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Subject:  Re: 401k vs. 457 Date:  5/21/2002  11:31 AM
Author:  TMFPixy Number:  34574 of 103146

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 I do understand the money rolled from the 401k to the 457 retain the 10% penalty if withdrawn before 59 1/2.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?


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