What Happens to a 457b After Leaving Job?
A 457(b) retirement savings account is a tax-deferred retirement savings plan offered by some state and local governments as well as tax-exempt organizations to their employees. Much like with 401(k) plans, money contributed directly from pay is deducted before taxes are applied – an attractive perk!
But unlike their more commonly-held counterparts, 457(b)s impose distinct withdrawal, rollover, and portability rules that must be observed.
Taxes
Physicians considering using a 457(b) or IRA to fund early retirement must carefully weigh any tax savings against limited withdrawal options and restrictive investments. Working with a financial professional is often essential when using such plans, providing advice that meets individual needs and goals.
Annual deferrals and earnings in a 457(b) plan do not fall subject to income tax withholding until they vest; at this point they become part of your gross income. Contributions and earnings may still be subject to FICA and FUTA taxes, however.
Non-governmental 457(f), or ineligible plans, are offered by certain tax-exempt employers to provide deferred compensation to high wage earners. They differ from governmental 457(b) plans in that participants don’t have the option of rolling assets over into an IRA or 403(k), like their counterparts; participants in 457(f) plans must begin taking Required Minimum Distributions when they reach age 73.
Withdrawals
Doctors working for government might have access to a 457 deferred compensation plan as a retirement savings vehicle, similar to 401(k) or 403(b). While governmental 457 plans offer tax-deferred accumulation periods and non-governmental ones are taxed at withdrawal time.
457 plans don’t impose an early withdrawal penalty until either you leave your employer or reach age 59 1/2, making them an excellent option for physicians planning an early retirement; using their 457 account first can save them from tapping into 401(k) or IRA plans later.
Like Roth IRAs and 401(k)s, savings held within a governmental 457 plan aren’t protected from creditors; rather they belong to your employer and will be distributed as required if your employer declares bankruptcy. Non-governmental 457 plans also don’t offer this level of security and their assets could potentially be distributed among creditors in case the sponsoring company declares bankruptcy.
Portability
A 457(b) plan is a tax-advantaged retirement savings scheme designed specifically for government and non-profit employees. Similar to 401(k) plans, 457(b)s allow participants to defer taxes until withdrawing money from their account.
Employers frequently offer both 401(k) and 457(b) plans, giving you the choice to contribute to both plans. Before making your choice, however, it’s important to understand their respective differences and similarities before making your decision.
457(b) plans don’t impose a 10% early withdrawal penalty like their 401(k counterpart, making them attractive options for asset transfers without incurring this tax penalty. You may even transfer assets directly from a government 457(b) into an IRA without incurring this cost; however, before doing so it would be prudent to consult a financial planner first as they can assist with planning your financial future and offering guidance as to where best invest your funds.
Catch-up contributions
State and local government employees as well as certain employees of tax-exempt entities such as universities can take advantage of 457(b) deferred compensation plans, similar to 401(k) and 403(b) retirement accounts in that participants can set aside pre-tax dollars which reduce income while growing tax-free until withdrawal is taken, at which point withdrawals must be taxed as ordinary income.
The government version of a plan offers participants with unforeseeable emergencies a way to withdraw funds without facing a 10% early withdrawal penalty. Such emergencies could include medical needs, home purchase or loss due to casualty.
Non-governmental 457(b) plans, on the other hand, do not offer this flexibility and often are backed by companies that could face creditor risk during bankruptcy proceedings. As a result, doctors who possess access to such plans should opt to roll them over into either their 401(k) or IRA rather than leaving it in its existing state.
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