retiring/terminating. Options are Lump sum or installments from 2 to 10 years. They can start immediately or no later than age 72. You can make only one change after your initial election and that can only further defer (can’t accelerate).
I’m obviously thinking spread this over 10 years and use it to “fill up the buckets”. I was thinking use age 60, then could defer it back to 65 or 70 depending on our financial situation at that time. We’re in late-30s, but wife is thinking of leaving this employer and no 457b transfer would be available out. The fees are low and the investment options are good.
Thanks for the great article. As a new attending in my mid 30s, my worry with using the non-gov 457b I have access to relates to distributions. There is a moderate chance I will decide to leave my employer in the next 10-20 years as life’s circumstances change. In that case, I would probably be moving to a higher paying job and my taxes would be higher than now when I’m making 350k. My employer would make me take out distributions over a maximum of 10 years, and in my case it sounds like I would be losing money that way compared to how much I’d pay taxes now in the beginning of my career if I don’t contribute to this account and just get paid that money. Is this fair to say or am I missing something?
10 years? I’d probably still put something in there. But you’re right to think carefully about the distribution options.
Thank you for this article. I am a greenhorn on retirement topics.
After completion of a small summer job in 2021, I opted to rollover a small 457(b) amount into a Vanguard traditional IRA. Less a $12 distribution fee charged by the bank, the final amount deposited into the rollover IRA in 2022 was $237. In order to meet the min. required to invest in any fund, can I contribute to this account without working in 2022? Also, will the IRS penalize me for the $12 distribution fee?
Lastly, the amount shown on my W2 didn’t match the amount I received. Not including the distribution fee, there was a less than $3 difference. I spoke to the bank that sent the distribution and my former employer but neither can explain the difference. Will this be a problem with the IRS?
Thank you for your time.
You could buy an ETF, but honestly, if I had a $237 retirement account I’d probably just cash it out and pay the taxes and penalties to simplify my life. If neither you nor your spouse has earned income, then no, you can’t contribute more to it. There’s no penalty associated with that fee.
Who cares about $3? If the IRS wants to audit you over $3, just send them $3. I’d just put what is on the form I was sent on my tax forms.
Thank you for the article. I left a job a couple years ago from a reputable long-standing private university with a non-governmental 457(b) plan. When I left, I requested that they start paying my distributions at age 65. After reading this article, I realize I should have started distributions about 10 years earlier. However, when I emailed my former university’s HR department, they said I could not move it up. Is this something they can legally refuse?
Probably. I bet a plan can be written that would allow them to do that. Unless you die.
This is exactly how my wife’s 457(b) is written. Once you make an election (age 65), you can NEVER accelerate that. They do allow a one-time deferral. So if you had picked age 55, then decided you didn’t need the money, you could push it back to say age 60 or age 65. But they are very explicit in the plan literature that you can never move it from 65 to say 55/60.
There is the option for an emergency hardship withdrawal, but it’s only in an amount necessary to meet the emergency and was worded in such a way to make it seem they would almost always not allow that.
Thanks to you both. That’s a bummer.
Once you separate from your employer and decide on a distribution option for your non-gov’t 457(b), let’s say over 10 years–how is that actually accomplished? Do you get to keep the funds in your preferred investments (asset allocation) to allow for continued market growth/appreciation over the 10 years (assuming there is appreciation), or is the entire 457(b) “annuitized” and they will pay you the same amount each year for 10 years. Thanks and sorry if a dumb ?
Yes, it stays invested.
Would 457b reduce MAGI and therefore IDR payments for those of us aiming for PSLF? In that case may be worth prioritizing over a backdoor Roth?
I think so. And yes, it could sway the decision. That’s a really tough thing to weigh–more PSLF versus more tax-free income later.
Seems my hospital NG457 checks the boxes for low fees, great investments and flexible distribution options (I can pick a frequency (quarterly, annual) and duration up to 10 years, delay start up to age 70.5).
