Retirement Planning/Liquidating an inherited 457 plan
QUESTION: When my father died 7 years ago, I inherited his 457 plan. The account is now in my name and we receive quarterly statements tracking the plan's change in value, but nothing else has gone in or out in years.
My husband is a real estate investor and we know we can do much better things with the $34,000 in this plan than the performance of the fund where the money is invested.
Can you please clarify the repercussions of liquidating this account for our personal use? Thank you in advance.
ANSWER: Hi Jenny,
A 457 plan as you are probably aware is a deferred compensation retirement plan. Since the compensation was deferred, it has never been taxed. This means that it will be taxed at withdrawal by either the owner or the person that inherits it. Any amount you withdraw will be taxed as ordinary income. They will withhold 20% off the top for federal taxes but you may owe more or less at tax time (depending on your AGI or gross adjusted income) plus state tax depending on where you live. So depending on your tax bracket and state, you could end up paying 40-50%. You would have that much less to invest in real estate. I hope this helps. Best of luck!
---------- FOLLOW-UP ----------
QUESTION: Thank you, Dave. This is what we kind of thought... no penalty since government employment is long since passed, but taxes due.
My follow-on question is, so these taxes will be due at the time of withdrawal of the funds, whether that is now or in 30 years, correct? Is there any reason at all to leave the money where it is? We see $34,000, but worst case we owe half in taxes, so it's really $17,000 TO US, whether we withdraw it now or down the road, correct?
Thank you so much again for your answer and prompt response!
Yeah, that's pretty much the case if your in one of the top tax brackets. There is no early withdraw penalty on a 457 like there is on a 401k or IRA. The reason why you would consider leaving it in there is so defer the taxes until later, such as if you retired. Depending on your retirement tax bracket this may not be an advantage. Most people assume they will be in a lower tax bracket when they retire but that is not always the case and there is no way to know what taxes will be in the future. This would be an advantage for someone with little or no retirement income. They could withdraw a few thousand a year and not trigger any taxes. I hope this helps. Let me know if you have any more questions.