By Dr. James M. Dahle, WCI Founder
Section 457 of the Internal Revenue Code (IRC) is all about deferred compensation plans for state and local governments and tax-exempt organizations. The most common type of plan seen under this section is a 457(b) plan. The key point to understand about 457(b) plans is that they are deferred compensation from your employer to you. That means that it is money the employer owes you but that the employer has not yet paid you.
Why in the world would anyone be willing to let employers keep the money they owe to the employee? Well, there are two very big reasons:
- Tax Benefits
- Asset Protection
In the first case, a 457(b) functions as another retirement plan, shielding your investments from any tax drag as they grow. There are both tax-deferred (traditional) and tax-free (Roth) versions. In the second case, the 457(b) shields your assets from your creditors. It isn't your money (yet), so your creditors can't take it. Of course, it may be available to your employer's creditors. More details about that below.
Here's what you need to know about 457 retirement plans.
What Is a 457 Deferred Compensation Plan?
A 457 plan simply refers to any plan that operates under section 457 of the IRC. Subsection (a) of the code really defines all 457 plans when it says that this plan is only taxable to the participant in the year the money is paid to the participant, i.e. it is deferred compensation. Subsection (b) gives further details for the plans we're really discussing in this post. Interestingly, subsection (f) is also relevant.
What Is a 457(f) Plan?
A 457(f) plan is a non-qualified deferred compensation plan where all contributions are made by the employer and none by the employee. It is usually just for a select management group or highly compensated employees, and it involves money that is paid to the employee at the time of retirement. It is sometimes called a Supplemental Executive Retirement Plan (SERP). With a 457(f) plan, the benefits are taxed when they vest, NOT when they are paid out. This makes it an “ineligible” 457 plan. 457(f) plans may have higher contributions than a 457(b) plan. In the remainder of this post, we will not be discussing 457(f) plans, only 457(b) plans.
What Is a 457(b) Plan?
The more commonly used 457 plan is the 457(b) or 457B. These plans are eligible (meaning no taxes due until the money is actually paid out), non-qualified (by the IRS, meaning the employee doesn't own the assets) retirement plans. They are typically offered by government employers or nonprofits, often in conjunction with a 403(b) and/or a 401(a) plan.
Governmental vs. Non-Governmental 457(b)s
The most important thing to know about your 457(b) plan is whether it is a “governmental” plan or a “non-governmental” plan. In this particular case, a governmental plan is better in all respects than a non-governmental plan.
Your asset protection and, probably more importantly, your distribution options are significantly better with a governmental 457(b). A governmental 457(b) can just be rolled over into a 401(k) or IRA when you leave the employer. That makes using a governmental 457(b) a “no-brainer” most of the time.
How Does a 457 Plan Work?
For the most part, a 457(b) plan works just like your 401(k) or 403(b). It's an “extra” retirement account. You put money in and then select which investments in the plan to invest the money into. Once you finish working, you take the money out and use it for your expenses.
How Much Can I Put in My 457 Plan?
The annual contribution limit for a 457(b) plan mirrors that of a 401(k) or 403(b)—$20,500 in 2022. However, the catch-up contributions work differently. Read your plan document carefully to understand if your plan allows catch-up contributions at all and, if so, how they work. The IRS allows a governmental 457(b) plan to do the same 50-year-old-plus extra $6,500 catch-up contributions that 401(k)s and 403(b)s allow.
However, they also allow both governmental and non-governmental 457(b) plans to have “special catch-up contributions” in the last three years before retirement age where you can either double your contributions ($41,000 per year in 2022) or make up for any years that you didn't put in the maximum $20,500 [2022]. Unfortunately, it's whichever of those two is less. So, total catch-up contributions are never going to be more than $20,500 x 3 = $61,500 [2022]. If your plan offers both the 50+ catch-up and a type of special catch-up, you can only do the one that allows the larger contribution, not both. So if your plan's retirement age is 65, you can do $6,500 [2022] extra from 50 to 62 and then possibly $20,500 [2022] extra from 63 to 65. I know, it's complicated. I don't write the rules, I just tell you what they are.
When Can You Withdraw from a 457 Plan Without Penalty?
There is no early withdrawal penalty from a 457(b), at least if you are allowed to make a withdrawal. While taxes may be due, there is no extra 10% tax for withdrawing prior to age 59 1/2. This can be both an advantage and a disadvantage.
