If 457(b) and 401(k) are both offered, prefer which?

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If 457(b) and 401(k) are both offered, prefer which?

Postby tidalwave10 » Sun Aug 25, 2013 6:40 am

The State of NC offers employees a choice of both a 457(b) plan and a 401(k) plan. I've been contributing to the 401(k) plan for years, but am starting to wonder if the 457(b) plan would be better. Assume fees and investment choices are identical. The only difference I can gather is that, upon separation, one can withdraw any funds without the 10% penalty (but taxes must still be paid). As someone contemplating retirement before Medicare age, having "demand" money before everything else kicks in, without the 10% penalty, could prove valuable. I'm doing all non-Roth because I believe my tax rate will be lower in retirement and I'd prefer to have the tax break now.

So, some questions:

1) Why would a government employer offer both a 401(k) and a 457(b)? I seem to recall someone saying that if you participated in both plans, you could double the amount of money that could be tax sheltered each year. Is that true? I'm a good saver, but not sure I could "double max out" two plans--or if it would serve my financial goals appropriately (thinking mid-term money needs). 6% of my salary is already involuntarily taken out of each paycheck for the State pension.

2) Going forward, which would be better to contribute future money to and why? The 401(k) or t he 457(b)?

Keeping in mind that I may retire early and am in my early 40's now. Won't have a pension kick in until age 60--too few years of service to be eligible for the pension earlier). I'm disciplined, so there' s no concern about the absence of a 10% early withdrawal penalty

3) If I had the opportunity to transfer all my funds from the employer's 401(k) to the 457(b) without there being any tax consequences, should I go for it? I'm not sure I can do this, but browsing through the literature I think it may be possible.

4) Does anyone in the State of NC system know about any "gotchas" with the 457(b) plan? I seem to recall looking into the State's Roth 401(k) option and they didn't allow withdrawal of contributions unless the employee separated. Or at all before age 59 1/2. Seemed to differ from what you typically read about that particular advantage of a Roth (or maybe that's only for a Roth IRA?). Specifically, I thought I saw a clause in the 457(b) literature about not being able to do the 10% penalty-free early withdrawals at all before age 55.
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Re: If 457(b) and 401(k) are both offered, prefer which?

Postby House Blend » Sun Aug 25, 2013 8:01 am

tidalwave10 wrote: I seem to recall someone saying that if you participated in both plans, you could double the amount of money that could be tax sheltered each year. Is that true?

Yes it's true. I do it--I max out a 457b and a 403b every year (and my employer puts matching contributions into a 401a).

I don't think it matters much, but if you plan to retire early, then withdrawals from a 457b may be more convenient. Those are penalty free at any age, once you are retired/separated. Also check your plan rules--it may be that you can withdraw from your 401k penalty free if you retire at age 55 or later.

If you don't plan to retire early, you may be eligible to do in-service withdrawals from the 401k, but not the 457b. (More of an issue if the fund options are significantly worse than a VG IRA.)

Also, our 457b plan doesn't offer hardship withdrawals or loans.

Regarding #3, our plan does not allow this. But if you leave the employer, both plans are eligible for rollover to another qualified plan.

The bottom line is: check your plan rules.
Last edited by House Blend on Sun Aug 25, 2013 8:10 am, edited 1 time in total.
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Re: If 457(b) and 401(k) are both offered, prefer which?

Postby stevep001 » Sun Aug 25, 2013 8:02 am

In the set of plans I participate in, the main benefit is what you cite -- the increased tax advantaged space.

I max out both the 401k space and the 457 space. In addition to the difference in withdrawal penalties, you should also look a the types of investments and their costs in each plan.

In the plans I participate in, on retirement/separation money can go from 457 -> 401k, but not in the opposite direction.
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Re: If 457(b) and 401(k) are both offered, prefer which?

Postby Spirit Rider » Sun Aug 25, 2013 8:23 am

1) There are a few reasons that a government employer may offer both a 457 and a 401k that I know about. You have already identified one benefit of a 457, money can be withdrawn any time after separation without penalty (taxes still apply and maybe 4)). An employer match can be provided in a 401k and not in a 457. Yes you can contribute the max to both plans, effective doubling the normal max contributions. Also, 457 plans have a special catch-up contribution that allows a person over 50 within 3 years of retirement to double their max contribution. So in 2013 you could literally contribute $17.5K + $17.5K (457) and $17.5K + $5.5K (401k) for a total of $58K.

