457 vs 403(b)?

[Urchina]

Hi, all. Due to an interesting combination of part-time jobs (one at an educational institution and one at a local govermental agency), I have access to both a 403(b) and 457. Both have low-cost index funds from Vanguard in all of our asset allocation categories; both are reasonably equivalent to manage. Neither have management fees. No employer match on either.

I have $17,500/year that can go into these accounts -- is one substantially superior than the other? Do they differ significantly in how they operate (from this end, so far, they appear nearly identical). For simplicity, it would be nice to have my contributions go into one alone, but that's not a requirement.

We also have IRAs, and DH maxes out his 401(k) annually.

Thanks for your ideas!

 

[Tandemlovers]

My husband had access to both and contributed to both plans.

There is a good website that covers general information:

http://www.457bwise.com

The only mild surprise I had after taking our first withdrawal in 2014 is that we
received a W-2 for the withdrawal, which in retrospect made sense, since
a 457b is a deferred income retirement plan.

 

[hnzw_rui]

Not sure what the rules are for 403(b) but something I learned recently about our governmental 457(b) plan:

Withdrawals/distributions from a governmental 457(b) plan are not subject to the 10% early withdrawal tax penalty as long as you're already separated from employment when you withdraw. That means you can retire anytime (heck, even at age 30) and draw from your 457(b) account without having to pay any penalty. Of course, distributions are still subject to regular income tax.

 

[utrecht]

Not sure what the rules are for 403(b) but something I learned recently about our governmental 457(b) plan:

Withdrawals/distributions from a governmental 457(b) plan are not subject to the 10% early withdrawal tax penalty as long as you're already separated from employment when you withdraw. That means you can retire anytime (heck, even at age 30) and draw from your 457(b) account without having to pay any penalty. Of course, distributions are still subject to regular income tax.

That's the reason we maxed out our 457's and didnt use our 401k's. We recently retired at 50 and 46 and have full penalty free access to our money.

 

[ERhoosier]

There are some potential safety concerns to 457's in not-for-profit employers, inc some schools. In some instances, 457 funds can be subject to creditors. This was reason I chose not to use 457 a few yrs back when working for a NFP I thought was not the most financially stable, tho admittedly some of these rules have changes since.

Safety of Government 457(b) to Bankruptcy, Creditors? - Bogleheads

Safety of Government 457(b) to Bankruptcy, Creditors? - Bogleheads

 

[hnzw_rui]

There are some potential safety concerns to 457's in not-for-profit employers, inc some schools. In some instances, 457 funds can be subject to creditors. This was reason I chose not to use 457 a few yrs back when working for a NFP I thought was not the most financially stable, tho admittedly some of these rules have changes since.

Assuming the 457(b) is through OP's employment with local government agency, assets should be held in trust and cannot be used to pay off the employer's creditors.

In case both school and govt agency offer 457(b), then might be better to fund the govt 457(b) then.

 

[Niuatoputapu]

I have $17,500/year that can go into these accounts -- is one substantially superior than the other?

2015 IRS limits for contributions are $18,000 for the 403(b) AND $18,000 for the 457(b) for a total $36,000. The limit is $42,000 for those of us over 49.

I am with a nonprofit employer so my approach has always been to max the 403(b) first and the 457(b) second due to ERISA protections and greater portability of the 403(b). My 457(b) is vulnerable to my employer's creditors, but it will fund the first three years of my retirement, so that risk will soon disappear. The absence of the 10% penalty on the 457(b) is great.

 

[Niuatoputapu]

For myself, with a nonprofit 457(b) as opposed to a governmental 457(b), I have to commit to a distribution plan within 60 days of the end of employment. That's okay with the proper planning, but definitely not as flexible as my 403(b). FYI, later this year I will choose 36 monthly distributions so I will spread the tax hit over four calendar years.

 

[Theseus]

Not sure what the rules are for 403(b) but something I learned recently about our governmental 457(b) plan:

Withdrawals/distributions from a governmental 457(b) plan are not subject to the 10% early withdrawal tax penalty as long as you're already separated from employment when you withdraw. That means you can retire anytime (heck, even at age 30) and draw from your 457(b) account without having to pay any penalty. Of course, distributions are still subject to regular income tax.

That's the reason we maxed out our 457's and didnt use our 401k's. We recently retired at 50 and 46 and have full penalty free access to our money.

1+ That was also the advantage in funding DW's 457 for us. But the inescapable 20% withholding for federal taxes has us moving those funds to an IRA now that she has passed the 59-1/2 milestone.

 

[steelyman]

A very long-term friend of mine (we ended up working at the same place) was working through the process of leaving his job too, and asked me about how this or that worked and what did I do? I was happy to help as best I could, it was sort of like an e-r.org, but where you actually know the people

One item was the 457 plan and what you could or couldn't do with it. There are no 59.5 age limit restrictions/penalties, only separation from service. Neither of us has hit that age, so 403 is still off-limits.

I didn't know for sure whether, if you did withdraw, it had to be the whole thing or some concrete distribution schedule, so I checked and I guess the answer is very plan/administrator-specific. For us, if you have more than $5K in the plan, you can do "partial lump sum distributions" at your discretion (subject to tax as ordinary income, which I'd known all along). Again, I think getting a definitive answer on treatment for your situation is worth a phone call or two.

 

[steelyman]

One more thing about 457 for me: in the best-case scenario, I will not make any withdrawals from it except the required if I make it to 70.5.

It's my only path to a stable value fund, which I view as year 3 of a 3-yr goal for cash/emergency (total 3 yrs target income). I have 2 other funds in it: one is a small-cap fund that I let "feed" the stable value fund when the market does well and a threshold is exceeded. The other is an institutional bond index.

If I go and the money is there, I'd like to bequeath it to an arts organization for a specific use.

 

[hnzw_rui]

It's my only path to a stable value fund, which I view as year 3 of a 3-yr goal for cash/emergency (total 3 yrs target income). I have 2 other funds in it: one is a small-cap fund that I let "feed" the stable value fund when the market does well and a threshold is exceeded. The other is an institutional bond index.

That's an excellent idea. I might copy your approach. I'll probably contribute to an S&P 500 Index (VIIIX) since ER of that is just 0.02 vs 0.3 for our small-cap fund.

 

[H2ODude]

I think government 457's are safer than once. In eighties I was loading up a local government 457 but was aware of the fine print that the money really wasn't mine (yet) and subject to creditors. That's why it was called DEFERRED income. I don't know when but that got changed to where it was held in trust or some such protection. The plan options stunk so as soon as I could I moved it to the tIRA.

While I loved me the low taxes loading up on the 457 and later both it and a 401k, the looming required distributions pose some ominous tax bills in 6 years. I'm fortunate to have pension and fairly good SS I haven't claimed yet, and our lifestyle doesn't require much of the tax deferred (brokerage account and pension really all we need). What really struck me as odd is that the iORP model says I should push Roth conversion to the point I'd be in 33% bracket next few years. Anyway, point is that Roth is your friend, tax deferral can create some later pain. Yeah, I know, plan ahead.