"Final Check" to 457b?

[mountainsoft]

We're starting to look over some retirement planning information from my wife's employer. One of the topics is the "final check" which would include her last paycheck, vacation and sick leave pay, etc. Her employer recommends rolling the final check into a 457b plan to "avoid a big tax bill".

Rough back of napkin calculations the final check could be somewhere around 15-20K or so. She will be retiring in August, so that amount is less than if she worked the last four months of the year. Unless I'm missing something, I don't see the tax impact being any different than a normal full work year.

Any thoughts on the 457 that I'm not considering?

I've been working to minimize our accounts and hope to convert the last of my traditional IRA to my Roth next year. So, I don't really want to add yet another account. It would also be nice to cut all ties with her employer once she retires.

Ironically, I didn't know what a 457 plan was until I researched it, and didn't know her employer offered them. With only a year or two remaining, and no additional funds to invest, it's not worth considering now.

 

[steelyman]

"Final Check" to 457b?

That’s what I did (rollover to 457) when I left. It’s my only access to a stable value fund. I don’t withdraw from it so it builds, no tax consequences at present.

[ADDED] I’d already been contributing to the 457, which allowed withdrawing on separation (no minimum age). I thought that might be useful for ER.

The unused vacation/sick leave benefits added up.

 

[Another Reader]

I had the maximum of two years of vacation (eight weeks) plus sick leave when I left in 2007. That was not a tiny sum and the withholding and the ultimate tax would have been huge. I deposited it into the 457 plan. The stable value fund I left it in paid well during the subsequent downturn and I rolled the whole thing over into two IRA's several years later, after things started to turn around. Might not be applicable to the OP's situation, however.

 

[mountainsoft]

I had the maximum of two years of vacation (eight weeks) plus sick leave when I left in 2007. That was not a tiny sum and the withholding and the ultimate tax would have been huge. I deposited it into the 457 plan. The stable value fund I left it in paid well during the subsequent downturn and I rolled the whole thing over into two IRA's several years later, after things started to turn around. Might not be applicable to the OP's situation, however.

The vacation and sick leave balances could obviously change over the next two years, but right now I'm not seeing any advantage to putting the final check in a 457 instead of taking it as a cash payment. Pay taxes now and be done with it. It's the same tax we would have paid had she worked the entire year.

Of course, if the final check was something like 40K or more that's a different matter. I guess we'll just wait and see when the time comes.

 

[Aerides]

IIRC a single big check - while it will take out the max tax bracket - evens out in the end of year taxes. Just like when we got our annual bonuses and kissed goodbye a huge chunk every year. I'd get my bonus info and figure I'd see about 60% of it after tax. It all resolved with annual tax filings. Since your wife is retiring, you're right, it would be no different come tax time.

 

[steelyman]

This thread got me to thinking about qualified charitable distributions (QCD) from a 457 RMD vs IRA.

From what I can tell, it seems the treatment is different (457 doesn’t get the tax-favored treatment, rather is treated as a normal distribution). I’m no CPA/tax expert, though.

Food for future thought, thanks for posting the topic.

 

[ikonomore]

At my work, the sick and vacation time can add up to an easy $60k.
They allow double catchup so you could put $39k into the final check if you weren't contributing all along.
It's amazing to me how many people actually open a 457 when they retire for just that reason. The previous 30 years they put nothing into the 457.

 

[pb4uski]

We're starting to look over some retirement planning information from my wife's employer. One of the topics is the "final check" which would include her last paycheck, vacation and sick leave pay, etc. Her employer recommends rolling the final check into a 457b plan to "avoid a big tax bill".

Rough back of napkin calculations the final check could be somewhere around 15-20K or so. She will be retiring in August, so that amount is less than if she worked the last four months of the year. Unless I'm missing something, I don't see the tax impact being any different than a normal full work year.

Any thoughts on the 457 that I'm not considering?

I've been working to minimize our accounts and hope to convert the last of my traditional IRA to my Roth next year. So, I don't really want to add yet another account. It would also be nice to cut all ties with her employer once she retires.

Ironically, I didn't know what a 457 plan was until I researched it, and didn't know her employer offered them. With only a year or two remaining, and no additional funds to invest, it's not worth considering now.

But, I presume that once she stops working that you'll be in a lower tax bracket the following year? If so, it might be worthwhile to put it in the 457 this year and withdraw or convert it to Roth and pay the tax, presumably at lower rates. For example, if you're marginal tax bracket is 24% in her last year of work but will be 12% in her first year retired then you save a tidy $1,800-2,400 with little work.

I've grown to like this quick & dirty tax calculator.... https://www.irscalculators.com/tax-calculator

 

[Navigator]

The vacation and sick leave balances could obviously change over the next two years, but right now I'm not seeing any advantage to putting the final check in a 457 instead of taking it as a cash payment. Pay taxes now and be done with it. It's the same tax we would have paid had she worked the entire year.

Of course, if the final check was something like 40K or more that's a different matter. I guess we'll just wait and see when the time comes.

It might be advantageous to roll the money into a 457 if your tax rate will be lower when the money is withdrawn than it is now.

