Transcription:

Episode 4 – Info about your 457 (b)

Announcer: This is Blue Money. A finance podcast made for cops by cops. With us you know your money safe. Lieutenant Jim Donnelley of the Bensalem Police Department and co-host Kevin McGarry of Valley Financial Group come together to help protect and serve your financial needs. This is Blue Money.

Jim Donnelley: I want to welcome everyone to the Blue Money podcast. My name is Jim Donnelley. I’m a financial advisor at Valley Financial Group. I’m also a police Lieutenant at the Bensalem Township police department. I’m here with my co-host Kevin McGarry.

Kevin McGarry: Jimmy D.

Jim Donnelley: Kevin’s the managing partner at Valley Financial and today’s episode, Kev, I’m going to break down into the audience basically what a 457B plan is the pros and cons. A little bit about it. And just give some guys some general knowledge in it.

Kevin McGarry: Yeah, I mean, 457B, 401k, 401A, 403B, IRA, Roth IRA. It can get pretty confusing. 

Jim Donnelley: Yeah, Kevin. I mean, when I first got hired in law enforcement, I was a Philadelphia police officer in 1998. And I had no clue what a 457B was. I didn’t know what a 401, I heard a 401 before, but I had no idea what a 457B was.

Kevin McGarry: It’s like Latin class. Remember Latin?

Jim Donnelley: Kev, I had no idea. I had no idea, probably 10, 15 years into my career. I just knew that was a retiring plan. I didn’t know the pros. I didn’t know the cons. I didn’t know why it started. I didn’t know why I had it. Do you think most officers, most law enforcement employees feel the same way you did?

Kevin McGarry: They have no idea. I polled three cops last week because I knew we’re going to do this podcast. I’m not kidding you. I asked three random guys I work with.

Jim Donnelley: Did you pick the smart ones?

Kevin McGarry: I picked one out of three smart ones. I want to make my point on this here. But I asked three random guys. I said, guys, you know why we have a 457B not a 401. And he looked at me and he said, I got no clue. Does it matter? And I said, yeah, it matters. You got to know the pros and cons of what retirement investment vehicle you’re putting all your money in it’s important. So, I’ve really thought that’s why we just out of nowhere, we did this podcast for the 457B to give the guy some information. So, when someone ever asked him again, why you have a 457B, they shouldn’t understand because they’re putting all their life savings in it. It’s important for them to know.

Kevin McGarry: And that’s what I’ve seen. I’ve seen like a lot of people, not just in the law enforcement industry, in all industries, they don’t understand it, truly understand what the difference between an IRA and a Roth is. So Jim, you become an expert on a difference between a 457B and 401A in your situation. You break it down for us?

Jim Donnelley: Yeah, right, I mean, I won’t call me an expert far from it Kev, but I appreciate it. So, just so everyone knows out there what the 457B is. The 457B is basically a 401k but for public sector organizations and that’s basically police, fire, some school teachers’ fall under 457B but most are 403. It’s really just our 401k. That’s basically what it is from a private sector. The private sector is going to be given the 401ks that employees while the public sector is given us the 457B option. And basically what we’re doing, we’re given contributions are made through salary deductions every time we get paid. Every two weeks that money’s going to go in tax free and it’s going to grow. It’s not taxed yet. When we take it out, that’s when it’s going to start getting tax. So, it balloons up. We’re going to have to pay Uncle Sam eventually but people always think that we might be in a better tax bracket later on in life than we are right now. That’s why a lot of people put money in the tax things.

Kevin McGarry: With the 457, where do you see the pros and the cons of the 457 plan?

Jim Donnelley: So, let me start first with the cons, the two things that jump out at me when I look at the 457B is sometimes the investment options are not as plentiful as a 401K. And sometimes I have a little higher fees. It’s not the end of the world. There’s still a lot to invest in, but it’s not as much as a 401. Another down thing I see with the 457B, it’s a lot harder to get your money out. You really can’t take a loan off for money. You see people with 401s constantly taking loans, and you really can’t do that with a 457. It really has to be really of a hardship to get your money. You can’t do it for buying a house or education. You can’t get it for getting through a divorce. It just can’t get your money out of 457. Now the positives I see about the 457 over 401, the big one is a lot of law enforcement, firefighters, we’re retiring at 50 52, in our fifties. We can touch our money over 457 the day after we retire. Now, if you have 401K, you can’t touch your money till you’re 59 and a half without paying a 10% penalty.

