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What should I do with my 457b?

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  • jfoxcpacfp jfoxcpacfp 
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    Posting this question anonymously on behalf of a forum member:

    I am about 9 years out of residency in a hospital employed specialty and considering a job change. we are a 2 MD couple under 40 with ~$900k in retirement accounts. our current position has offered 457b plans which we have maxed. income in the $550k range.

    balance: $185k split between 2 plans

    current employer: massive non-gov’t academic health care organization that is rich and growing, I have zero concern about its financial solvency going forward.

    future employer: academic shop that does not offer a 457b.

    distribution options:

    1) Lump sum (obviously)

    2) Distributions spread over 5 years starting the year of termination

    3) Unique thing: “a participant may elect ONE time to defer the commencement of the payment of his or her plan account to a date beyond his or her termination but before the required distribution date (70.5 age).”

    this final option seems like kind of a no-brainer if I am really confident about the institution right?

    I could just set the distribution date for like 65. everyone always says to use 457s first in retirement. Lump sum that year might be a bit painful from a tax standpoint but hopefully there will be good growth in that account.

     

    thanks for everyone’s thoughts.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #219628 Reply
    Zzyzx Zzyzx 
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    I did 3 – I was in a nearly identical situation (same type of employer), but it depends on fund choices and brokerage (mine = Fidelity with vanguard funds)

    Question – After choosing option 3 could this 457b still be rolled into a future employer’s 457b or converted to ROTH?

    It’s psychosomatic. You need a lobotomy. I’ll get a saw.

    #219647 Reply
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    Avatar Tim 
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    Using 457b first is because no early withdrawal penalty. Given you are considering deferring until 65, well you know that’s iffy with your plan. That brings to mind 85, 20 more years of tax exempt growth in a Roth.
    https://www.irs.gov/pub/irs-tege/rollover_chart.pdf

    Lump sum is completely taxable but seems like you might be able to roll it over. I think this is eligible for rollover(it is a qualified plan) to either an IRA or a Roth.
    With your incomes and savings, parking it in a Roth because you may not need it solves some RMD problems at 70.5 and still gives you access and tax exempt growth. Much preferable for heirs if you don’t need it. Sure you will owe tax, but run numbers.
    Tax now with gains tax free, tax at 65 with gains taxed and depending on your plan you might have a nice tax free piggy bank. No idea when you think the taxable income will drop or the rates will be. Just like saving in a Backdoor Roth has value, so would a conversion.
    Maybe someone (hint Johanna, Spiritrider or Jacoavlu)
    can chime in. Rollover is worth pursuing.

    #219678 Reply
    Avatar FIREshrink 
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    I would never choose 3, health care can change a lot over 25 years, but I’m conservative. This is a sticky wicket created by your use of the 457. I’ll be curious to hear what you choose.

    Consider that a lump sum won’t have cost you much, since you were in the highest or near highest tax bracket while you were contributing.

    #219761 Reply
    Avatar BCBiker 
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    In perfect world, I would choose a year and plan a year long vacation (maybe trip around the world) and try not to make any other income that year. How practical that is in a medical practice?… Not very. 2nd option, set a date for retirement and make that when they take distribution. I definitely would not want to take distribution at anywhere near peak earnings. But if they are financially comfortable it doesn’t really matter.

    #219769 Reply
    Lordosis Lordosis 
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    Known tax hit now vs unknown tax hit in the future plus the small but real chance of actual loss. Tough choice.
    25 years is a long time and so much could change. I think I would just bite the bullet and take it now and move on.

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

    #219772 Reply
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    White.Beard.Doc White.Beard.Doc 
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    Is your 457b with a megacorp or a university?

    You are young and perhaps don’t understand the gut wrenching changes in health care that will likely come over future decades.  Corporations like Kodak or GE or Chrysler that once seemed invincible can die and go to heaven, along with your 457b.

