How quickly would you draw down a 457(b) account?

[Miss Bonnie MD]

White.Beard.Doc wrote:

I retired from my university position to another medical position.  I am still working and I have plenty of assets and income. When I left the university, I had to choose a distribution option for my 457b.  Each 457b plan is written differently, according to the wishes of the sponsor, per my understanding.

 

My first question is regarding your concern about risk and your principal balance. My 457b funds are all held by Vanguard. How does the financial health of the University Hospital where I worked have anything to do with risk of my 457b funds that are invested with Vanguard?

 

Regarding distributions and choices, I am in excellent health, have plenty of money to live on, and don’t need the money. So I looked at the distribution options and elected to let the 457b money ride as long as possible. I have to start taking the money out when I reach the age of 70.5. The maximum distribution period is 10 years.   So that is what I chose. There is an option to take a hardship withdrawal if circumstances change. So if I need the money and have some type of financial emergency, that is an option.

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Is this a private 457b? If so, the money technically is "owned" by the university, not you, like money in a 403b. So if the hospital goes under, your 457b money can be used to pay off their creditors.

Public 457bs are different and the money is safe.

[nachos31]

White.Beard.Doc wrote:

My first question is regarding your concern about risk and your principal balance. My 457b funds are all held by Vanguard. How does the financial health of the University Hospital where I worked have anything to do with risk of my 457b funds that are invested with Vanguard?

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Your 457b is owned by your University Hospital and uses Vanguard as its custodian. 457b plans are nonqualified plans (meaning they are not protected by ERISA laws like 401k/403b plans) and are really deferred compensation plans (your employer is holding onto your money for you). There are two main types of 457b plans: governmental and non-governmental. Governmental (what Miss Bonnie calls "public") plans are more favorable because your money is not subject to creditors if your employer goes bankrupt. Non-governmental (what Miss Bonnie MD calls "private") plans are less favorable because your money is subject to creditors. That means even if your money is invested with Vanguard, if your company goes under, then creditors will get first dibs on the money that you saved via a non-governmental 457b plan.

Most university hospitals (especially state schools) have governmental 457b plans, but that is something you should confirm with your HR/benefits folks.

 

[White.Beard.Doc]

Thank you for that new information Dr. Bonnie. I had no idea that the money isn't mine until withdrawal since my 457b funds are invested in the funds I chose at Vanguard.

 

However, I'm still feeling ok. The fund is controlled by the university, not the hospital.  It is likely a safe bet because the university has been around for hundreds of years and has billions in endowment funds.

[ciuriburi]

Quick question, PoF wrote: "Taking $36,000 a year will limit my ability to make low-cost / no-cost Roth conversions in those first 5 or so years, which could be a bummer."

Should I understand that distributions from 457 b would count toward the "pro rata" rule for backdoor Roth IRA? I am forced to take distributions from a 457b and I was thinking to take them yearly throughout 10 yrs. Would those distributions make it hard to do the backdoor IRA?

thanks

[jacoavlu]

ciuriburi wrote:

Quick question, PoF wrote: “Taking $36,000 a year will limit my ability to make low-cost / no-cost Roth conversions in those first 5 or so years, which could be a bummer.”

Should I understand that distributions from 457 b would count toward the “pro rata” rule for backdoor Roth IRA? I am forced to take distributions from a 457b and I was thinking to take them yearly throughout 10 yrs. Would those distributions make it hard to do the backdoor IRA?

thanks

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No. Distributions from any pretax account such as a 457 will add to one's adjusted gross income, potentially pushing one into a higher tax bracket. Which is why PoF references the effect on pretax to Roth IRA conversion, which is another taxable event that raises AGI.

Pro rata calculation only applies in the instance of non-zero pretax balances in traditional, SEP, and SIMPLE IRAs

Distribution from 457 has no effect on the backdoor Roth IRA.

[FIREshrink]

would drawdown within no more than five years. tax deferral worth very little once you get down to the 12-15% bracket. youkve already beaten the system once by avoiding 35-50% taxes, no reason to get greedy.

[wonka31]

*Selfish post*:

I know this has been discussed in the past and WCI has posted before, but are people still in the ‘max out your non-governmental 457’ camp?

Some of the thoughts POF brought up in one of his posts regarding changes to medicine leading to risk for healthcare systems, etc are ideas that I have been throwing around in my little brain as well. My system is seemingly quite stable now, but I think all systems face some degree of uncertainty long term, even if it is only in the form of mergers as opposed to closure. The new year is coming and I’m on the fence whether or not to keep contributing to the 457 or not, given that my retirement timeline is quite a ways away (>a decade).