However, plans generally require you to either separate from the employer first or, at least, have a hardship before you can make a withdrawal. This is beneficial in that you can tap your 457(b) first as an early retiree, leaving your 401(k) or 403(b) to cover spending after you are 59 1/2. This is usually a good idea anyway with a non-governmental 457(b), given the asset protection concerns. The disadvantage comes in with some non-governmental plans that have relatively poor distribution options, such as requiring you to withdraw the entire 457(b) balance in the year you leave the employer. This can result in withdrawals being taxed at the same or even higher tax rate than you had at the time of contribution!
Do 457 Plans Have Required Minimum Distributions?
Like 403(b)s, 401(k)s, Roth 401(k)s, Roth 403(b)s, and traditional IRAs, 457 plans have required minimum distributions (RMDs). If you have not already depleted the account, beginning at age 72, you will be required to take a certain amount of money out of your account each year or pay a massive tax (50% of the amount you should have withdrawn). You don't have to spend the money, but you do have to remove it from the retirement account and reinvest it elsewhere.
How Are 457 Distributions Taxed?
The taxation of a 457 plan is identical to that of a 401(k) or 403(b). If you made tax-deferred (traditional) contributions, you get an upfront tax break at your marginal tax rate. The investments then grow in a tax-protected way without the tax drag you would see in a taxable account. At the time of withdrawal, all money taken out is taxed at ordinary income tax rates. However, if you have minimal other taxable income, you can use the 457(b) withdrawals to “fill the brackets,” resulting in a much lower effective tax rate on withdrawals than you saved at the time of contribution. This arbitrage of tax rates is a major benefit of using retirement accounts to save for retirement.
Are There Roth 457s?
Some 457(b) plans allow Roth contributions. These work precisely the same way as in a 401(k) or 403(b). While you do not get an upfront tax deduction, the investments grow tax-free and will be completely tax-free at the time of withdrawal. If you roll the money into a Roth IRA eventually, you can even avoid having to take RMDs.
Can I Withdraw from My 457 While Still Employed?
While every plan may be different, 457(b) plans generally do not permit in-service withdrawals except in the case of hardship. The IRS has this to say about what qualifies as a hardship and what does not:
“Under a 457(b) plan, a hardship distribution can only occur when the participant is faced with an unforeseeable emergency. (Code Section 457(d)(1)(iii))
An unforeseeable emergency is a severe financial hardship resulting from an illness or accident, loss of property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant or beneficiary. Examples of events that may be considered unforeseeable emergencies include imminent foreclosure on, or eviction from, the employee's home, medical expenses, and funeral expenses. Generally, the purchase of a home and the payment of college tuition are not unforeseeable emergencies.
(Reg. Section 1.457-6(c)(2)(i))Whether a participant or beneficiary is faced with an unforeseeable emergency depends on the facts and circumstances. However, a distribution is not on account of an unforeseeable emergency to the extent that the emergency can be relieved through reimbursement or compensation from insurance, liquidation of the participant's assets, or cessation of deferrals under the plan. (Reg. Section 1.457-6(c)(2)(ii))
A distribution on account of an unforeseeable emergency must not exceed the amount reasonably necessary to satisfy the emergency need. (Reg. Section 1.457-6(c)(2)(iii))”
Severe financial hardship is the key. You'll need to convince your employer, but that shouldn't be too hard in a legitimate situation.
What to Do with Your 457 After Leaving a Job 457 b Rollover
What you do with your 457(b) after you quit, retire, or are fired depends heavily on whether it is a governmental or non-governmental 457(b). If it is a governmental plan, you have all kinds of options. You can
- Roll it into a traditional IRA (or Roth IRA if it is a Roth 457(b))
- Convert it to a Roth IRA
- Roll it into your new employer's 401(k) or 403(b)
- Roll it into an individual 401(k) if you qualify to have one
- Roll it into your new employer's governmental 457(b)
- Leave it in the 457(b) plan
- Pull it out gradually or all at once and pay taxes on it (no taxes due if a Roth 457(b))
If your 457(b) is a non-governmental plan, your options are far more limited but include:
- Roll it into your new employer's non-governmental 457(b) (if both plans permit rollovers)
- Leave it in the 457(b) plan
- Pull it out according to the options provided by the plan and pay any taxes due (no taxes due if a Roth 457(b))
457 Account Rollover Rules
Can You Roll Over a 457(b) to an IRA?
Yes, but only if it is a governmental 457(b) and you have separated from the employer.