2) It is really up to you given the above reasons and there may be more that I don't know about. However, if you are contemplating retirement earlier than 55, a 457 normally gives you a more seamless option. This is provided you misunderstood the NC 457 rules in 4).

3) Here again, it is a personal decision based on the above and any other information other responses provide.

4) It is only Roth IRAs where you can withdraw contributions at any time. This does not apply to a Roth 401k. A Roth 401k is also subject to RMDs at 70 1/2, not Roth IRAs. The 457 penalty free withdrawals are not age restricted by the IRS. However, I don't know if the employer can have such a requirement. Maybe you read it in the 401k literature. You can withdraw at age 55 if you retire from the administrator of your current 401k plan. Normal 401k withdrawals from previous employers or not at separation are restricted to >= 59 1/2

If you want to retire before 55 and your are correct about the NC 457 rule, there is an IRS rule 72(t) the allows for "substantially equal periodic payments" (SEPPs). If you follow this rule for early withdrawals, you are not subject to the 10% penalty.
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Re: If 457(b) and 401(k) are both offered, prefer which?

Postby tidalwave10 » Sun Aug 25, 2013 2:04 pm

Thanks House Blend, Steve P, and Spirit Rider for the responses and great info. The State of NC Plan is with Prudential, incidentally. I'll read the Plan rules closely as suggested. Unfortunately the State does no matching with the 401k. So no advantage there over the 457b. I believe the investment options and fees are identical between the two plans--will have to double-check.

I do have questions about the investment options generally with the Prudential-brokered State of NC plans vs. Vanguard if anyone out there works for the State of NC. Or rather, looking for Three Fund / Lazy Portfolio suggestions using the Pru funds. I do have a non-Roth IRA with Vanguard (rollover from a former employer). Hope some day to rollover again to Vanguard if and when I separate. Looking, of course, to go all Index. But for the bond portion, I'm wondering how Pru's Fixed Income Index fund differs from its actively managed Fixed Income fund--the former seems to have out-performed the Index fund. Not necessarily interested in chasing past returns--that would be a most unlike BH thing to do. But I do wonder if there's any last advantage to an actively managed Fixed Income fund over an index in that asset class. More of a curiosity than anything else. And to be sure I don't stray.

Spirit Rider wrote:1) There are a few reasons that a government employer may offer both a 457 and a 401k that I know about. You have already identified one benefit of a 457, money can be withdrawn any time after separation without penalty (taxes still apply and maybe 4)). An employer match can be provided in a 401k and not in a 457. Yes you can contribute the max to both plans, effective doubling the normal max contributions. Also, 457 plans have a special catch-up contribution that allows a person over 50 within 3 years of retirement to double their max contribution. So in 2013 you could literally contribute $17.5K + $17.5K (457) and $17.5K + $5.5K (401k) for a total of $58K.

2) It is really up to you given the above reasons and there may be more that I don't know about. However, if you are contemplating retirement earlier than 55, a 457 normally gives you a more seamless option. This is provided you misunderstood the NC 457 rules in 4).

3) Here again, it is a personal decision based on the above and any other information other responses provide.

4) It is only Roth IRAs where you can withdraw contributions at any time. This does not apply to a Roth 401k. A Roth 401k is also subject to RMDs at 70 1/2, not Roth IRAs. The 457 penalty free withdrawals are not age restricted by the IRS. However, I don't know if the employer can have such a requirement. Maybe you read it in the 401k literature. You can withdraw at age 55 if you retire from the administrator of your current 401k plan. Normal 401k withdrawals from previous employers or not at separation are restricted to >= 59 1/2

If you want to retire before 55 and your are correct about the NC 457 rule, there is an IRS rule 72(t) the allows for "substantially equal periodic payments" (SEPPs). If you follow this rule for early withdrawals, you are not subject to the 10% penalty.
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Re: If 457(b) and 401(k) are both offered, prefer which?

Postby Twins Fan » Sun Aug 25, 2013 6:02 pm

Spirit Rider wrote:1) There are a few reasons that a government employer may offer both a 457 and a 401k that I know about. You have already identified one benefit of a 457, money can be withdrawn any time after separation without penalty (taxes still apply and maybe 4)). An employer match can be provided in a 401k and not in a 457. Yes you can contribute the max to both plans, effective doubling the normal max contributions. Also, 457 plans have a special catch-up contribution that allows a person over 50 within 3 years of retirement to double their max contribution. So in 2013 you could literally contribute $17.5K + $17.5K (457) and $17.5K + $5.5K (401k) for a total of $58K.


