Q.
I have access to a non-governmental 457(b) plan at work. I’d like to save more but someone told me I could lose the money if my employer’s sued. Also, can I roll over a non-governmental 457(b) into an IRA? Is this something I should use?
A.
Benefits of a 457 Plan
The main benefit of using a 457 plan is you basically get another 401K/403B. You can double your tax deduction and double your savings. Another benefit is that 457 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. So they’re a great option for someone planning an early retirement. You just withdraw from the 457 first. 457s, like most retirement plans, are good asset protection vehicles since they are generally protected from YOUR creditors.
Governmental vs Non-Governmental 457(b)s
When discussing 457 plans it’s important to recognize the difference between a governmental and a non-governmental 457. In a governmental plan, the money is held in trust, i.e. not subject to the employer’s creditors. The money can also be rolled over into an IRA upon separation from the employer. Not so with a non-governmental plan. That money technically belongs to the employer, and is thus subject to the employer’s creditors. Even when you quit the job, your 457 money can only be withdrawn or transferred to another non-governmental 457 plan. It can’t be rolled over into a 401K or IRA.
Tax Savings Vs Risk Of Loss
Most doctors with access to a governmental 457 should be maxing it out. With a non-governmental 457 the right move is a little less clear. You have to balance the tax savings of having another retirement account, especially one you can access before age 59 1/2 without penalty, with the potential risk of loss. Personally, I think the risk of loss due to your employer going bankrupt is pretty low. While I’m sure it’s happened, I’ve never heard of it happening. It certainly isn’t common. I don’t think I’d be willing to give up a $5-6K per year tax break 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 401K and Backdoor Roth IRAs first. And I’d definitely spend that money first in retirement.
If the participant doesn’t meet the conditions of the 457(f) plan (e.g., continuing to be employed by the company for a specific time period), then the the participant gets nothing. And once the conditions of the 457(f) plan are met, the money is taxable.
Actually, there are at least three different types of 457 plans: 457(b), 457(f) and 457(g). The 457(f) carries not only the risk that a participant’s asset may be subject to the employer’s creditors, it also exposes the participant to the risk of forfeiture in the event of early termination. So, for example, let’s say Dr. Smith saves $60,000 into his 457(f) plan but leaves his employer before five years are up. Dr. Smith will forfeit (lose) all sixty grand… whether or not his employer remains solvent.
To make the matter more complicated, an employer may have more than one type of 457 plan in place simultaneously.
To be certain which plan you’re looking at, read the Summary Plan Description (ask your HR person for it). It will tell you whether or not the substantial risk of forfeiture is at play or not.
In my opinion, the risk is NOT worth the “tax break” because (a) it’s not a tax break at all–it’s a tax deferral–and some day you’ll have to pay the taxes and (b) it exposes physicians to the risk of total loss (not unlike putting everything into one stock).
If you follow the interest rates and credit ratings on municipal bonds, you’ll see that hospital debt bears a higher yield and lower rating precisely because there is a greater risk of default or bankruptcy.
I *have* actually seen a forfeiture and that poor guy lost all of his savings. The risk is real.
Hi WCI,
I enjoyed this section on the 457b. I am about to start a new job and will most likely take advantage of the 457b (along with doing the standard 403b and backdoor Roth x2) . I understand and also agree the likelihood
Of my employer defaulting is very low. What I am concerned with is the ability to transport the 457b portion of my deferred salary if I join a new Employer later on. As far as I can tell, the new employer will also have to offer a 457b and accept “rollovers” from other 457 plans.
Have you heard of any examples? Thanks.
Jason
You’ve got it. If you want to move it to your new employer, they have to have a 457. You can always keep it at the old employer’s 457, of course.
Here’s my example…I have/had a 457 b through my old employer(non government). Within 60 days of termination they made a full distribution, without my knowledge. The best/only option now I’m told will be to put the money into a rollover IRA ( ie if I don’t want the money at this time)…Also there is a 60 day period, after the date of distribution, during which one has to make the change..
looks like i was misinformed by the first person i spoke to a fidelity..I can’t roll it over in an IRA..aargh…
what are my options besides taking the withdrawal and paying the taxes on this at this time?
thanks for the great website!
If they let you put it in a roll-over IRA, you can then either convert it to a Roth, transfer it into a 401(k), or just leave it in the rollover IRA if you don’t want to do backdoor Roths. That’s not such a bad thing.
Great article and discussion! Non-governmental 457s seem to be a little-known option for hospital-employed physicians.
Bear in mind that your 457 contributios generally CANNOT be rolled over to a self-directed IRA. Instead, you must accept a lump or periodic payments from the plan administrator…fully taxable of course in the year of distribution. (I do not give legal or tax advice–please verify this with a professional practicing in those areas.)
In addition, plans often limit participation to the most highly compensated employees. For example, the top 6% of earners employed by a private hospital.
Ron
Hi WCI:
I am brand new attending. I am employed with 500000. Spouse in residency program making 50k. One car loan (20000) for zero interest and another one 30000 for 1.99%. No other debts. Me and spouse live in different states because of personal circumstances. We don’t own house. Renting for the moment. We have 3 yr old son. Monthly expenditure is about 6000 max. I have maximally contributed in 403b, 457b and 401k that will start after 6 months of employment with 5% matching from the employer.
