Debating on a Roth or traditional retirement plan is usually as involved as choosing a retirement account gets. But, last year I was thrown for a loop. I was offered the holy grail of retirement plans. The 457(b) deferred compensation plan. This plan isn’t anything like an IRA, 401k, or 403b. The 457b is a different beast entirely, made up of everything that makes other retirement accounts great without the added penalties.
What Benefits Come With a 457(b) Plan?
A 457b plan allows for contributions of up to $18,500 (2018 numbers), the same as a 401k or 403b. However, there are two main distinctions from these more traditional retirement options. For one, you can contribute to the 457b even after maxing out both an IRA and 401k. That’s over $40,000 in tax-sheltered investing.
Now if that wasn’t enough, the 457b plan allows for a traditional or Roth option, but there is no early withdrawal penalty. Accessing retirement savings before 59.5 without penalty is a common dilemma for early retirees. The lack of a penalty makes the 457b plan a perfect fit for early retirement hopefuls.
So to tally up the benefits column:
- Tax-deferred investing
- Roth or traditional options
- No early withdrawal penalty
- High limit, $18,500 for 2018
- Can be used in combination with a 401k or 403b for an even bigger limit
Roth or Traditional
For my employer’s plan, I was given the option of a traditional or Roth 457b. Currently, my qualified retirement accounts are split 50/50 between Roth and traditional options. I have my 403b contributions set up as a Roth and the employer match set up as traditional.
Under other qualified retirement plan circumstances, I would choose the Roth option so that I could pull the money out without penalty and not have the gamble on tax rates changing. However, since there is no penalty for early withdraw, I chose the traditional option. I’ll have to pay taxes when I withdraw, but I won’t have any issue accessing these funds before 59.5.
Thankfully there are Fidelity index funds available through this plan so I can continue the joy of low expense investing.
Seek the Grail
I had read about the 457b plan and other more rare retirement plans when I studied for the Series 65 exam, but I never appreciated the benefits it provides until I took this new job and started making financial independence and early retirement a priority. Unfortunately, a 457b plan is rare. This plan is only available to state and local governments and tax-exempt organizations.
If you have the opportunity to work for one of these organizations, don’t assume your only retirement option is a 403b. Do your research and contact human resources, ideally before applying.
Even with its many benefits, many of my coworkers have no idea that they have a 457b plan available to them, much less know what it is. Even fewer take advantage of this benefit. I guess this comes as no surprise since many along the traditional finance path don’t max out their 403b.
photo credit: youtube Monty Python and the Holy Grail