Not sure where you got your information from there, but I'm in a government 457b plan and a couple things are very different that what you say. I do get an employee match in my plan/account, but only $17,500 can be contributed total. So... say my match from the employer is $3500, then the most I can contribute is $14,000... for $17,500 total per year (going off current max. amount). I had questions about that, asked around, and others confirmed if one gets an employer match the combined total contributions can not go over the yearly max. amount. And, some with a 457b don't get a match from their employer.

Also, the catch up contribution for those over 50 in my plan is only $5500 just like the others. So, currently $23,000 for those folks, and again that's combined contributions.

I don't think these are state to state kind of plans, so I would like to see where you got the no match and double up contributions for those over 50.
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Re: If 457(b) and 401(k) are both offered, prefer which?

Postby mah001 » Sun Aug 25, 2013 7:50 pm

IRC section 457(b)(3) allows the plan to choose to have the "double the contibution" provision. It doesn't mention age 50 but is instead based on the employee's 3 years PRIOR TO the plan's normal retirement age.

457 doesn't contain nondiscrimination rules, so employer can contribute $17,500 for employee A while employee B has to contribute out of his own salary. There is no doubling up of the basic limit; the 17,500 is the total of employer deferrals plus employee deferral contribution.

If also in 401(k) plan, that's a separate limit.

457 plan isn't normally subject to 10 percent penalty. Exception for amount rolled to or from a plan that is subject.
See i.r. Regulations section 1.457 for more information.
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Re: If 457(b) and 401(k) are both offered, prefer which?

Postby seamonkey » Sun Aug 25, 2013 11:23 pm

Another important difference, but one that doesn't appear to pertain to you, is that if the 457(b) is not established by a government employer, then the money in the plan can be seized by creditors if the employer goes bankrupt. If this is the case, then the 401(k) should be preferred.
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Re: If 457(b) and 401(k) are both offered, prefer which?

Postby Spirit Rider » Mon Aug 26, 2013 9:36 am

Twins Fan wrote:
Spirit Rider wrote:1) There are a few reasons that a government employer may offer both a 457 and a 401k that I know about. You have already identified one benefit of a 457, money can be withdrawn any time after separation without penalty (taxes still apply and maybe 4)). An employer match can be provided in a 401k and not in a 457. Yes you can contribute the max to both plans, effective doubling the normal max contributions. Also, 457 plans have a special catch-up contribution that allows a person over 50 within 3 years of retirement to double their max contribution. So in 2013 you could literally contribute $17.5K + $17.5K (457) and $17.5K + $5.5K (401k) for a total of $58K.


Not sure where you got your information from there, but I'm in a government 457b plan and a couple things are very different that what you say. I do get an employee match in my plan/account, but only $17,500 can be contributed total. So... say my match from the employer is $3500, then the most I can contribute is $14,000... for $17,500 total per year (going off current max. amount). I had questions about that, asked around, and others confirmed if one gets an employer match the combined total contributions can not go over the yearly max. amount. And, some with a 457b don't get a match from their employer.

Technically, what you have is a 457 non-elective employer contribution not a match. A 401k can have a non-elective employer contribution called profit sharing. The difference between the two is that a 401k can also have an employer match. I realize this might be a distinction without a practical difference, but it is a difference.
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Re: If 457(b) and 401(k) are both offered, prefer which?

Postby Mudpuppy » Mon Aug 26, 2013 12:50 pm

The special catchup provisions in a 457(b) relate to how much contribution space you didn't take advantage of earlier in your career with that employer. Let's say you start and you max your contributions every single year. In that case, you are limited to the standard $5.5k catchup. But if you start and you do not max your contributions every year, you can contribute (edit: catchup contributions in addition to regular contributions) up to $17.5k or (non-utilized contribution space)/3, whichever is lesser. For most people, the lesser is $17.5k. You can only do this particular 457b catchup in the last 3 years of employment; before then you are limited to the standard $5.5k catchup. That's how it works in CA at least.
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Re: If 457(b) and 401(k) are both offered, prefer which?

Postby tidalwave10 » Sun Sep 01, 2013 8:04 am

Thanks to all. I've enrolled in my employer's 457b plan and am now directing 100% of future contributions to it rather than the 401k.

