457 dilemma

[Kidilandoc]

Hello all

i am a recent graduate and currently working as a hospitalist in pa.

my hospital offers a 403b and 457 b (non governmental) both of which offer the same investment options

im currently maxing out the 403b

the 457 im not so sure about

after my online research what i understand is that the drawback for 457 is hospital creditor risk and distribution might not be tax favorable. Main advantage seems to be being able to withdraw funds after leaving the current employer without 10% penalty

 

when i called the company who holds the accounts they said i can withdraw from 457 without the 10% penalty and taxes would apply based on my income.

however when asking 2 different company reps at the hospital, they are giving me vague answers as follows

 

"The 457 b Plan is not as flexible as a 403 b retirement plan. Therefore, the details regarding distributions/withdrawals of the plan will differ from those of other retirement plans.

The 403 b plan will allow you to make periodic withdrawals at any time once you have severed employment and the penalty that may apply will depend upon your age at the time of the withdrawal request.

10 % penalty may apply if you were to leave the employer prior to age 59 1/2. This is an IRS rule which will apply if under the age of 59 1/2 for the 403 b and the 457 b plan, as well as, several other retirement plans."

so im not sure what to do, the only reason i was going to put money in the 457 was so i could withdraw prior to 59.5 if i decide to retire early. So is there a 10% penalty or no?

 

[PhysicianOnFIRE]

No penalty for withdrawing from the 457(b) if retired before age 59 1/2.

From the Bogleheads.org wiki:

"Although 457 plans rarely provide an employer matching contribution, withdrawals after retirement are qualified for an exemption to the 10% early withdrawal penalty for eligible employees retired prior to age 59 and 1/2. This feature can make contributing to a 457 plan of special interest to public employees with a full retirement option prior to age 59 and 1/2 (such as many public safety officers.) "

For more info, see: https://www.bogleheads.org/wiki/457(b)

[jfoxcpacfp]

You don't say what kind of hospital you are working for. The rules for 457 plans for NPOs are different from a 457 from a public organization, such as governmental employees. That is why you are getting conflicting advice - it can be very confusing. We just worked with a physician on this issue as he was leaving an NPO. I am out of office and not in a position to send my research but I will check on this when I return today. Can't remember how the 10% penalty applied but his problem was the inability to roll into another 457 since he went from a NPO to a government-run hospital.

[Kidilandoc]

Thanks johanna

i work for a non profit hospital

my 457 b is non governemental

i know i would be able to roll it over to another non governmental 457, but not sure about early withdrawal penalty. Like i said not getting a clear answer from the reps who seem to be confusing it with the 403b

[jfoxcpacfp]

Robin George wrote:

Hello all

i am a recent graduate and currently working as a hospitalist in pa.

my hospital offers a 403b and 457 b (non governmental) both of which offer the same investment options

im currently maxing out the 403b

the 457 im not so sure about

after my online research what i understand is that the drawback for 457 is hospital creditor risk and distribution might not be tax favorable. Main advantage seems to be being able to withdraw funds after leaving the current employer without 10% penalty

 

when i called the company who holds the accounts they said i can withdraw from 457 without the 10% penalty and taxes would apply based on my income.

however when asking 2 different company reps at the hospital, they are giving me vague answers as follows

 

“The 457 b Plan is not as flexible as a 403 b retirement plan. Therefore, the details regarding distributions/withdrawals of the plan will differ from those of other retirement plans.

The 403 b plan will allow you to make periodic withdrawals at any time once you have severed employment and the penalty that may apply will depend upon your age at the time of the withdrawal request.

10 % penalty may apply if you were to leave the employer prior to age 59 1/2. This is an IRS rule which will apply if under the age of 59 1/2 for the 403 b and the 457 b plan, as well as, several other retirement plans.”

so im not sure what to do, the only reason i was going to put money in the 457 was so i could withdraw prior to 59.5 if i decide to retire early. So is there a 10% penalty or no?

 

Click to expand...

If you are working for a NPO:

• There will be no 10% penalty.


• The NPO can determine the timeline for taking your money out when you leave and are unable to roll over. May not be able to leave it behind, depending upon the NPO's requirements.


• It is an unfunded account and subject to creditors' claims in the event of bankruptcy


• It is still a great benefit if you are working for a stable company


• If you leave and go to another NPO that has a 457b that you qualify for, you can roll your 457 $$ to that.

If you are working for a governmental entity

• No 10% penalty


• Funded account, not subject to creditors


• A great way to save more tax-deferred for retirement

You'll be happy to know that WCI has a Q&A column addressing your question (for NPOs).

