At the Motley Fool Answers podcast, we can tell a lot about what's on our listeners' minds by looking into the mailbag, and no surprise, right now, the topic of interest is starting to be taxes. The W-2s are rolling in, people are beginning to anticipate their tax refunds, and they're also beginning to stress about the process involved in getting them.
So for this episode, hosts Alison Southwick and Robert Brokamp recruit a special guest to sort out some of those concerns: Megan Brinsfield, head of financial planning for Motley Fool Wealth Management, and also a CFP and CPA. In this segment, she discusses the upsides of a 457 account.
A full transcript follows the video.
This video was recorded on Jan. 30, 2018.
Alison Southwick: Bro, are you ready for the next question?
Robert Brokamp: I'm ready.
Southwick: The next question is actually us trying to tackle four questions. I don't think we have ever received a question about a 4-5-7 account. Four fifty-seven? I don't even know how to pronounce it.
Brokamp: Four fifty-seven.
Southwick: Four fifty-seven. We received four questions in the last month or two about 457 accounts. So, Charles, Ben, and Matt, we hope we can cover it all by addressing Katherine's question. Katherine writes, "My company offers a 403(b) and a 457."
Southwick: "I'm not very familiar with 457s" -- neither am I, Katherine -- "but it appears as though you can withdraw the money anytime. Could that really be true? Would this be a good option to put my money in if I've already maxed out my 403(b) and am over the income limits for the Roth IRA?"
Brokamp: Yes, it is true. 457 is very similar to a 403(b) and a 401(k). Generally offered by government entities, but not exclusively. The main question that Katherine has is can you take the money out before 59 1/2 without paying a penalty and the answer is yes. That is a unique aspect of the 457.
I will add, though, that with all employer-sponsored accounts, there is what the IRS allows you to do and then what the plan provider allows you to do, so you might want to check with the provider and ask, "Can I really take the money out?" They might say you have to separate from the company before you can touch the money. But yes, as far as the IRS is concerned, you can take the money out and not pay that 10% early withdrawal penalty. You still have to pay taxes, by the way.
The other interesting thing about it is the limits are the same as the 403 and the 401(k), which for this year is $18,500 and another $6,000 if you're 50 years old or older. However, the total amount you can contribute to a 403(b) and 401(k) can only be that $18,500. You can't have a separate $18,500 for one 401(k) and then do another 403(b). A 457 is different. You can max out both accounts if you want to be a supersaver. So, yes, if you, Katherine, are not eligible for the Roth IRA, contributing to the 457 is a good possibility.
Southwick: But that's only if your employer offers it. Most people out there probably don't have this benefit.
Brokamp: Probably don't. And the other big difference between the governmental and the non-governmental 457 is that the non-governmental one is a lot more restricted in what you can do with the money after you leave, and I bring this up because it was part of one of the other questions we received. The non-governmentals have a lot of rules about what you can do when you leave your employer and when you can take the money, so be very aware of those restrictions before you decide to contribute to the account.
Megan Brinsfield: I think one other thing that we see frequently is people who had a 457 and rolled it into an IRA, not realizing that if you roll that money into an IRA, you lose that main benefit, which is being able to take the money out before 59 1/2. If you have one, you probably want to keep it intact, even after you separate from service.
Southwick: But it would stay with your former employer, right?
Brokamp: Right, and they might charge a little bit extra. That's one of the trade-offs of leaving any kind of employer-sponsored plan with your employer after you leave. You're stuck with their investment options and they might charge you a little bit more than they otherwise would charge their employees. But if you need that money before 59 1/2, it might be worth it.