Excellent WCI 457 article inspired me to inquire with employer,,, A bit confused

[ChristopherMD20]

It has literally taken them since 4/27/2019 when this article dropped https://www.whitecoatinvestor.com/should-i-invest-in-my-457-the-what-why-and-when/ to get back to me and provide me with the 457 documentation. It is from 2012, but I guess this is the best HR could do.

 

What I have learned:

1. Although this is the 457 associated with a large university medical system it is NOT a governmental plan. I am not sure if this is because I am employed through a community hospital and not the main university campus.

2. The documentation refers to it is a "Top-Hat" program for which I am eligible because of my base salary crossing their designated threshold.

3. I am glad I did not go to law school. My head hurts.

Reviewing the WCI "reason's to pause" from the article:

1. Poor Financial Situation No I think this entity is fairly secure

2. Bad distribution options This is actually what compelled me to email HR the night I read the article. I had not even considered that. I have attached a screen shot of the distribution by-laws. From my understanding, it appears that when I decide to take my distributions (either in early retirement, job loss, normal retirement age) it can be done in monthly/quarterly/semi-annual/annual/lump sum methodology. The thing that I do not understand is what is mean by "over a fixed period not to exceed the life expectancy of the Participant or the joint life expectancies..." For instance, if I have $300,000 in the account and I decide to retire at 60 years old. If my life expectancy is 70, I can then take $30,000/year broken up however I want?

3. Poor Investment Options VINIX for the win

 

I am 31, my wife is 30. We have eliminated student loans during my first year as an attending. No other debts besides small mortgage (for now...). We are maximizing 403b x2, 457, backdoor roth x2, HSA. We are saving for a downpayment, but we will eventually start a taxable account. We have a good savings rate, but much of it is waiting in Ally and not going towards retirement. Since the 457 contributions currently represents 27.5% of our retirement savings I just want to have a gameplan for the future. Any insight on what this distribution options means and if it is a "good" or "bad" distribution option would be helpful. I am just getting started so I can easily correct contributing to a bad 457 now, but I do not want this to be a compounded mistake in 20-30 years.

 

Thank you for your time.

 

[JBME]

Is your large university system public or private? If it's a public university than it would be a governmental plan. But either what I think you've figured out that your 457 isn't the best kind but it sounds like you believe in the sound financial footing and still feel good about using it.

You should inquire but you might, at the time when you retire, need to determine for the rest of your life, what distribution option you'll take because I've heard you can't change how often you'll take a distribution once it's been set. Another thing to ask about. Either way, you should read PoF's drawdown strategy, as he has a 457 plan. If you have a 457 plan basically you should dip into that in order to bridge the time between retirement and taking SS first. Probably use your 457 plan to live on before you even dip into taxable. So yeah, I'd plan to use this for the first 5-10 years of your retirement. After that use taxable and/or your 403b money, and then Roth in the end.

You appear to be in a stellar position for only 30 years old. no loans at 30! not sure if you're looking for more tax-sheltered space but both you and your wife should look to see if either of your 403b plans allow for the megabackdoor Roth IRA (WCI just had a post about this the other day). You probably don't have that as an option but worth looking into

[jhwkr542]

It states that the distributions must be substantially equal, so you don't get to break it up however. They take your sum and divide by number of payments (you provide the years and# distributions per year). The life expectancy probably is not individualized but rather according to social security life expectancy. So if you retire at 60, current life expectancy for a 60 yo is around 23 years. Max distribution years would be 23 (or probably a little more since your wife is a year younger and female). You probably won't even want to do it for that long.

I'd consider this a good distribution time frame.

[ENT Doc]

This seems solid. I would definitely use this.

[MPMD]

You are so young that what I would be looking at is not what happens at retirement but what happens if you leave before then. I think you need to make sure you have looked at this part of the plan document.

457b are much harder to roll around than other accounts. Private ones usually can't be rolled -- I know there are variations in this but it's a good ROT.

So the factor comes that you are a few years into your first job which will probably (statistically) not be your last job.

[Brains428]

@MPMD. If you were at your first job in your early 30s, would you cap your contribution and just fund a taxable account for the difference?

[MPMD]

Brains428 wrote:

@mpmd. If you were at your first job in your early 30s, would you cap your contribution and just fund a taxable account for the difference?

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I didn't do taxable when I had the chance I funded a 457b.

Honestly I wasn't smart enough to scrutinize the distribution options. When I left after 3 years I had to take a lump sum.

Not the end of the world but I guess I probably would have simplified it and done taxable.

I'm echoing WCI and TPP here but I think it really comes down to a) stability of the employer and b) distribution options. Stability can be kind of subjective but distribution options aren't.

[ENT Doc]

I would still make the argument to do the 457 with those distribution options.  Even if it mandated a lump sum and you happened to leave your employer after 3-4 years it all depends on what marginal tax bracket that lump sum puts you into.  If you're in or near the same bracket it's worth the risk IMO because of the upside compared to taxable.  There is no loss if you are in the same bracket (in fact you win compared to taxable because of tax drag), and with the distribution options you have available to you you'd be able to manage this well to ensure that's the case.  This wouldn't be the case with every 457, but if your institution is on solid financial footing and your distribution options are what they are I wouldn't hesitate to do this.

