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  • 401k AND 457b

    My hospital system offers both a 401k and 457b plan- I have maxed out the 401k every year. Should (could) I also contribute to the 457b plan? Is it the same amount 18K per year max?

  • #2
    Whether you should depends on a lot of factors, primary among them being whether your 457 is a governmental or non-governmental, and if the latter, how comfortable you are having that money potentially subject to being seized by creditors should your hospital system go under. Other factors include the forced disbursement schedule if you change jobs. Do a search on 457 here and at Bogleheads and you'll better understand the risks.

    And yes, you can contribute 18,000 to both the 403b (I'm assuming it's a 403b at a non-profit hospital) and the 457.

    I contribute to both at my hospital, a non-governmental 457. I'm aware of the risks and am comfortable with where my hospital system is at.

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    • #3


      (I’m assuming it’s a 403b at a non-profit hospital)
      Click to expand...


      I work for a non-profit and have a 401k and a 457b (non-governmental). The lines between 401k and 403b and for-profit vs non-profit are not always so clear-cut in my experience. And before you tell me that the group I work for is not a non-profit and I am mistaken, all health groups in my state are required by law to be non-profit and mine is definitely a 501c3 that qualifies for PSLF.  

      treswolf, Maxpower nailed the factors you have to weigh in decided to contribute to your 457b plan. I max out my 401k but do not contribute at all to my 457b because the disbursement options (what happens to the money when I leave the company or retire, etc) are horrendous--I can receive the entire balance in a lump sum 60 days after I leave or defer it for up to 5 years but still receive the lump sum. My wife contributes to her non-governmental 457b since it has more reasonable disbursement options.

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      • #4





        (I’m assuming it’s a 403b at a non-profit hospital) 
        Click to expand…


        I work for a non-profit and have a 401k and a 457b (non-governmental). The lines between 401k and 403b and for-profit vs non-profit are not always so clear-cut in my experience. And before you tell me that the group I work for is not a non-profit and I am mistaken, all health groups in my state are required by law to be non-profit and mine is definitely a 501c3 that qualifies for PSLF.  ?

        treswolf, Maxpower nailed the factors you have to weigh in decided to contribute to your 457b plan. I max out my 401k but do not contribute at all to my 457b because the disbursement options (what happens to the money when I leave the company or retire, etc) are horrendous–I can receive the entire balance in a lump sum 60 days after I leave or defer it for up to 5 years but still receive the lump sum. My wife contributes to her non-governmental 457b since it has more reasonable disbursement options.
        Click to expand...


        Those disbursement options are not attractive, but you'll still save your marginal tax rate on contributions now (a bird-in-the-hand when you are probably in the highest marginal bracket) and earn tax-free interest until disbursement (when your marginal rate might be lower).

        The disbursement options wouldn't deter me, but I would be uncomfortable with a non-governmental 457b unless I was very confident about the long-term solvency of my employer. My father lost all of his money in a Rabbi Trust (a non-qualified deferred compensation arrangement in which funds are invested in an irrevocable trust to be held for the benefit of employees for retirement purposes) when his former employer declared bankruptcy. PoF was employed by a hospital that declared bankruptcy. These things do happen.

        The limit moves up to $24,000 after age 50 (just like 401k), and then to $36,000 for the last three years prior to normal retirement age (as defined by the plan document). I invest in my governmental 457b (and 401k); too much tax-deferral to decline.

         
        Erstwhile Dance Theatre of Dayton performer cum bellhop. Carried (many) bags for a lovely and gracious 59 yo Cyd Charisse. (RIP) Hosted epic company parties after Friday night rehearsals.

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        • #5
          CM said "Those disbursement options are not attractive, but you’ll still save your marginal tax rate on contributions now (a bird-in-the-hand when you are probably in the highest marginal bracket) and earn tax-free interest until disbursement (when your marginal rate might be lower)."

          I feel like in more situations than not I would not be be taking the disbursement at a lower marginal rate. A few examples:

          Assuming I stayed with the same company until I retired (25-30 years) and contributed the max amount annually, I would have an amount that itself if disbursed without any other income would put me in the highest bracket

          Assuming I switched jobs in say 5 years and am forced to take the disbursement, I'd be paying full marginal rate on the smaller (compared to the first example) disbursed amount.

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          • #6




            CM said “Those disbursement options are not attractive, but you’ll still save your marginal tax rate on contributions now (a bird-in-the-hand when you are probably in the highest marginal bracket) and earn tax-free interest until disbursement (when your marginal rate might be lower).”

            I feel like in more situations than not I would not be be taking the disbursement at a lower marginal rate. A few examples:

            Assuming I stayed with the same company until I retired (25-30 years) and contributed the max amount annually, I would have an amount that itself if disbursed without any other income would put me in the highest bracket

            Assuming I switched jobs in say 5 years and am forced to take the disbursement, I’d be paying full marginal rate on the smaller (compared to the first example) disbursed amount.
            Click to expand...


            If the marginal tax rate is the same on disbursement (highest bracket), you'll still delay payment of the tax and earn tax-free interest prior to disbursement (allowing greater compounding). This is still a benefit, correct?

            (This is true if you use your tax shelters for your bond allocation. It may not be true if you hold low-dividend stocks in the 457b for 25 years and thus convert the lower tax rate on LT capital gains into the higher tax rate on earned income.)
            Erstwhile Dance Theatre of Dayton performer cum bellhop. Carried (many) bags for a lovely and gracious 59 yo Cyd Charisse. (RIP) Hosted epic company parties after Friday night rehearsals.

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            • #7
              Yes, tax-deferred growth is still a benefit. But in my books, the poor disbursement options tilt the pro/con scale of using of a nongovernmental 457b more towards the con side (in addition to being subject to employers creditors) and thus not using it. Better disbursement options would give more upside for taking on that risk of potential forfeiture.

              I raised the concern with our director of benefits which prompted a review of disbursement options for the various retirement plan iterations (diff for diff groups of employees--didn't think that was kosher) which is great but tremendously slows down the review process. I probabaly won't hear any further news until 2018.

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              • #8
                If you are hesitant about the 457b (and I believe the disbursement options are most frequently the deciding factor versus the solvency of the business, which anecdotal evidence would have us believe has a higher-than-expected risk), you might consider funding a taxable account. A very good additions to your overall financial plan.

                11 Reasons You Need a Taxable Account
                Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                • #9
                  Great advice. Appreciate all the thoughts and now understand that I need to do further research before making a decision. This is why this forum is so invaluable.

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                  • #10
                    I use my hospital's 457b. If you have a governmental (or public) 457b it's a no brainer - use it.

                    If it's a private, you'll want to know:

                    1) is your hospital in any danger of going bankrupt? Hard to know.

                    2) What are the distribution options upon separation? Some will make you take it out in one lump sum - not ideal. If you have very flexible options, then def consider using it. I'm in this camp.

                     

                     

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                    • #11
                      Agree with much of what has been said.  I would add that you can estimate the probability of your hospital system going bankrupt by looking at bond ratings and reading summaries from analysts.  Tax exempt organizations with investment grade ratings have a minuscule (much less than 1%) chance of bankruptcy in the next 10 yrs.  The tax savings and deferred growth plus asset protection features make this attractive.  Additionally, if you have decent payout options, than it is a no brainer in my opinion.  It only costs me 11k in after tax pay to invest 18k.

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