Can You Contribute to a 457 After Retirement?
No. Only income earned from that employer can go into a 457(b). Once you have left the employer, no additional contributions can be made.
Additional Information
Can a 403(b) Be Rolled Into a 457(b)?
Benefits of a 457 Plan
#1 Additional Savings
The main benefit of using a 457(b) plan is you basically get another retirement plan similar to your 403(b). You can double your tax deduction and double your savings.
#2 No Early Withdrawal Penalty
457(b) 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. They're a great option to spend during early retirement. You just withdraw from the 457(b) first and leave your other retirement accounts until your 60s and later.
#3 Asset Protection
Like most retirement plans, 457(b) plans are good asset protection vehicles since they are generally protected from YOUR creditors. Governmental 457(b) plans are held in trust. Non-governmental 457(b) plans are subject to the creditors of your employer.
Downsides of a 457(b) Plan
It's not all rainbows and unicorns. These plans have downsides, too.
#1 Limited Investment Options
Like with most employer-provided retirement accounts, the employer gets to choose the investments. They might not have done a very good job. While you can remind them of their fiduciary duty to their employees, employees are rarely able to change the options. Alternative investments (precious metals, private businesses, real estate, cryptocurrency) that you might be able to invest in with a self-directed 401(k) or self-directed IRA are also generally not an option.
#2 Fees
It costs something to run the plan, and that cost is often passed along to the employees. Read your plan document and understand what fees you will be responsible for.
#3 Withdrawal Restrictions
This is retirement money, and in order to get the tax benefits the government is offering you to save for retirement, you must put up with some restrictions on accessing your money. You generally can't get it before you leave the employer. If you roll the money into an IRA, 401(k), or 403(b) after separation, the Age 59 1/2 rule will apply. Non-governmental 457(b) plans are also notorious for providing limited withdrawal options. Make sure you understand what they are and find them acceptable before investing.
#4 Asset Protection Concerns
With a non-governmental plan, the 457(b) money still belongs to the employer and is subject to their creditors. If they go bankrupt, you could lose your money.
Should You Use Your 457 Account?
Naturally, once an investor understands the downsides of a 457(b) account, they are often hesitant to use it. Here is how to decide.
457 Tax Savings vs. Risk of Loss
You are really weighing the tax savings of using the account against the restricted investments, limited withdrawal options, and, especially, the risk of loss. However, most doctors with access to a governmental 457(b) should consider it just another retirement account like their 403(b). In fact, some people aiming for early retirement actually fund it in preference to a 401(k) or 403(b). If the fees and investments are absolutely horrendous, you might want to give it a second thought, but even then, it often makes sense to use the plan, as you can probably roll it into a good 401(k) or IRA in just a few years when you separate from the employer. That still leaves you decades to enjoy the additional tax and asset protection benefits of retirement account investing.
However, if you have a non-governmental plan, you'll need to spend a little more time on your decision. If the fees and investments stink, you might be stuck with them for a much longer period of time. The withdrawal options might also be terrible. I have seen plans that require you to withdraw the entire amount as soon as you leave the employer. That could result in a “reverse tax arbitrage,” where you actually pay a higher tax rate on withdrawals than you saved on contributions. It is not uncommon to have to withdraw the money over just five or 10 years after separating, whether you are retired or not.
More importantly, you have to look at the employer. If your hospital is on shaky financial ground, you might want to limit how much of your compensation you want to defer. A bird in the hand may beat two in the bush. Some doctors avoid maxing out their 457(b), stop contributing after a few years, or avoid using it altogether due to this concern. While the tax savings are nice, the return of principal matters more than the return on principal. Talking to the hospital CFO about future expectations might help you decide whether to use the 457(b).
Personally, I think the risk of loss due to your employer going bankrupt is pretty low. While I'm sure 457 dollars have been lost, I've never run into a doc that had it happen to them. It certainly isn't common. I don't think I'd be willing to give up a $5,000-$6,000 per year tax break (along with ongoing tax and asset protection) 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 401(k) and Backdoor Roth IRAs first. And I'd definitely spend that money first in retirement.
What Is the Difference Between a 403(b) and a 457(b)?