Kevin McGarry: Or doing a stretch?

Jim Donnelley: Correct. So, if you don’t want to pay that 10% penalty, I mean, you could take your money at a 401, but you’re going to be paying that 10% penalty. So that’s definitely an advantage of you’re able to touch your money. Not that we’re recommending it, not that you should touch your money, but it’s their case of emergency you have.

Kevin McGarry: There’s some flexibility, right?

Jim Donnelley: The other plus, the pro that I actually see is you can max this account out a 457B and still have a 401A and you can max both of them out. So, you can contribute 20,500, which is the limit for 457 B. And then if you have a 401A, you can contribute also 20,500. So, you’re pulling $41,000 a year, which is big. There’s not too many other, like you can’t have a 401 and a 403 and do that. So, 457 is the only tool that allows you to have two different accounts.

Kevin McGarry: So, you can contribute to both at the same time and max out?

Jim Donnelley: That’s correct. A home run. You can stash more money away.

Kevin McGarry: And talking about maxing out, what about what we’re speaking about earlier the last three years?

Jim Donnelley: And that’s a huge one. So, with a 457B your last three years towards retirement, you can do double your contributions. Now, if you’re a 50 above, you actually can do an extra 6,500, which gets you to 27,000. But this is even better than that. This your last three years, even if you’re not in your 50s, you be 47, 48, as long as your last three years in retirement, you can double your max. So, that’s $41,000 a year you can save. And that helps us out when we get those big checks with vacation, sick, and you’re going about to retire. You’re getting some big checks. So, it’s a great opportunity to stash more money away without paying those taxes on it.

Kevin McGarry: Right and the other thing we were speaking about earlier is a new offering that you’re seeing out there. That’s the 457 Roth. So right now, when you’re sitting down and you’re making these elections on where you’re going to contribute it, the new one is the 457 Roth we’re seeing right now, right?

Jim Donnelley: That’s correct Kev, you have a 457A’s really starting to take off the great thing about that, which I see is, you know, if you do a regular Roth, a traditional IRA or a Roth IRA, and the limits are a lot lower, but you can’t make a certain over an income. If you’re married, it might be 150, whatever the number might be here with the Roth 457, there is no limit. No, it doesn’t matter. What do police officers make, and you can still contribute it, which is a great tool.

Kevin McGarry: And if you’re sitting down there and you’re saying, all right, which one do I select? Everyone’s situation is different, but here’s what I want to explain about the 457 Roth or Roth in general. When we’re doing planning, the biggest assets we see with our clients and this is no different for law enforcement clients, is their biggest assets are their 401A, 401k, or their property, their home. And when it’s time to take income and your own boss in retirement, and you’re starting to pay yourself, if you’re taking a lump sum out of that IRA, if you rolled that 401A or that 457 into an IRA, you’re taking that distribution out and you know what? I want to buy a truck. I want to buy a boat. I want to buy a vacation home. I want to pay for my daughter’s wedding. That’s going to have tax consequences. So, when we’re looking at, and when we’re contributing to our retirement plans, we’re looking at future income and how can we have better tax efficient income and retirement. And the one way to do it is contribute to your 457 Roth or your 401k of Roth. It’s a great source of potential tax, free income and retirement.

Jim Donnelley: So, Kevin the only thing I see negative with the Roth 457 is you can’t touch your money to your 59 and a half. Where if you have a 457B a regular one, you can take it out when you’re 51, 52, without that 10% penalty. So, just so you know, if you are invested in a Roth 457, you’re not going to be able to get your funds out without paying that penalty until you’re 59 and a half. And also I want to make sure just that everyone understands you can have both. You can have a Roth 457 and you can have a traditional 457B, but the limit will be the same. You only can save 20,500. So, say if you save $10,000 in your Roth 457, then you’re only going to be able to save ten five in your traditional 457. So the limits the same, but you can still have both, which is a nice vehicle. If you want to put some away before taxes and then some after taxes and let that grow. So, it’s also an instrument that you can look at and see if it helps you out.

