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Questions about non-governmental 457b

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  • PhysicianOnFIRE
    replied
    I've been using mine. The tax deferral at 33% (now 32%) plus 9.85% state income tax is well worth the very small risk that my hospital system goes belly up and I can't collect. And I've worked at a place that went belly up (as an independent contractor).

     

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  • AR
    replied




    Yes, what AR and Billy are saying makes no sense to me. I’m quite certain an employer cannot cap your own contributions to your 457 plan. The limit of what you can contribute is $18,500 OR 85% of your salary. If you’re making only 22k per year then sure, contribute 85% to your 457 plan. But most people even outside of this forum make more than that, and so they don’t put in 85% because that’ll put them over what they are legally limited to on their contribution
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    To clarify, mine is capped at 18.5K.  As a percentage of my income it is no where near 85%.  That's what I meant.  Sorry for the confusion.

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  • billy
    replied
    Attempting not to give away which company I work for, but technically I'm allowed deferred comp in a SERP, not a 457b but I consider it very similar (same risk/benefit in my mind, unqualified), which explains why I can put up to 85% deferred comp without the 18500 limit.  If I am wrong, someone please correct me.  My reasoning for not doing it yet is in case I end up switching jobs prior to retirement/FIRE time.  I'm assuming if I switched jobs in the next few years it would be for better pay somewhere, and then over the next 2-10 years I'd be adding to that with the deferred payment from the SERP, which will be taxed at my marginal tax rate so it will lose all the benefit of putting the money in. But if I wait until my last 10 working years, while I give up on some growth, I'd still be lowering my last 10 years taxes while then getting the money (plus whatever growth) back at a lower tax bracket.  Using that money I will hopefully also limit the amount of money I'd have to take out of my qualified retirement plans for a little longer than if I havent used the SERP.  Sorry for the confusion about the 457b.

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  • JBME
    replied
    Yes, what AR and Billy are saying makes no sense to me. I'm quite certain an employer cannot cap your own contributions to your 457 plan. The limit of what you can contribute is $18,500 OR 85% of your salary. If you're making only 22k per year then sure, contribute 85% to your 457 plan. But most people even outside of this forum make more than that, and so they don't put in 85% because that'll put them over what they are legally limited to on their contribution

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  • Seabass
    replied
    Also. 85% seems odd. My understanding is the limits are just like 403b, 18,500 per year at this point set forth by the fed.

    Maybe the perctage of 85% is a cap for part timers?

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  • Seabass
    replied
    Doesn’t waitin until 10 years out sorta defeat the purpose. The benefit is tax deferred growth. The longer it’s in the better the return. Or am I missing something ?

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  • AR
    replied




    I have a similar 457 available to me that allows up to 85% of salary deferred, with a payout either on termination or over 2-10 years after termination. I havent contributed anything yet.  My new plan is to wait until I’m 10 years away from retirement, and then stock it with as much as I think I will need to bridge the gap between retirement (hopefully early retirement) and when I start tapping my retirement accounts.  I think this will minimize the risk of a huge tax bill if I leave way before retirement, and of potential loss due to national company going bankrupt.
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    Wow 85%?.  That's insane.  My own non-governmental 457 allows only and extremely small percentage, so in my case, it pretty much doesn't matter what I do.  If I could choose any amount upto 85% that would be a tougher problem.  I'm not sure what the optimal percentage would be, I know it would be more than can I put in now, but exactly how much is tough to say off the top of my head.  I'd probably have to spend a few days thinking about it and running some numbers.

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  • billy
    replied
    I have a similar 457 available to me that allows up to 85% of salary deferred, with a payout either on termination or over 2-10 years after termination. I havent contributed anything yet.  My new plan is to wait until I'm 10 years away from retirement, and then stock it with as much as I think I will need to bridge the gap between retirement (hopefully early retirement) and when I start tapping my retirement accounts.  I think this will minimize the risk of a huge tax bill if I leave way before retirement, and of potential loss due to national company going bankrupt.

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  • AR
    replied




    By the way, the word substantial is not my word. It’s the word required by the IRS to permit nonqualified money to be tax deferred, and is right there in the plan literature for a non gov 457b.
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    If that's what you meant by it, it's kind of out of context.  What the IRS considers substantial is irrelevant to your decision making process.  It is only relevant to the extent that it allows the plan to exist.  If it didn't meet the IRS threshhold, there would be no plan for you to even contemplate.

    Once the plan exists, the only context in which substantial is important is whether the risk of loss is substantial relative to the compensation of the risk.

    In any case, we can fix this communication problem quite easily.  When you were researching your organization's plan, what did *you* estimate the risk of loss to be in your specific case?  That's a lot more useful metric than a vague term like "substantial" which has a wide range of interpretations.

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  • AR
    replied




    Shrug. It’s my opinion, which you solicited. I’m not going to argue with either of you about it. I said at the outset, people will make their own decisions.
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    It's obvious no one is going to change your mind.  However, not all opinions have equal merit.  If you post an opinion that doesn't make a lot of sense, even you choose not to respond, I don't know why you are surprised that people would comment on it.

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  • FIREshrink
    replied
    By the way, the word substantial is not my word. It's the word required by the IRS to permit nonqualified money to be tax deferred, and is right there in the plan literature for a non gov 457b.

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  • FIREshrink
    replied
    Shrug. It's my opinion, which you solicited. I'm not going to argue with either of you about it. I said at the outset, people will make their own decisions.

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  • jhwkr542
    replied
    Anybody calling the US economy a Ponzi scheme should probably not be taken seriously on a financial forum.

