Retirement Plan Option for High-Income Doctors
Published on Investopedia on February 9, 2017.
If you are a medical doctor who earned over $120,000 in 2016, you may be eligible to defer a portion of your salary into a 457(b) plan, if your hospital offers such a plan. 457(b) plans are established by tax-exempt organizations such as private hospitals, private schools and foundations, labor unions and charitable organizations to allow highly-compensated individuals to save more per year for retirement than the $18,000 allowed by 403(b) plans ($24,000 if age 50 and older). This brings the percentage of salary saved by highly-compensated employees more in line with the percentage saved by the non-highly-compensated employees. (For related reading, see: Deferred Compensation Plans for Nonprofits.)
These plans are reserved for highly-compensated employees (over $120,000 earned) and management (over 5% ownership). There are different types of 457 plans:
- Eligible 457(b) plans, which can be either public/funded/government or private/unfunded/tax-exempt;
- Ineligible 457(f) plans, or top hat plans.
We will focus on the 457(b) deferred compensation plan as it is the most relevant type of plan for tax-exempt organizations, including private hospitals.
Advantages of Private, Non-Governmental 457(b) Plans
- Contributions to the 457(b) plan allow employees to defer a portion of their salaries into the plan, thus reducing present income-tax liability by reducing the taxable income.
- Contributions grow in the plan tax-deferred as well (interest, dividends and capital gains).
- An employee may contribute the maximum amount to a 401(k) or a 403(b) retirement plan ($18,000 per year or $24,000 per year for age 50 and older) in addition to the deferral limits for a 457(b) of $18,000 per year.
- Catch-up contributions to 457(b) plans, up to twice the annual limit ($36,000 in 2017), are allowed for participants who are within three years of normal retirement age. (For related reading, see: 457 Plans: The Pros and Cons.)
Disadvantages of Private, Non-Governmental 457(b) Plans
- The 457(b) plan assets are not held in trust for employees, instead they remain available to creditors, which in the event of legal claims (litigation or bankruptcy) have priority over employees.
- In-service withdrawals are permitted, but a 10% penalty for early withdrawal before age 59.5 applies, unless the employee has terminated their employment or is faced with an unforeseeable emergency.
- Funds are only allowed to be rolled over from the 457(b) plan into another tax-exempt organization’s 457(b) that accepts such transfers. No rolling into an IRA or any other type of employer-sponsored retirement plan is allowed. Upon termination, the employer may allow the money to be left with the plan, but if it doesn’t and the funds are not rolled over in a timely fashion, tax implications of a lump sum may have to be taken into consideration (Depending on individual plans, distribution may be allowed over several years.).
- No loans are permitted against the assets in the plan.
- No ERISA protection is given since the funds are not placed in a trust and there is reduced visibility into the fees since it is not a qualified retirement plan.
- Withdrawals from a 457(b) plan must begin by age 70.5 according to the required minimum distribution (RMD) schedules, similar to an IRA.
The Bottom Line
While not included in the typical benefits package offered to hospital employees, even eligible, highly compensated medical professionals have a hard time being allowed in the plan.
The above pros and cons should help determine if a 457(b) is the right supplemental plan for you, or if a different vehicle would be better for saving for retirement above and beyond the maximum 403(b) limit. (For related reading, see: 5 Lesser-Known Retirement and Benefit Plans.)