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Understanding the Pros and Cons of 457 Deferred Compensation Plans

Writer's picture: Betsy at RVPFBetsy at RVPF

As a physician, managing your finances with the same care and attention as you manage your practice is crucial. While saving for retirement is a top priority for most women in medicine, the right retirement account can make a significant difference in how much you accumulate over the years. One such option worth considering is a 457 Deferred Compensation Plan.


This retirement savings vehicle, often available to employees of non-profit organizations or government employers, allows you to defer a portion of your salary until retirement. But like any financial tool, it comes with its pros and cons. Let’s dive into what a 457 plan offers, and whether it could be the right choice for you.


What is a 457 Deferred Compensation Plan?

The 457 plan is a type of employer-sponsored retirement plan that allows you to defer a portion of your salary until you retire. It works similarly to other retirement savings plans, such as 401(k)s and 403(b)s, but with some key differences.


One of the most attractive features is the ability to contribute substantial amounts of pre-tax income, reducing your taxable income for the year. Contributions grow tax-deferred, meaning you won’t pay taxes until you begin withdrawing the funds.


Pros of a 457 Plan

  1. Contribution Limits For 2025, you can contribute up to $23,500 if you’re under 50, an additional $7,500 catch-up contribution if you’re 50 or older, or an additional $11,250 if aged 60-63. If you're late in your career or already well into saving for retirement, this can provide an excellent opportunity to supercharge your savings. These limits are in addition to 401(k) or 403(b) contributions.

  2. No Early Withdrawal Penalty Unlike many other retirement plans, 457 plans do not impose a penalty for early withdrawals if you leave your employer. This can be particularly beneficial if you’re transitioning between jobs, deciding to change your career path or retiring before age 59 1/2.

  3. Tax Deferral Benefits The ability to defer taxes on a significant portion of your income until retirement is a huge benefit. This means that the money you would have paid in taxes stays invested, allowing you to take advantage of compounding growth over time and potentially withdraw during a period of lower income tax rates.

  4. Flexibility in Retirement Planning The 457 plan allows for flexibility in how and when you access the funds. Depending on your situation, you can start withdrawing without penalties even if you're younger than 59½, as long as you’ve separated from your employer.

  5. Good for Women in Medicine Who Have Variable Incomes Physicians who often experience fluctuations in income can use a 457 to help smooth out those financial peaks and valleys by allowing you to contribute more in years when income is higher.


Cons of a 457 Plan

  1. Limited to Certain Employers One of the major drawbacks of the 457 plan is that it is only available to some employers as not all employers offer this benefit.

  2. No Rollover Option for Private Sector Employees Non-governmental employer 457 plans have limited rollover options whereas governmental 457 plans may be rolled over to other qualified retirement plans such as an IRA or 403(b).

  3. Required Minimum Distributions (RMDs) Like other retirement accounts, a 457 plan requires you to start taking minimum distributions by age 73. While this isn’t unique to 457 plans, it’s something to keep in mind as you plan for your retirement income.

  4. Investment Choices May Be Limited Not all 457 plans offer the same range of investment options. Depending on your employer’s plan, you may have limited choices for where to place your funds, which could restrict your ability to optimize returns.

  5. Complexity in Understanding Withdrawal Rules While you can access your 457 plan funds without penalty upon leaving your employer, there are still certain rules and nuances that vary depending on whether you retire, are laid off, or transition to a new employer. It’s important to understand these withdrawal rules to avoid unintended tax implications or penalties. Some withdrawals must be taken in very short windows of time and can result in higher than expected tax burdens.

  6. Non-governmental 457 plans are employer assets. While 457 plans allow employees to defer a portion of their income for retirement, it's important to note that non-governmental plans are technically still considered employer assets. This means that if the employer faces financial difficulties or goes bankrupt, the funds in the 457 plan could be at risk, unlike other retirement accounts like 401(k)s or IRAs, which are protected by federal laws. In cases where an employer holds a 457 plan, the assets are part of the employer’s general assets, making them subject to claims from creditors. It's a key consideration when deciding whether to invest heavily in a 457 plan, particularly if you work for a smaller or financially unstable employer.


Should You Consider a 457 Plan?

If you're a physician who works in a government or non-profit setting, a 457 Deferred Compensation Plan could be an attractive addition to your retirement strategy. The plan’s flexibility and higher contribution limits are great tools for maximizing your savings, particularly if you’re later in your career and may not have saved as aggressively early on.

If you work for a private employer with a non-governmental 457 Deferred Compensation Plan, the rules are more limiting and require careful consideration of whether this account is a good fit for your financial plan.


If you're a physician thinking about a 457 Deferred Compensation Plan for your retirement, it's a great idea to get all the details before diving in. A financial advisor at RVPF can help you figure out if it’s the right fit for your goals and guide you through the process. Reach out today to start the conversation—you deserve to feel confident about your financial future!



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