Should I use my hospital's 457(b)?

Menfi, Sicily[/caption] 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? You might want to. Here’s why:

  • An additional tax deferred $18,000 annually (in 2017) which escalates to $24,000 annually if you are over 50.  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.
  • In addition, you can withdraw this money before age 59.5  This is great if you are planning early retirement (unlike the 401(k)/403(b)/and most IRAs).
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. 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)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). 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) (if the new private 457(b) accepts rollovers….they don’t have to). Always get a copy of your employer’s 457(b) plan as details can differ widely.
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. What do you think? Does your job offer a 457(b)? Do you use it? Why or why not? Comment below.]]>

2 Comments

  1. Jesse on February 19, 2017 at 9:12 pm

    I’ve looked at this extensively and I’m still undecided. A public 457(b) is a no-brainer. But choosing to invest in a private 457(b) is a more difficult decision.

    My biggest fear is being forced to take 457(b) distributions after leaving my employer. Particularly if I move to a state with a higher income tax.

    Another concern is TOO MUCH tax deferred savings. Imagine a two person household saving $80,000 every year for 30 years. Those RMDs are going to be killer.

    On the other hand- I had the pleasure of paying AMT this year and I find the thought of reducing my MAGI appealing.



    • missbonniemd@gmail.com on February 21, 2017 at 6:50 am

      You need to find out the distribution options – that is easy. Ask HR for a copy of the plan document AND the form for withdrawals.
      Your concern about too much tax deferred savings tells me you don’t have a financial plan. You can do Roth conversions piecemeal in lower income years.



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