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The UNC 457b Retirement Plan… 4 Things To Know

| July 01, 2018
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In the fall of 2015, the UNC General Administration authorized a new 457(b) Plan within the UNC System Supplemental Retirement Plans. While most people are familiar with 403b and 401k plans, many have not heard of a 457b, a retirement plan similar to the 403b and 401k, yet with distinct differences and unique financial planning opportunities.

 

1) Retirement Plans Background

Typically, 401ks are retirement plans for employees of for-profit companies, 403bs are for employees of educational institutions like universities and public schools, and 457b plans are for employees of local and state governments.

Most people have one retirement plan at their workplace with one plan custodian (i.e. a 401k with Fidelity), so they don’t have a choice between multiple options.

However, many years ago the NC Legislature decided to allow NC state employees to participate in all three types of retirement plans (403b, 401k, 457b), if they so choose. The expanded choice is great, but it does require quite a bit of homework in order to figure out which plans are ideal for your particular situation.

(Keep in mind, these Supplemental Plans that I am discussing here are over and above the UNC Mandatory Plans… the Teachers & State Employees Retirement Plan (TSERS) and the UNC Optional Retirement Plan (ORP)… that UNC system employees sign up for upon being hired at their respective institutions. For more information on the differences between the TSERS and ORP plans, see my article New To UNC? – Choosing The Right Mandatory Retirement Plan (TSERS vs. ORP).)

For many years, UNC faculty and staff have been able to participate in a 403b plan with Fidelity or TIAA CREF, a 401k with Prudential, and a 457b plan with Prudential. Last month’s announcement by UNC General Administration now adds Fidelity and TIAA CREF to your 457b custodian choices.

This is great because instead of the rather bland 14 investment options available in the Prudential 457 plan, UNC system employees can now have a 457b plan with Fidelity/TIAA CREF’s expanded investment options (20+ investment options in their Core Lineups and almost unlimited investment options in their 457 Brokerage platforms).

 

2) 457b Plan… Similar to a 401k or 403b

Like a 401k or 403b plan, employee voluntary contributions to a 457b plan are made on a pre-tax basis, thereby reducing your taxable income in a given year. Earnings are tax-deferred until distributions are made in retirement. Qualifying distributions are taxed at the time of withdrawal as ordinary income.

Roth contributions are also permitted in all three plans. Roth contributions do not reduce your taxable income, but qualifying distributions of Roth contributions are tax-free.

 

3) 457b Plan… Different than a 401k or 403b

While there are many differences between the 457 and the 403b and 401k plans, one of the primary differences is when you can make withdrawals without tax penalty. Leaving aside the less common reasons that some plans allow for in-service withdrawals (i.e. death, disability, hardship, etc.), the primary differences between plan withdrawal rules are:

If you are still employed at the institution where you started your 403b/401k/457b:

– You can take withdrawals from your 403b without tax penalty starting at age 59½.

– You can take withdrawals from your 401k without tax penalty starting at age 59½.

– You cannot take withdrawals from your 457b while you are still employed.

If you no longer employed at the institution where you started your 403b/401k/457b:

– You can take withdrawals from your 403b without tax penalty starting at age 55.

– You can take withdrawals from your 401k without tax penalty starting at age 59½.

– You can take withdrawals from your 457b at any age.

So, the good news here is that, if you leave the institution where you started your 457b, you can take withdrawals without tax penalty at any age, and that might come in handy. (For example, a computer science professor in his 30’s or 40’s, who thinks he may leave for a startup someday, may want to split his contributions up between the 403b and the 457b, giving him the ability to tap into the 457b money without tax penalty, to help fund startup costs.

On the other hand, if you stay at the institution where you started your 457b for your entire career, then you can’t take any withdrawals until to retire, which may be limiting.

 

4) Supercharge Your Tax-Deferred Savings

Double-Up Contributions

One of the great things about a 457b is the fact that, when combined with a 403b or 401k, you can double your maximum tax-deferred savings each year.

For example, in 2018, one can contribute $18,500 into a 403b and another $18,500 into a 457b plan for total tax-deferred savings of $37,000.

Those age 50 and over can also contribute an extra $6,000 into each plan in 2018... $24,500 into a 403b and another $24,000 into a 457b plan... for total tax-deferred savings of $49,000.

Married couples who both work at a UNC institution, and who are both age 50 and over, can together save up to $98,000 over 2018. For those closing in on retirement, this is an amazing retirement planning and tax planning opportunity!

(Note: You can only double up contributions to a 457b and either a 403b or a 401k. You cannot double up contributions to a 403b and a 401k. Contributions to a 403b and a 401k are aggregated under the single limit of $18,500 for 2018, or $24,500 for those age 50 and over. So, for 2018, if you have a 403b and a 401k, your total maximum contribution across all plans is $18,500, or $24,500 for those age 50 and over. If you have a 457b and a 403b, your total maximum contribution across all plans is $37,000, or $49,000 for those age 50 an over. If you have a 457b and a 401k, your total maximum contribution across all plans is $37,000, or $49,000 for those age 50 an over.)

Three-Year Catch-Up Contributions

If you’ve had previous years in which you did not contribute the full amount to a 457b, then you may be eligible to contribute double the maximum amount into your 457b as well, between ages 56½ and 59½. (You cannot utilize the Age 50 And Over Catch-Up while utilizing the Three-Year Catch-Up. You’ll have to talk to your HR Benefits department to see if you are eligible.)

Here is a chart summarizing some savings scenarios using 2018 limits:

 

457b Plan… Should You Have One?

So, to conclude, there are three general scenarios in which you should consider starting a 457b plan:

  • You want to shelter more of your income from current-year taxation. The ability to put away anywhere from $36,000-$96,000 is a tax sheltering opportunity not available at most employers… Take advantage of it!
  • You want to aggressively ramp up your retirement savings. Do it! Carpe diem!
  • You think you may leave your current institution before you turn 59½ and might like the ability to access funds without tax penalty, if need be. In such situations, it can’t hurt to put at least some of your annual retirement savings in a 457b plan.

You can reference the UNC Supplemental Retirement Plan Decision Guide for an overview of the 403b, 401k, and 457b plans, and the UNC 457b Plan Summary for information on the 457b plans specifically.

The UNC System offers faculty & staff an amazing retirement savings and tax deferral opportunity not available to many people. Take advantage of it!

Feel free to contact me with your questions or comments.

PJH

*This article was originally published 01/01/16 and was revised 07/01/18.

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