We’re doctors with 457(b) plans that we can’t roll over into IRAs. What now?

My wife and I are both physicians and we have been contributing to our employer-retirement plans since residency training. This includes Roth 403(b), tax-deferred 403(b) and tax-deferred 457(b) plans. I am 60 and my wife is 56, and we expect to continue working until our 70s.

I am just now looking at the 457(b) plan rules and, as this is not a governmental 457(b), the distribution options are limited, and include a lump sum, fixed amount over a set number of years, or single- or joint-life annuities. The main issue with these plans is once you make a distribution decision, it can never be changed. 

I don’t know if there are exceptions, but according to our plan representatives, it’s basically set in stone. I think there are also RMD requirements, but our plans also require that we begin distributions at age 70 1/2. It’s unclear whether or not these hold if we stay employed past 70 years old. 

If we keep saving at our current rate, I expect that our retirement savings will be distributed as follows: 20% in our 457(b)s, 40% in other tax-deferred plans, 20% in Roth plans, and 20% in an after-tax brokerage account.

We are not allowed to roll over into an IRA. One option is to use the plan early and distribute all the money within five to 10 years. Another option is to use the plans as a quasi-indexed annuity and withdraw the money over 20 to 25 years and, of course, we could pick the joint annuity option. 

If we do choose a life annuity or a long duration for withdrawals, how does that affect our RMD calculations for the other tax-deferred accounts?

One final caveat is the money belongs to the employer until it is completely distributed so, in theory, if the employer goes bankrupt, we could lose the balance of the accounts. I have very low concern that this could happen but it’s certainly out there.

Since our 457(b) plans are so restrictive, could you give advice on the best way to utilize these plans? 

See: We have $3.9 million in retirement and cash, but face a $60,000 annual college bill for our child over 5 years. Can I retire if my wife keeps working? 

Dear Reader, 

Having a diversified array of accounts will help you tremendously in your later years. As for your question, the answer boils down to the type of income you’ll need in retirement, and equally as important, the tax implications. 

It’s wonderful that you have such a keen eye on the 457 plan, as it can heavily impact how the rest of your income plan goes in retirement. Distributions from 457 plans are considered “deferred salary,” so they are fully taxable, and will be added to any other taxable income you have in retirement, including annuities, required minimum distributions and Social Security, according to FI Physician, a site dedicated to retirement planning for physicians. 

Lump sums can feel overwhelming. You get a huge sum of money, you expect your tax bill to go through the roof, and you have to allocate the money wisely so that it works for you in the future.

If you go the lump-sum route, you could pick your own annuity to put some of the money in, as annuities are a form of “guaranteed income.” (Before you do that, compare any annuity you may be interested in to what the plan offers, as sometimes plans have more favorable rates and terms.)

And if you aren’t interested in an annuity — or if you simply don’t need one because of other sources of retirement income — there’s always the investment-portfolio option. You could work with a qualified financial planner, such as a certified financial planner, to create an investment portfolio that rides the waves of market volatility and works for you for the next few decades. It should also meet other specific financial goals like leaving behind an inheritance to loved ones or to charity.

Timing your distributions

The distribution over five to 10 years only makes sense if you have really finished working when you leave this employer, because otherwise you’d have that income on top of your salary, and that puts you at risk of a higher tax bracket. “This is why waiting to fund one of these plans is essential until you are sure of your traditional or early retirement plans,” according to FI Physician. “It doesn’t do any good to defer income now just to take it soon while still earning income.

Three more things: First, check again about the required minimum distribution age for your account as most plans don’t need to begin distributions until age 73, including 457(b) plans, according to the Internal Revenue Service

Second, I know you said you’re not worried about your employer going bankrupt and thus you losing any of this money, but it is still important to check the fiscal health of your employer, just to be on the safe side. What you find may change the approach you’re going to take. And if you do have another decade to go before retirement, be sure to regularly check on that fiscal health, in case you need to adjust your plans. 

Third, you both have your own accounts, so you could always choose different avenues for each of them. For example, maybe one of you takes the annuity option, and another opts for the lump sum. It’s another way to diversify. 

Given your intentions to keep working until your 70s, you do have time to make your decisions around distributions, but it’s great you’re getting a head start. To really maximize your benefits, take this time instead to think critically about what you’ll need to spend in retirement and be sure to include healthcare and emergencies (in other words, be extra conservative in your estimates). 

You already have a breakdown of how you anticipate making up your retirement income, but now run the numbers for each type of 457(b) plan distribution — that is, what would your income look like if you took a lump sum and created an investment portfolio? What would it look like if it were divided over five to 10 years? Does it still make up 20% of your retirement income as you anticipated, or does it shift the allocation of withdrawals?

Would you want to use some more of your non-taxable distributions, such as Roth assets, to offset your tax liabilities until the periodic distributions end? And what would your tax bill look like if you went the annuity path after all? 

You have all of the pieces in place, and you and your wife have been diligent in preparing for the future. Keep on truckin’.

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Also see: I’m 60 and want to withdraw $250,000 from my 401(k) to pay off the mortgage and bills. Is that a smart thing to do?

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