Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
457 tax/withdrawal strategy.
Old 10-23-2006, 10:29 PM   #1
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
457 tax/withdrawal strategy.

Is anyone who is ERed with a 457 and some after tax investments taking an amount equal to your income tax deductions from the 457, thus leaving you with zero income tax, and making up the rest of your annual expenditure from after tax investments, so you'll only have capital gains to pay.

In this way you can draw down your 457 without ever paying income tax on the money. You could do the same with 403b 401k IRA etc, but have to wait unitl 59 1/2. Or am I missing something?
__________________

__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: 457 tax/withdrawal strategy.
Old 10-23-2006, 10:49 PM   #2
Thinks s/he gets paid by the post
maddythebeagle's Avatar
 
Join Date: Jun 2005
Posts: 2,450
Re: 457 tax/withdrawal strategy.

I am not retired yet, but have this in my planning with a 457 plan.....I would also consider taking some additional money into the 10% tax bracket if you wanted more.....and supplement it with dividend income and cap gains from any taxable investments...we'll see if these tax rates stay the same over time, though....
__________________

__________________
- Hurry! to the cliffs of insanity!
maddythebeagle is offline   Reply With Quote
Re: 457 tax/withdrawal strategy.
Old 10-23-2006, 10:53 PM   #3
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Re: 457 tax/withdrawal strategy.

Quote:
Originally Posted by Maddy the Turbo Beagle
I am not retired yet, but have this in my planning.....I would also consider taking some additional money into the 10% tax bracket if you wanted more.....and supplement it with dividend income and cap gains from any taxable investment income...
Yes I'd thought of that too that extra $7k or so at 10% would be useful and cheaper than using cap gains or dividends.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Re: 457 tax/withdrawal strategy.
Old 10-23-2006, 11:00 PM   #4
Thinks s/he gets paid by the post
maddythebeagle's Avatar
 
Join Date: Jun 2005
Posts: 2,450
Re: 457 tax/withdrawal strategy.

http://www.retireearlyhomepage.com/wdraw59.html

here is the loophole for the IRA/401k withdrawals...but this isnt nearly as flexible as the 457 plan....

The idea of taking just enough out to avoid taxes sounds good....I guess you have to balance out that your account could grow larger and you will end up taking money out at higher tax rates.....if you have that problem, I guess you should have retired earlier...
__________________
- Hurry! to the cliffs of insanity!
maddythebeagle is offline   Reply With Quote
Re: 457 tax/withdrawal strategy.
Old 10-24-2006, 06:50 AM   #5
Recycles dryer sheets
 
Join Date: Aug 2006
Posts: 53
Re: 457 tax/withdrawal strategy.

Nun-

As I recall you don't have your money in a 457. If you were thinking of rolling 403b money into the 457 (which is allowed, I believe) I don't think the rolled-in money is treated the same as money that was originally contributed to the 457. I don't believe the rolled-in money can distributed prior to 59.5 without penalty (unless you do the 72t SEPP, like you can do with 403b/IRA). I may be misremembering this though.
__________________
mja is offline   Reply With Quote
Re: 457 tax/withdrawal strategy.
Old 10-24-2006, 07:20 AM   #6
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Re: 457 tax/withdrawal strategy.

Quote:
Originally Posted by mja
Nun-

As I recall you don't have your money in a 457. If you were thinking of rolling 403b money into the 457 (which is allowed, I believe) I don't think the rolled-in money is treated the same as money that was originally contributed to the 457. I don't believe the rolled-in money can distributed prior to 59.5 without penalty (unless you do the 72t SEPP, like you can do with 403b/IRA). I may be misremembering this though.
I think you're right which I why I also mentioned the IRAs etc.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Re: 457 tax/withdrawal strategy.
Old 10-25-2006, 09:48 PM   #7
Dryer sheet wannabe
 
Join Date: Jan 2006
Posts: 10
Re: 457 tax/withdrawal strategy.