    I took the risk of deferring to age 70.5 with my 457b, but mine is with a university approaching 300 years old with many billions of dollars in their endowment. And I am much closer to retirement than you are. I would likely not have deferred if the plan was with a big, solid, megacorp.

    #219797 Reply
    jfoxcpacfp jfoxcpacfp 
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    Question – After choosing option 3 could this 457b still be rolled into a future employer’s 457b or converted to ROTH?

    Click to expand…
    • Not rolled into a Roth. This is a non-governmental plan (NPO), hence the restrictions on distributions.
    • Can only be r/o into another NPO’s 457b assuming the NPO has a 457b and the 457b accepts r/o’s. My understanding that most plans don’t accept r/o’s.
      • Per OP’s post, not available at next job
    With your incomes and savings, parking it in a Roth because you may not need it solves some RMD problems at 70.5 and still gives you access and tax exempt growth. Much preferable for heirs if you don’t need it. Sure you will owe tax, but run numbers. Tax now with gains tax free, tax at 65 with gains taxed and depending on your plan you might have a nice tax free piggy bank. No idea when you think the taxable income will drop or the rates will be. Just like saving in a Backdoor Roth has value, so would a conversion. Maybe someone (hint Johanna, Spiritrider or Jacoavlu) can chime in. Rollover is worth pursuing.

    Click to expand…

    Not an option, see above.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #219858 Reply
    Liked by Tim
    jfoxcpacfp jfoxcpacfp 
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    From OP:

    response to questions:

    Question – After choosing option 3 could this 457b still be rolled into a future employer’s 457b or converted to ROTH? .

    That is a great question that I will need to find the answer to!

    I would never choose 3, health care can change a lot over 25 years, but I’m conservative. This is a sticky wicket created by your use of the 457. I’ll be curious to hear what you choose. Consider that a lump sum won’t have cost you much, since you were in the highest or near highest tax bracket while you were contributing. 

    Yeah that’s pretty much the crux here. Your point about lump sum and tax rates is a good one that I hadn’t considered, I appreciate it. We’re already in the top bracket so in some ways you’re right it’s kind of a push.

    In perfect world, I would choose a year and plan a year long vacation (maybe trip around the world) and try not to make any other income that year. How practical that is in a medical practice?… Not very. 2nd option, set a date for retirement and make that when they take distribution. I definitely would not want to take distribution at anywhere near peak earnings.  

    Interesting take. Honestly I’m not sure our earnings will be lower in retirement for a variety of reasons some obvious (lots of early saving) and some more complex/family related.

    Is your 457b with a megacorp or a university?…I took the risk of deferring to age 70.5 with my 457b, but mine is with a university approaching 300 years old with many billions of dollars in their endowment. And I am much closer to retirement than you are. I would likely not have deferred if the plan was with a big, solid, megacorp. 

    It’s a university and much like the one you described. That’s where I am it’s a long time horizon but it’s also the kind of health system where if it’s going to fail then the whole American healthcare system is going to fail. Ugh, tough call.

    Frankly the questions raised by everyone (rather than a simple straightforward answer) kind of reassures me that I wasn’t an idiot to be confused by these options.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #219860 Reply
    Avatar BCBiker 
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    In perfect world, I would choose a year and plan a year long vacation (maybe trip around the world) and try not to make any other income that year. How practical that is in a medical practice?… Not very. 2nd option, set a date for retirement and make that when they take distribution. I definitely would not want to take distribution at anywhere near peak earnings.  

    Interesting take. Honestly I’m not sure our earnings will be lower in retirement for a variety of reasons some obvious (lots of early saving) and some more complex/family related.

     

    Click to expand…

    I think this is a real option for you. It doesn’t have to be in retirement. Maybe a milestone year (age 55 or 60, special anniversary, children with gap year time, etc). If you are staying in academics, your department chair will probably not object to a self funded sabbatical. They can use your salary to fund young faculty positions. If you are the chair, you deserve a year off after a couple years on the job. 🙂

    #220225 Reply

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