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Non govt 457b

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  • Non govt 457b

    I’d like to preface this question by saying that I have read the WCI and physician philosopher posts about this topic but would like help on a specific question.

    My employer offers a 457b. This is not a govt employer and I do not intend to ever work for the govt. For the sake of this post I plan to leave in 2 years. My employer is financially in very good shape so I am not worried about losing this money. However if I leave my job I can choose to defer distribution for 10 years with annual distributions (I’m not yet sure if I could delay the entire amount to 10 years).

    Is it worth contributing to this knowing I will leave in 2 years versus just putting it in taxable? In 10 years I will likely still be in the highest tax bracket. Are the only benefits are not paying taxes on dividends until distribution? As either way I will pay taxes on the amount after I leave.

  • #2
    While not cut and dried, my answer is no, not worth it. Instead, invest the money in a total stock market index fund and leave it there. The particular value of the 457b is tax deferral. If you are going to withdraw while working, that is less advantageous that normal compounding and paying capital gains when the time comes. Besides, why tie up your money in a structured account with withdrawal rules. Your taxable account will be a lot more flexible. By the way, my answer would be different if you could hold until retirement.

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    • #3
      There is an inherent tension in these non gov 457b plans.

      The sooner you can get your money, the less the risk. That argues for taking a lump sum distribution upon separation.

      But the tax benefit is only meaningful if distributions are deferred to a time when you are in a lower tax bracket, often retirement. This argues for deferring the distribution for years or decades.

      So you can either choose quick distribution and get limited tax benefit and relatively small risk (because of the short time frame), or delayed distribution, greater tax benefit, and greater risk.

      Add to this the fact that most (?all) of these plans require you to make a determination once and never revisit, and they’re not very flexible either.

      I can see some limited applicability (ie, you’re 55 in a high tax bracket and plan to retire in 3 years, during which you will definitely be in a low tax bracket and you won’t need the space to make huge Roth conversions, and your company has a high financial rating, etc), but for the most part I don’t find them attractive for the risk.

      In my case losing $500k+ in a 457b would really hurt. It’s a risk I can’t insure against, and it’s hard to quantify that risk - everyone says they’ve never heard of it happening, but a lot of things have never happened, and then, voilá, they happen. For that reason I don’t use my non gov 457b.

      Others feel differently.

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      • #4
        It seems like this wouldn’t be worth it unless you knew your salary was going to go down when you left your current job. Even then, it may not be worth the hassle.

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        • #5
          Some use this 2 years of contributions as a transition fund. Defer taxes for two years and it fills in an income gap. 5 week vacation and move on leisurely. Does distort the income,

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          • #6
            In general these are only good if you think you will work for the employer until retirement, or if for some reason you think you will be in a lower tax bracket for the years after you leave (lower income that year, getting married?).
            My job offers one. I will take their free money (employer contribution) but am not contributing any of my own money. Mine offers the option of taking it immediately, pread over 5, 10, or 15 years after leaving or a lump sum at 65.

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            • #7
              Originally posted by billy View Post
              In general these are only good if you think you will work for the employer until retirement, or if for some reason you think you will be in a lower tax bracket for the years after you leave (lower income that year, getting married?).
              My job offers one. I will take their free money (employer contribution) but am not contributing any of my own money. Mine offers the option of taking it immediately, pread over 5, 10, or 15 years after leaving or a lump sum at 65.
              You raise an important point. The 457b account may be set up in many different ways. My answer above was for an employee contributed 457b, which is what is available to me and also what I think the OP has available. An employer contribution would be very different. I’d take that money with the only caveat that it is important to understand the restrictions, if any, placed on the funds.

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              • #8
                probably not worth it?

                if you do it you would need to invest aggressively and get decent returns i think to make it even a possibility.

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                • #9
                  Originally posted by Larry Ragman View Post

                  You raise an important point. The 457b account may be set up in many different ways. My answer above was for an employee contributed 457b, which is what is available to me and also what I think the OP has available. An employer contribution would be very different. I’d take that money with the only caveat that it is important to understand the restrictions, if any, placed on the funds.
                  agreed. I have both available, so take the employer option (I mean I have no choice in that- I'd rather have it as salary but whatever) and decline the employee option. If I somehow stay with this employer until I retire for good, I suspect I'll add some of the employee contribution my last few years working and use that as the first bucket I draw from in retirement.

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                  • #10
                    Agree with all the above, and I'll add that non-gov 457s work better at the end of one's career, rather than at the beginning. Get a solid start on your taxable brokerage account.

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                    • #11
                      I’m a big proponent of 457s, even non-governmental ones, but I’d be hesitant to contribute in this circumstance. The one case where this might work ok if you are for sure leaving in 2 years is to contribute the maximum and then take it as a lump sum at your departure (assuming that’s doable with that 457’s rules) and use the money as a sabbatical fund of sorts between jobs. Would work even better if you plan on taking 3-6 months off between, or if you might need that time to move, get credentialed/licensed in a new location. The big advantage of a 457, as I see it, is the tax deferral. If you’re going to be taking it out with the same tax rate that you put it in, I don’t see an advantage over just putting the money into a taxable account.

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                      • #12
                        Appreciate the responses I think I have my answer!

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