Many times, 457(b) plans are described online or by the HR representatives as another 403(b) account only available to the high-earning employees of the organization, like the physicians. In many regards, the 457(b) is quite similar to your available 403(b):
- Both have annual maximum savings of $20,500 [2022] per year
- Both are contributed to with pre-tax dollars providing a nice tax break
- Both can have a tax-free (Roth) option
- Both grow in a tax-deferred (or tax-free if Roth) manner
- Both are taxed as ordinary income upon distribution
- Oftentimes, the same investment options will be available in both
- Both require withdrawals to start at age 72 with required minimum distributions
In one important way, the 457(b) is even better than the 403(b). It has no penalty for withdrawing money prior to age 59 1/2. The lack of the 10% early withdrawal penalty makes it an excellent source of income for a physician planning an early retirement. However, a 403(b) is always your money and always has a plethora of distribution options. That is not the case for a non-governmental 457(b).
At the end of the day, a 457(b) is a wonderful option to enjoy some additional tax and asset protection. Learn about your account and use it. Just be aware of the potential downsides, particularly of a non-governmental 457(b).
Are you saving enough for retirement? Get a personalized answer with this FREE retirement calculator powered by NewRetirement. Find out how much YOU need, get a “chance of success score,” suggestions to do better, and more.
What do you think? Do you have access to a 457(b)? Do you use it? Why or why not?
Just out of curiosity, if your employer did go bankrupt and funds in employees’ 457 plans were taken, could the employees deduct as a loss? and would it be a loss of the account value at time of seizure, or contributed amounts.
Thanks, as always, for your great articles –
-Ajo
No because they still haven’t paid taxes on it. As far as the IRS was concerned, they never got anything they could lose.
Pls i have a question, I had 457band 403b with my previous employer and moved to a new employer in march who also has 457b and 403b .I did move my previous job retirements 403/457 to rollover IRA. I did extra contributed to my 457b in 2022 by about 3000. My accountant Saied that is okay according to my plan and it seems has no problem while she is doing the Tax-return. I am less than 50 years old. are there a 457b plans which allow to contribute more than 20500? how to know the limits if any?
I don’t see how that would be a legit contribution, no. 457(b)s can have some weird catch-up contribution rules though. What does your plan document say?
Remember that the presence of rollover IRAs causes Roth conversions like step 2 of The Backdoor Roth IRA process to be pro-rated.
https://www.whitecoatinvestor.com/457-retirement-plan/
My previous job is 457b government plan and I did move the money to IRA when I started the new job. Now I have the new job 457b(nongovernmental) and I did contributed the whole amount into it in 2022(20500). I did contribute the extra 3000 through the previous job governmental 457b which I did move it to rollover IRA. Hope that clarify it better? Is it possible to do the extra money through that way?
I don’t know if you can have two 457(b)s in a single year or not honestly. But I think it’s very unlikely that if you can’t anyone will notice. Certainly if the old plan allowed a $3K catch-up contribution and that’s what you did, then that’s okay.
I left my prior job which had a non governmental 457b and started a new job which also has a non governmental 457b. I was able to roll over contributions (roughly 30k) I had in the first 457b to the second one after getting approval from both plans. However, I was issued a W2 from the first fiduciary on this 30k despite this being a direct fiduciary to fiduciary rollover. Why is this? So I need to pay taxes now on this amount and also pay taxes again when I pull out this money in retirement?
Was it even legal for me to roll over this money into the new 457b? I just don’t want the IRS to think I “over contributed” for this tax year by rolling over 30k, even though I know roll overs do not count towards IRS limits. I don’t want any significant tax hit in the future by having rolled over this money.
Thank you for your help!
Great question. I don’t know why that happened. Sounds like some kind of an error (you’re not supposed to pay taxes twice) but I’m not sure how to fix it. First thing I’d do is go back to the first 457 provider and see if they can redo that. Maybe they didn’t realize where it was going. If that doesn’t work, I’d check with an accountant to see if you can take a deduction for the rollover to offset the income.
Thank you for answered. Idid communicated to my retirement financial company they have mentioned that I did overcontributed for 457b and they have mentioned that they will not send the Check back to me but they are going to send it to the employer and the employer should update the W 2 form for me . that the way it works ? is it possible to update the W2 form for 2022 now? do u think this sound right?
I’m having a hard time following you. But sure, your employer can update your W-2 with a W-2C. Sounds like a good solution to me.
I recently graduated dental school and am in a residency. Previously, I worked for a state agency with a 457 Deferred Comp account.