Biggest concern to me is the risk of the hospital going under. I’m in my early 30s, and the hospital would have to be around 35+ years for me to use these funds in retirement. It seems a lot can happen in that time. Is it really possible to have a good assessment of the hospitals default risk over that kind of time period?
You said it seems this is very rare in reality, any way to dig deeper into this? Also, what happens if your hospital is acquired at some point?
35 years? Maybe not. Usually getting acquired isn’t an issue, the obligation is just picked up by the new entity. In fact, I’ve never met a doc who lost 457 money due to this, but it is a theoretical possibility. If concerned, limit how much you put in there to an amount you’re willing to lose.
I have maxed my (Nationwide) 457b contribution of $20,500. I have an option contribute to a (Nationwide) Roth 457 under the same employer plan. Do these share the same $20,500 contribution limit? Do I have another $20,500 limit in the Roth 457?
Yes.
No.
I’ll soon have access to a 457 plan at work. I already have a 401(k) and employer pre-tax contribution. I have the option of putting a portion (or all) of my 401(k) as a Roth option. I currently contribute all pre-tax. I also do a Backdoor Roth.
When I start to contribute to the 457, I’ll have access to over $60k/year between the 457, 401(k), and employer contribution. Would it make sense for me to use a portion of the 401(k) as a Roth option, and if so, how much? Thank you.
Ok so if we invest in a 457b plan and leave the money in after leaving a position can we still contribute to the same 457b if we are working with another employer that doesnt offer a 457b?
No, you can only contribute if you’re a current employee.
No.
So I guess it would be better to transfer any funds to an IRA after leaving the group instead of just leaving it there?
When you leave your job, you can’t roll a non-governmental 457(b) into an IRA—you have to take distribution(s) depending on the rules of your specific 457(b) plan. Occasionally a new employer may accept a 457(b) rollover/transfer in from the old employer.
If it’s governmental, transfer it to a 401(k). Don’t put it in an IRA because it’ll cause your Backdoor Roth IRA to be pro-rated. If it’s non-governmental you can’ transfer it anywhere (except maybe another non-governmental 457(b), but I’m not even sure that’s an option.)
Any of thoughts of asset allocation in a nongovernmental 457 as part of an overall portfolio to mitigate risk from employer creditors?
Specifically, I was thinking of using my nongovernmental 457 as a bond sink. I mean, the risk of loss due to hospital creditors is low, but I could always focus on more stock growth in my 403, roth IRA, taxables, etc. This would leave the 457 with mostly conservative investments. If there was a major loss (due to hospital bankruptcy etc), it would still sting, but would prevent large scale growth in the 457 (that hopefully occurs in accounts without the risk) and thus minimize the loss.
I guess one caveat is that right now because my bond allocation goal is pretty much met with my 457 account total. Ideally, my other accounts grow much faster and my bond percentage “spills” over to my other accounts as I move through time.
Does this make sense?
Asset allocation isn’t going to protect you from that risk. I’d just include the account with the rest of your retirement accounts when setting asset allocation. If the employer seems at risk, I’d fund the account less or not at all and get the money out of there as soon as possible.
As far as your plan, what happens if the stock market tanks, stays down for a long time, and then you lose the 457? No protection there. If you’re 100% sure stocks will outperform bonds over your horizon, then just put it all in stocks. If you’re not sure, then your method doesn’t provide any additional protection from creditor default does it?
Is it okay to have bonds in there? Sure. But you’re not eliminating this risk or even really decreasing it much.
OMFS resident starting in July and will have access to a 403b and nongovernmental 457b. Neither will include a match. I definitely wouldn’t max out one/either, unfortunately, but am struggling to decide which is better to contribute to? Or do I split contributions and not max out either? I do plan to max out Roth IRA.
403b
Hi, I have 2 non governmental 457b plan access due to 2 jobs. Can I contribute to both simultaneously and how much I can put from employee contribution yearly in each? Thank you!
