Skip to main content
No. of Recommendations: 0
Would a deferred comp program be a good tool for early retirement? I've read debates on the other boards weighing the pros and cons of a 457b vs a Roth
IRA. I have both but have put more money in the deferred comp program instead of the Roth. (my goal is to have the ability to max out both). However, I've heard some Fools suggest that a deferred comp is a poor option regardless due to the fees and limited choices.
My job only offers a pension plan and the optional deferred comp. I jumped into the plan due to the tax benefit- I am single, no property ownership, or anything else I can think of to really save on taxes and the fact that the money would be available should I lose or leave my job.

Thanks very much
Print the post Back To Top
No. of Recommendations: 0
Greetings, Pookiefool, and welcome. You asked:

<<Would a deferred comp program be a good tool for early retirement? I've read debates on the other boards weighing the pros and cons of a 457b vs a Roth
IRA. I have both but have put more money in the deferred comp program instead of the Roth. (my goal is to have the ability to max out both). However, I've heard some Fools suggest that a deferred comp is a poor option regardless due to the fees and limited choices.
My job only offers a pension plan and the optional deferred comp. I jumped into the plan due to the tax benefit- I am single, no property ownership, or anything else I can think of to really save on taxes and the fact that the money would be available should I lose or leave my job.>>


The deferred comp plan gives you an immediate tax break on contributions, but when you leave that job the money cannot be transferred to an IRA. It will be paid to you and fully taxed at ordinary income tax rates at that time. Given the high-cost, poor investment choices offered in many such plans and in the absence of matching employer contributions, I would strongly consider the use of a Roth IRA first and then the deferred comp plan. However, before you make the choice you need to analyze all alternatives on a tax-equivalent basis. Sometimes a taxable account will result in far better results. For an idea of how to do that analysis, see Step 4 of my 13 Steps to Foolish Retirement Planning at http://www.fool.com/Retirement/Retirement.htm.

Regards..Pixy
Print the post Back To Top
No. of Recommendations: 0
...when you leave that job the money cannot be transferred to an IRA. It will be paid to you and fully taxed at ordinary income tax rates at that time.

Um, I don't know about this. When I left my last government job, I had the option of taking my deferred comp out, or leaving it be in the account until I retired. I chose to leave it be, and was then able to roll it over, IRA-style, into the deferred comp program under my new gov. job.

Print the post Back To Top
No. of Recommendations: 0
There is another disadvantage to Deferred Comp for those that have multiple employers or some self employment income. In 1998, the individual limit for contributing to employee funded programs was $10,000. But if you participate in a Deferred Comp program that limit drops to $8,000.

jbw
Print the post Back To Top
No. of Recommendations: 0
EllenE writes:

<<...when you leave that job the money cannot be transferred to an IRA. It will be paid to you and fully taxed at ordinary income tax rates at that time.>>

Um, I don't know about this. When I left my last government job, I had the option of taking my deferred comp out, or leaving it be in the account until I retired. I chose to leave it be, and was then able to roll it over, IRA-style, into the deferred comp program under my new gov. job.


That's different. To avoid taxation you left the money in the old 457 plan. You later continued tax deferral by transferring the money to a new employer's 457 plan. In effect, you haven't taken a distribution yet. When you do or must, you cannot transfer the money to an IRA. You must take it, and when you do you will pay ordinary income taxes on the sum taken.

And BTW...Not all 457 plans will allow you to leave the money there when you depart employment. The fact that yours did was just a fortunate circumstance.

Regards..Pixy
Print the post Back To Top
No. of Recommendations: 0
Thanks for the replies, I really appreciate them.

I remember the representative telling me that the money
could stay in the plan when I leave or transferred to another 457b plan if certain circumstances exist. However I was stunned to find out that the funds could not be transferred to an IRA or the money borrowed for a house downpayment.

Well if nothing else it's a learning experience

Thanks again

Michelle


Print the post Back To Top
No. of Recommendations: 0
As we know the 457b plan is deferred compensation rather than a retirement plan. This fact causes a some problems that have already been mentioned.

One problem that was ignored was the ownership of the funds within the plan. The company not you owns the funds in 457b plan. The company can not use these funds for day to day usage, but these funds are considered an asset of the company for bankruptcy. These funds can be & probably would be used to pay creditors in a bankruptcy case.
Print the post Back To Top
No. of Recommendations: 0
<<One problem that was ignored was the ownership of the funds within the plan. The company not you owns the funds in 457b plan. The company can not use these funds for day to day usage, but these funds are considered an asset of the company for bankruptcy. These funds can be & probably would be used to pay creditors in a bankruptcy case. >>

A local trucking company just went bankrupt. The first thing the union did was file a claim to make it known one of the "creditors" in the bankruptcy case is the employees wages that hadn't been paid yet. I don't know if this company had a 457 plan, but if it did it would be a court decision how much of the retirement money you were counting on you would really get.