[ChristopherMD20]

MPMD wrote:

457b are much harder to roll around than other accounts. Private ones usually can’t be rolled — I know there are variations in this but it’s a good ROT. So the factor comes that you are a few years into your first job which will probably (statistically) not be your last job.

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This is a very excellent point. It does handcuff me a bit when deciding to move jobs. I will be more inclined from a 457/retirement and non-compete standpoint to stay within the University System even if I change hospitals/employers within the system

MPMD wrote:

I would be looking at is not what happens at retirement but what happens if you leave before then.

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It is the same distributions if I leave or get fired. Admittedly there is a big difference between leaving at age 35 versus 50. I do like the concept of this being a pseudo-severance package and allow me to be able to take my time moving into a new job if I leave around 35. At 35 assuming a 5% return, my account would be $135k which provides quite a nice buffer. I know I am oversimplifying something like that. If I get fired at age 40 that would be a really tough spot...

This thread has certainly been helpful. Although I plan to continue continue maximizing the 457, if things change I know where the 457 goes in the pecking order depending on what our plans are.

Overall though, I am just glad that the WCI wrote the article that has empowered me to look closely into the 457 and figure out how that fits into the context of our plans. It prompted a discussion with my wife about our retirement plans and goals.

[ChristopherMD20]

ENT Doc wrote:

Even if it mandated a lump sum and you happened to leave your employer after 3-4 years it all depends on what marginal tax bracket that lump sum puts you into.

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I agree with you. It is likely worth the risk in this situation. I am still going to be funding a taxable once we reach our Ally downpayment threshold. Living in this little condo helps out since our PITI +HOA is only $1000/month. Our savings rate is currently >75%. The equation will change when we buy a house. I will have to probably re-evaluate the 457 vs. taxable depending on where we are in life. Again, I am just glad I now have better knowledge about this topic so I can make educated decisions in the future.

[ENT Doc]

ChristopherMD20 wrote:

Living in this little condo helps out since our PITI +HOA is only $1000/month. Our savings rate is currently >75%. The equation will change when we buy a house.

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With these numbers I wouldn't move one inch unless there was a significant reason to do so (commute terrible, hate the area, kids literally on the way and needing to move to a better school district).  Of course this depends on what real estate is like in your area, but I find it hard to believe buying wins out financially compared to your present situation.

[ScubaV]

I am also struggling with deciding whether to use my non-governmental 457.  The investment options are great (low-cost Vanguard) and the distribution is also very flexible.  The hospital system is growing (if anything, maybe growing a little too fast).  It fits all the criteria for a good NG-457 according to that WCI article.  However, I still hesitate.  I'm 34 and this is my first job out of fellowship.  Odds are very good I will not be here my entire career.  If I can't roll over the plan, then it's going to sit around for 20+ years without me being on the inside to assess the financial situation.  The current strong CEO will be replaced eventually.  Maybe even the distribution options will change.

There's a lot of uncertainty and moving parts, such that I'm thinking of just putting that money in a taxable account instead.  I lose out on some tax drag, but I also lose the risk and can be a lazy investor which is my favorite kind of investing.

[Brains428]

What are my deferred payment options?
A – You may elect distribution of your account balance in annual installments over a period
up to 10 years, beginning on the first business day of the month that occurs more than
two months after your termination of employment with *******
provided such election is made no later than 60 days after your termination of
employment. You may also elect to defer distribution until after the end of any calendar
year after your termination of employment and before you attain 70 years of age (your
“Deferred Payment Date”).

This is from my employer's plan document. Other things not copy pasted-- my 457b money is mine even if I'm terminated for any reason. I can't rollover to an IRA (which is standard for all NG 457b, I believe). So, my understanding of this statement is that even if I decide to leave my job at my current employer, then I can elect to have distributions to whenever I plan to retire. Another statement not listed above is that I can change that date, but cannot accelerate said date (which means I'd have to be pretty on the ball with a retirement plan set for 25 years from now).

I'm assuming that if I leave my employer but decide to leave the account as is until distributions are set at a future (hopefully) lower tax bracket, then it's still subject to creditors should my employer declare bankruptcy.

This seems like an ideal account if you feel your employer is secure. Thoughts?

 

[Peds]

ScubaV wrote:

I lose out on some tax drag

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and the entire initial tax deduction....

[MPMD]

ENT Doc wrote:

I would still make the argument to do the 457 with those distribution options.  Even if it mandated a lump sum and you happened to leave your employer after 3-4 years it all depends on what marginal tax bracket that lump sum puts you into.  If you’re in or near the same bracket it’s worth the risk IMO because of the upside compared to taxable.  There is no loss if you are in the same bracket (in fact you win compared to taxable because of tax drag), and with the distribution options you have available to you you’d be able to manage this well to ensure that’s the case.  This wouldn’t be the case with every 457, but if your institution is on solid financial footing and your distribution options are what they are I wouldn’t hesitate to do this.

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this is something i've always thought about but never articulated as clearly as you did.

if a really high earner sheltered some money in a 457b for a few years and then decided to change jobs for whatever reason wouldn't it truly act like the deferred comp it is supposed to be? whatever growth you have on that money was just bonus in a tax sheltered space for a few years.

assuming investment options are reasonable i'm coming more and more around to just thinking most people w/ access to these should be doing them.