Well, I thought the 457(b) limits were per employer. That makes sense to me. However, this article suggests you’re limited to just $20,500 (although if your employer put in more apparently that’s okay.)
https://www.ntsa-net.org/taking-it-contribution-limit#:~:text=In%20other%20words%2C%20while%20a,under%20the%20applicable%20IRS%20annual
Fact: The total of employer and employee annual contributions to a 457(b) plan is not subject to the 415(c) annual additions limit.
The 415(c) annual additions limit does not apply to 457(b) plans at all. Rather, total contributions that can be made to a 457(b) plan are governed by IRC Section 457(b), which provides that cumulative employee and vested employer contributions to the participant’s account under the 457(b) plan cannot be more than 100% of compensation up to that year’s IRS annual dollar limit (in 2016, $18,000 before any available catch-up and subject to annual cost of living adjustments). An employer offering a 457(b) plan with both employee and employer contributions will want to consider the impact of permitting employer contributions under that plan on those participants looking to make the entire contribution from pre-tax deferrals and/or Roth 457 contributions (to the extent that the 457(b) plan is sponsored by a governmental entity).
$20,500 each assuming you don’t qualify for any catch-up contributions.
Kind of a rare situation, but you’re not the first to ask this question.
I’m a resident starting soon at a university program that is offering a Roth 457B through the state. I currently also have a private Roth IRA that I opened several years ago. Will I be able to max out contributions in both if I wanted to (i.e. put away $26,500 of post tax-money into these accounts)?
Yes.
Is it permissible to perform a Roth Conversion of a non-governmental 457(b) to a Roth IRA? I understand Rollovers are not allowed and the 457(b) is not currently a Roth.
No.
Final year resident here. Thank you for all the work that you do.
If I have access to both a Roth 403b and a Roth governmental 457b, which would you pick? Neither are matched. Have already maxed out my Roth, and obviously don’t have money to max both right now.
I’ll be finishing residency and likely leaving the employer next year.
In the case of a governmental Roth 457(b), being able to withdraw early seemed like a perk (possibly for down payment or other big expenses). Is it possible to leave the Roth 457(b) with the employer for a period of time after leaving employment and then years down the line, later convert it to a Roth IRA?
That way the benefit of being able to withdraw early can remain, but then after converting it to an IRA, RDMs can be avoided? Not sure if there is a time limit to convert Roth 457(b)’s to Roth IRAs after leaving an employer.
Additionally, the 403b would be through Fidelity, but the 457 is through Empower and it seems like there aren’t many fund options beyond target date funds if that would color your opinion.
Thank you!
403b. No question.
Yes, you could probably leave the 457 with the employer for a while, check the plan. I’d still do the 403b first, especially when it is Fidelity vs someone I’ve never heard of.
Governmental 457bs can be converted to IRAs/Roth IRAs later.
With a governmental 457b plan, what is the Employer’s role in the plan after an Employee retires?
My brother (70yo), had a 457b account with an Employer who decided to change the Plan & Company used for managing its 457b, 4 years after he retired.
Under Company 1, “his” money was in a “100% Fixed Asset/Cash” account, in-line with his “risk tolerance”, and unknown to him (seemingly due to improper notification), the money was transferred to Company#2’s “2020 Target Date fund”. Since then, his account has lost a significant amount of it’s value.
What role does an Employer/Sponsor have in directing the 457 accounts after retirement? It seems my brother’s “ownership rights” have been violated, but he is unsure about where to turn for advice or help.
I suspect he was informed of that change but didn’t read/understand the change of the default option in the plan. If he was not informed of it, then I think he has a case to ask the employer to make up the difference.
In the long run, he’ll likely do better in the target date fund of course, it’s just that stocks and bonds are down year to date. If the change was made in 2017 or 2018 or something he’s probably way ahead of where he would have been. If it was made in late 2021, you’re right that he’s probably way down.
I’d start with HR and the folks running the plan. If he doesn’t get a satisfactory answer, I guess he could hire an attorney. By the time it all plays out, he may be ahead for the change though!
