Announcement

Collapse
No announcement yet.

Hospital 457b - yea or nay?

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • Hospital 457b - yea or nay?

    My hospital currently offers a 403(b), 401(a), and a 457(b) for physicians. The 403b is employee driven and vests immediately, pre-tax. The 401a is employer contributed, 2.5% of my compensation, again pre-tax, vests after 3 years. The 457b is employee driven, vests immediately, and is also pre-tax.

    The plans offer the same types of funds, all of which are fantastic to be honest with very low expense ratios. My question is whether or not to invest in the 457(b). It is a non-governmental 457, so subject to creditors in case the hospital becomes insolvent; however, I'm not too concerned about this as our financials have been fairly solid (at least for the time being).

    My biggest issue is the disbursement of funds. Reading through the plan summary, you can only take a lump sum at the time of severance. You can defer this disbursement by a year if you want, with the option to defer to a second year after that. What do you all think? Should I utilize this option and hope taxes are lower in the future at the time of retirement (not likely in my opinion)? Or should I take the tax hit now and invest in a taxable account instead?

  • #2
    Depends if you plan to leave, not work as much that year, take time off etc.
    but since it doesn't sound like you are hurting for retirement space I might pass....

    Comment


    • newdoc2016
      newdoc2016 commented
      Editing a comment
      I've maxed it out since 2016, so have about $85k in there. May stop after this year. Going to keep maxing out the 403b though!

  • #3
    Taxes not or later.

    https://www.irs.gov/retirement-plans...tal-457b-plans

    Comment


    • #4
      Originally posted by newdoc2016 View Post
      My hospital currently offers a 403(b), 401(a), and a 457(b) for physicians. The 403b is employee driven and vests immediately, pre-tax. The 401a is employer contributed, 2.5% of my compensation, again pre-tax, vests after 3 years. The 457b is employee driven, vests immediately, and is also pre-tax.

      The plans offer the same types of funds, all of which are fantastic to be honest with very low expense ratios. My question is whether or not to invest in the 457(b). It is a non-governmental 457, so subject to creditors in case the hospital becomes insolvent; however, I'm not too concerned about this as our financials have been fairly solid (at least for the time being).

      My biggest issue is the disbursement of funds. Reading through the plan summary, you can only take a lump sum at the time of severance. You can defer this disbursement by a year if you want, with the option to defer to a second year after that. What do you all think? Should I utilize this option and hope taxes are lower in the future at the time of retirement (not likely in my opinion)? Or should I take the tax hit now and invest in a taxable account instead?
      I edited to red font above. Am typically in favor of these plans, but not those with this provision. I vote no.
      Financial planning, investment management and CPA services for medical professionals | 270-247-6087

      Comment


      • #5
        Originally posted by jfoxcpacfp View Post

        I edited to red font above. Am typically in favor of these plans, but not those with this provision. I vote no.
        Agreed. Would have to be invested in plan a long while or be close to retirement (and lower bracket) to make sense

        Comment


        • #6
          "Am typically in favor of these plans, but not those with this provision. I vote no."
          If current earnings are at the top 2 tax brackets currently (35/37 range), would deferring taxes for 5 or 10 years not make sense? Sure you might pay in a lump when you leave. Not trying to run a tax differential payoff, simply it seem deferring taxes at the top rates might make sense. What say you? Still vote no regardless?

          Comment


          • #7
            I'd hold off on contributing to the 457(b) plan until you're fairly close to retirement. Otherwise that "withdraw as a lump sum" requirement is going to cause you to owe a huge tax bill. Contribute only during your last 5-10 years pre-retirement, then use the lump sum to fund your first year or so of retirement income.

            In the meantime, increase your funding of a taxable account, and be sure to max out an IRA (ideally a Roth via the backdoor).

            Comment


            • #8
              To @tim:
              Yes, still no. Reason being, difficult to really know the future and things may change. You may think you'll be in the 35/37% brackets for 10 yrs, probably will be, but having to take several hundred taxable $$ out in one year are golden handcuffs that could be mighty uncomfortable. To me, it's a mental thing for me, not a math thing. The susceptibility to loss is the final nail, but I don't really need one. I'd just go with the taxable account and explain my rationale. If a client knew the risks and still wanted to go with the 457b, I certainly wouldn't fight it, just would make sure to document the convo.
              Financial planning, investment management and CPA services for medical professionals | 270-247-6087

              Comment


              • #9
                I agree with above comments. I think the nongovernmental 457b are reasonable tax deferred vehicles when contributions are not that large and can be withdrawn over a longer time frame. For a younger physician whom might have 10 plus years of contributions that then need to be taken as a lump sum Is he 457 might defeat the whole purpose.