I figured I’d try and crowdsource opinions from people I respect given this timely post. POF, would you continue to contribute to your plan if you weren’t nearing retirement?

[ENT Doc]

You don't have to look very hard to see the failings of multiple hospital systems - just look at the sidebar of Becker's Hospital Review.  That's what's going on currently.  If the new OPPS proposals come to fruition they are going to have site neutral payment everywhere.  Then add bundled care payments and that forces them to go from a FFS model to an operationally efficient model, but only for that bundled care.  So part of the hospital system functions as a "do more, see more" while the other is focused on "cost constraints and efficiency".  Competing interests but as long as the do more see more mentality exists it threatens their bundled payment efficiency goals.

The ability to pay for 457s will be threatened.  God help them if single payer comes along, where we get 40% payment cuts and the governmental system still spends just as much as we would have anyway.

[StarTrekDoc]

We have the KIS-457.  It may not be the most efficient, but I think we're good to use it this way.

Our plan for 457 is the primary source draw for our -RE between 55 and 65 and to allow for pension and SS# (if no changes in benefits) to be deferred as long as possible.  Every year we don't hit the pension disbursement need, we gain ~5% on the disbursement amount -- that's not small potatoes.

We'll use other 401/403/TSP/IRA funds to get us through that period too as a way to minimize a large RMD tail as possible.

[ciuriburi]

FIREshrink wrote:

would drawdown within no more than five years. tax deferral worth very little once you get down to the 12-15% bracket. youkve already beaten the system once by avoiding 35-50% taxes, no reason to get greedy.

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I don't expect being in a 12-15% bracket for another 10 yrs. Why is 5 yrs better then for example 10 or even more?

[AlexxT]

We don't know your dividend income or you expenses, or much else for that matter.  But my approach would be to look at how much you need for expenses, and take out at least that much from the 457 until it's gone.

I would also look at your RMDs, decide how you will do Roth conversions, and see how much you'll want to spend from your 401k each year after that, and start doing your Roth conversions after the 457 money is gone.  You might want to integrate the two.  See what your  Roth conversions need to be now to equalize your marginal tax bracket now and after 70.5.  Then make sure that either your 457 withdrawal or 401k withdrawal/Roth conversion, or a combination of both,  hits your target number.

I wouldn't count on your hospital still being there in a few years.  Once word gets out that you're gone, everyone will run for the exits.

[FIREshrink]

ciuriburi wrote:

FIREshrink wrote:

would drawdown within no more than five years. tax deferral worth very little once you get down to the 12-15% bracket. youkve already beaten the system once by avoiding 35-50% taxes, no reason to get greedy.

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I don’t expect being in a 12-15% bracket for another 10 yrs. Why is 5 yrs better then for example 10 or even more?

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Risk of forfeiture is not zero. In my opinion I’d take it out as soon as possible. I also don’t use my 457b for the same reason.

[PhysicianOnFIRE]

So many variables. Employer's financial stability, future tax rates (after 2025), how soon you might start collecting (leave your employer), and every plan has different withdrawal options -- some only do lump sum, apparently. I think the risk of forfeiture is really low -- no one here has ever said they lost money from one as far as I know -- but the risk greater than zero. Personally, I would probably take the risk for the tax deferral in a high marginal tax bracket, but it's a personal choice and the best answer depends on some of those many variables.

[Larry Ragman]

PhysicianOnFIRE wrote:

Good question — I’ve got access to a variety of institutional Vanguard funds in the account. I could go 100% stocks, 100% bonds (just to rile you, Johanna) or any allocation in between.

I would use the money for living expenses, but wouldn’t be relying on that 457(B) money as I’ll have access to a 7-figure taxable account.

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POF, I’ve asked for myself in another thread, but have you actually decided what asset allocation you will set in the 457 while you are drawing it down?

[PhysicianOnFIRE]

Larry Ragman wrote:

PhysicianOnFIRE wrote:

Good question — I’ve got access to a variety of institutional Vanguard funds in the account. I could go 100% stocks, 100% bonds (just to rile you, Johanna) or any allocation in between.

I would use the money for living expenses, but wouldn’t be relying on that 457(B) money as I’ll have access to a 7-figure taxable account.

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POF, I’ve asked for myself in another thread, but have you actually decided what asset allocation you will set in the 457 while you are drawing it down?

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It will probably be bond-heavy. Possibly 100%. In some ways, it doesn't matter much, as money is fungible, and I'll be rebalancing the portfolio as a whole.

Another "issue" that makes my situation unusual is that I'll continue to make money via a different source (my online presence), so this 457 money may not be spending money, and could end up being reinvested, anyway. As you can see, I haven't fully thought this through, but I won't be collecting until 2020.