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.
I’ve seen variations of this question about 457(b)s several times recently, and unfortunately, there’s no good answer. With respect to retirement plans, it’s usually better to be a business owner — whether an independent contractor or a partner, because you can take advantage of much higher maximum contributions into a SEP-IRA, Solo 401K, or through a “self-match” into a profit-sharing plan/401K. A business owner may also have a cash balance plan and maybe even an HSA on top of that. An employee is lucky to be able to put $19K (2019) into a 401K. So oftentimes an employer will offer a 457b in addition to a 401K, or more typically, its governmental cousin the 403B. This allows an employee to sock away $38K instead of just $19K.
Benefits of a 457(b) Plan
#1 Additional Savings
The main benefit of using a 457b plan is you basically get another 401K/403B. You can double your tax deduction and double your savings.
#2 No Early Withdrawal Penalty
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.
#3 Asset Protection
Like most retirement plans, 457b 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…
- Money from the non-governmental plan 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- Even when you quit the job, your 457 money can only be withdrawn or transferred to another non-governmental 457 plan.
- Non-governmental 457(b)s can’t be rolled over into a 401K or IRA.
457(b) 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.
Do you have access to a governmental or non-governmental 457(b) plan at work? Do you max it out yearly? Why or why not? Comment below!
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.
Correct me if I’m wrong, but isn’t tax that’s deferred tax that’s saved? It’s no different in that sense than a traditional IRA or 401k, right? Provided you aren’t pushed into a higher bracket when you take the disbursement, seems a good way to defer/save tax money. I’m no CFP, so please correct me if I’m wrong. For me, I looked up Standard and Poor’s bond rating for my hospital’s debt, and it’s A-. Given that the U.S. government bonds are AA, I feel that’s fairly reasonable for me.
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!
Shilpa. I just researched this extensively at my institution. Contact the 457 plan manager at your prior workplace. I am concerned that this is a “done deal” and you just received a complete, taxable distribution. There’s no early withdrawal penalty, but will be added to your income and taxed the year of distribution
What you described is exactly what will happen with my current plan if I do not make a distribution election upon termination.
I hope I’m wrong for your sake…
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.
I am in this situation and doing exactly as you are. Maxing both my 403b, 457, and backdoor Roths.
Find out the specifics re: distributions upon termination from the vendor as well. For example, ours is provided through TIAA. You have to make a selection about distribution upon termination. Thereafter, you can only change that decision once for life. So, as WCI mentioned, I’d likely choose to keep the money at the current employer unless my new one had a non governmental 457 to to roll into. Thereafter, I can only change that decision once.
My employer isn’t going to go bankrupt (I work at a massive academic hospital).
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)
For those with non-government 457(b) be sure to pay attention to any rule changes. Mine used to require us to take all the money out in the year of termination. Now it can be taken out monthly, quarterly, or annually over a 5-10 year period. The new plan is much better due to cash flow, convenience, and importantly – taxes. Not many doctors noticed that important change even though we all got the letter. Keep reading WCI and over time you will be ready to pounce on changes like that.
That’s great news for you!
Anyone out there had to take out their 457 in lump sum? I’m debating stopping contributing to my plan because of the unstable hospital system.
Different employer 457b plans can have different distribution options, so you should read your plan rules to evaluate your choices. But lump sum is almost always an option. The only downside I am aware of is that it might push you into a higher tax bracket the year you take it.
And it stops the tax protected growth on the money.
Unstable hospital and lump sum distribution? I’d be pretty hesitant to put much of anything in a plan like that.
I work for a state funded entity that has a “governmental 457b”. I have maxed it every year I’ve been employed there. It’s safe, can be taken out before age 59.5, and can be rolled over into an IRA. I plan to retire at 58.5, so this funds the bulk of the first year of my retirement.
They also have a 401A into which I put 5% off the top, and they match this 5%. It vests in 6 years (now under three). For six years, this adds up to a noticeable chunk. I also have a “side gig” that funds a SEP-IRA. Between the three I can max them all and get the 5% on that bit.
