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Bob Morningstar

Advice On Handling 457b After Leaving Company

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I recently voluntarily left my company after 13 years for a better opportunity.

 

My old company is a non-governmental 501c4 not-for-profit with a 401k for all and a 457b for certain employees.

 

My new employer is a not-for-profit 501c3 without a 457b program (unfortunately).

 

I'm 46 and have 14 years to my planned retirement date (hopefully). I have a substantial sum in the 457b.

 

It is my understanding, please correct me if I get it wrong, that I may:

 

1) Withdraw now and pay fed and state income tax (no 10% penalty).

2) Leave it with my employer until a date I specify then start a distribution.

 

The employer has a decent future, but what if.....? I hate the fact that this money is a risk to company demise, bankruptcy, etc. My gut says take it out, pay the taxes, and put the remainder into my IRA.

 

Questions:

1) If I leave it there and the employer elects to discontinue the program, what happens to my funds?

2) Can I take it out in some other form other than a lump sum?

 

What would you do? I have very little debt and I am a conservative investor.

I am not asking for investment advice per se, just need some guidance on the 457b portion of my investment portfolio.

 

I apologize for asking here, the HR benefits specialist at my old company is completely clueless on 457b, she is new to the company and never heard of one till now.

 

 

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I may: 1) Withdraw now and pay fed and state income tax (no 10% penalty).

Probably yes. The 457(b) plan has a document that will spell out the timing of when you are truly eligible for a payment. It is most likely that the document allows for a full payment sometime shortly after termination of employment, but it might not - you should look at the plan's language to be certain.

 

Or I may 2) Leave it with my employer until a date I specify then start a distribution.

True. Again the 457(b) plan document has a lot to say about how this is accomplished - what must be signed by exactly what deadline in order to make this happen. An election to delay means you must decide on a future date now, and your distribution cannot occur before reaching that future date. That means you will NOT be able to change you mind later to say "I really didn't want to wait that long, please pay me earlier." Thus, a decision to delay is an important decision and the future of the company itself is an important factor.

 

My gut says take it out, pay the taxes, and put the remainder into my IRA.

Unfortunately, you cannot roll over your 457(b) to an IRA (none of it). If your employer was a government, then you could roll it over. Some say that historically speaking, the current time could be considered a period when income taxes were at somewhat of a low point, so paying income taxes now might not be a bad decision, but I am not a tax guy and this is just a freelance message board, so don't take that as advice, talk to a CPA or tax advisor about that.

 

1) If I leave it there and the employer elects to discontinue the program, what happens to my funds?

Unless they are bankrupt, they must pay the amounts agreed upon under the terms of the plan. The plan document itself has a claims procedure that spells out your rights to make a claim for your benefits. I don't know that you would be eligible to receive your benefits any earlier than the plan would have otherwise paid, but I could be wrong about that - I am not an expert on 457(b) plan terminations. If you are really curious, I could look into it after the end of 2008 (I still have a lot of 403(b) plan documents to finalize).

 

2) Can I take it out in some other form other than a lump sum?

The plan document should spell out exactly what forms of payment are available from the plan. You can only take it out in one of those forms of payment. Most 457(b) plans have some type of an installment option (or something similar to an installment option).

 

What would you do?

I'd post my questions in some 457(b) message board and see what kind of wild answers I get! ;)

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