I want to roll the ~$14,000 from my Deferred Comp into my Roth IRA that I just opened this year at Vanguard. I actually have the money sitting in a rollover IRA brokerage at vanguard but don’t want to mess this up. Is there any concerns I need to be aware of here and will I need to fill out a Form 8606 or 1099-R to pay taxes on the money rolled into my Roth IRA? Trying to find out how to do this right and couldn’t find much for doing a 457 rollover.
If it’s a governmental 457(b) and you are willing to pay taxes on that $14K this year then you can do that.
Now that you’ve put it into a traditional IRA, yes, you’ll likely need to fill out 8606. But you probably need to anyway since you’re doing Backdoor Roth IRAs, right?
Now you’re not doing a 457 rollover, just a Roth conversion of a traditional IRA. You already did the 457 rollover (so it must have been governmental) so sounds like you didn’t mess that up.
Maybe I misspoke.
I’m actually far below the backdoor Roth IRA limits.
I contribute the old fashion straightforward way to my Roth. I simply wanted to roll my 457 to my Roth. The process I did was governmental 457 to traditional IRA to Roth IRA (and pay taxes).
Sounds right? Do I still need an 8606 for that?
Yes, only part 2 though.
https://www.irs.gov/pub/irs-pdf/i8606.pdf
Who Must File
File Form 8606 if any of the following apply.
• You made nondeductible contributions to a traditional IRA for
2022, including a repayment of a qualified disaster or reservist
distribution.
• You received distributions from a traditional, SEP, or SIMPLE
IRA in 2022 and your basis in these IRAs is more than zero. For
this purpose, a distribution doesn’t include a distribution that is
rolled over (other than a repayment of a qualified disaster
distribution (see 2022 Form 8915-F)), qualified charitable
distribution, one-time distribution to fund an HSA, conversion,
recharacterization, or return of certain contributions.
• You or your spouse transferred all or part of their traditional,
SEP, or SIMPLE IRA in 2022 to the other spouse under a
divorce or separation agreement where the transfer resulted in a
change in the basis of the IRA of either spouse.
• You converted an amount from a traditional, SEP, or SIMPLE
IRA to a Roth IRA in 2022.
• You received distributions from a Roth IRA in 2022 (other than
a rollover, recharacterization, or return of certain
contributions—see the instructions for Part III, later).
• You received a distribution from an inherited traditional, SEP,
or SIMPLE IRA that has a basis, or you received a distribution
from an inherited Roth IRA that wasn’t a qualified distribution.
You may need to file more than one Form 8606. See IRA with
basis under What if You Inherit an IRA? in Pub. 590-B for more
information.
Note. If you recharacterized a 2022 Roth IRA contribution as a
traditional IRA contribution, or vice versa, treat the contribution
as having been made to the second IRA, not the first IRA. See
Recharacterizations, later.
You don’t have to file Form 8606 solely to report regular
contributions to Roth IRAs. But see What Records Must
I Keep, later.
Hi. I’ll be leaving my job later this year to effectively be self employed. I currently have a non-govt 457b that I have been given the option to cash out by year 5, starting at any year of my choosing. I assume I can’t roll over to a solo 401k or any other retirement bucket given the nature of non-governmental 457b.
I will be in the highest tax bracket this year. Am I correct in assuming that withdrawals will be taxed on your effective tax rate the year of withdrawal? So if I am able to dramatically reduce by tax burden by say year 2, I should opt to cash it all out that year?
Hope it makes sense, thanks for your reply.
Yes.
Yes.
Thanks Jim.
Original comment mentioned early withdrawal for Roth 457 – I was under a similar impression but that is not correct. I have ceased contributions into a Roth 457 (since there is an early withdrawal penalty for Roth 457 it would be functionally the same as contributing to a Roth 403b, per my limited understanding). This is not the tax code but similar discussion on BH forum: https://www.bogleheads.org/forum/viewtopic.php?t=368895
“… Roth 457 is also subject to the early withdrawal penalty under 59.5, whereas the regular 457 is not and funds are available to use without penalty upon separation of service.
Roth 457 is subject to the 5-year rule from first Roth 457 contribution.”
and further down the thread explains why, “Roth 457 has a bit of a stumbling block if you want to use it before age 59.5 because the the earnings in Roth 457 are not yet tax free.
When withdrawing from Roth 457 before 59.5 they must distribute contributions and earnings together. This causes the earnings to be taxed (because you are too young for them to be tax free) and there is also a small penalty for the early withdrawal of the earnings part.
