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  • Trump tax plan and 457b accounts?

    So, I've heard that one of the changes in the new tax plan (which looks likely to be passed) will have contributions made to deferred contribution plans classified as taxable once "the risk of forfeiture is insignificant".  Most sources seem to be interpreting "insignificant" to mean once the employee is vested in the account.  Does anyone have any educated guesses as to how this will effect contributions to governmental versus non-governmental 457b plans?  I'm currently contributing to a non-governmental 457b plan; if I'm going to have to do it going forward using after-tax dollars, it might make sense to stop future contributions and put that money in my taxable investment accounts instead.  I'd be giving up tax-free interval growth, but gaining a lot more control of the money and eliminating any risk of loss should my health system ever go belly-up.

    Opinions, anyone?  (Wild guesses are welcome, too!)

  • #2
    I've read a couple articles now that suggest the 457(b) is unchanged:

    https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/how-tax-bill-alerts-employee-benefits.aspx

    https://www.benefitnews.com/news/breaking-down-retirement-provisions-in-the-tax-reform-bill

     

    There was some language in the Kitces' article that sounded scary, but I found the same language in the bill under "Present Law" on page 352 of the bill:

    "Compensation is generally includible in an employee’s income when paid to the
    employee. However, in the case of a nonqualified deferred compensation plan, unless the
    arrangement either is exempt from or meets the requirements of section 409A, the amount of
    deferred compensation is first includible in income for the taxable year when not subject to a
    substantial risk of forfeiture (as defined), even if payment will not occur until a later year."

     

    So I think we're OK, but I will hold off on contributing for a little while until it is confirmed that there are no changes impacting those of us who invest in governmental or non-governmental 457(b)s.

     

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    • #3
      Thanks for the info and the links!  Since I can drop my monthly 457b contributions at any time, I'll go ahead and continue making them for now.  Once the tax bill has passed a definitive answer will have to forthcoming shortly after, and having a few thousand more in the plan than I have now won't make a whole lot of difference.

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      • #4
        Not sure if I should start a new thread but I had a question about 457 plans as well. I too have been contributing to a non governmental 457 plan but regardless of what happens to them I'm considering stopping my contributions. The hospital I work for is financial sound so bankruptcy in the near term, probably even long term, seems unlikely but you never know what the future holds. The fact there is even a very small chance I could lose that money makes me a little nervous.  The other reason I plan on stopping is the distribution policy. If I retire early I have to take a lump sum which would be a big tax hit, not take any distribution until 70.5 or distribute it over 10 years starting as soon as I leave. My intention is if I retire early is to live off my tax account and do a Roth conversion ladder with my 403b and 401K. I'm not sure which is the "better" strategy? Taking the tax shelter now and continue to contribute to the 457 or stop now so I do not have to take taxable distributions when I retire and I can covert more from my traditional to roth ? Am I over thinking this? If I do not contribute to the 457 I will be putting that money into a tax account.

         

        Thanks for any insight

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        • #5
          A 457(b) is a qualified plan. The bill refers to non-qualified deferred compensation plans.

          Late edit: I'm wrong about this.  a 457(b) is not a "qualified" plan, it is an "eligible" plan per ERISA, as opposed to a 457(f).  Sorry if I created any confusion.

          IRS guidance [link]

          Comment


          • #6
            @DMFA

            Actually nongovernmental 457b are nonqualified plans. But as PoF has pointed out, most of the harsh restrictions on NQDC plans from previous house bill versions were not added back in

            OP is correct to worry that this could be a prime target to feed the beast if the government needs more revenue in the future. But then again so might Roth IRAs. This risk may be on par with bankruptcy forfeiture risk now, but for me still worth it to defer 40%+ state and local tax.

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            • #7
              The faculty benefits guy at my hospital (offers non-gov 457b) says that everything he's read shows them to be safe.

              I want to learn more about what was actually being proposed b/c some of the language on this forum made it sound pretty scary.

              It's been stressful watching this bill be debated and pass.

              Comment


              • #8


                A 457(b) is a qualified plan. The bill refers to non-qualified deferred compensation plans.
                Click to expand...


                Like Gipper said, 457b plans are non-qualified deferred comp plans.

                Ruraldoc, I don't contribute to my non-gov 457b because it has only one distribution choice: lump sum upon separation/retirement. I'm working on our benefits folks to revisit the distribution options and have been promised they will review them in 2018 (whatever that promise means). However, for money that is at risk for forfeiture like non-gov 457b plans (no matter how small that risk may be), I would plan on tapping that first if retiring early since any risk of forfeiture is more risk than your 401k and/or taxable accounts have. I think that's what POF is planning and if I recall he has post(s) discussing this on his website.

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                • #9
                  I do not know the intricacies of non-government 457b accounts, but I do know that another option for a government 457b account is that you can roll it over into a traditional IRA. Of course, you have now also inherited the pros/cons of a traditional IRA when you make such a move.

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                  • #10
                    Right, "qualified" wasn't what I meant to say. I meant "eligible" under 457(b) as opposed to ineligible under 457(f). So I apologize for having misspoke.

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