Our son just got his first professional job and is asking us for input re his benefits. It appears that he is eligible to participate in either/both a 401K and 457 plan. A quick google states that one of the primary benefits of the 457 is that there is no 10% penalty for early withdrawal. We have no prior experience with 457s. Can anyone clarify a good way to invest in these retirement plans? We know he gets up to 5% matched in the 401K, but are waiting to find out more from his enrollment email to see if there is a match for the 457. Is one plan better than the other or is a combined approach the best way to go? Can the 457 plan be rolled over into an IRA if he leaves this employer?
Is one plan better than the other or is a combined approach the best way to go?
If he can afford to max out both, he can basically double his allowable deferral. So for 2022, he can contribute $20,500 to his 401(k) and an additional $20,500 to his 457.
A quick google states that one of the primary benefits of the 457 is that there is no 10% penalty for early withdrawal.
Be sure to understand the withdrawal rules for the 457. He may be required to withdraw the entire amount if he takes it early.
Is one plan better than the other or is a combined approach the best way to go? Can the 457 plan be rolled over into an IRA if he leaves this employer?
Pretty sweet. He gets a pension too.
Given the fact that he gets a pension, I’m assuming this is a government sponsored 457, rather than a non-profit sponsored 457? If it is a government sponsored 457, then it can be rolled into an IRA. Non-profit sponsored 457s cannot be rolled into IRAs.
If he can afford to max out both, he can basically double his allowable deferral. So for 2022, he can contribute $20,500 to his 401(k) and an additional $20,500 to his 457.
Not this decade, but maybe some day.
Be sure to understand the withdrawal rules for the 457. He may be required to withdraw the entire amount if he takes it early.
Great heads up. Thanks!
Given the fact that he gets a pension, I’m assuming this is a government sponsored 457, rather than a non-profit sponsored 457? If it is a government sponsored 457, then it can be rolled into an IRA. Non-profit sponsored 457s cannot be rolled into IRAs.
My public sector job includes a similar set of retirement options…basically the same except I don’t get any kind of match going to the 401(k) or 457. But I have no complaints: the “match” going to the pension side is quite generous.
For the last several years I have maxed out both 401(k) and 457 contributions. No issues to report with one small exception: Having both accounts means I get dinged two management fees, one for each account. It’s a small, fixed dollar amount ($1.50/month/account). I loathe bank fees. So this really chaps my hide. YMMV.
Regarding withdrawals: If I wanted to access money in those accounts I would be much more inclined to take a loan agains the balance. For our plan we can go up to the smaller of (1/2)*BALANCE or $50k. I think those might be federal limits. Not sure about what interest rate gets charged, though. I’ve thought about taking out a small loan just to “see what happens.” But I’m sure it would generate bank fees, which I loathe!
A couple of other notes:
– There are often exceptions to the standard withdrawal penalties for “new home purchases” and “emergency situations” with respect to accessing monies in these accounts. Still have to pay income taxes, though.
– My wife earns loads more money than I do. So for our household’s financial situation having the ability to contribute to an “extra” 401(k) (i.e. the 457) represents a fairly large (and accumulating) benefit because we are likely to face a significantly lower marginal tax rate in retirement than during our working years. I mention this only because your son sounds like he is just now starting his professional life. His income (and household income) are very likely to go up during his working life. Thus, the marginal benefits of having an “extra” 401(k) limit are likely to grow through time as well.
we are likely to face a significantly lower marginal tax rate in retirement than during our working years.
You should check that assumption closely by figuring what tax bracket your SS, pensions, RMDs and other expected income would put you in, especially for a surviving spouse who ends up filing Single.
Note that the chart specifies Governmental 457s. Non-profit 457s cannot be rolled into IRAs.
Interesting. And thanks! I didn’t realize there were different flavors of 457s…learn something new everyday! I’ll have to start referring to mine by its true 457(b) designation.
I sure would like to get me one of them 457(f)s (apparently only for “highly compensated” (>$1 million per year?) public sector or non-profit employees)…
Does he have a Roth option? Locking in his taxes while he is at a fairly low tax rate now may be more advantageous than deferring the taxes when his income will probably be higher and the tax rate in the future is an unknown.
Does he have a Roth option? Locking in his taxes while he is at a fairly low tax rate now may be more advantageous than deferring the taxes when his income will probably be higher and the tax rate in the future is an unknown.
Yes, and I too am a fan of Roth’s as much as possible. He is also on board with that.
One really cool thing about the 457s seems to be the catch up provision, but am getting confused on the details. It seems that as of age 50, eons away for Youngest who is not yet 25, both the 401K and 457b allow for catch up of an additional $6500 in todays law. For the 457b there are also : "Special 457(b) catch-up contributions, if permitted by the plan, allow a participant for 3 years prior to the normal retirement age (as specified in the plan) to contribute the lesser of:
the elective deferral limit ($20,500 in 2022; $19,500 in 2020 and in 2021).
The basic annual limit plus the amount of the basic limit not used in prior years (only allowed if not using age 50 or over catch-up contributions)"
I am no doubt dropping into the possible vs the probable at this time, but since we are trying to figure out which plan to use from day 1, am looking far into the future. Who knows if he will even still be with this gov’t entity in 25 years and able to take advantage of catch ups, or if there will be a need to use a catch up provision given he has the ability to invest in both a 457 and a 401K. I am trying to understand if there is any real benefit to the 457’s catch up provision, or if the more typically provided 401K might be better for portability to other companies should he move to a private company and away from Gov’t. He gets a 5% match either way, and is going to put that much into whichever account he choses, at least to start. I have doubts he would need to put funds both in 401K, 457 and do catch up, particularly since we continue to fund our kids’ Roth IRAs as a way to transfer a small amount of assets.