[Sajimone]

Regarding creditor risk.. You ought to know if your hospital looks financially stable?  My hospital has been around for 100+ years and although nothing is guaranteed.. High likelihood of sticking around for several more decades.   Theyre expanding significantly with perhaps currently 8-9 hospitals in the region and university affiliation.  Again pointing out financial stability... My 457 is similar and the main advantage as for any tax deferred account is minimizing taxes in the current year and the tax arbitrage.  Our custodian is through Lincoln financial and they only had a limited number of mutual funds to choose from... Which makes for another point.  Some of these funds were loaded funds and most had high ER?!  Luckily they have ONE vanguard MID cap mutual fund which I dump all the funds to... And as part of my overall portfolio.. Holds most of my mid cap allocation.  Look over your options.  Hope it helps!

[conniebird]

I am struggling with the same q - I also work for a non-profit hospital that offers non-govt 457b. My hospital system is very large and solvent - so risk of them going under is nil IMO - but I am many years away from retirement and things can change.

 

For now, I've decided to wait to contribute to this - if I am still working here say around age 50, then Ill start contributing. The 457b plan here offers the same funds as my 403b plan, lots of vanguard funds including the target funds and pretty low expense ratios.

 

I'd love to contribute tho and get that extra tax deferred space.

[jfoxcpacfp]

conniebird wrote:

I am struggling with the same q – I also work for a non-profit hospital that offers non-govt 457b. My hospital system is very large and solvent – so risk of them going under is nil IMO – but I am many years away from retirement and things can change.

 

For now, I’ve decided to wait to contribute to this – if I am still working here say around age 50, then Ill start contributing. The 457b plan here offers the same funds as my 403b plan, lots of vanguard funds including the target funds and pretty low expense ratios.

 

I’d love to contribute tho and get that extra tax deferred space.

Click to expand...

You are giving up a lot of long-term growth simply because you can't predict the future. What if tax rates are much lower when you're 50? What if you are in a different job without a 457b? What if you look back at 50 and realize you could have retired or changed careers if only you had maxed out that 457b when you had the opportunity? I recommend you go with what you know today and maximize your tax deferral opportunities.

[conniebird]

not comfortable with the money not being "mine" and less flexibility with what to do if/when I leave the job.

 

non-govt 457b would be a def yes tho

[childay]

In my case my hospital seems to be somewhat shaky financially.  That is the main reason I am hesitant to use the 457b.  They should be able to tell you exactly what the details are after you leave employment, lump sum etc.

 

I assume you saw this already

https://www.whitecoatinvestor.com/should-you-use-your-457b/

 

[litovskyassetmanagement]

If you contribute into a non-governmental 457 plan, you will HAVE to take a distribution of this money over the following 5 years after changing jobs.  So you might end up paying MORE taxes than you saved by using this plan.  Usually, investment choices are terrible (unless the plan offers a brokerage account) so that's another ~1% or so cost that eats into your returns.  If you plan to change jobs in the near future, this won't be a good investment. Even if you work for this hospital long term, imagine having to take 20 years worth of contributions as a distribution over 5 years!  Do backdoor Roth for yourself + spouse, HSA, pay down high interest debt, and invest after-tax, and for most people this would be plenty.

[conniebird]

Thanks Kon- my 457b does not require me to take distributions over 5 years - it's whatever I want but can't be more than my life expectancy. Also they offer the same funds as my 403b with low expense ratios < 0.15%. So on that end its actually pretty sweet.

I guess I have to make this decision my self.
Btw I don't have access to an HSA because there are no high deductible insurance options thru my job.

[litovskyassetmanagement]

conniebird wrote:

Thanks Kon- my 457b does not require me to take distributions over 5 years – it’s whatever I want but can’t be more than my life expectancy. Also they offer the same funds as my 403b with low expense ratios < 0.15%. So on that end its actually pretty sweet. I guess I have to make this decision my self. Btw I don't have access to an HSA because there are no high deductible insurance options thru my job.

Click to expand...

Please look up the distribution rules - they are usually very specific and do vary by plan.  You might be able to specify a 'future date' of distributions, but you have to understand how the distribution is to be made - it is usually a 5-year distribution window, so if you accumulate a large portfolio, you would have to distribute it quickly, and this might or might not be beneficial for you.   For example, if the distribution happens when you are still working, you might end up paying more taxes than you save. Also, you'll need to find out whether you can change the distribution date more than once, and how far away this date can be set - if you are planning to working past 'normal' retirement age, this can matter.

[jz]

I think 457 deferrals work better at the end of one's career than at the beginning.  It is easier to judge the solvency of one's hospital  10 years out than from 20 years out.  At age 50ish you can more concretely plan the withdraws on your own best terms.

If I had deferred compensation from my hospital employer at age 35,   I would be very nervous now. I'm fortunate to be employed at St. Elsewhere.

[conniebird]

I did look it up of course. I saw the actual form to request distributions. I can take it over any amount of time and can change it. It is def not limited to 5 years.

Agree with contributing to this closer to retirement. Sort of leaning towards not doing this until I'm 50ish. My hospital is the largest employer in the state, but you never know these days I guess with how medicine is going....