457 vs. IRA

Submitted by Jennifer Poole on Fri, 2017-03-17 15:03

What is the benefit of a 457 for a fire department versus an IRA? They think it is a big benefit because the first $3,000 is tax free as long as they pay insurance. What is the tax benefit of that versus having it tax free? Also, the fire department won’t match.



Submitted by Alan - IRA critic on Fri, 2017-03-17 17:56

  • 457 – much larger annual contributions could be made (18k plus any catch up with two possible catch up options). Any distributions taken are penalty free regardless of age. Govt 457 plans usually do not fail even though they do not have ERISA protection. As for the 3,000 tax free, this is essentially the same benefit a private employee gets if their health premiums are paid by pre tax cafeteria plan under which the premiums are not included in income (or for SS deductions). But the fire Dept employee can not likely itemize medical deductions (10% AGI offset), so this does provide them with an effective deduction for these premiums.
  • IRA – contributions are smaller (5500 plus catchup). No conditions to take distributions, but typically there would be a 10% penalty before 59.5. Creditor protection per state law. More investment options possibly with lower expenses. RMDs are the same for either plan. Either plan also permits Roth option, if 457b adopted it.

Submitted by Jennifer Poole on Fri, 2017-03-17 19:26

The prospect is interested in the Roth rather than the Traditional. What is the benefit of the 457 over the Roth if he is not going to contribute over the 5,500? So what is the benefit of having the $3,000 taken out tax free to pay for their insurance? This 457 plan is offered by Nationwide.  

Submitted by Alan - IRA critic on Fri, 2017-03-17 19:42

If he wants a Roth, he might still be better of contributing enough to the 457b pre tax to pay up to 3,000 for the insurance annually. Anything additional should go into his Roth IRA. Avoiding taxes altogether on 3,000 of premiums is preferable to a Roth IRA for anyone who is not in the lowest tax bracket. The higher his tax rate, the greater advantage of that.

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