There’s no one-size-fits-all when it comes to retirement. Some want to retire to the peace and tranquility of a cabin in the woods. Others prefer jet-setting across Europe.
Regardless of your retirement dream, everyone shares one common concern: How to pay for retirement.
Many will rely on Social Security or money saved in workplace 401(k) plans or 403(b) plans, while others will get pension income or draw down money set aside in other retirement vehicles, like 457b plans.
In any case, the source of retirement income will likely determine the best strategy for withdrawing money wisely from retirement accounts.
For example, as part of our Ask Bob retirement series, one reader asked how to approach planning for retirement funded by a pension and a 457(b) plan.
We asked subject matter expert, Denise Appleby, CEO of Appleby Retirement Consulting and author of the “2025 IRA Quick Reference Guide,” to help us answer the reader’s question.
Retiring wisely includes having a plan for how to best withdraw money from retirement accounts.
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Question:
I am planning to retire with sizable government pensions and 457(b) accounts. What key factors should I consider in my planning process?
Answer:
Retiring with substantial government pensions and 457(b) accounts provides an excellent foundation for financial security, according to Denise Appleby, CEO of Appleby Retirement Consulting and author of the “2025 IRA Quick Reference Guide.”
“Pensions typically provide guaranteed lifetime income, offering significant financial security in retirement,” she says. “However, it’s crucial to consider other factors that can impact your finances, such as healthcare costs, Social Security eligibility, and long-term care.”
Understanding 457(b) Tax Implications
Distribution Taxation:
Pension payments are generally taxed as ordinary income.For Governmental 457(b) plans, pre-tax contributions are taxed as ordinary income upon withdrawal, while after-tax and Roth contributions are distributed tax-free.
Note: tax implications for Governmental 457(b) plans, which are offered by state/local governments, differ from non-governmental plans offered by non-profit organizations.
Early Withdrawal Considerations:
If you’re under age 59½, be aware that early withdrawals may trigger a 10% penalty tax. “If you plan to take early distributions, consult with your adviser about potential exceptions to this penalty and whether you qualify,” advises Appleby.
Optimizing Your 457(b) Retirement Strategy
Roth Conversion Opportunities:
Appleby recommends evaluating whether Roth contributions or conversions make sense for your situation. “Roth accounts provide tax-free retirement income and valuable tax diversification,” she notes.
457(b) Required Minimum Distributions (RMDs):
Once you reach your RMD age (73-75, depending on your birth year), you must take annual distributions from governmental 457(b) plans, except for Roth accounts.
Missing an RMD deadline could result in a 25% IRS excise tax on the undistributed amount. A tax adviser can help determine if you qualify for a penalty waiver.
Additional Pension and 457(b) Retirement Considerations
Social Security Integration:
“For many Americans, Social Security provides essential retirement income,” says Appleby.
Consult with your financial adviser to determine your eligibility and whether your pension affects your Social Security benefits.
Investment Allocation:
“Your investment allocation review becomes increasingly important as you approach retirement,” Appleby emphasizes. “This is when you shift from accumulation to distribution or decumulation.”
Estate Planning:
Ensure your beneficiary designations, will, powers of attorney, and healthcare directives accurately reflect your current wishes.
Action Steps:
1. Review your pension and 457(b) plan documents.
2. Consult a tax professional about distribution strategies.
3. Determine your RMD requirements and timeline.
4. Evaluate Social Security claiming options.
5. Update all estate planning documents.
Got questions about retirement? Email [email protected]
For more, read: Ask Bob – Retirement Daily on TheStreet
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