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(Another) What to do with my 457?

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  • Avatar familydocPA 
    Participant
    Status: Physician
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    Joined: 03/03/2017

    I’m about to leave my employer and need to make a decision about my 457.  Current balance is around $90k.

    Options:

    1.  Take it as a lump sum

    2.  Defer for any amount of time, taking periodic payments over any period of time.  If you choose to defer, you can change the deferral date only once, and only to a date later in the future.

    Current tax bracket is 24%.  The kicker: I’m going back to training, so I’ll be dropping to the 12% bracket, but close to the marginal 22% bracket. However, that also means I won’t max out my FICA SS tax next year as a resident, so whatever my marginal rate is, I would have to add 6% to get the true rate.

    Part of the problem is that I’m 33 and don’t have a true plan for this 457 money.  I could defer it and hope that when I get my next job they have a plan that allows rollovers, but this is far from certain. So for the best flexibility I’m thinking to just take it as a lump sum now and invest in in a taxable account, acknowledging that I didn’t get any tax benefit from using this plan for the past 4 years.

    Thanks in advance for any thoughts.

     

    #220972 Reply
    Liked by adventure
    Avatar Peds 
    Moderator
    Status: Physician
    Posts: 4420
    Joined: 01/08/2016

    this is a nongovt 457 then?

    training how long? 1, 2, 3 years?

    if 1 year, then yes, lump sum, max out retirement accounts offered, rest to taxable.

    if longer, can you take periodic payments over the length of time of training?

    #220977 Reply
    Avatar familydocPA 
    Participant
    Status: Physician
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    Joined: 03/03/2017

    Nongovt plan.

    Training 4 years.

    The problem with periodic payments is that they push me into the 22% bracket, plus 6.2% towards SS tax, making it a worse proposition.  Hence my thought of either lump sum or defer.

    #220981 Reply
    Avatar Peds 
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    Status: Physician
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    Joined: 01/08/2016
    The problem with periodic payments is that they push me into the 22% bracket,

    Click to expand…

    but you will be higher after that 4 years…..the only other time youll get is early retirement.

    but yes otherwise defer and maybe be able to rollover to new job that has nongovt 457.

     

    #220982 Reply
    Avatar DCdoc 
    Participant
    Status: Physician
    Posts: 556
    Joined: 06/14/2016

    So you were an attending (presumably at a high bracket), deferred pre tax to the 457, and now will return to training and drop to a much lower bracket? That’s a perfect use of a 457. You will pay taxes at the lower rate on money that would otherwise have been taxed at a higher rate. It’s difficult to tell from your post, but you understand the concept of marginal tax rates right? If you bump up to a higher bracket, only the additional income above the previous range will be taxed at the higher rate. Whether you do lump sum or spread it out over a couple years of your training, this is your chance to get that money in your pocket paying the lowest tax rate, before you complete training and return to a higher rate. As peds said, you should either get it out now, or wait till retirement.

    #220989 Reply
    Avatar DCdoc 
    Participant
    Status: Physician
    Posts: 556
    Joined: 06/14/2016

    I missed that your rate as an attending was only 24%. So you didn’t get as much benefit as if you were originally in the 35-37% bracket. But, my answer still holds. Your rate will be much lower in training than as an attending (again)? Take 1/4 per year of training, do lump sum now, or wait till retirement.

    #220992 Reply
    Avatar familydocPA 
    Participant
    Status: Physician
    Posts: 67
    Joined: 03/03/2017

    Thanks for the replies.

    To clarify taxes:

    Taking as a lump sum now would be in the 24% bracket. No SS tax as it is maxed out.

    Taking periodic payments during residency would be partially in the 12% and partially in the 22% bracket, but would also include SS tax of 6.2%, so effective rate would be 18.2% to 28.2%, which is why taking periodic payments would be worse during residency than taking a lump sum.

    #220999 Reply
    Avatar DCdoc 
    Participant
    Status: Physician
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    Joined: 06/14/2016

    Yes. By spreading it out over training you pay additional SS taxes, but you also get a return from that in the form of additional SS income when you retire (assuming it still exists). I’m not smart enough to know if the return is worth it, and it depends on many factors you haven’t included.

    #221001 Reply
    Avatar JBME 
    Participant
    Status: Spouse
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    Joined: 03/26/2018

    it sounds like you might be in an income-tax-free state? If so, I’d take it all out over the course of training. yeah it’ll push you into the 22% bracket, but be aware that bracket was 25% a couple of years ago. Federal tax rates are historically at their lowest levels ever. 22% is nothing to be upset about. Wait until you start getting taxed at over 30% or maybe up to 50%. Then you’ll be glad you took out the 457 money. If you have no use for the money, put it in taxable or take it for your Roth IRA contributions. Or use it to pay down debt, any debt.

    #221003 Reply
    Lordosis Lordosis 
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    I am guessing from your username you work in PA.  Flat 3% state tax so if you are staying in PA it should not matter.  If moving to a higher tax state think about it.

    PA is a great state to work in but a bad state to die in.  One of the few with inheritance tax.

     

    I don’t think you need to worry about the SS taxes.  Found this on Investopedia;

    Social Security and Medicare taxes

    FICA taxes are paid on compensation when it is earned, even though you opt to defer it. This can be beneficial because of the Social Security wage base. Take this example: Say in 2015 your compensation is $150,000 and you made a timely election to defer $25,000. The earnings subject to the Social Security portion of FICA are capped at $118,500. Thus, $31,500 of total compensation for the year is not subject to the Social Security portion of FICA. When the deferred compensation is paid out, say in retirement, there is no additional FICA at that time.

    “Never let your sense of morals prevent you from doing what is right.”

    #221034 Reply
    Avatar familydocPA 
    Participant
    Status: Physician
    Posts: 67
    Joined: 03/03/2017

    I am guessing from your username you work in PA.  Flat 3% state tax so if you are staying in PA it should not matter.  If moving to a higher tax state think about it.

    PA is a great state to work in but a bad state to die in.  One of the few with inheritance tax.

     

    I don’t think you need to worry about the SS taxes.  Found this on Investopedia;

    Social Security and Medicare taxes

    FICA taxes are paid on compensation when it is earned, even though you opt to defer it. This can be beneficial because of the Social Security wage base. Take this example: Say in 2015 your compensation is $150,000 and you made a timely election to defer $25,000. The earnings subject to the Social Security portion of FICA are capped at $118,500. Thus, $31,500 of total compensation for the year is not subject to the Social Security portion of FICA. When the deferred compensation is paid out, say in retirement, there is no additional FICA at that time.

    Click to expand…

    This is so helpful!  I had read elsewhere on the internet that I would have to pay social security taxes, so this is a gamechanger.  I will verify and proceed with distribution during my training years.

    #221368 Reply
    Liked by RocDoc
    Lordosis Lordosis 
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    Status: Physician
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    Joined: 02/11/2019

    Remember I am a doc not a tax expert. Make sure you verify. Good luck.

    “Never let your sense of morals prevent you from doing what is right.”

    #221490 Reply
    Avatar chambers136 
    Participant
    Status: Spouse
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    Joined: 07/27/2017
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    My wife took a distribution of a 457 last year. We’re also in PA. Make sure you go back and verify that state and local taxes were not paid upon earning. PA has (had) a rule that the taxes were paid at deferral. I can’t figure out if that’s still the law (online sources seem to be contradictory), but her employer withheld state and local taxes so they did not need to be paid at distribution. It caused a bit of a headache when figuring out what to document when filing taxes, but it’s better than paying taxes twice.

    #221546 Reply

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