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Excellent WCI 457 article inspired me to inquire with employer,,, A bit confused

Home Retirement Accounts Excellent WCI 457 article inspired me to inquire with employer,,, A bit confused

  • Avatar JBME 
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    my 457b money is mine even if I’m terminated for any reason.

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    this is true except in the case that your employer goes under. Then it’s not longer yours and it’s the money of the creditors.

    #214694 Reply
    Avatar Brains428 
    Participant
    Status: Physician
    Posts: 355
    Joined: 11/09/2017

    Yea, I assumed the subject to creditors was understood. Sorry for not clarifying.

    Another thing pointed out in the plan document is that distributions are subject to FICA and medicare taxes. Something I should’ve assumed, but didn’t realize.

    #214707 Reply
    Avatar Raddoc123 
    Participant
    Status: Physician
    Posts: 107
    Joined: 07/03/2016

    If you have to take a distribution for any reason before retirement, you can take a lump sum and set aside some of the money for taxes.

    In my opinion, most should be using this account since it’s a nice tax shelter and much more likely to provide benefit than not. The risks are minuscule when working for a large health system compared to other risks facing the money and you.

    #214725 Reply
    Avatar FIREshrink 
    Participant
    Status: Physician
    Posts: 984
    Joined: 01/11/2017

    one of the reasons I don’t use my 457b is for tax diversification. If I’m in the 32% bracket now, and maybe retire in the 24% bracket, I’m giving up 8%. But I also already have a large pretax account (403b and 401a contributions), and I like having some taxable money. Roth/HSA play their own role. i don’t want to force another $19k per year into a 457b and then find out that some politicians have raised my taxes to 32% or higher in retirement. I have to be paid substantially to put my money at risk to my employer’s creditors. If I were in the 40%+ bracket including state and were planning to retire into a sub 20% bracket, that 20% delta would be enough to entice me. At under 10%, not worth it to me.

    #214747 Reply
    Avatar Raddoc123 
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    Status: Physician
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    Joined: 07/03/2016

    one of the reasons I don’t use my 457b is for tax diversification. If I’m in the 32% bracket now, and maybe retire in the 24% bracket, I’m giving up 8%. But I also already have a large pretax account (403b and 401a contributions), and I like having some taxable money. Roth/HSA play their own role. i don’t want to force another $19k per year into a 457b and then find out that some politicians have raised my taxes to 32% or higher in retirement. I have to be paid substantially to put my money at risk to my employer’s creditors. If I were in the 40%+ bracket including state and were planning to retire into a sub 20% bracket, that 20% delta would be enough to entice me. At under 10%, not worth it to me.

    Click to expand…

    Don’t forget the tax deferred growth and more pre tax dollars invested.  For example 19k invested for 25 yrs at say 6% becomes 1.1 mil while 12k invested in a taxable account becomes 698k without counting paying taxes on dividends and capital gains over the years.  Then you’ll have to pay taxes on both the 457b and taxable when you actually need the money, granted at better rates for the taxable, at least for now,

    #214748 Reply
    Avatar FIREshrink 
    Participant
    Status: Physician
    Posts: 984
    Joined: 01/11/2017

    one of the reasons I don’t use my 457b is for tax diversification. If I’m in the 32% bracket now, and maybe retire in the 24% bracket, I’m giving up 8%. But I also already have a large pretax account (403b and 401a contributions), and I like having some taxable money. Roth/HSA play their own role. i don’t want to force another $19k per year into a 457b and then find out that some politicians have raised my taxes to 32% or higher in retirement. I have to be paid substantially to put my money at risk to my employer’s creditors. If I were in the 40%+ bracket including state and were planning to retire into a sub 20% bracket, that 20% delta would be enough to entice me. At under 10%, not worth it to me.

    Click to expand…

    Don’t forget the tax deferred growth and more pre tax dollars invested.  For example 19k invested for 25 yrs at say 6% becomes 1.1 mil while 12k invested in a taxable account becomes 698k without counting paying taxes on dividends and capital gains over the years.  Then you’ll have to pay taxes on both the 457b and taxable when you actually need the money, granted at better rates for the taxable, at least for now,

    Click to expand…

    The tax drag of a low cost index ETF is minimal, around 50 basis points per year. Otherwise as you point out, the difference is not as great as it seems because taxes owed upon 457b withdrawal will be taxed at your marginal rate. Since my marginal rate today is not much higher than it will be in retirement, it’s not a huge advantage.

    I think folks are being awfully sanguine about the future of health care, but no need to rehash that here.

    #214764 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
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    Joined: 02/01/2016

    Is your large university system public or private? If it’s a public university than it would be a governmental plan.

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    This is not necessarily true. Public university hospitals can be a separate 501c non-profit entity where the employees are not state government employees. Such an entity’s 457b plan will be a non-governmental plan

    #214765 Reply
    Liked by Peds, Tim
    Avatar ChristopherMD20 
    Participant
    Status: Physician
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    Joined: 10/31/2017
    With these numbers I wouldn’t move one inch unless there was a significant reason to do so (commute terrible, hate the area, kids literally on the way and needing to move to a better school district).  Of course this depends on what real estate is like in your area, but I find it hard to believe buying wins out financially compared to your present situation.

    Click to expand…

    You commented on my post about the moving situation https://www.whitecoatinvestor.com/forums/topic/howard-county-maryland-is-it-all-it-is-cracked-up-to-be/page/3/#post-213987

    Wife will likely win this argument, but if I had my choice I would stay in our condo until we needed to move.

