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Until the 2001 tax changes, IMO the 401k plan was superior to the 457 plan when you could choose between the two plans. With the 2001 changes, the 457 plan now looks slightly better. The contribution limits were raised to match 401ks. You can now rollover the money in the account to other retirement plans. The big difference between the 457 and 401k plan is that there is no 10% penalty for early withdrawls in the 457 plan.

I know you can contribute to both the 457 and 401k plans. It would be nice to have that much spare cash lying around. The Roth IRA is funded. So if your finances only allow one plan to be funded, which plan would you choose? Is there any disadvantages to using the 457 over the 401k? In this case, the fees are comparible between the plans. The 457 has better investment options.

Another question: Should I rollover the current 401k plan into the 457? I do understand the money rolled from the 401k to the 457 retain the 10% penalty if withdrawn before 59 1/2.

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Greetings, Moiless, and welcome. You asked:

Until the 2001 tax changes, IMO the 401k plan was superior to the 457 plan when you could choose between the two plans. With the 2001 changes, the 457 plan now looks slightly better. The contribution limits were raised to match 401ks. You can now rollover the money in the account to other retirement plans. The big difference between the 457 and 401k plan is that there is no 10% penalty for early withdrawls in the 457 plan.

I know you can contribute to both the 457 and 401k plans. It would be nice to have that much spare cash lying around. The Roth IRA is funded. So if your finances only allow one plan to be funded, which plan would you choose? Is there any disadvantages to using the 457 over the 401k? In this case, the fees are comparible between the plans. The 457 has better investment options.


In the absence of an employer match in either plan and given that after you leave the employer sponsoring the plan you may take a distribution from the 457 plan before age 59 1/2 without having to worry about paying an early withdrawal penalty, my inclination is to go with that plan over the 401(k). That's especially true if the investment options are better in the 457 plan than in the 401(k).

Another question: Should I rollover the current 401k plan into the 457? I do understand the money rolled from the 401k to the 457 retain the 10% penalty if withdrawn before 59 1/2.

The decision is yours, but if the investment options are better in the 457 plan and if that plan accepts a transfer from the 401(k), then why would you prefer leaving the money in the 401(k)? Seems to me you would wish to put your money where it has the best chances of growth, no?

Regards..Pixy

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In the absence of an employer match in either plan and given that after you leave the employer sponsoring the plan you may take a distribution from the 457 plan before age 59 1/2 without having to worry about paying an early withdrawal penalty, my inclination is to go with that plan over the 401(k). That's especially true if the investment options are better in the 457 plan than in the 401(k).

Pixy, thanks for your response. I have read the materials and looks at websites for information on the 401k and 457 plans. When I ask for disadvantages between the plans, what I am asking for are the little details many people fail to ask about. Specifically, are there any legal protections (i.e. bankrupcy, divorce, legal judgements) that make one plan better than the other?

The decision is yours, but if the investment options are better in the 457 plan and if that plan accepts a transfer from the 401(k), then why would you prefer leaving the money in the 401(k)? Seems to me you would wish to put your money where it has the best chances of growth, no?

I misspoke. The 457 plans have more investment options than the 401k. Both have index funds, bond funds, large cap, mid cap, small cap, value, and international funds. The 457 plans just have more choices for each type of fund. The 457 has over 22 choices versus 8 choices for the 401k. Also, you can invest in other funds if you directly make a request of the 457 administrator. Yes, more choices don't mean better choices. I have more research to do.


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Moiless writes:

When I ask for disadvantages between the plans, what I am asking for are the little details many people fail to ask about. Specifically, are there any legal protections (i.e. bankruptcy, divorce, legal judgments) that make one plan better than the other?

Since the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), there is little difference between the two (i.e, 457 vis a vis 401(k)). Still, non-governmental 457 plans don't play by all of the same rules as do governmental 457 plans. A major difference exists when it comes to the claims of creditors. The 457 plan assets of tax-exempt employers are subject to the claims of the employer's creditors, but those of plans sponsored by governmental entities are not. And the 457 plan assets aren't subject to the early withdrawal penalty.

The 457 plans have more investment options than the 401k. Both have index funds, bond funds, large cap, mid cap, small cap, value, and international funds. The 457 plans just have more choices for each type of fund. The 457 has over 22 choices versus 8 choices for the 401k. Also, you can invest in other funds if you directly make a request of the 457 administrator. Yes, more choices don't mean better choices. I have more research to do.

All else being equal, then the more extensive choices argue in favor of the 457. However, as you say, you have more research to do, and only you can do that.

Regards..Pixy
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