Announcement

Collapse
No announcement yet.

457b deferred compensation plan

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • 457b deferred compensation plan

    I contributed to an employer 457b compensation plan for 4 yrs. Due to my husbands military obligations I resigned from my job and moved overseas. I notified the plan of my changes. I was never notified by the employer nor retirement plan to provide a future distribution election until this past spring which I submitted. The employer just recently decided to in order to correct an operational problem, they sent me a letter and a lump sum check of my benefits of course w/ a 20% tax. This money was and is for my retirement. What are my options? I've tried contacting the previous employer benefits office w/o success. . Do I have a case?  What investments can I now make that will not cause double taxation..

  • #2
    If you received the check less than 60 days ago, roll it into an IRA. If you can get your hands on enough to add in the tax withholding, include that so that you can make the account whole. You'll get the w/h refunded when you file your tax return, but I understand it can be a PITA to deal with this when $$ is tight.

    You could also try contacting the employer to see if you can send back the check and have the account handled per your instructions. Include copies of your communications and send RRR, signature required. Iow - do not email (although you may want to copy to email, also) but snail mail marked "URGENT" on the outside of the envelope.

    Good luck.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

    Comment


    • #3




      If you received the check less than 60 days ago, roll it into an IRA. If you can get your hands on enough to add in the tax withholding, include that so that you can make the account whole. You’ll get the w/h refunded when you file your tax return, but I understand it can be a PITA to deal with this when $$ is tight.

      You could also try contacting the employer to see if you can send back the check and have the account handled per your instructions. Include copies of your communications and send RRR, signature required. Iow – do not email (although you may want to copy to email, also) but snail mail marked “URGENT” on the outside of the envelope.

      Good luck.
      Click to expand...


      You can not roll the assets from a deferred compensation plan into an IRA unless it is a Governmental 457b plan (the money can be rolled over into another non-governmental 457 plan as far as I know).  If the plan sponsor screwed up, this might be the grounds for Department of Labor complaint - DOL might actually do something about this if it is a violation of the plan rules. Probably not worth the hassle unless we are talking huge amount of money.  Next time you work for a company offering this type of plan about the distribution rules, but it is a big problem if they didn't tell you about the rules.
      Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

      Comment


      • #4
        Another thing to do would be to first figure out what the distribution rules for your 457b plan are.  Employer may be allowed to give you a distribution upon severance.  So first you'll need to be clear on what the rules are, and also get everything from the employer in writing.  I believe that they must provide you with the rules upfront so that you know about what triggers the distribution and whether you have any control over it. It sounds like there are some complex things going on above and beyond these rules, so that's why it is impossible to say whether they were right or wrong without having someone better qualified than myself to make that determination.  You might also want to get in touch with the Third Party Administrator for the plan to understand what triggered this distribution and whether you had any choices (but were not informed of them in a timely manner).
        Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

        Comment


        • #5
          Thank you both for your input. I learned quite a bit for the future- The money $80k was in a non qualified 457b plan, under an annuity at 3%. the company initially managing the account never informed me of a distribution election which per the IRS, money must be distributed to employee by 1 yr after leaving if no future distribution was elected.  4 yrs later a different company now managing my previous employer plan notices error from previous company encourages me to sign a distribution plan but per previous employer (third party counsel) is not allowed per IRS codes and would put the entire current 457b plan in jeopardy, thus I get a check w/ a 20% tax cut.  Now I will invest the money in a taxable account and hope that I can make up for the lost $. In a nutshell, know the ins & out of all the plans you invest your $. Lesson learned..

           

           

          Comment


          • #6




            Thank you both for your input. I learned quite a bit for the future- The money $80k was in a non qualified 457b plan, under an annuity at 3%. the company initially managing the account never informed me of a distribution election which per the IRS, money must be distributed to employee by 1 yr after leaving if no future distribution was elected.  4 yrs later a different company now managing my previous employer plan notices error from previous company encourages me to sign a distribution plan but per previous employer (third party counsel) is not allowed per IRS codes and would put the entire current 457b plan in jeopardy, thus I get a check w/ a 20% tax cut.  Now I will invest the money in a taxable account and hope that I can make up for the lost $. In a nutshell, know the ins & out of all the plans you invest your $. Lesson learned..
            Click to expand...


            Count yourself fortunate to have had this experience so early in your career when you have years ahead to make up for it. This is a lesson you can pass along to your colleagues who have less financial acumen and do a lot of good. I appreciate your willingness to be frank about your experience.
            Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

            Comment


            • #7
              Hey guys, I'm in a similar boat where I need to figure out if this is really "worth" it. I have the opportunity to defer up to 85% of the base (this kind of assumes that my family will be eating mainly ramen though ).

              The big issue is that this requires so much pre-planning on assumptions that I are highly likely to change. I need to figure out how much to take out and then need to figure out when I want to distribute (within X of years in-service or guess when I'm likely to separate from the company).

              Also this really only helps if the future tax when the distribution happens will be much lower then my current rate.

              Lots of moving parts cause in one sense I maybe able to do better by paying the tax and investing aggressively (relative to the bond they will place the deferred comp in).

               

              So this is how I'm doing the math (please check my logic):

              Let's defer $100K (just a nice round number) and let's assume current tax is around 42% (9% state + 33% fed) this is coming off the top so completely the marginal tax rate. So off the bat now have $42K that's available to grow via deferred comp.