Roth IRA is different. When withdrawing from Roth IRA, contributions come out WITHOUT the earnings…so you avoid the tax on the earnings and the small penalty on the earnings.”
There is no early withdrawal penalty for 457s whether traditional or Roth. They all have their own distributions options though, but no age 59 1/2 rule or age 55 rule or age 65 rule or anything. That poster on Bogleheads is mistaken on that point. Here are some sources that back me up:
https://defcomp.nv.gov/Resources/FAQ-Roth_457/#:~:text=Taxable%2C%20but%20not%20subject%20to,if%20under%20age%2059%20%C2%BD.
https://www.brla.gov/DocumentCenter/View/3886/Mutual-HartfordPDF?bidId=#:~:text=If%20you%20retire%20or%20leave,the%20amount%20that%20you%20withdraw.&text=In%20the%20event%20of%20your%20death%2C%20designated%20beneficiaries%20are%20entitled,remaining%20funds%20in%20your%20account.
And from the IRS itself:
https://www.irs.gov/taxtopics/tc558
In general, an eligible state or local government section 457 deferred compensation plan isn’t a qualified retirement plan and any distribution from such plan isn’t subject to the 10% additional tax on early distributions. However, any distribution attributable to amounts the section 457 plan received in a direct transfer or rollover from one of the qualified retirement plans listed above would be subject to the 10% additional tax.
Sorry, should’ve been more clear in my original comment. Agreed there is no early withdrawal penalty, but do the earnings get taxed before 59.5 years old? Unlike a Roth IRA, I don’t believe you can just ‘pull just the contributions first’ in the Roth 457b. So you would get a mixed tax rate (not taxed on contributions, but taxed on earnings, proportionate to the account makeup at time of withdrawal). Similar to the cream-in-the-coffee situation outlined here in an article about 401k withdrawals https://fitaxguy.com/roth-401k-withdrawals/ This is a super confusing area and I don’t feel like I’ve read a conclusive answer on this (maybe makes it a good blog post or question on the podcast?) I’ve been roasted on both sides of this on BH forum / subr – I don’t have enough in a 457 Roth for it to matter appreciably in my situation, but I’m in the REALLY BORING accumulation phase and questions like this keep me intrigued/engaged.
No. There is no 59 1/2 year old rule for 457s.
I left my non-governmental 457 B employer and was told I had to take distributions over 4 years or roll over. My new employer had 2 seperate 457 B-unfortunately when enquired the HR folks only informed me of the governmental one and so I got hit with my first distribution! Now, I came to know my new employer actually had a non-governmental 457 B that could have technically accepted my 457 B from previous employer? What do I do? Can i fix this? I feel terrible. Can i stop further distributions?
You can ask HR if it can be reversed but otherwise I don’t see that you have any choice other than to take the distributions and pay the taxes on them.
Hello. I retired from a governmental job Dec 2022. I have the 457B Roth account. HR told me I have one year to take action on my 457 B account, after which I will be charged a monthly maintenance fee. I am ready to take action but not sure if I should rollover to a traditional Ira or a Roth IRA , 401k. I am 58 years old and the estimate amount I have in the 457B is $45K. Also, I am planning to get a distribution of $5K to $8K, and the remaining amount is what will be rollover. I think I will only pay taxes on the distribution amount and not the rollover amount.
Can’t really answer without more info. Most people would probably choose to just roll their governmental 457b into an IRA at age 58, but doing a Roth conversion could also be right as could rolling it into a 401K or just leaving it in the 457b or even using it to cover this year’s spending.
Hi, I am planning to leave my non-gov 457b employer at the beginning of next year. I am currently in Illinois and contribute to their 529 plan which allows for a 20k state tax deduction per year (married filing jointly). I am relocating to a different state with a not-quite-as-good 529. The 457b allows for many flexible distribution options. Could I opt to take a 20k distribution from the 457b every year, ensuring that I have Illinois state income, and then get the state tax deduction from the 529? Do you see any downsides to doing this that I haven’t thought of? On a related note, if I do this can I take the full 20k deduction even if my wife has no Illinois income? Thanks!
You know you pay federal taxes on the 457b withdrawal but only save state taxes on the 529 contribution, right? But yea, you could do that.
I bet you can still do the $20K if you’re filing MFJ and there is at least $20K of total Illinois income, but read the fine print.