    #214766 Reply
    Avatar ChristopherMD20 
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    Status: Physician
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    Joined: 10/31/2017
    This is not necessarily true. Public university hospitals can be a separate 501c non-profit entity where the employees are not state government employees. Such an entity’s 457b plan will be a non-governmental plan

    Click to expand…

    This is the case for my 457b. Non-governmental top hat plan is actually stated in the 457b legal documentation that I was provided.

    #214768 Reply
    Avatar JBME 
    Participant
    Status: Spouse
    Posts: 495
    Joined: 03/26/2018

    Is your large university system public or private? If it’s a public university than it would be a governmental plan.

    Click to expand…

    This is not necessarily true. Public university hospitals can be a separate 501c non-profit entity where the employees are not state government employees. Such an entity’s 457b plan will be a non-governmental plan

    Click to expand…

    well I stand corrected then! thanks for pointing this out

    #214775 Reply
    ENT Doc ENT Doc 
    Participant
    Status: Physician
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    Joined: 01/14/2017

    I would still make the argument to do the 457 with those distribution options.  Even if it mandated a lump sum and you happened to leave your employer after 3-4 years it all depends on what marginal tax bracket that lump sum puts you into.  If you’re in or near the same bracket it’s worth the risk IMO because of the upside compared to taxable.  There is no loss if you are in the same bracket (in fact you win compared to taxable because of tax drag), and with the distribution options you have available to you you’d be able to manage this well to ensure that’s the case.  This wouldn’t be the case with every 457, but if your institution is on solid financial footing and your distribution options are what they are I wouldn’t hesitate to do this.

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    this is something i’ve always thought about but never articulated as clearly as you did.

    if a really high earner sheltered some money in a 457b for a few years and then decided to change jobs for whatever reason wouldn’t it truly act like the deferred comp it is supposed to be? whatever growth you have on that money was just bonus in a tax sheltered space for a few years.

    assuming investment options are reasonable i’m coming more and more around to just thinking most people w/ access to these should be doing them.

    Click to expand…

    I agree – but I would only do this if I knew my place was going to be around for decades.  I’d probably look at their financials and also see what their bonds were rated, and track this over time.

    #214777 Reply
    Liked by Tim
    Avatar Raddoc123 
    Participant
    Status: Physician
    Posts: 107
    Joined: 07/03/2016

    one of the reasons I don’t use my 457b is for tax diversification. If I’m in the 32% bracket now, and maybe retire in the 24% bracket, I’m giving up 8%. But I also already have a large pretax account (403b and 401a contributions), and I like having some taxable money. Roth/HSA play their own role. i don’t want to force another $19k per year into a 457b and then find out that some politicians have raised my taxes to 32% or higher in retirement. I have to be paid substantially to put my money at risk to my employer’s creditors. If I were in the 40%+ bracket including state and were planning to retire into a sub 20% bracket, that 20% delta would be enough to entice me. At under 10%, not worth it to me.

    Click to expand…

    Don’t forget the tax deferred growth and more pre tax dollars invested.  For example 19k invested for 25 yrs at say 6% becomes 1.1 mil while 12k invested in a taxable account becomes 698k without counting paying taxes on dividends and capital gains over the years.  Then you’ll have to pay taxes on both the 457b and taxable when you actually need the money, granted at better rates for the taxable, at least for now,

    Click to expand…

    The tax drag of a low cost index ETF is minimal, around 50 basis points per year. Otherwise as you point out, the difference is not as great as it seems because taxes owed upon 457b withdrawal will be taxed at your marginal rate. Since my marginal rate today is not much higher than it will be in retirement, it’s not a huge advantage.

    I think folks are being awfully sanguine about the future of health care, but no need to rehash that here.

    Click to expand…

    50 basis points over 25-30 yrs results in loss of 10%+ of portfolio.

    Who knows what will happen to healthcare over the next 20-30 yrs, but it’s much more likely that the worst case is a taxable return of balance rather than a complete loss of 457b.

    #214778 Reply
    Avatar FIREshrink 
    Participant
    Status: Physician
    Posts: 984
    Joined: 01/11/2017
    Splash Refinancing Bonus

    We disagree, but the bigger point is there is simply no need for me to take this risk. Marginal utility of incremental wealth from the gain is not worth the chance I lose everything. That chance is not zero. Easy decision for me. Some will decide differently.

    #214781 Reply
    Liked by eyecandy
    Lordosis Lordosis 
    Participant
    Status: Physician
    Posts: 1654
    Joined: 02/11/2019

    Does anyone mitigate this risk by only investing X% of their portfolio in a 457?  Mine is less then 10% right now but it is 20% of my contributions.  This will likely go down as my taxable investments go up.  Loosing 10-20% of my portfolio would really suck but it is something I would be able to recover from and just likely have to work a few more years.  I see it as quite a bit of gain for sure and a very low chance of a big risk.

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

    #214876 Reply
    Liked by RocDoc, Zaphod
    Avatar MaxPower 
    Participant
    Status: Physician
    Posts: 338
    Joined: 02/22/2016

    By virtue of how much I’m contributing overall to retirement accounts, my 457 is right around 15% of my investment portfolio. Would it be terrible to lose? Absolutely. Would it be catastrophic? Probably not. If it were 40-50% of my retirement fund I probably wouldn’t do it.

    My main reasons for contributing are three fold. 1) Being in the 35% marginal tax bracket currently and doubtful I will be that high in retirement, barring significant changes to the tax code; 2) a pot of money to distribute from for my planned early retirement age of 58 until SS or accessing other retirement accounts (if current trends continue, this 457 could have 7 figures in it at that time); and 3) a decent pile of money in case I separate from my current employer to tide me over until I find a new job. I could take 6-9 months off easy with the money I have in there now and not have to worry about a paycheck.

    #214886 Reply

Reply To: Excellent WCI 457 article inspired me to inquire with employer,,, A bit confused

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