              Let's say for discussion I assume tax rate drops 10% (32%) in 10 years when I want to take distribution. Assuming the 3% compound for the total deferred, I get an end balance of roughly $134K, but then I need to pay tax for that distribution so net gets to ~$91K (since I deferred paying tax till later).

              Next I evaluate the alternative if I don't do the comp deferral and pay the tax on the $100K now that would net me $58K (post tax) immediately that I can go invest in anything I want.

              Doing some convoluted math, I then figured out how much the annual compound rate would need to be in the taxable $58K account to be HIGHER than the 3% annual growth I would get from deferred comp factoring in the tax savings.

              So after doing that I'm getting that I need to at least get around a 6% annual return (does that seem right?) to beat what I could possibly be saving with deferred comp. Again this all based on 10 year hold, with a presumed tax bracket decrease, and the deferred growth of 3% annual.

               

              Here's my question to the community, for those that do deferred comp, how did you figure out if you want to participate and by what amount? Looking at this example, it seems to me that I rather have complete control and try my hand at hitting 6% vs the risk (I know it's minor) of going the deferred comp route with all it's restriction.

              On the other hand maybe worth just putting a little in there say just 10k-20k and at least I'm "diversifying" my risk into different tax efficiency instruments.

              Also my sense is that taxes will likely be going down (with the new administration), so in some sense I could try to defer a bunch for next year (while taxes are high) and anticipate that taxes will likely be going down in two years (My plan requires a minimum hold of 2 years but of course you need to elect that now).

              Thanks!

              Comment


              • #8
                Penguin: you have no other options other than a bond of your employers' choosing for your deferred comp plan? Anyway to petition to get them to loosen that rule up a bit?

                Comment


                • #9
                  Non-governmental 457(b) plans are very tricky to evaluate, WCI wrote a very nice piece on them and it still took me a bit of thought to decide to participate in my employer's plan.

                  Here are the things I thought about before making my decision:

                  1) If the money didn't to into the 457(b), where would it go? In my mind, non-governmental 457(b) accounts "eat last", after 401(k)/403(b), after Roth, after 529 accounts, after income needed to live on. In my case, the money would have gone into taxable accounts so a potential win on taxes.

                  2) How solid is the financial footing of your employer? If the employer goes bankrupt, odds are good you are losing at least some of the money. In my case, Aa bond rating, persistently in the black as a large multistate nonprofit. Another win.

                  3) What are the options for investment? It doesn't matter that you tax-defer money if your employer sticks it into low-yield, high-fee investments. You'd be better off with the money in a taxable account that you can control. In my case, it's the same options as my 403(b) which includes all low-cost funds. Another win.

                  4) How bad is the tax penalty for distribution if you leave your job? You cannot roll over your 457 money except into another 457, and many plans do not accept rollovers. Therefore, the money comes as taxable income. If it will be a huge lump sum that pushes you into a higher tax bracket, it may be preferable just to pay taxes upfront. In my case, already in the 39% bracket so "excess" money as a distribution would be a wash tax-wise.

                  5) Does your plan allow you to spread out distributions if you leave before retirement? In my case I could elect anywhere from 1-120 monthly payments and defer payment for 10 years if I wished.

                  In my case, everything about the plan lined up in my favor so I am contributing. However, I think if any one of the points above was negative I would have passed because of the real possibility of deferring income and ending up worse off.

                  Comment


                  • #10
                    Great summary/eval algorithm by pulmdoc! Pretty much the same line of thinking I had with my non-gov 457b offered through my employer.

                    1) If not 457b, money would go in taxable.

                    2) Relatively solid financial footing for my large employer, although a recent prolonged nurses' strike at two of their hospitals have made them tighten their belts.

                    3) Investment options are same for the 401k they offer, which are fantastic (300+ options).

                    4/5) This was the sticking point for me: terrible distribution options. My only choices were lump sum at time of separation or deferred lump sum up to 10 years or so. I'm just starting out. If I maxed this out annually for 20-30 years and then retired I'd get a hefty lump sum for which I'd lose 50% of the balance above the 39% tax bracket (due to state tax, etc) to taxes. That's not kosher. I've actually petitioned our director of benefits and am waiting to hear back to see if they'd consider adding installment options. I'm not sure how much extra this would cost them to offer (if anything), but I assume the plan administrator (Fidelity) would charge them extra for more complexity in distribution options. One of my arguments was ideally more people using their 457b if it had better distribution options and thus more assets under management to overall lower costs, but that depends on others actually using it--I don't know if that's actually going to happen, but worth a shot.

                    I think in PenguinMD's situation, I would go taxable because if you will be deferring a large percentage of income (up to 85%!! This can't be a 457b, something else?), then your asset allocation would be forced into likely more bonds than you'd prefer. Also if it's only a bond offering and NOT a guaranteed rate of return (eg annuity), then there's no guarantee for the 3% return. All of this combined with the fact that it is deferred comp and subject to my company's creditors (no matter how strong the company seems to be now), and I would forego maxing this out. Now, if say your IPS calls for 20% bonds, then perhaps you could defer an amount into this plan to cover your entire 20% fixed income allocation (again, if the offering is solid/low cost, etc) and then the rest into taxable where you could diversify per your IPS?

                    Comment


                    • #11
                      Another thing to keep in mind is that 18k of 457b investment costs me 11k in take home pay, then grows tax deferred which always beats a taxable account and the associated tax drag.  Added benefit of asset protection as well since money is not yours technically.

                      Comment

                      Working...
                      X