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.
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®
Typically, I would not advise paying taxes any earlier than necessary, so the first option to take all the money out is usually not recommended. However, some factors to consider in determining the right answer:
1. Are you still working?
2. Beside any anticipated changes in the tax laws, do you expect your tax rate to increase significantly in the future?
3. What is your expected annual need from the portfolio? In other words, how much do you need for spending from the 457B?
4. Do you have plans to pass the assets to heirs?
5. What are your investment options in the current 457B?
Most likely, keeping the funds in their tax-deferred status by either leaving them in the 457B or rolling them into an IRA is the best option, especially if you are getting a return on the investments in the account. Either way, with these two options, you will have to fulfill the Required Minimum Distribution (RMD) distributions at a minimum. One reason to rollover to an IRA is that typically you have more choices on how to invest the funds.
You have a serious concern that could affect your retirement. Allow me to address each option and I hope it provides some insight.
1- Option to take the cash and run, but Uncle Sam will collect his tax and increase your taxable income. Not a good situation.
2 &3 - The RMD situation is the same while in the 457 and if you roll it over into an IRA.
Pro’s & Con’s.
If the money stays in the 457, what type of program is it in? Is it an annuity contract (TSA or Tax Sheltered Annuity) with a general account option (conservative interest bearing account) and sub accounts (mutual funds)? I ask this because 457’s generally are with non-profit or government type organizations. If so, you might have an interest rate in the general account that might have some guarantees and some mutual funds in the sub accounts. However, if the interest isn’t favorable, it could be impacted as interest rates rise. If the account is not in an annuity and has traditional mutual funds then my question is what is the quality and cost of investments available?
If you rollover the account into an IRA,then you could do a combination of things that addresses your concerns. Additionally, you would have greater control over the assets. Without knowing your goals it is hard to get specific and wouldn’t want to confuse you with jargon. I am a fee based advisor and offer a complimentary 30 minute goal planning session to help get an understanding of a person’s situation and concerns. I hope this helps you know what to look for and reach out directly if you have questions that are more specific.
I certainly wouldn't take it all out now and pay ordinary income tax on an additional $450,000 of income. Moving it into an IRA will likely give you the most amount of options. From there the investment spectrum is quite large. Typically an annuity wouldn't be my first plan of attack here, but what you are describing seems to suggest that might be worth exploring. I would consider some form of variable annuity likely to maximize income and continue to keep ownership of the assets. It is as close to predictable as you are going to get in the investment world. Happy to answer any other questions on this or other options if you would prefer. Best of luck and hope this helped.
If you're happy with the investments you hold in your 457(b) and do not plan to change them, then there's no real advantage in rolling it over into an IRA. If you'd like to change your investments, then rolling into an IRA will allow you a lot more freedom of choice as to what you hold inside the plan.
Regarding withdrawal rates, generally it's a better idea to take installments of the required minimum amounts. This will allow you to keep the income tax rates on the withdrawals as low as possible