457 tax/withdrawal strategy.

[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?

 

[maddythebeagle]

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....

 

[nun]

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.

 

[maddythebeagle]

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...

 

[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.

 

[nun]

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.

 

[tlg501]

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

 

[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 ?

 

[mja]

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.

 

[nun]

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.

 

[Gumby]

Don't forget the personal exemption as well, which will allow you to take an extra $3300 before incurring any tax.

 

[Patrick]

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?

 

[maddythebeagle]

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/index.php?topic=8868.0

 

[Gumby]

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.

 

[nun]

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.