Nun-

As I recall you don't have your money in a 457. If you were thinking of rolling 403b money into the 457 (which is allowed, I believe) I don't think the rolled-in money is treated the same as money that was originally contributed to the 457. I don't believe the rolled-in money can distributed prior to 59.5 without penalty (unless you do the 72t SEPP, like you can do with 403b/IRA). I may be misremembering this though.

Nun, this site shows that yes the roll overed amount is still treated as 403b/IRA i.e. it is subject to the 10% penalty if withdrawn before age 59 1/2
http://www.oregon.gov/PERS/OSGP/docs/rollinpacket.pdf

__________________
tlg501 is offline   Reply With Quote
Re: 457 tax/withdrawal strategy.
Old 10-25-2006, 11:13 PM   #8
Confused about dryer sheets
 
Join Date: Mar 2006
Posts: 5
Re: 457 tax/withdrawal strategy.

Nun,

My understanding of the IRS rules are that you may withdraw from a 403b account if you have reached your 55th birthday and have separated from service. My employers plan has the same rules for the 457 plan. There are also a bunch of rules about when you must declare your withdrawal plan and how you structure it.

Not too ?
__________________
Not too ? is offline   Reply With Quote
Re: 457 tax/withdrawal strategy.
Old 10-25-2006, 11:32 PM   #9
Recycles dryer sheets
 
Join Date: Aug 2006
Posts: 53
Re: 457 tax/withdrawal strategy.

Quote:
Originally Posted by Not too ?
My understanding of the IRS rules are that you may withdraw from a 403b account if you have reached your 55th birthday and have separated from service. My employers plan has the same rules for the 457 plan. There are also a bunch of rules about when you must declare your withdrawal plan and how you structure it.
That used to be the case with my employer's plan as well (the declared withdrawal plan), but they changed a few years ago, or perhaps the law changed. Mine now allows as many lump sum (of any size) withdrawals as I'd like to take, provided I've separated from service, no age restrictions. They continue to allow annuitized withdrawals as well, but give the unlimited mini-lump-sum option I don't see the point of annuitizing.
__________________
mja is offline   Reply With Quote
Re: 457 tax/withdrawal strategy.
Old 10-26-2006, 08:37 PM   #10
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Re: 457 tax/withdrawal strategy.

Quote:
Originally Posted by Not too ?
Nun,

My understanding of the IRS rules are that you may withdraw from a 403b account if you have reached your 55th birthday and have separated from service. My employers plan has the same rules for the 457 plan. There are also a bunch of rules about when you must declare your withdrawal plan and how you structure it.

Not too ?
My state pension benefit is has the 10% penalty if distributed before 59 1/2 as does the 403b, but the 457 does not. I'm going to keep working for a couple more years to give me an ER buffer and max out the 457. Once I ER I'll take distributions from the 457 account equal to my IRS deductions, or maybe up to the 10% tax limit. So if I take the standard deduction, $5k, I can take another $7k from the 457 and only pay $700 in tax on the total of $12k.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Re: 457 tax/withdrawal strategy.
Old 10-27-2006, 01:09 PM   #11
Administrator
Gumby's Avatar
 
Join Date: Apr 2006
Posts: 10,151
Re: 457 tax/withdrawal strategy.

Don't forget the personal exemption as well, which will allow you to take an extra $3300 before incurring any tax.
__________________
Living an analog life in the Digital Age.
Gumby is online now   Reply With Quote
Re: 457 tax/withdrawal strategy.
Old 10-29-2006, 03:42 PM   #12
Full time employment: Posting here.
Patrick's Avatar
 
Join Date: Mar 2005
Location: Northern, Florida
Posts: 925
Re: 457 tax/withdrawal strategy.

Quote:
Originally Posted by nun
Is anyone who is ERed with a 457 and some after tax investments taking an amount equal to your income tax deductions from the 457, thus leaving you with zero income tax, and making up the rest of your annual expenditure from after tax investments, so you'll only have capital gains to pay.

In this way you can draw down your 457 without ever paying income tax on the money. You could do the same with 403b 401k IRA etc, but have to wait unitl 59 1/2. Or am I missing something?
I don't see how you are not paying income tax on the 457 money, unless that is your only income in retirement. If you have other income, the standard deduction could have been applied to that, right? So any amount that is used (on paper) against your other income would not be available to apply to your 457 withdrawal, correct? In other words, the standard deduction applies to your total income, not just the 457 proceeds. What am I missing?
__________________
Retired in 2006 at age 49.