Can I contribute to my wife’s retirement ? IF yes, then how can I maximize contribution for her and will that be tax deductible ? Wife has 403 b and is not contributing at the present time.
Are there any other ways I can save on taxes?
You comments or thoughts appreciated.
With an income over half a million dollars, you’re going to pay a lot of taxes, no matter what you do. If I were you, after maxing out the retirement accounts, I’d pay off all the debt (I know, it’s low interest, but it seems silly to have car loans on that income) and start saving seriously for a down payment on your home, which you’ll presumably buy when the two of you get back together after her training. I’d also be making big contributions to a 529 and an UGMA for the kid.
Be sure also to do a personal and spousal Backdoor Roth IRA. You can do that with your income, but she has plenty as a resident. Have her max out her 403B as well. Should be easy to do given your income and expenses.
Congratulations on your success.
Thanks for your comment. Now it makes sense why to pay off car loans. If I can pay off that loan, quickly, I can start investing getting more return. Thanks again for putting up this website. I have learnt a lot and definitely has put me ahead of the game especially when I was starting new job.
Thank you for this topic. As a state employee can I assume my 457(b) is a governmental 457? I am currently maxing my 403b, but not contributing to my 457 (b). To clarify, if it is governmental 457 should I still be maxing out my backdoor IRA first? I also have a roth and a traditional option for the 457 (b), I was planning to go with traditional because there is an option to roll over into an IRA when I leave. Does that sound reasonable? Thank you!
If you’re at peak earnings, and it’s a government 457 with a state, then I think I’d do that before a backdoor Roth. Hopefully you can do both.
I have 457b (non-government). Is it true that if I leave the current employer I have to take full distribution and pay the tax on the whole amount that year unless I decide to leave the money? Or do I have the option to take partial distribution and just be tax on the amount distributed?
Read the plan document. I believe each is different. But yes, if you want the money out of the plan then you have to pay tax on it.
Thanks for the information. When I have been working (currently I’m retired) I signed the Nonqualified Plan Participation Agreement (plan 457b) with my former employer.
Distribution Elections have been defined in this agreement as annual installments for 3 years and in 2015 I received the first one. The amount of this distribution is entered in the box 11 of W2.
Now I started to prepare Tax Return using H&RBlock Deluxe 2015 software and I need to decide if this distribution could be qualified for the pension or annuity exclusion. Qualified pension and annuity income include periodic distributions from deferred compensation plans sponsored by tax-exempt organizations, but qualified pension and annuity income does not include distributions received as a result of an annuity contract purchased with your own funds from an Insurance Company.
But reading the above-mentioned agreement I can’t figure out who purchased 457(b) Plan with their own funds from the Insurance Company: me or my Employer?
Could you please shed some light on this issue.
Thank you,
My opinion would be they are employer dollars so I would think the employer contributed the money.
I’m a full-time federal employee/doctor. I max out my TSP and nor my back-door Roth. As I understand, federal employees do not have access to 457. Does anyone know of any other avenue for full-time federal employees to access tax-deferred savings?
Like any employee, you’re limited to what your employer offers, Roth IRAs (backdoor if necessary) and a taxable account. If you get some self-employment income you can do an individual 401(k). I don’t think the feds have a 457 but lots of state employees do.
I have been investing $360 per month since 1999 in a 457B plan from my pay check thru my employer. I asked my HR who the 457 plan is with and they can give me no information. Who should I contact regarding this?
Uhhh….HR can’t tell you anything about your 457? I guess I’d start with your supervisor and run up the chain to the CEO until someone can tell you where your money is.
I am a former employee of a hospital and I was separated from service when our department was outsourced to an outside agency.
I am over 65 and have a 457B (nongovenmental) plan that I am told I can only take as a distribution. I would like to transfer the assets in the 457B plan tax-free to my soon to be ex-spouse. Do you know if it is possible to do this pursuant to a QDRO – or is the only option distribution (a taxable event) pursuant to a QDRO? In other words can a non-govenmental 457B plan be rolled over into an IRA of a spouse pursuant to a QDRO?
I am a former employee of a hospital and I was separated from service when our department was outsourced to an outside agency.
I am over 65 and have a 457B (nongovenmental) plan that I am told I can only take as a distribution. I would like to transfer the assets in the 457B plan tax-free to my soon to be ex-spouse. Do you know if it is possible to do this pursuant to a QDRO – or is the only option distribution (a taxable event) pursuant to a QDRO? In other words can a non-govenmental 457B plan be rolled over into an IRA of an ex -spouse pursuant to a QDRO?
Good question. Don’t know about the QDRO. Have you asked the 457B administrator? As a general rule, my understanding is that non-governmental 457Bs can’t be rolled into any IRA.
According to the article:
https://www.irs.gov/retirement-plans/comparison-of-tax-exempt-457b-plans-and-governmental-457b-plans
Tax-Exempt 457(b) plan is not eligible for rollovers to other eligible retirement plans (401(k), 403(b), governmental 457(b), IRAs)