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

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  • jacoavlu
    replied
    “a tax delayed is a tax not paid”

    I think this ones easy - 35% marginal rate and you don’t need the liquidity?

    Defer, defer, defer.

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  • mbaCPA
    replied
    There was a post a couple of years ago you might find helpful that partially addresses the 457 and how it's draw down fits into the hierarchy of retirement income sources.

    https://www.whitecoatinvestor.com/common-questions-about-investing-in-retirement/

     

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  • jfoxcpacfp
    replied







    Yes, I’ve had that thought too. Maybe split the difference, but I can save up to 38K in 457b. Perhaps the $ saved won’t make much difference. But then I may fall on the side of enjoying the control in my own $ in taxable account.

    The tax bracket I was quoting is marginal tax (including FICA and state income tax) that I’d pay on distributions.
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    I’ll let one of the accountants verify, but I don’t think you owe FICA on retirement account distributions.
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    Larry is correct. RMDs are not considered “earned income”, just “taxable income”.

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  • Larry Ragman
    replied




    Yes, I’ve had that thought too. Maybe split the difference, but I can save up to 38K in 457b. Perhaps the $ saved won’t make much difference. But then I may fall on the side of enjoying the control in my own $ in taxable account.

    The tax bracket I was quoting is marginal tax (including FICA and state income tax) that I’d pay on distributions.
    Click to expand...


    I’ll let one of the accountants verify, but I don’t think you owe FICA on retirement account distributions.

    Leave a comment:


  • jfoxcpacfp
    replied




    While one might be able to calculate the break even point for you in terms of tax drag in your taxable account but with capital gains rates when cashed v. Tax deferral in the 529 but income tax rates on withdrawal, it is possible to over think your decision. Doesn’t have to be either/or. You are saving ~$120k a year in taxable. Carve out 15% ($19k max contribution) of that for the 457b and take the tax break. You don’t know when you are going to move, your employer is solid, and your distribution options are good. Take the tax break now and you are most likely to come out ahead. And I suspect if circumstances work out hypothetically that the “all taxable” investment option would have been better, in reality you’ll never notice the difference when you cash out.
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    Oh, Larry - that is such a rational response that I wish I could hug you.

    @eyecandy, you have to go with what you’ve got today. Yes, the laws can change in the future, but you (and none of us) know in what direction. Take what advantages you have or bet that you’ll be in a higher tax bracket than you’re currently projecting and use that to adjust your financial plan. You may settle down in a state with high income taxes but no tax on retirement income. You may stay there. Or you may move to a high income tax state that changes the tax law because it’s losing too much due to migration to the competition. Ever thought of that?

    The point is, you simply don’t know. Neither do I. Neither does Larry. Or WCI. My ROT for clients is that, even if your nephew is the POTUS, you should base your decision on what’s in effect now. There is no other reference point that makes sense, same as with predicting what the stock market will do in the short term (totally different in the long term, as we all know, right?) It is a waste of brain cells, not to mention precious time, to overthink this.

    As always, some serious financial planning, whether DIY or with a planner who is experienced with physicians and HIPs, could make a big difference on your clarity and direction - and future net worth. (Yes, this recommendation d/n apply just top physicians.)

    Good luck!

    Leave a comment:


  • eyecandy
    replied
    Yes, I've had that thought too. Maybe split the difference, but I can save up to 38K in 457b. Perhaps the $ saved won't make much difference. But then I may fall on the side of enjoying the control of my own $ in taxable account.

    The tax bracket I was quoting is marginal tax (including FICA and state income tax) that I'd pay on distributions.

    Leave a comment:


  • Larry Ragman
    replied




    Back of the napkin calculations show my income would have to drop to 120K for my effective tax rate to be lower (31.16%) than my current income tax state. Does this reasoning make sense? Am I in the situation where the 457b isn’t a worthwhile vehicle if I may be moving to a more expensive state in the future? Should I just keep plugging along with the taxable instead?

    Thanks in advance! Also, I would love an update from POF on his current 457b plans.
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    The 24% bracket goes to ~$160k for single and ~$320k for married filing joint.

