What strategy should I employ for taking funds from my 457(b) retirement account?

I’m 70 years old and soon will have to take minimum withdrawals from my 457(b) account which has about $450,000 in it. I'm considering three options on how to take the withdrawals. Should I take all the money out at once and pay taxes at current reduced rates, take it in installments of the required minimum amounts, or consider rolling it over into an IRA? I’m not a risk taker and would prefer a decent guaranteed rate on my investments.

Retirement, Investing, IRAs, Taxes
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June 2018

That's a great question, and I would start by saying don't withdraw all of the funds at once.  The tax impact would be significant, because it would throw you into a high tax bracket, and impact the taxability of your Social Security benefits if you're eligible and currently receiving them.  That leaves you with 1) taking just your RMDs and leaving the rest in your 457 plan, or 2) taking your RMDs and rolling all or a portion to an IRA account.

It is true that most 457 plans have limited investment options so you may not have a great money market or fixed account available to you.  If the government entity that you worked for was a large city or state then your fees are likely competitive.  If you worked for a smaller city or county then unfortunately the plan may be expensive, and you might be better off rolling into an IRA account.  If you can look at the expense ratios for your investment options they should be under 1%.  If most of the investment options are over 1% (especially over 1.5%) then you are likely getting hit with high fees and may be better off in an IRA account.

I would challenge you to consider this though.  Any investment options that offer guaranteed rates of return right now are offering very low guarantees.  You have a $450,000 account that you haven't touched until the IRS said you had to.  That sounds like you are financially secure, and while this money is important to you, it doesn't sound like its market fluctuations would significantly impact your financial security.  It is this financial security that gives you the flexibility to take some risk.  There's no need to go crazy and try to earn 10% a year, but a moderately conservative portfolio designed to return you 4-5% per year sounds like it could help grow your portfolio and give you some sense of peace.

I'd suggest you speak with a fee only financial advisor, and see how they would propose managing those funds.  If you have target date funds in your 457 plan then even the most conservative fund should have 25-30% equity exposure which I think would be appropriate to help fight inflation and allow you to grow your assets.

Good luck to you,

Matt Ahrens, CIMA®

June 2018
June 2018
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June 2018