Non governmental 457b- How are gains taxed?

[chambers136]

My wife is taking time off of work. We just got word that her non-governmental 457b will need to be distributed as a lump sum at a time determined by her with one chance for an additional deferral. Now that I am reading the details of the plan, I don't think she should've been in it. Her FA at the time thought it was like a 401k (or governmental 457b). I'm going through calculations to decide when to take the distribution, but I'm trying to find out if the entire account is taxed as income, or just the contributions with the gains taxed as capital gains. I've found in my searches that people are using contributions and plan assets interchangeably, never actually specifying how the growth is taxed.

Thanks

[jfoxcpacfp]

Yes, the entire distribution is taxed as income. If there is a chance that your wife will go to work for another nonprofit entity with a 457b, you should see if she can leave the money where it is and allow her to roll over later. And is the only option a lump sum? i.e. not over a period of years? Depending on the size of the account and your tax situation, it may make sense to take it out in a year in which she is not working, especially if you are already retired or not working, either.

Unfortunately, options with non-governmental 457b plans are more limited than with governmental, as you are finding out. It's important to know the consequences before you make the decisions. She may still have chosen to participate for the tax savings, but some plans are particularly onerous when you separate from service and, I agree, it would have been helpful to find out sooner rather than now.

[chambers136]

Thanks. I will be working next year, but she won't, so I'm trying to decide between targeting next year or letting it go into retirement (she's 45). Lump sum is the only option, but deferrals are a possibility. The problem is the account is relatively large (250k), so simply letting it go to retirement will almost guarantee a high tax bracket. I'm running scenarios now, and the fact that the gains are taxed as income as opposed to capital gains makes the 'distribution now vs. 65y/o deferral' decision very close. I'm just glad we found out now as opposed to 10-20 years from now. I never thought the need to research this account before now, as the financial advisor said it was just like a 401....Live and Learn.

Thanks again.

[RadDoc6876]

Who is the plan administrator ("sponsor")--is it TIAA-CREF?  For other 457(b) plans I am familiar with the "sponsor" can offer other payout options such as a lifetime annuity, annuity for a fixed period, RMD, and lump sum, which you can elect through TIAA or Vanguard, etc.  The way I understand it is that the lump sum payment is the default plan unless you elect another payment plan from the sponsor.

[q-school]

until last year, the only option we had was lump sum payment.

it was when they started offering multi year payment that i got interested.

 

[PhysicianOnFIRE]

chambers136 wrote:

Her FA at the time thought it was like a 401k (or governmental 457b).

Click to expand...

That's like your anesthesiologist thinking pancuronium is like succinylcholine or something. Pathetic.

As others have said, check with HR and the plan administrator to ensure those are your only options. Our non-governmental 457(b) is with Transamerica and they have very flexible withdrawal options (although once you set it, it's set).

[chambers136]

Thanks for the input. We received a letter stating, and we also verified with HR, that one time lump sum payout is the only option. The only flexibility is when, so at least we can do it when she is not working most of the year. This is through Voya.