If anyone is in the State of NC's 401k and/or 457b plans (Prudential unfortunately rather than VG), I'd be interested in hearing your thoughts on the Fixed Income fund vs. the Fixed Income Index fund. Would you go 50/50 in each for the bond portion? Or 100% in one or the other?
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Re: If 457(b) and 401(k) are both offered, prefer which?

Postby tidalwave10 » Sun Sep 08, 2013 11:17 am

Any further thoughts on this strategy?
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Re: If 457(b) and 401(k) are both offered, prefer which?

Postby tibbitts » Sun Sep 08, 2013 12:06 pm

I have no knowledge of NC but assume you can choose between an intermediate bond fund or a stable value fund. It's probably not a bad rule of thumb to put your largest contribution into whichever yields more. Given no restrictions on transfers to/from stable value, I might even choose that with a slightly lower yield.

Paul
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Re: If 457(b) and 401(k) are both offered, prefer which?

Postby tidalwave10 » Wed Sep 11, 2013 5:25 pm

tibbitts wrote:I have no knowledge of NC but assume you can choose between an intermediate bond fund or a stable value fund. It's probably not a bad rule of thumb to put your largest contribution into whichever yields more. Given no restrictions on transfers to/from stable value, I might even choose that with a slightly lower yield.

Paul


Thanks Paul.

They offer the following:

* Fixed Income Fund (has yielded more than the Index over its lifetime; but expenses, I believe, are double vs. the Index)
* Fixed Income Index Fund
* Stable Value Fund like you mentioned; but presumably that's considered "cash", e.g. money market and CDs. I wouldn't consider that to be the same Asset Class as the two bond funds on offer.
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Re: If 457(b) and 401(k) are both offered, prefer which?

Postby tidalwave10 » Sat Oct 05, 2013 2:40 pm

tidalwave10 wrote:
They offer the following:

* Fixed Income Fund (has yielded more than the Index over its lifetime; but expenses, I believe, are double vs. the Index)
* Fixed Income Index Fund
* Stable Value Fund like you mentioned; but presumably that's considered "cash", e.g. money market and CDs. I wouldn't consider that to be the same Asset Class as the two bond funds on offer.


Anyone out there familiar with these funds offered by the State of NC's retirement plans and how those particular funds differ?
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Re: If 457(b) and 401(k) are both offered, prefer which?

Postby EHoops » Sun Oct 06, 2013 7:55 am

I'm late to this thread but we have access to all options (401K, 403B, 457B) like many/most people. One significant difference for us is that the fees for the 457 are quite a bit higher than for the 401K so that has always bugged me. Of course, there is the value of tax-advantaged space, yet the fees were above 1% last I checked.

Best wishes.
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Re: If 457(b) and 401(k) are both offered, prefer which?

Postby tidalwave10 » Sun Oct 06, 2013 8:05 am

EHoops wrote:I'm late to this thread but we have access to all options (401K, 403B, 457B) like many/most people. One significant difference for us is that the fees for the 457 are quite a bit higher than for the 401K so that has always bugged me. Of course, there is the value of tax-advantaged space, yet the fees were above 1% last I checked.
Best wishes.


Sorry the fees are higher for your 457. That was one thing I wanted to be absolutely sure of--no difference in fees between our 40k1 and 457b. Wow, 3 tax-advantaged options seems extraordinary. I can't max-out two plans--and am not even maxing out one, for other reasons. But with a pension available, I'm looking at the 457b as potential Demand Money for early retirement, e.g. pay current taxes but no 10% penalty once I separate from service. Can't do a no-10% penalty early withdrawal while still working for the State.
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Re: If 457(b) and 401(k) are both offered, prefer which?

Postby nirvines88 » Sun Oct 06, 2013 9:39 am

tidalwave10 wrote:Thanks to all. I've enrolled in my employer's 457b plan and am now directing 100% of future contributions to it rather than the 401k.

If anyone is in the State of NC's 401k and/or 457b plans (Prudential unfortunately rather than VG), I'd be interested in hearing your thoughts on the Fixed Income fund vs. the Fixed Income Index fund. Would you go 50/50 in each for the bond portion? Or 100% in one or the other?


I too work for NC and have to decide between the 457 and 401k. With early retirement a potential goal...I'm wondering if I should go with the 457. Any issues so far, tidalwave10?
"Beware of little expenses, a small leak will sink a great ship" - Poor Richard
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Re: If 457(b) and 401(k) are both offered, prefer which?

Postby Lafder » Sun Oct 06, 2013 12:34 pm

I thought:

The 401k maximum 2013 employee pretax contribution is $17,500. (plus $5500 if over 55)

The employer match can be in excess of this amount. And some plans allow after tax contributions over this amount as well.

