So you’re a government employee, and you want to save as much as you can for early retirement. Excellent – me too. Chances are good that you’re in a 403(b) – also good, or at least not bad.
But how are your fees? And how long do you have to wait to get that money WHEN you retire early?
If you want to access that money early, you can jump through the hoops and do your fancy Roth conversion ladder or 72(t) distribution (and you do plan on retiring early, right?), but there is an easier way: the 457(b).
Many of you all haven’t heard of it, and perhaps your financial advisor steered you away from it. If they did, shame on them (unless the fees are terrible – as they are for my wife – in that case buy your advisor a beer. But if the fees are no worse than the 403(b), then smack that beer out of his hand, and smack yourself for buying him a beer without thinking it all the way through, and tell your advisor to get you signed up for a 457(b) yesterday).
For me, as a State of Florida employee, the 457(b) is an amazing investment vehicle:
- Like a 403(b) or 401(k), money goes in tax-free, and is only taxed upon withdrawl.
- At least in Florida, by law, the fees that the providers (in my case Voya) are allowed to charge on 457(b)’s are SIGNIFICANTLY LOWER than the fees that the 403(b)’s are allowed to charge (I started out paying 1% PLUS the typical mutual fund fees with my first 403(b). Yikes!).
- Most 457(b) plans have Vanguard funds – yay for sub 0.1% fees.
But that’s not the most important part. For you, my early retirement friends, the best part is this:
You can start your withdrawals as soon as you quit your job.
Yup, you read that right. See here if you don’t believe it.
You do NOT have to wait until you are 59 1/2 as you do for 401(k)’s, 403(b)’s, and IRAs.
This gives you, Mrs. Jane Q. Public Servant, ultimate flexibility as you head into early retirement. I would hope that you would not need to tap into the 457(b) until after 59 1/2 so you can let that money grow tax-deferred (you do have to begin distributions by 70 1/2), but in case you need to pull the money out or you plan to pull the money out, you aren’t constrained by the 59 1/2 rule.
Now I know what you are thinking – holy shit, let me roll over my IRAs, 401(k)’s, and 403(b)’s immediately into the 457(b).
Nice try, but you’re stymied there. Here are the caveats:
- Only direct contributions to the 457(b) can be withdrawn early.
- If you roll your IRAs, 401(k)’s, etc. into the 457(b), your investment company has to keep close track of what you can withdraw early and what you can’t. It’s a pain for them, so just don’t do it.
- Even if you ignore my sage advice above and try to roll them over anyway, you may find that your investment company doesn’t allow you to do the rollover (for instance, VOYA wouldn’t let me roll my 403(b) into my 457(b), since they were both serviced by VOYA. And thank goodness they didn’t, because I rolled that money into a Vanguard IRA and did much better than I would have in the 403(b), and then rolled it into a 401k solo trust so I could invest in a startup company. More on that awesomely crazy decision in another post).
More good stuff:
- You can contribute to a 401(k) or 403(b) AND a 457(b) at the same time, doubling the amount of tax-deferred income you can stash away. So you have making decent coin working for Uncle Sam or a state cousin, sock away $36,000 before tax. Why not?
A couple more points, of the more neutral variety:
- Besides the kick-ass (but don’t be dumb with it) “draw your money out as soon as you quit” clause, 457(b)’s act more-or-less than same as 401(k)s and 403(b)s.
- I say more-or-less, because 401(k)s and 403(b)s are defined benefit plans, whereas 457(b)’s are deferred compensation plans. On your end this won’t likely make much of a difference (besides allowing you to pull out funds before 59 1/2, as long as you no longer work for the company/government agency), but it could.
- Some have concerns about 457(b)s because if your company goes kaput, so does your money. you become a creditor. So if your company (not government agency) offers a 457(b), be aware. If you are going to be there a short time, you should be fine. Long term – I’d be hesitant.
- With a deferred compensation plan, if you are with the government, your money is typically put into a trust, so invest away – you are essentially safe. But check first, just to make sure.
- Current (2015) maximum contribution is $18,000 per year.
- If you’re really fortunate, and it makes sense to contribute to it, you may have a Roth 457(b) available as well (max contribution is $18,000 COMBINED for pre-tax and Roth 457(b)’s).
- Shop around with different investment firms. At least in FL, most 457(b)’s have at least one Vanguard fund, so you can invest your pretax gubmint paycheck dollars in funds that won’t leave you walking funny.
- Now this may be a plus or a minus, depending on your opinion. I view it as a plus: There are many fewer fund options for most 457(b)’s. What this really means from you is that instead of having to choose between 5 small cap funds with ridiculous fees and 4 small cap funs with only slightly outrageous fees, you have only one kind of each. If you are a maximizer like me, this is great – now I only spend 30 minutes agonizing over a fund rather than 3 hours.
Finally, I recently read a blurb on the interwebs which gave 457(b)’s a lukewarm “meh”. Why? Because you get taxed when you withdraw your funds.
Well, Duh. But you are also taxed when you withdraw from a 401(k) or 403(b) or IRA. AND with the457(b) you get to withdraw whenever you damn-well-please after quitting your job. And hopefully you’re doing it while living a kick-ass, low spending lifestyle like Mr. Money Mustache so that you can take advantage of a really low tax bracket.
So go do some research and find out if your government agency has a 457(b) available, and request info from the providers in your state/municipality. Then call your current advisor (or a new one, if your old one doesn’t have a good plan), and make your retirement account happy.