    Leave a comment:


  • Larry Ragman
    replied
    While one might be able to calculate the break even point for you in terms of tax drag in your taxable account but with capital gains rates when cashed v. Tax deferral in the 529 but income tax rates on withdrawal, it is possible to over think your decision. Doesn’t have to be either/or. You are saving ~$120k a year in taxable. Carve out 15% ($19k max contribution) of that for the 457b and take the tax break. You don’t know when you are going to move, your employer is solid, and your distribution options are good. Take the tax break now and you are most likely to come out ahead. And I suspect if circumstances work out hypothetically that the “all taxable” investment option would have been better, in reality you’ll never notice the difference when you cash out.

    Leave a comment:


  • eyecandy
    replied
    Digging up an old thread here as I'm looking for some insight on whether to use my non-governmental 457b account.

    Details: The only tax deferral options I have at work are a 401k and the 457b. So far I haven't done the 457b because I was worried it was lump sum only and I didn't know how long I'd be at the job. Now I'm looking into it. I have no debt except for 30yr mortgage at 3.75%. I fully fund the 401K and have been saving approx 10K/mo in taxable. Previous income was highest tax bracket. But my future income will most definitely be lower due to likely changes in pay structure at work and eventually decreasing my FTE in the next couple years to avoid burnout.

    Current marginal tax rate 35% and effective tax rate 31.76%. The 457b payout options are lump sum or distribution from 1-30yrs. The hospital group is large with a solid bond rating (Moody's AA-). Now if I was going to stay in a low income tax state i think it definitely makes sense to fully fund the 457.

    However here's the rub, if I don't find a reason to 'settle down' where I currently live then I'll likely leave once I'm closer to my FU number and move back to my high-income tax state. Seems unlikely I could roll the plan over as I may pursue private practice and there's no rollover on the IRA side. In the future I would continue to work for at least 15 years at a lower FTE even once in more expensive state d/t the FU portion (thinking 1/2 of what I currently make --but that's still 32% income bracket).

    Back of the napkin calculations show my income would have to drop to 120K for my effective tax rate to be lower (31.16%) than my current income tax state. Does this reasoning make sense? Am I in the situation where the 457b isn't a worthwhile vehicle if I may be moving to a more expensive state in the future? Should I just keep plugging along with the taxable instead?

    Thanks in advance! Also, I would love an update from POF on his current 457b plans.

    Leave a comment:


  • Larry Ragman
    replied
    Ciuriburi, there are probably other factorsrelated to the specifics of the plan, but I’d say for you the simplest considerations are long term viability of your employer and tax burden.If your employer is viable, I recommend taking a series of payments to keep down taxes and keep the money tax deferred as it grows.

    In terms of taxes the lump sum is likely to drive you into a much higher tax bracket in the year you take it because the 457 withdrawals are taxed as ordinary income. But if your employer is shaky, it might be worth taking the lump sum to avoid a potential loss. If you honestly think you would remain in the highest tax bracket over the planned withdrawal period regardless of the withdrawals then take the lump sum.

    One of those other factors is the type of 457b. The governmental plans are much more stable than the private plans, at least theoretically.

    Leave a comment:


  • ciuriburi
    replied
    Can somebody explain to me if in my situation there is a benefit of withdrawing funds from 457b over 10 yrs versus lump sum? I likely will be in the next 10 yrs in the same high bracket anyway so at the end of it I would still pay same taxes right?

    I assume benefit of withdrawing throughout the yrs is only if you end up in a lower bracket in some of the years to come. Thank you.

    Leave a comment:


  • Larry Ragman
    replied
    Thanks for the insight. I actually agree with both your intended allocation within the 457 and treating the monies in the account as part of the portfolio as a whole.

    However, regarding fungibility and rebalancing I view the window as finite. Once you start the 457b withdrawals you lose control of the timing and the sequence of return risk becomes immediate in that account. That is, if you did have a significant equity allocation in the 457 and the market went down that year you could not choose to wait it out. You would have to take that distribution and eat the loss.

    Ive learned that not all 457b plans have the same rules, so there is actually a caveat to the concern I just raised. In my plan at least I get one “out of jail” free card for the distribution schedule I select. So, if I had significant equities in the 457 I could suspend distributions a down year in the market. But since that is a one time use, back to your original point...I will be bond heavy in the 457 by the time I am ready to start withdrawals. But I will slightly overweight the other accounts in stocks to adjust for my preferred allocation overall.

     

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  • PhysicianOnFIRE
    replied







    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.
    Click to expand…


    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.

    Leave a comment:


  • Larry Ragman
    replied




    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.
    Click to expand...


    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?

    Leave a comment:


  • PhysicianOnFIRE
    replied
    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.

    Leave a comment:

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