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September 15, 2020

457 Plans for Physicians: How you can lower your taxes and increase your retirement savings

Written by Nathan Snow, CFP, EA ®, Posted in

While most physicians know about their employer’s 403(b) retirement account, the 457 – which carries many additional benefits for high-income earners – remains relatively unknown and complex to navigate.

Similar to a 401(k) or 403(b), the 457 account allows you to contribute pre-tax income and defer taxes. This year, participants can contribute the lesser of $19,500 or 100% of their includible compensation. Those who are 50+ may even be able to make a catch-up contribution of $6,500 to their governmental 457 account and thus contribute a total of $26,000 for 2020.

Since the 457 is a non-qualified account, it’s exempt from the Employee Retirement Income Security Act (ERISA) guidelines – meaning employers can offer these types of plans as an additional benefit in some cases.

It’s worth keeping in mind that there are two types of 457 (governmental and non-governmental), and they are importantly different. When a physician leaves their role (whether voluntarily or involuntarily), a governmental 457 plan enables a direct roll-over into an individual retirement account. Because the money that’s contributed into this type of plan is held in a trust, it’s not subject to an employer’s creditors. Alternatively, with non-governmental 457 plans, participants must take additional risks that are worth considering in-depth prior to investment.

Here are the four basic factors that our team at Accruent Wealth Advisors encourages our clients to consider:

  1. The greatest benefit of a 457 is that you can invest much more in tax-deferred savings. For example, if your employer offers both a 403b and a 457, you can invest the maximum amount into the 403b ($19,500, or $26,000 if you are 50+) and also contribute the maximum amount into the 457 ($19,500). Maxing out your contributions in the same tax year will help you to reach your retirement goals much sooner (especially if you start saving and investing later in life). What’s more, this lowers your overall tax liability since more of your pre-tax income can be deferred through these plans.
  2. Since a 457 is non-qualified, if you withdraw from it before you reach 59½, it’s not subject to the typical 10% penalty that accompanies 401k and 403b plans. This is a great advantage if you plan to retire early. In theory, you could start drawing from it to meet your living expenses while your other tax-deferred accounts continue to grow (until you can safely withdraw from them without incurring a 10% penalty).
  3. With a non-governmental 457 plan, the assets (which technically belong to the employer) are subject to their creditors. Before contributing to this plan, it’s critical to consider your employer’s financial health. (This is a moot point with governmental 457 plans, as they offer additional protections, namely being backed by the federal government.)
  4. When it comes to withdrawal options, a non-governmental 457 is much more varied and complex. Some participants are required to withdraw the full account balance upon separation from service or receive distributions over a 10-year period, until the account is depleted. Each plan is different, so the best practice is to become highly familiar with its policies and guidelines – especially since your withdrawals will be taxed and could carry major consequences.

Overall, 457 accounts are a great tool to save pre-tax income, and in some cases – like early retirement (pre-59 ½) – they can be the cornerstone of your plan. The first and most important step you should take is to work with a professional to understand your options, so that you can determine whether the 457 is the right fit for your goals and objectives.

Please feel free to reach out to us at Accruent Wealth Advisors if you have any questions about the content of this article or any other financially challenging issue you may be facing.

Nathan Snow, CFP, is an associate Wealth Advisor at Accruent Wealth Advisors located in Winston-Salem NC.  He and his wife Kayla and their 2 children, Lily and Bennett reside in Yadkinville, North Carolina. 

About the Author
Nathan Snow, CFP, EA

Nathan was born and raised in Yadkinville, NC. He graduated from Liberty University in Lynchburg, VA with a B.S. in Religion and M.A. in Philosophy. Shortly after graduating, he spent time teaching at Liberty University. He decided on a career change in 2015 into the financial services industry. Nathan completed the Accredited Asset Management Specialist designation through the College for Financial Planning in 2016...