non-governmental 457(b) money: what are my options?
I am currently employed by a non-profit and I participate in a non-governmental 457(b) plan. This money is at risk if my employer were to become insolvent.
I’m 34 years old now.
Let’s say I resign from the company now. What can I do with that money? I don’t want to leave it with an employer who has a measurable chance of insolvency over the next 25 years. Apparently I can’t rollover this money into a traditional IRA since it’s non-governmental. And I can’t take a distribution without incurring a penalty because I’m not 59 1/2. So what can I do?
If I have basically no good options, why would anyone ever participate in a non-gov 457(b)? The risks seems way too high.
Permalink Submitted by Al Fry on Fri, 2008-08-08 16:00
The distribution, while taxable, would not be subject to the 10% penalty. 457 plan are generally exempt from the penalty tax, except for non-457 rollovers to 457(b) Governmental plans.
Permalink Submitted by robert axelrod on Fri, 2008-08-08 23:46
So this means that I could resign, and once my resignation is effective (I have a 3 month notification period), I could immediately take the distribution and just pay normal income tax on both the principal and the earnings?
That is a relief, although of course my marginal rate compared to what my capital gains tax rate is very unfavorable. But at least there is no penalty.
Thank you!
Permalink Submitted by Alan Spross on Sat, 2008-08-09 00:00
One possible solution if you happened to change employment to another non profit that accepts incoming transfers and is in better financial shape, you could transfer the funds. The only type of plan that can accept a non govt 457b or 457f plan is another such plan.
If you move to a for profit firm, check with your current plan to see if they allow installment distributions rather than a lump sum. At least that would reduce your tax bracket, but you would have to weigh the security issues as well.
Permalink Submitted by robert axelrod on Sat, 2008-08-09 05:34
thanks again – final question.
Can I take the 457 money out at any time? Like now? Or does my employment have to be terminated?
Permalink Submitted by BruceM on Sat, 2008-08-09 06:38
Unfortunately, non-profit 457(b) plans are generally not portable as they are formally not funded, meaning it could be nothing more than your employer’s promise to pay in the future. These kinds of plans are in a kind of no-man’s land between govt funded 457(b) plans and pure deferred comp, where there are maximum annual contributions through salary deferral but they are assets of the employer until you, the employee, are in constructive receipt.
The truth lies in the plan document. The few I have worked with allowed for structured payouts that began when the employee separated from service and then attained a certain age. But you’ll need to check the plan.
As to your question of why would anyone defer their salary into these? Good question…..as I’m pretty sure I wouldn’t. Even though the deferrals are pretax, their typical inherent illiquidity and risk of loss if the employer goes BK would prompt me to look for taxable accounts with tax efficient ETF’s. And to potentailly make matters worse sometimes the non-profit organization will allow insurance companies to set up and administer these, including the investment options….whcih could translate into fairly high annual fees that could eat up much of your account’s earnings over the years.
BruceM
Permalink Submitted by robert axelrod on Mon, 2008-08-11 06:34
I’ll have to check the plan documents. Sounds like some fun weekend reading. On the plus side, my 457 is administered by Fidelity, so at least the costs are low.
Permalink Submitted by Bradley Ford on Fri, 2013-10-18 18:40
is there a make up provision for employees over 50 that will allow them to put more into a 457(b) rather than the standard $23000?
Permalink Submitted by Alan - IRA critic on Mon, 2013-10-21 00:30
Yes. See the attached and note that the catch up options for govt 457b plans differ from non-govt plans: http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics—457(b)-Contribution-Limits
Permalink Submitted by royceton pinder on Mon, 2015-09-14 16:56
wf3lei have Contributed not my company to a 457b non governmental (not for profit company) retired age 70.5 and over can i roll that money into a ira
Permalink Submitted by Alan - IRA critic on Mon, 2015-09-14 17:21
No, only a govt 457b plan can be rolled over to an IRA. A non govt plan cannot.
Permalink Submitted by David MAURICE on Fri, 2017-02-10 21:22
So the only way to access funds from a non-government 457 plan is by taxable distribution – lump sum or instalments, is that correct? That’s like forced RMD’s at whatever age!
Permalink Submitted by Alan - IRA critic on Sat, 2017-02-11 02:30
Yes, participant is dependent on the plan distribution options. No rollovers to IRAs are allowed.