~~paul

I'm glad to see this end up on hot topics list. I wanted to respond to the original post, but didn't feel qualified to give the full answer it deserved.
Print the post Back To Top
No. of Recommendations: 0
The employer I work for is saying that in the first of the year they will start matching a portion of our contribution to our 457 plan. In the plan I invest in a S&P 500 index fund. In my IRA I invest in stocks. I figure if I were to retire early, say at 50, then I could tap into my deferred comp and not touch my IRA until 59 1/2. Make sense?

Foolishly trying to learn.
Print the post Back To Top
No. of Recommendations: 0
One problem that was ignored was the ownership of the funds within the plan. The company not you owns the funds in 457b plan. The company can not use these funds for day to day usage, but these funds are considered an asset of the company for bankruptcy. These funds can be & probably would be used to pay creditors in a bankruptcy case.

Great point, jdbst!

IMHO very few people truly appreciate this risk you've noted. Though it may not be much of a risk if one works for a major corporation that's been around a long time, its enough of a fundamental risk that people ought to pause - a LONG pause - before they jump in.

BTW, are these 457b plans subject to ERISA and its protections? Or are they what are called "Non-qualified" plans?

Ken


Print the post Back To Top
No. of Recommendations: 0
I was able to roll my deferred comp. over to an IRA. I am now considering whether to convert that to a Roth IRA. I believe my long-term tax savings will substantially support the move.
Print the post Back To Top
No. of Recommendations: 0
Greetings, Mplkear, and welcome. You wrote:

<<The employer I work for is saying that in the first of the year they will start matching a portion of our contribution to our 457 plan. In the plan I invest in a S&P 500 index fund. In my IRA I invest in stocks. I figure if I were to retire early, say at 50, then I could tap into my deferred comp and not touch my IRA until 59 1/2. Make sense?>>

Yes, it does up to a point. Remember that when you retire you must take your 457 plan money, and any distribution will be taxed in full at ordinary rates in the year it is received. Some 457 plans will allow distributions in installments over a period of years, typically from 2 to 15 years. Others do not. In the latter case, all the money will be paid out and taxed in one year, and that can be a significant tax bite. If your 457 plan is one of those that require a single distribution, then you'll have to see if what's left after taxes will last you until you reach age 59 1/2. Other than that issue, you have a very reasonable approach to an early retirement.

Regards..Pixy
Print the post Back To Top
No. of Recommendations: 0
Ken asks:

<<BTW, are these 457b plans subject to ERISA and its protections? Or are they what are called "Non-qualified" plans?>>

They are not subject to ERISA, may discriminate, and are nonqualified for tax purposes, which is why distributions are ineligible for transfer to an IRA or anything else except another 457 plan under certain circumstances.

Regards..Pixy
Print the post Back To Top
No. of Recommendations: 0
Greetings, Aljanbeach, and welcome. You wrote:

<<I was able to roll my deferred comp. over to an IRA. I am now considering whether to convert that to a Roth IRA. I believe my long-term tax savings will substantially support the move.>>

I sincerely doubt you were able to transfer the proceeds of a deferred compensation (i.e., 457) plan to an IRA. Such plans are nonqualified and totally ineligible for such treatment. Are you sure you aren't confusing a defined contribution plan (401k, 403b, profit sharing) with a deferred compensation plan? They aren't the same thing in that the former are qualified plans and may be transferred to an IRA.

Regards..Pixy
Print the post Back To Top
No. of Recommendations: 0
"Yes, it does up to a point. Remember that when you retire you must take your 457 plan money, and any distribution will be taxed in full at ordinary rates in the year it is received. Some 457 plans will allow distributions in installments over a period of years, typically from 2 to 15 years. Others do not. In the latter case, all the money will be paid out and taxed in one year, and that can be a significant tax bite. If your 457 plan is one of those that require a single distribution, then you'll have to see if what's left after taxes will last you until you reach age 59 1/2. Other than that issue, you have a very reasonable approach to an early retirement."

I called today and asked about this. They told me I can have it distributed any way that I desire. Lump sum, annual distributions or varied distributions every month.

Thanks for responding TMFPixy
Print the post Back To Top