The sum of all 401k contributions can not be over $51,000 for 2013. But there are percent of income exclusions, I believe 25%.

Is the TOTAL 457b annual amount $17,500 ? In which case more can be put away in a 401k?

Still trying to make sense of it all.

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Re: If 457(b) and 401(k) are both offered, prefer which?

Postby LowER » Sun Oct 06, 2013 12:43 pm

Lafder wrote: But there are percent of income exclusions, I believe 25%.


What does this mean?
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Re: If 457(b) and 401(k) are both offered, prefer which?

Postby Mudpuppy » Sun Oct 06, 2013 2:37 pm

Lafder wrote:I thought:

The 401k maximum 2013 employee pretax contribution is $17,500. (plus $5500 if over 55)

The employer match can be in excess of this amount. And some plans allow after tax contributions over this amount as well.

The sum of all 401k contributions can not be over $51,000 for 2013. But there are percent of income exclusions, I believe 25%.

Is the TOTAL 457b annual amount $17,500 ? In which case more can be put away in a 401k?

Still trying to make sense of it all.

Lafder

The annual limit to a 457b is $17,500, with additional catch-up provisions that fall into two categories that I'll loosely call "standard" and "special". Standard catch-up is $5500 a year when 50 years and over. Special catch-up can only be done in the last 3 years before "normal" retirement (definition of normal depends on employer) and cannot be done at the same time as a standard catch-up. Special catch-up allows additional contributions equal to the minimum of a) $17,500 or b) 1/3 of unused contribution space over the time you've been employed. For most people, they have at least 3x$17,500 of unused contribution space over the term of their employment, so the special catch-up usually works out to an additional $17,500 catch-up contribution in the last three years before retirement.

With respects to after-tax contributions to 401k plans, employers are not required to offer this provision of 401k plans. Government employers with pension plans also rarely offer a match in 401k plans, although some states are switching to the "three leg" model with a smaller pension and matches in the voluntary retirement plans (401k, 403b, 457b, etc). For CA Savings Plus Program, there are no matches at the state level and no after-tax contributions to the 401k plan. So the 401k contribution is just $17,500 plus the $5500 catch-up around here. The OP would need to look at the plan documents for NC to see what the situation is in that state.

Also keep in mind that contributions to a 457b plan DO NOT count against contributions to a 401k/403b plan. It's only contributions to 401k and 403b plans that have to be coordinated and count against the same limit. The 457b contribution space is an entirely different contribution space. So if you are a high earner (or low spender and moderate earner), the most contribution space that can be utilized is a combination of the 457b plan with either the 401k or 403b plan. The OP however is trying to determine which of the two options is best given that contribution space in even one cannot be maximized.
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Re: If 457(b) and 401(k) are both offered, prefer which?

Postby tidalwave10 » Mon Oct 07, 2013 6:49 am

nirvines88 wrote:
tidalwave10 wrote:Thanks to all. I've enrolled in my employer's 457b plan and am now directing 100% of future contributions to it rather than the 401k.

If anyone is in the State of NC's 401k and/or 457b plans (Prudential unfortunately rather than VG), I'd be interested in hearing your thoughts on the Fixed Income fund vs. the Fixed Income Index fund. Would you go 50/50 in each for the bond portion? Or 100% in one or the other?


I too work for NC and have to decide between the 457 and 401k. With early retirement a potential goal...I'm wondering if I should go with the 457. Any issues so far, tidalwave10?


None so far that I'm aware of re: early retirement. But I'm not an expert on the subject. There could be hidden "gotchas" I've not yet discovered. For those who continue to work for the State above the retirement age of 65, there's a difference between the 457 and the 401k, but I don't recall what it is since it doesn't apply to my situation. May be something about mandatory minimum withdrawals if you're still in Service with the State.

Wished I'd started with the 457 plan years ago. But then it may have been structured differently then, e.g. perhaps different investment choices and/or fees.

Don't see the point in working up to traditional retirement age when I've seen many colleagues' health deteriorate in their 60's. And so they either must love the job more than anything else in life--or didn't plan properly? Don't know.

There also seems to be a general obsession with hanging on to squeeze out small extra bits of future payment from the pension plan, either by working extra years or stockpiling vacation time. I use vacation time for its intended purpose--to relax, re-energize, and enjoy things like travel now, while I'm in good health and have mobility.
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