Why I Started a 457 Plan

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A while back, I shared with you Why I Opened an SEP IRA.  Recall that part of the reason I went with the SEP IRA was because I was told that my employer had discontinued the 457 plan.  As it turns out, that wasn't the case.  We simply transitioned away from a third party provider who was administering the 457 plan.  Long story short - the 457 plan was still available.  Let me tell you why I signed on...

The 457 Plan

The 457 is a type of non-qualified tax-advantaged deferred compensation plan created under - you guessed it - the Internal Revenue Code (IRC) section 457.  You can read about it in detail at the IRS website, but here are the cliffnotes:

  • The organization (employer) must be a state or local government or a tax-exempt organization under IRC 501(c).  If you work for a for-profit healthcare organization, you can stop reading now.
  • Depending on your employer, you can have a governmental or a non-governmental 457.  If available, most residents likely have access to a non-governmental plan. Note: There's also a distinction between eligible "457(b)" and non-eligible "457(f)" plans, but we'll stay out of the weeds for now.
  • Contributions to a 457 plan are tax-deferred.
  • Earnings on your investments are tax-deferred.
  • Distributions (withdrawals in retirement) will be taxed as ordinary income.
  • You can contribute up to 100% of eligible compensation or $18,000/year for 2017.

For all intents and purposes, think of this as another 401(k) or 403(b) plan.  

Key Differences

While each 457 plan will be somewhat different depending on your employer's specific provisions, here are some key differences that distinguishes it from your 401(k) or 403(b):

  • That $18,000/yr limit?  It's separate from the contribution limit for your 403(b) plan.  Translation - you get an additional $18,000/yr in tax-deferred investments!  And we all know how that can add up over time.
  • The 457 plan is limited to a "select group of management or highly compensated employees."  While who qualifies as part of this "select group" is not exactly defined by the IRS, your employer will likely have some kind of criteria to determine whether you can contribute to a 457.  This limitation has also lead to the 457 being referred to sometimes as a "Top Hat Plan".
    • For example, in order to contribute to my employer's 457, I am required to max out my 403(b) contributions first.
  • There are, of course, certain drawbacks of a 457 plan you should consider.  Luckily for us, Doctor in Debt has summarized them nicely in this article - The Hidden Danger In Your Hospital’s 457(b) Plan.

Why I Signed Up

If you read the Doctor in Debt post referenced above, you would have seen the notes I left in the comment section.  I will list them again here.  As with many other topics, details matter.  My particular situation made the 457 an attractive tax-deferred investment option for several reasons:

  1. In case I leave my current employer, it allows me to rollover the balance into another non-profit 457, leave the funds in place or cash out - pretty much all the options legally allowed. 
  2. The investment choices in my 457 plan are identical to that offered by my 403(b) plan.  Which are actually reasonable in cost and selection.
  3. My employer is one of the largest health systems in the country so the insolvency risk is minimal.

Bottom Line

If your employer is a non-profit healthcare provider, it's worth finding out whether you are eligible to contribute to a 457 plan.  If you are, I would take a hard look at the detailed provisions.  It might just turn out to the be difference between retiring at 50 instead of 65.


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Future Proof, MD

Dr. Bo Liu is an aspiring radiologist-in-training and the founder and editor of the White Coat Money Blog.  He has an interest in interventional radiology and helping his medical colleagues get ahead in this mad world of medicine and money.  When he's not crushing the list at the PACS station or typing up your next favorite blog post, you can usually find him at the local badminton club, movie theater or the most recently opened restaurant.