I am thinking of leaving my govt job to a very large corotate company job that has a 401k and stock options. The issue is most likely the first year or so of my new job my pay will be about 15k less and I am afraid of being put in a financial burden. However there is a extremely good chance that after two years or so at the new job I will begin making more than i ever did at the govt job. I was thinking of cashing in and doing monthly payments over the course of 3 years and as soon as my income surpassed my govt job, I would begin putting the payments into my 401k and stock option. Is that dumb? or reasonable? I still have 22 years before I’m 65.
Ideally you’d be able to leave the 457 money while still maxing out the 401(k) and other opportunities. I don’t know how much you make, but a $15K reduction in income for most readers of this site should not make a financial impact on their life. Certainly it shouldn’t make someone start doing something like raiding their retirement accounts to maintain their spending.
But I’m guessing you don’t make as much as most of my readers. So assuming you don’t make/save enough to do that, it is generally wise to move money from a 457 to a 401k.
Well I wish I made more apparently. I currently make base pay of 57k with an additional income of 15K with a part time secondary job. I need both for the most part to stay current financially. That’s why this first year of loosing 12-15k is rough. I want out of govt work and this is a great opportunity to do so, that’s why I was thinking of taking the monthly payments at least for the first 12 months, then I could leave the remainder if I no longer need it or I could roll the remainder into the 401k.
Oh yea, $15K of $57K is a huge drop in income. Now it all makes sense.
Hi. I work for an academic hospital and HR is telling me the annual contribution limit to the 457b is $249,500. Could this possibly be right? I am a bit confused based on reading about the limits above. My spouse( who works for a non academic for profit hospital ) is able to put 75% of her salary in her deferred comp plan…really no limits….puts away 300k a year…are there other deferred comp plans out there that are allowed higher contribution limits? Thanks for the help.
No.
Yes I think there are.
My husband works for an organization and contributes to a 457b. The organization also contributes on his behalf to a 401a. The organization is in a major building program at the moment and we have learned that due to the financial constraints that have come over the last several years (due to COVID), they could potentially default on their bonds. From your article, it sounds like if this happens and they go on to declare bankruptcy, we could lose all of the funds in our 457 to their creditors. Am I understanding this correctly? Would this also apply to the 401a?
If my husband terminated employment, would this protect his 457? Or would the money still be accessible to the organizations creditors? Do you have any suggestions on how to best protect all the money that he has contributed over the years? Thank you.
I’m assuming you are referring to a non-governmental 457(b)? What state? A governmental 457(b) (think university hospitals, government agencies, etc.) would be extremely safe from hospital creditors and is just as safe as a 403(b). If it is a non-governmental 457(b), then you are correct, it is deferred compensation and technically belongs to the employer. This is at-risk if they become insolvent/bankrupt as it is their asset, not your husband’s. However, this would still be extremely rare and many in the personal finance space for physicians don’t know of anybody where they’ve lost 457(b) funds. Yes, if your husband quits now and takes the full lump sum of his 457(b) then the company’s creditors can no longer access this money since now it has been paid to him. This might have major tax consequences for you, however, as it will all be taxed this year and may push you into higher tax brackets. Another organization may accept a 457(b) rollover if he seeks new employment but this can be a rare circumstance. The 401(a) match money is your husband’s—it is not available to any company creditors. There is often a vesting schedule so that as long as he has been with the organization the required years and is 100% vested, all this money belongs to him.
Yes.
No, I don’t think it applies to a 401a but I am not 100% sure. I know 401(a)s are not covered by ERISA, but neither are lots of 403(b)s and they’re not considered employer money.
No. It’s accessible until you get the money from your employer.
Best way to protect it from your employer’s creditors is to get it out of the 457(b) ASAP and don’t put any more in.
I have an option of a 457 (b) and 457 (f). Can you withdraw from 457 (f) while still working for the same employer if I need? I understand taxes have to be paid at an ordinary income rate.
On the other hand if I leave the employer do I get hit with a lump sum tax bill for the entire saved amount in that year?
I think every 457(f) is unique. I think your plan can allow you to withdraw from it, but I don’t know if yours does. I also don’t know what the withdrawal options are in your plan as I believe those can also vary by plan.