My 457b allows loans of up to $50,000 and you pay back yourself plus interest (growing the balance). I am thinking about pulling out $42,000 to pay off a vacant land loan that is at 6.5%. Why? Well, a guaranteed 6.5% may beat the 2020 market return on my 457b especially at 60/40 allocation. It does pull this money out of the market for two years while I pay it back. For the past three year averaged, this account has returned 15% annually…but that can’t continue from here for 2020 and 2021 (it could I suppose). A balanced allocation has returned 9% per year from 1/2017 to now.
I confirmed today after reading this post that my plan is governmental, it can be tapped earlier than age 59, it can be rolled over into an IRA and one can take out up to a $50,000 loan and then essentially pay yourself back plus about 5.75% in interest (increasing the balance by this interest on the loan) and the loan repayment is not tied to employment, meaning if I leave, no taxable distribution occurs. One simply keeps paying the loan amount.
Any thoughts? This account is not my main account, but by 2022, it will have about 1/6th of all my cheese in it.
Well, first, your actual advantage is only 0.75%, right? That is, the difference between the property loan and the 529 loan? Second, even though your loan payback is not technically tied to employment, are you clear about when you have to begin your distributions? That is, it is great that you can role it over to an IRA, but when do you have to either take a distribution or do the rollover? I only ask because some plans make you start distributions immediately. In mine, I have to start within two years of retirement.
Now, this is just an impression, but I would not take the 457 loan for this purpose. Instead, if you want to retire the property loan, I’d just start preferentially buying it down with accelerated payments. But I only say that because I don’t see enough advantage in the 457 loan to be worth the complexity. Leave the money in the 457 to grow; don’t time the market, and all that…
Well, in one case (paying the bank) I’m paying 6.5% interest to the bank.
In the other case, I’m paying 5.75% interest to myself. It goes back in the 457B balance. Across two years it is several thousand dollars that go in to account to me (plus returns on that money).
At present, I’m tying up a similar amount of money (I’m already paying accelerated payments of $1000 a month on $600 note), but I’m paying that interest to the bank.
It’s not about the rate arbitrage, it’s about the loss of earnings in the account. But I don’t find either a 5.75% or a 6.5% debt very attractive. Either way, it would be a major priority for me to get rid of it.
Fair enough. I think I’ll take your advice and the other fellows advice and pay it down aggressively as it’s the only debt I have that is above 2.75%.
I bought it to make sure I had all three lots on the single lane mountain road up to the cabin so no one could build next to me and mess with my access.
It has appreciated by 33% in 3 years.
Should have bought more eh? 🙂
But the appreciation doesn’t matter much if you’re not willing to sell. You’ll just pay more in taxes on it probably.
Yes, that’s true. I made sure I “own the road” by buying the lots on either side of the one with the cabin. It’s a total of 25 acres. Essentially the top of a mountain. The taxes with the two buffer lots are $3300 total instead of $2500. That’s the price of privacy.
I’m likely to give the other two lots to my kids in the future. I may build a cabin on one for a “vacation rental” that allows me to control the traffic issue.
The biggest one (11 acres) is not a total waste as it has a one mile trail up and around the summit that we use for fitness walks several times a week.
I use my non governmental 457 but I don’t expect my system to go out of business and I reviewed the disbursement options which are excellent. Can put off disbursement up to 10 years and can make another choice at that time to disburse over 5 years. Still. Won’t hold all my eggs in that basket but I’m 10 years from retirement and can use that money first. It’s worth the work to get the plan from HR before deciding whether and how long to fund it.
Sounds worth using.
Did you have a question? Seems like a 457 worth using, no?
If I had a loan at 6.5% I’d be eating ramen and cancelling vacations to pay it off (or selling the vacant land I bought on credit) rather than borrowing against retirement accounts to pay it off.
I have access to a governmental 457 with a brokerage window into Schwab that costs a flat annual fee (could not find any hidden fees). Is it safe and easy to use? Are there any considerations other than the expenses being lower & options being better in the PCRA? I think transaction costs would be zero if I stick with ETFs? Thanks for any advice.
No, it’s fine. I have a Schwab PCRA for my 401(k). No big deal. I either buy Schwab index funds/ETFs or Vanguard ETFs there.
Great news! Thank you!!!