                Comment


                • #10
                  "The susceptibility to loss is the final nail" That is the killer for sure. Especially if you don't have a way to get funds out prior to leaving.
                  Other than that is seem even a drop in income would be lower rates. The math is similar to a pre-tax contribution, just shorter period. Future higher tax rates are a factor regardless of the number of years, but if you are at the top seems like the lump sum is a non factor. At the highest rates in and coming out.



                  Comment


                  • #11
                    Originally posted by Tim View Post
                    "The susceptibility to loss is the final nail" That is the killer for sure. Especially if you don't have a way to get funds out prior to leaving.
                    Other than that is seem even a drop in income would be lower rates. The math is similar to a pre-tax contribution, just shorter period. Future higher tax rates are a factor regardless of the number of years, but if you are at the top seems like the lump sum is a non factor. At the highest rates in and coming out.


                    I agree to an extent. At issue is that human emotion don’t process math with such practicality. There will be a large (possibly absurdly large) income hit in the future. At that point, it probably won’t help a lot to “explain” the math and the past tax savings which are, most likely, long gone by then and not set aside in a savings account to pay the future tax bill. Very likely those savings will have been consumed - early debt payoff, vacations, frontloaded 529s, whatever. And the perception will be that 40% of all of those years of savings is going to the IRS and “somebody” didn’t explain that very well when giving the advice to load up the 457b.

                    Please understand, I am simply giving you my opinion from a practical standpoint, and not very elegantly. Math works well in tax planning when the impact is fairly current (this year or next, typically). Something far into the future is an intangible - until it happens. Then it’s not.
                    Financial planning, investment management and CPA services for medical professionals | 270-247-6087

                    Comment


                    • #12
                      This is most likely esoteric to most folks here. But there is a basic truth, no pass on the math. Deferring taxes in the corporate world is a "good thing", less cash to the IRS.
                      Yes, you will pay later when the position is closed. The key point is to not structure any transaction so the rate impact is disadvantageous and outweighs the utility of keeping the cash. The bonus is a 457 the gross proceeds are available when closed to pay the same tax or lower (assuming the tax tables remain the same). Bypassing a deferral for any number of years is a "good thing". Pay later with the funds already in place in the 457. So you collect $1mm and pay $350k tax ten years later. That compares to $35k per year AND you get the gains (big assumption). Tax deferral for one, ten or thirty seems to be a math calculation. Solvency is another issue.
                      For a group that relies on math and tax implications, I am simply surprised at not deferring taxes based on the number of years.
                      Steps off the podium. Not trying to start a debate, simply surprised at recommendations that aren't based on the math.

                      Comment


                      • #13
                        I understand your point, which may or may not be valid, given that you are assuming best case scenario. Looking closer at the numbers, I don't believe I'm passing on the math, but I have not addressed this point. Most physicians will be saving 32% - 35% (some as low as 24%, some as high as 37%) on the deduction only but almost certainly paying 37% on not only the amount they contributed but on all growth, all in one fell swoop.

                        We'll have to agree to disagree - this is just not something I would recommend to a client if I were asked my opinion. At least other retirement contributions can be taken out ratably and delayed until age 70.5 so that the tax effect can potentially be smoothed and mitigated. I do not see that happening in this case in most scenarios.

                        Interesting debate!
                        Financial planning, investment management and CPA services for medical professionals | 270-247-6087

                        Comment


                        • #14
                          It’s at the time of severance and a lump sum. Hard no. Taxes will go up in the future - it’s written into law right now and we are on an unsustainable debt path. Say you decide to leave for another job in 10 years. You’ll then be forced to take it during high earning years. And in the future when taxes are higher the first amount you contributed has a marginal benefit but subsequent contributions less so. Given your current position I would stop and do taxable.

                          Comment


                          • #15
                            "Should I utilize this option and hope taxes are lower in the future at the time of retirement (not likely in my opinion)? Or should I take the tax hit now and invest in a taxable account instead?"

                            Hope is not a plan. Taxable gives not only the contributions at what you say will be a higher rate, additionally pushes into a higher marginal rate bracket AND the gains will benefit from LTCG rates. Your rate predictions, the safety potential, and the forced distribution all there are negative. Taxable.

                            Comment

                            Working...
                            X