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  • AR
    replied




    The risk is compensated but not adequately unless the OP plans to work at this position until within 10 years of retirement. Barring that, all the income will be taxed at the same rates he would avoid with deferral. So all he gets is the tax deferral on the growth – avoiding tax drag of maybe 50 basis points is not work the substantial risk of forfeiture these plans require.
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    OK, so if he does plan to work there within 10 yrs of retirement, then it's fine.  Maybe he does, maybe he doesn't. He's pretty young, so who knows. But there are plenty of people who can make this judgment with some accuracy and find the risk more than adequately compensated by tax savings.

    The risk is not substantial. That's not even really a matter of opinion. Even you describe it as "low probability" but not zero.  No one is saying that it couldn't happen, but so far even non-profit hospitals in dire situations haven't had it happen yet, that we know of.  So it's either non-existent or rare.  While it's true that past performance is not a guarantee of future results it does give us some information about what the future might look like.  Based on the collective experience of these plans so far, the risk of loss is minute.

    If you try to assign a risk of loss, any reasonable number that you pick, if you run the numbers, will be compensated by the tax savings in many cases (Obviously not all.  As you note, the plans are different and situations are different).  Out of curiosity, what chance do you think there was that you would have lost your 457b before withdrawal.  If you can give us an approximate number, we can have an idea if it is compatible with reality and if the tax savings would compensate it.

    It's true that you could choose to pick a relatively high probability out of thin air.  Or just based on some gut-feeling, hunch, etc. that things could go south.  But there is nothing firm to back that up.   I'm not saying that it's won't happen. It's just that the probability is low.

    Furthermore the doomsday scenario that you've laid out (i.e., "the day of reckoning for the US economy"), sounds so dire that no matter what you're is invested in and where it is (457b, taxable, etc.) you're going to be screwed.

     

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  • FIREshrink
    replied







    I would never use a non gov 457b and don’t use mine. It’s an unnecessary risk. I can easily achieve (have achieved) FI without it. I know others do and feel the odds (gods?) favor them.

    A large number of community hospitals are at the brink of insolvency, or were until Obamacare saved them. It’s easy to forget how dire health care finances were in the Great Recession. Did you examine your organization’s finances at that time? I examined ours, and it wasn’t pretty. Margins went from 12% to 3% and our bond rating dropped three notches. We laid off ten percent of our work force , and some physicians, while not strictly terminated, were let go through contract non renewals. My institution is larger and has a much longer history than yours.

    If Obamacare is repealed or Medi/Medi are substantially reformed to block grants or individual stipends, neither of which is out of the question if Republicans win the 2020 election, all bets are off.

    Certainly consolidation rather than closure will be the rule, and the odds of forfeiture are low. But a wise rule of investing (and life) is to take no unnecessary risk which isn’t compensated. In your case, the compensation is minimal barring early retirement or some other period of prolonged and substantially lower income, because you will remain in the highest tax bracket otherwise.

    The real question is why you are using a Roth account . If you’re searching out more tax deferral in the form of a non gov 457b, why not take the easy one in the form of the 401k?
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    1.  Are you aware of any health care organization’s 457b plans being taken by creditors?  I understand that it could happen, but have you ever heard of a single instance.  Even with the tough times your organization went through, did people lose their 457b plans?

    2.  I don’t understand why you think the risk is uncompensated.   The tax benefits can be quite significant.  The money is not taxed going in.  It grows tax free. And at retirement, you will presumably withdraw from this account exclusively until it is exhausted.  So odds are you will be taxed at a lower rate than when you were earning. That’s a lot of tax savings. When weighed against something that is extremely rare (losing the 457b), it seems more than sufficiently compensated.

    Most of these tax savings will not be achieved if you leave the organization and go work somewhere else prior to retirement. So the likelihood of that happening should definitely play a role in the decision.  However, even if that happens (which in OP’s case is a consideration given his age, but it is definitely less of a concern in many other cases) it seems the rate of these plans being lost is so low, that it is generally probably worth it.
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    1. (just my opinion): There will be a day of reckoning for the US Economy, which is, at this point, largely a Ponzi scheme. I don't know what it will look like, or when it's going to happen, but (in my opinion), this time around the health care industrial complex is not going to be exempted. It cannot go on forever that health care expenses grow to become a larger and larger part of our economy. There is simply no way it is sustainable and at some point it is not going to be acceptable to voters that we fund hospitals, doctors, nurses, health care executives, hospital administrators, insurance company shareholders - but not schools, roads, child care, or public safety. Things will shake out. The fact that it has not happened yet does not mean it will not happen. Low probability events are not zero probability events. LTCM was thought to be impossible. A national real estate collapse was thought to be impossible. Lehman Brothers going out of business was thought to be impossible. Until they weren't.

    2. The risk is compensated but not adequately unless the OP plans to work at this position until within 10 years of retirement. Barring that, all the income will be taxed at the same rates he would avoid with deferral. So all he gets is the tax deferral on the growth - avoiding tax drag of maybe 50 basis points is not work the substantial risk of forfeiture these plans require. Note every 457b is different. For example, upon separation mine gives me 90 days to make an irrevocable decision about how the 457b should be paid out. My choices are a. take the entire distribution as cash. b. defer the entire distribution until retirement age. or c. choose an annuitized payout. Choice a. negates the tax advantage and choices b. and c. leave my funds at risk for decades. None of these options are tenable and hence, I don't use my 457b.

    It's a personal choice everyone has to make. I sleep better at night and reached my goals without taking on the risks of a non-gov 457b so it was the right choice for me.

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