 

[pb4uski]

^^^^ Great idea. Wish had thought of that.

 

[Navigator]

^^^^ Great idea. Wish had thought of that.

I guess I’m just a slow typist.

 

[mountainsoft]

At my work, the sick and vacation time can add up to an easy $60k.

Wow, that's impressive. We won't be anywhere near that. Maybe 15K-20K or so.

It's amazing to me how many people actually open a 457 when they retire for just that reason. The previous 30 years they put nothing into the 457.

We never contributed to my wife's 457 plan. I didn't even know what a 457 was until I saw it on the retirement checklist last week. My wife's employer had another name for it, something like deferred compensation. The way they described it in the annual financial reviews just made it sound like a savings account. So we didn't bother.

For that matter, we didn't even realize my wife had a pension through her work until 8-10 years ago. They would just send out annual statements for the "retirement plan", showing cash values which never seemed to amount to anything. I just happened to stumble across something I was reading one day and realized it was a pension plan. Granted, I am rather naive and didn't really even know what a pension plan was at the time.

Sadly, we were young, retirement wasn't really even on the radar. I started a traditional IRA in my late 30's, just because I thought I should do something. Unfortunately, I didn't really contribute much to it until I was almost 50.

It wasn't until I found this forum that I really started to understand investing and retirement savings, and I still learn new things (like what a 457 plan is. ).

It's just dumb luck, intense research, and frantic catch-up savings over the last several years that will allow us to retire in a couple years.

It's too bad they don't teach this stuff in school...

 

[mountainsoft]

I presume that once she stops working that you'll be in a lower tax bracket the following year?

We are in the 12% tax bracket now and should remain there through retirement (unless tax brackets change).

 

[Koolau]

We are in the 12% tax bracket now and should remain there through retirement (unless tax brackets change).

Hard to make too big a mistake in that tax range UNLESS you have too MUCH in a 457(b), 401(k) or traditional IRAs, etc. IOW, if you HAVE sheltered a lot of income from taxation while w*rking, you may have to begin taking payments that then put you into a higher tax bracket when you are retired. Doesn't sound like that's an issue to you. You CAN figure the taxes (or hire a professional) to see if it's worth the effort to use the 457b to lower your tax rate for the year. Does not sound like this year will be different than other years no matter which way you go. Of course, money in the 457(b) or similar plan such as IRA WILL grow tax deferred, but that isn't always the best move as mentioned above. Do you have a ROTH to stick some extra money into? Generally, only if you are still w*rking can you put new money into a ROTH. I love ROTHS - as do most here. You CAN eventually convert IRA and I think 457b's to ROTHS (don't quote me on the latter) without still being employed - you just pay the taxes due on the withdrawal for the other style of plan. The ROTH grows - tax FREE (with some caveats.)

Sorry, way too much info. I couldn't do it, but if you threw out some figures, I'll bet someone here would do a quick calc. for you on the TurboTax or similar to see if the 457b makes any sense. Remember that no matter what WE say, YMMV.

 

[mountainsoft]

money in the 457(b) or similar plan such as IRA WILL grow tax deferred, but that isn't always the best move as mentioned above. Do you have a ROTH to stick some extra money into?

Yep, the vast majority of our retirement savings is now in our Roth accounts. We're contributing the max 50+ $7000 per year in each account whenever possible.

I still have about 25K in my original traditional IRA, but hope to convert the last of that to my IRA next year. I'm trying to get away from the deferred accounts. Pay the taxes now while rates are low, then our withdrawals will be tax free in retirement.

 

[pb4uski]

We are in the 12% tax bracket now and should remain there through retirement (unless tax brackets change).

Then I would still put it in the 457. While you can't get a tax benefit directly, you can indirectly by converting the money into a Roth after it is deferred in the 457 (I assume that one can convert 457 money to a Roth like one can convert 401k money to a Roth).

If you don't put it in the 457 then you have no way of getting it into a Roth where it can grow tax-free. From what you wrote you'll pay 12% either way so the 457 is a good way to get it into the Roth.

 

[mountainsoft]

Then I would still put it in the 457. While you can't get a tax benefit directly, you can indirectly by converting the money into a Roth after it is deferred in the 457 (I assume that one can convert 457 money to a Roth like one can convert 401k money to a Roth).

As far as I know, her 457 is a traditional deferred plan. Assuming we could roll it over to her Roth, we would need to pay taxes at the time of the conversion. No real difference over taking the final check as cash and paying taxes.

Also, all of our retirement savings should be in Roths by the time we retire. So we either pull from an existing Roth account for living expenses, or we take the final paycheck as cash. I don't see any benefit to introducing the 457 into the mix. It's only 4-5 months of normal pay, so it just seems like unnecessary added complexity.

Either way, it's "extra" money I haven't factored into any our retirement plans. Even if we lose a portion in taxes it's still money we weren't expecting anyway.

 

[pb4uski]

If you're going to need that money in the near term for expenses then I agree that the 457 doesn't offer any benefit.

 

[jr6035]

I rolled all my sick, vacation and comp time over into my 457 when I retired. I then rolled all that into a Fidelity IRA.