I retired from my county job and do receive a state pension and a monthly withdrawal from a 457. Starting early next year my former employer has offered me employment for three months. I will be casual part-time, no benefits. Can I still receive the 457 while working part time, no benefits , without any tax issues? Or any employer for that matter. Or should i suspend the 457?
No idea. Better ask HR You might be able to both take withdrawals and contribute more to it! Or maybe neither.
Hello, I contributed to 457b last year and thinking about leaving my job in about 6 months. Would it make sense to continue to contribute this year to the 457b? It is my understanding that you have to take it out when you leave and it will be taxed? Is that correct?
Depends on the 457b. See what the distribution options are. For governmental 457bs you can just roll them into your next 401(k), no big deal. So if that’s the case then absolutely, go max that sucker out. You probably won’t have access to retirement accounts at your new job for a year anyway.
I left my old job. Choices on my 457 is lump sum if no decision is made by 1/31 or keep invested. I have to decided irrevocably on the age of distribution which has to be by 70.5. Even though I plan to retire in my 50s I am afraid I will have too many assets that I still get income from my property investments (not sure if over my current salary 370K) and the tax implications will still be high. Debating on setting the age to an earlier time to take distributions before I am allowed to from 403b or just to set to the limit at age 70. Any recs?
A 457 is generally some of the first money spent by retirees. It often helps fill the pre age 55/59 1/2 gap for early retirees along with a taxable account. But if you just think you’ll have money coming out of your ears for the rest of your life and don’t have any worry about the company going under, I guess you could just leave it in there until 70. But by 70 you’re getting SS, your rental property income is presumably much higher and much less protected by depreciation, and you’re not far from RMD age. If you really want to retire by age 53, I’d set it up to start getting the money at 53.
Bummer that the decision has to be made so far in advance.
I have a non-governmental 457b at my previous job in California. The plan allows me to park it there indefinitely. I also have the option to roll into into a non-governmental 457b at my current job in Georgia. If I take distributions from the California 457b at some point in the future, do I need to pay California income tax on those despite no longer being a California resident? If so, I’m thinking this may be a good reason to transfer those funds to the Georgia 457b. Thank you.
I don’t think so but I confess I’m not 100% sure. Worth checking though for exactly the reason you mention.
The Utah state 457(b) only withholds for Utah taxes, but I don’t think that would necessarily mean that one would owe Utah taxes if they were living in Nevada when they made the withdrawal.
https://www.urs.org/documents/byfilename/@Public%20Web%20Documents@URS@Forms@DC@401_457@457_Withdraw@@application@pdf/#:~:text=State%20of%20Utah%20taxes%20are,for%20the%20state%20of%20Utah.
Hey Jim – are the rules for 457s dictated by the IRS or the plan? We are contemplating a move from a government academic center to a private academic center – we currently have about 150k in the governmental 457b and will be eligible for the non-governmental 457 at the new job and are trying to figure out our best course of action for this. We do backdoor roths every year (have about 100k in a roth & $0 in trad IRAs). We would also be eligible for a 403b at the new job and to my knowledge can rollover the old 403b to new job 403b. For the 457 – ideal course of action would be to roll to new 457b but I don’t think that’s possible. Would next course be to roll to the new plan’s 403b? Is that even possible?
Depends on the rule. Roll the old governmental 457b into the new 403b. Make sure the new non governmental 457b has acceptable distribution options for you or don’t use it at all.
I have a non- government 457(b) plan. I have been trying to get my money for the past 4 months. I first tried rolling it over. After sending 2 different forms which were both supplied by the company I was told that plan couldn’t be rolled over it had to be paid out. They have sent me 4 different sets of forms, which I have completed and returned only to be told they are the wrong ones each time and then they send me new ones. How can I get my money?
A non-governmental 457(b) can only be rolled over into another non-governmental 457(b).
I don’t think I can solve your customer service issue, but I’d be hassling them on the phone and in person and filling out the forms they say they need right in front of them and then asking to their face “Is there anything else you need me to do? When will I have this money?”
my grandfather was a physician and lost all of his retirement when his hospital went under decades ago. it does happen with 457 accounts. nope nope nope. wouldn’t ever fund one unless it was governmental. I’ll just max out all the normal stuff then open a taxable brokerage and take the tax hit.
Thanks for sharing! I think you’re the first I’ve run into that even knows someone who lost 457 money.
I am a W2 employed physician at a rural hospital. Financially the hospital is doing “ok” but just like may rural hospitals the finances are not devoid of intermittent budget issues and concerns. Having said that we serve a large catchment area and a lot of people rely on this hospital (hopefully providing longer term financial security).
