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457b Question

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THANK YOU FOR YOUR HELP. I WILL BE RETIRING AT AGE 55. IF I TAKE MY 457B MONEY & BUY TAX FREE MUNICIPAL BONDS WHAT TAX IMPLICATIONS WOULD I BE LOOKING AT? I DONOT PLAN ON TOUCHING THE BASE BUT WOULD LIKE TO HAVE THE 4 TO 5 PERCENT IT MAKES....THANKS AGAIN

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THANK YOU FOR YOUR HELP. I WILL BE RETIRING AT AGE 55. IF I TAKE MY 457B MONEY & BUY TAX FREE MUNICIPAL BONDS WHAT TAX IMPLICATIONS WOULD I BE LOOKING AT? I DONOT PLAN ON TOUCHING THE BASE BUT WOULD LIKE TO HAVE THE 4 TO 5 PERCENT IT MAKES....THANKS AGAIN

 

Any money in your 457 upon distribution will be added to your income for the year of distribution regardless of what investment vehicle was used during the accumulation phase. This will, in fact, not be "tax free" income since you are not investing in a taxable account. I am assuming you are trying to accomplish this within your 457 or an IRA. You will have a fully distributable event if you take the 457 out, and purchase the muni bonds with that money.

 

 

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can I move my 457 money to another investment, such as a muni fund, collect the interest and pay the tax on my earnings? Again I will only be 55 yrs old...

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THANK YOU FOR YOUR HELP. I WILL BE RETIRING AT AGE 55. IF I TAKE MY 457B MONEY & BUY TAX FREE MUNICIPAL BONDS WHAT TAX IMPLICATIONS WOULD I BE LOOKING AT? I DONOT PLAN ON TOUCHING THE BASE BUT WOULD LIKE TO HAVE THE 4 TO 5 PERCENT IT MAKES....THANKS AGAIN

 

 

Any distribution of your 457b funds will be taxed at marginal income tax rates that could be anywhere from 15 to 35% plus any applicable state income tax. This will reduce the amount that you could invest for your retirement. After the funds are distributed you could purchase any investment including muni bonds. If you purchase muni bonds issued by your state or a municipality located in your state the income will usually be exempt from federal and state income tax. This is why muni bonds pay a low rate of interest. Unless you are in the 25% bracket or higher muni bonds do not provide a good rate of return on for the amount invested.

 

If you participate in a govt 457b plan you could rollover the funds tax free to an IRA and receive a better rate of return on you investment than muni bonds pay and the earnings would compound tax free. You would only be taxed as you receive the distributions. You could take distributions from the 457b plan at any time before 59 1/2 without paying the 10% penalty tax if the only funds in the plan were contributions to the 457b plan.

 

If you participate in a non profit 457b you cannot rollover the funds to an IRA.

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Guest Sierra

 

THANK YOU FOR YOUR HELP. I WILL BE RETIRING AT AGE 55. IF I TAKE MY 457B MONEY & BUY TAX FREE MUNICIPAL BONDS WHAT TAX IMPLICATIONS WOULD I BE LOOKING AT? I DONOT PLAN ON TOUCHING THE BASE BUT WOULD LIKE TO HAVE THE 4 TO 5 PERCENT IT MAKES....THANKS AGAIN

 

 

Any distribution of your 457b funds will be taxed at marginal income tax rates that could be anywhere from 15 to 35% plus any applicable state income tax. This will reduce the amount that you could invest for your retirement. After the funds are distributed you could purchase any investment including muni bonds. If you purchase muni bonds issued by your state or a municipality located in your state the income will usually be exempt from federal and state income tax. This is why muni bonds pay a low rate of interest. Unless you are in the 25% bracket or higher muni bonds do not provide a good rate of return on for the amount invested.

 

If you participate in a govt 457b plan you could rollover the funds tax free to an IRA and receive a better rate of return on you investment than muni bonds pay and the earnings would compound tax free. You would only be taxed as you receive the distributions. You could take distributions from the 457b plan at any time before 59 1/2 without paying the 10% penalty tax if the only funds in the plan were contributions to the 457b plan.

 

If you participate in a non profit 457b you cannot rollover the funds to an IRA.

 

 

I am not sure what your plans are but please do not buy tax free bonds inside of your 457 investment account because it is against the rules. Only taxable investments belong in a pre-tax account ie corporate stocks and bonds, annuities, mutual funds, bank deposits. Tax free interest bonds are to be bought with money that has previously been taxed. This is called an "open account". Capital gains/losses when you sell the bonds must be reported in a timely fashion. Capital gains and losses have no application in a pre-tax retirement investment account.

 

Having said all that, it is the rare bird that will benefit by taking all his money out of a pre-tax account, pay the taxes due in a single sum and then invest the remainder in tax-free bonds. Before you embark on this investment approach for your 457 accumulation you better do your homework!!

 

Joel L. Frank

Pension Columnist

The Chief-Civil Service Leader

277 Broadway

NYC 10007

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