If you work for a large healthcare provider, you may have access to a 457(b) retirement account in addition to a 401(k)/403(b). Are you using it? Maybe yes, maybe no. You might want to use your hospital's 457(b).
Here's why:
The Benefits of Your Hospital's 457(b)
- Tax benefits! With your hospital's 457(b), you can invest an additional tax deferred $19,000 annually (in 2019). This escalates to $24,000 annually if you are over 50. Why do this? This lowers your taxable income. Like a 401(k), you pay income tax when you withdraw. Some 457(b)s even offer a Roth option.
- Flexibility! In addition, you can withdraw this money before age 59.5. This is great if you are planning early retirement. Why? Unlike the 401(k)/403(b)/and most IRAs, you'll have access to your money earlier.
Understanding The Types of 457(b)s
There are 2 types of 457(b)s and it's important to know which type your employer offers. There are governmental (or public) and non-governmental (or private) 457(b)s.
Governmental 457(b) Options
If you have a governmental 457(b), this is a “no-brainer”. You should use it if you need more tax advantaged space to save in. Of course, this also depends on if the plan costs and fund choices are agreeable. Public 457(b)s can be rolled over into an IRA or 403(b)/401K(k) when you leave the job.
Private 457(b) Options
Private 457(b)s are different story. The money you deposit technically belongs to your employer and can be used to pay off employer's creditors. This is only an issue if your hospital goes under. A good way to see if your hospital is afloat is to check their credit rating. I know this sounds scary but as far as I know, no one has lost their 457(b).
Exploring Your Hospital 457(b) Plan Options
The next step is to find out what the distribution options (if there are any) are when you leave the job.
Some plans make you take out one lump sum on separation. This is a lousy option, and I would hesitate using it.
You want multiple options. Preferably, you can defer distribution until retirement age and take money over time to control your taxable income. The main “con” of a private 457(b) is that you can only roll it into another private 457(b). Another catch is this. Your new private 457(b) would have to accept rollovers, and they don't have to.
Your best bet is to always get a copy of your employer's 457(b) plan as details can differ widely.
Final Thoughts on Your Hospital's 457(b) Plan
A 457(b) is a way to have access to your money before age 59.5 besides a taxable account
Your retirement savings plan should include different types of accounts to diversify. A 457(b) is a way to have access to your money before age 59.5 besides a taxable account.
I am using my hospital's private 457(b) account. I almost maxed it out last year ($16K) and will be maxing it out this year. My 457(b) plan is low cost and has a limited fund list but does include some basic Vanguard funds. Fortunately, the distribution options are very flexible so upon leaving this job, I can defer distribution until retirement age.
Since this post went live, I left the hospital job. I chose to cash out my 457(b) despite being able to leave it there indefinitely. Why? I wanted total control over the money. Yes I paid income taxes on it. I promptly deposited the check into my Vanguard taxable brokerage account. With the changing and unstable landscape of medicine, I do not want to depend on the hospital staying afloat.
No matter where you are in your career or where you are on your retirement journey, inquire about your 457(b) plan that your hospital offers. You might be able to get your hands on some serious tax-time benefits and add more flexibility to your retirement plan.
Does your job offer a 457(b)? Do you use it? Why or why not?
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