I understand that there is no way to eliminate the risk of hospital bankruptcy. In reading the article it sounds as though it is quite rare to see physicians suffer the consequence of creditors going after non-gov’t 457 funds.
Do you have any tips/metrics to evaluate this risk?
I have not been contributing into the 457 due to some uncertainty with the above factors.
Other than delving into the finances of the hospital and its corporation, not really.
You should be reassured by the fact that very few if any non governmental 457s have lost anybody’s money. This is not a common thing that happens.
Great topic. I have a quick question regarding 457b distributions and how they are taxed. I recently changed positions – was attending physician in Virginia for 9 years; now in Florida. I had a 457b plan that. My former employer required a lump sum distribution following separation (was not able to do a roll-over or a yearly distribution). The funds were distributed 3 months after my separation date. The deferred funds in the plan were earned in Virginia, but I received the money when living in Florida (no state income tax). This was reported on a W2 from Principal to my address in Florida – federal income tax was withheld, but not state tax (I assume because of my Florida address). My question is…do I report this on my Virginia state taxes? It is a little unclear to me; it seems like I should, but haven’t received a clear answer. Certainly, it would increase my VA tax bill, so do not want to do this if not needed.
Thanks for any help/guidance.
Regards,
David
If you were living in Florida when you received the money, I’d call it Florida income and report it on my taxes that way. Turbotax agrees with me and I think you’d have a very defensible position in an audit.
https://ttlc.intuit.com/community/state-taxes/discussion/457b-distribution-tax-reporting/00/3292577#
Thanks! I posted this question on the TurboTax forum and they agreed as well. I appreciate the follow-up and thanks for all the help over the years. This site has been so great and I recommend it to all of my residents and medical students.
Hello! I’m a new attending working at a university hospital. How do I tell if my institution (and therefore the 457(b) plan is considered governmental vs. non-governmental?
Thanks!
Ask HR/look at the plan document. But if it’s a state university it’s almost surely a governmental 457(b).
Since a non-governmental 457b distribution is reported on a W-2, is it considered earnings and potentially reduce your social security benefit?
Interesting question. I think the answer is no, but confess I can’t cite chapter and verse to prove it. You might find something in here:
https://www.irs.gov/pub/irs-drop/n-00-38.pdf
I am eligible for a 457(B) at my academic institution and will be maxing it out at 23K for the remainder of 2024 (~4-5K per month). I fund a 403b at the max IRS limit and get an employer match. I do some side consulting and fund an individual 401k (ie, Solo 401K) with employer contributions. Will the 457(B) add any complexities or issues when it comes to contribution limits for the individual 401K?
I am changing jobs later this year and need to decide what to do with my current non-governmental 457b, which currently has about 200k in it. Options are to take this out as a lump sum next year, or spread the distributions over a time period up to 10 years. My income will be a bit lower with my new job but am moving to a high-tax state so I won’t be paying any less in taxes going forward. Still 20+ years away from retirement, so I’d like to reinvest this money in a presumably taxable investment account for the future. From a tax standpoint, what is better? Lump sum or spread out the distributions?
Ideally you spread them out during a few years AFTER you retire. How long an you put these withdrawals off? If you really can’t put them off that long, I’m not sure I would have even used this 457b, but at this point how much you take out each year depends on your taxable income and how much space you have to the top of your current bracket.
Since I am leaving my current position I cannot defer the distributions – I have to take them starting next year. If I take the entire lump sum distribution it would put me towards the top of our current tax bracket but probably won’t bump us up. Any other schedule won’t affect our tax brackets.
$200K wouldn’t put you into the next bracket? You sure? If that’s the case, I might just take it all then in that year. Or split it between two if necessary and move on with life/reinvest in taxable after taxes.
My employer is trying to retain staff. Along with administering a 457 (b), they are depositing a lump sum of money into a 457 (f) which vests after 3 years. Have you heard of a 457 (f) being used to retain staff. Any tax reduction strategy for when that 457 (f) pays out in three years?
I wouldn’t turn down free money, but I don’t know of any way to spread withdrawals out if that’s what the plan says. I don’t think they can be transferred either. Sorry.
Would you prioritize maxing out a 403b then once you do that, start contributing to a 457?
Yes, it is almost always the right move to max out a 403(b) before even considering a 457 contribution.