Kevin McGarry: I mean, there’s a bunch of things here. Just to reiterate what Jim said, the money that’s going in the 457, or your traditional 401A or 401k it’s going in before tax. So, you’re not paying any taxes on it until you turn on net income stream in retirement. With a Roth 457 or 401A, 401k Roth, the money’s going in after tax, but it’s still growing tax deferred, but the withdrawals are coming out tax free. So, there’s a bunch of benefits with the Roth, especially with the 457 or 401k Roth, your money’s growing tax free. Your withdrawals are tax free. Unlike an IRA or a 401k, there’s no require minimum distributions with a Roth. Also if something happens to you, you’re leaving the money tax free to your heirs, to your beneficiaries on that. And the big thing is when we’re doing the planning, there’s tax flexibility in retirement, because if you have to make that big distribution, that big withdrawal to pay for your daughter’s wedding or pay for that boat or that vacation home down in the shore, you’re probably going to take it out of the Roth because you don’t want to increase your taxable situation and give the IRS any gifts. So, the one thing is if you have it, it’s a great tool. It’s probably wise to sit down and talk to somebody and see if it makes sense for you.

Jim Donnelley: So, Kev before we wrap this podcast up, there’s one thing I want to talk about the 457B that I forgot to mention. And that is that if you have an employee match, it’s very important for them maybe to put that into a 401k, if they will. So, at Bensalem, we have a 2% match and they put that into a 401k and I can max out my contributions in my 457B to the 20,500. So, I have two accounts grown, and I can even put more money into 401A. The first time they say they open it up, it closes. So, I can’t just do that periodically. I can’t just do that a couple times a year. They opened it once and it’s locked, but it gave us a nice investment opportunity for two different accounts. So, hopefully other financial departments will do that out there for townships if they don’t already have that. So Kevin, I just want to get this. Can you wrap this up for us before we end this podcast up before we [crosstalk 00:10:53]?

Kevin McGarry: I think a few things just to remember is your 457B is very flexible. It allows you to take income prior to 59 and a half if you’re retired. Number two, you can max out, remember this, you can max out both your 457B and your 401A or your 401k, depending what you have. Here’s another big one, is you can you have a catch up provision in your final three years in your 457B up to $41,000. Take advantage of that. And when it comes to the Roth, either if it’s a 401k, 401A Roth or a 457B Roth, it gives you the ability in retirement to have tax flexibility in retirement income planning and spending. You don’t want to be giving any gifts to the IRS and that’s what the Roth offers in retirement. So Jim, there are things they need to remember when they’re sitting down and selecting which plans they’re going to be contributing to.

Jim Donnelley: Kev, thanks for wrapping that up and telling everyone what the 457B pros are and what to really look out for during their investment in 457B I just also want to thank all the listeners today for giving us the opportunity to tell you guys, everyone about a 457 B plan. Hopefully this helps going in the future. If anyone asks you why you have a 457B plan, you have a little information. Now, if anyone has any questions, feel free to contact me and Kevin directly or contact information. That’s going to be on the short show notes. I hope everyone has a great day and be safe out there.

Kevin McGarry: Be safe. 

Announcer: Thanks for listening to Blue Money, to learn more about Jim and Kevin or for a free financial assessment, visit valleyfinancial.com or click on the link in the podcast description or show notes. Until next time safe investing.

This material is intended to be educational in nature and not as a recommendation for any particular strategy approach, product or concept for any particular advisor or client. These materials are not intended for any form of substitute for individualized investment advice. This discussion is general in nature and therefore not intended to recommend or endorse any asset class security or technical aspect of any security for the purpose of allowing a reader to use the approach on their own. Before participating in any investment program or making any investment clients as well as all other readers are encouraged to consult with their own professional advisors, including investment advisors and tax advisors. Valley Financial can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.