"Who among us is smart enough to learn from the mistakes of others?" - Voltaire
Patrick is offline   Reply With Quote
Re: 457 tax/withdrawal strategy.
Old 10-29-2006, 04:10 PM   #13
Thinks s/he gets paid by the post
maddythebeagle's Avatar
 
Join Date: Jun 2005
Posts: 2,450
Re: 457 tax/withdrawal strategy.

Quote:
I don't see how you are not paying income tax on the 457 money, unless that is your only income in retirement. If you have other income, the standard deduction could have been applied to that, right? So any amount that is used (on paper) against your other income would not be available to apply to your 457 withdrawal, correct? In other words, the standard deduction applies to your total income, not just the 457 proceeds. What am I missing?
there was a thread a little while back on the cap gains tax/dividend rates going to 0 in 2008 for folks in the 10/15 bracket...I think Nords started it...I think that will explain how you can take more income out.....capital gains and dividends on taxable investments....

http://early-retirement.org/forums/i...p?topic=8868.0
__________________
- Hurry! to the cliffs of insanity!
maddythebeagle is offline   Reply With Quote
Re: 457 tax/withdrawal strategy.
Old 10-29-2006, 04:42 PM   #14
Administrator
Gumby's Avatar
 
Join Date: Apr 2006
Posts: 10,151
Re: 457 tax/withdrawal strategy.

Quote:
Originally Posted by Patrick
I don't see how you are not paying income tax on the 457 money, unless that is your only income in retirement.... What am I missing?
As I understood the original post, that was exactly the plan -- the only taxable income would be the 457 withdrawal plus any dividends and capital gains on the after tax investments. In that circumstance, you could take as much out of the 457 as you had deductions and exemptions and have no ordinary income tax. You would of course pay tax on the dividends and capital gains at the favorable rates for that type of income. Others pointed out that you might increase the 457 withdrawal to the top of the 10% bracket if you needed more money.
__________________
Living an analog life in the Digital Age.
Gumby is online now   Reply With Quote
Re: 457 tax/withdrawal strategy.
Old 10-30-2006, 07:17 AM   #15
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Re: 457 tax/withdrawal strategy.

Quote:
Originally Posted by Gumby
As I understood the original post, that was exactly the plan -- the only taxable income would be the 457 withdrawal plus any dividends and capital gains on the after tax investments. In that circumstance, you could take as much out of the 457 as you had deductions and exemptions and have no ordinary income tax. You would of course pay tax on the dividends and capital gains at the favorable rates for that type of income. Others pointed out that you might increase the 457 withdrawal to the top of the 10% bracket if you needed more money.
Exactly. Of course you could do the same with any before tax savings vehicle, but the 457 has the added advantage that you can make withdrawals without penalty as soon as you leave employment. I was saving quite a bit after tax, now I've reduced that so I can max out my 457. I plan to do this for 3 or 4 years. Then I'll be able to take say $7k out tax free, if that's my exemption/deduction, for about 12 years. The money is tax deferred going in, grows tax free and comes out tax free. The rest of my expenses will be paid out of after tax savings so I should only have to pay CGT and tax on dividends. This will take me to 59 1/2 when I'll start taking money from the 401k/IRA etc up to the 15% tax limit.
__________________

__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
My "Core Plus" Strategy - Feedback on the "Plus" part? milmoose Young Dreamers 24 11-01-2006 10:41 AM
retirement tax strategy and where to live simple girl Life after FIRE 69 10-08-2006 01:29 PM
Dividends and options strategy Beachbumz FIRE and Money 14 05-26-2005 12:52 PM
Roth vs. 457 (401k, etc.) Skylark FIRE and Money 7 08-20-2004 12:12 PM
Tax Deferred to Roth Strategy mccl FIRE and Money 10 06-09-2004 12:08 PM

 

 
All times are GMT -6. The time now is 11:20 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.