Disclaimer
I am a money mentor, not a financial planner. While I can provide good, general information, your situation is specific to you. Always do your own research or speak with a fee-only financial planner about your personal circumstances.
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A Four-fifty What?
I’m a personal finance geek. I actually LOVE blogs and books and podcasts about budgeting and savings and planning for retirement. So I kind of freaked out when my sister asked if I’d ever heard of a 457 and I hadn’t. (She’s my little sister, and LOVES it when she knows more than I do – which of course, is quite rare! 😉 )
After looking into it, I realized that 1) it was a real thing, not a hoax, and 2) it could seriously change a teacher’s financial life.
So what is a 457(b)?
It’s a deferred-compensation plan. Yep. I know. That helps exactly not at all, doesn’t it? Ok, here’s the Cliff Notes version. You choose to have a portion of your money put aside before you ever see it. It comes out of your paycheck like taxes or insurance payments, and you just see a line item on your pay stub telling you that it got deducted. (Yeah, I know. So far, it sounds WAY less than enticing. But it gets SO much better.) Then it is put into an account for you, much like a retirement account. You can choose to take this account and draw from it whenever you leave that employer – here’s where it gets good – EVEN if you are not at retirement age.
Um, what’s the point?
So I imagine that you might be thinking, “Um, you want me to get excited about not getting my pay until years later? I could put it in a savings account of my own and at least have control of it. You’re not the brightest knife in the drawer, are you, Jill?”
But WAIT!!!!! This is important. They take this money out pre-tax and when you withdraw it, it will be taxed at your tax rate at that point. This means two very important things are happening. First, that money is going to grow tax-free until you need it. So you will be making money on what you would have otherwise already paid out in taxes. Sounding a little bit better? Second, when you withdraw it, it will be taxes at your current (at that point in time) tax rate, which could be significantly lower if you are no longer working.
So you say it can help me leave teaching?
So let’s say you want options.
Maybe you are ssssooooo close to retirement, but need a few hundred extra dollars a month to make it work.
Maybe you have already decided you don’t want to go back to teaching this fall, but you want a little extra cash cushion in case you don’t find a job right away.
Maybe you are thinking about having kids and you’d like to be able to take a couple of years off. Or you want to have another kid, but you don’t think you could afford the childcare for two (or more).
Maybe you’ve always wanted to start your own business and you’re thinking you might want a couple of years away from teaching to try that.
Or maybe you have always dreamed of just taking some time off and living overseas or traveling around the country in an RV while homeschooling your kids, (That idea absolutely makes my hair curl, but different strokes for different folks, you know?) or after the kids are gone to college (much less-terror inducing for me).
If the rest of your financial house is in order, a 457 could be a tool to get you to any of those dreams.
What a 457 allows you to do, is not collect your pay now, but collect it at any time in the future after you have left your current employer.
Show me the money
The 2022 limit is $20,500 per year, but people over 50 who have not maxed out their contributions can put in an extra $6500/year, for a total of $27,000/year. I realize that most of us can’t spare $27,000 a year (or even $20,500), but remember, this money is pre-tax. That means it’s still going to make a dent in your paycheck. However, the dent will be about 20-25% less that what’s going into your account. Depending on your particular tax situation, you could deposit $1000 into your account, and only see your take-home pay drop by $800.
And you don’t have to put the entire amount it. You could put $4000/year in. Over several years, that could add up to enough to allow you to take some time away from teaching or even to retire earlier than you thought.
What’s the catch?
This is the big one. You have to be a government employee (like a public school teacher, firefighter, or police officer) AND your employer has to offer the plan. Not all of them do. However, if your spouse is government employee, the 457 could apply to them, too.
Also, the employee has to actually leave the job at which they have the 457 account. It can’t be a leave of absence.
But here is the big issue, and why I recommend you do your own research or talk to a professional. Whatever money you put into a 457b and take out is money that isn’t available for retirement later. Given the state of teaching at the moment and how many teachers’ mental health is declining, that might not be your primary concern. But whatever choice you make, I want you to have thought through both short and long-term issues.
How the 457 (b) worked for us
When we realized we were really going to go all in on this crazy adventure and move to Norway, we started re-evaluating our finances. One part of that was for me to go back to work full time and stash my salary in savings. We opened a savings account with Huntington Bank (which honestly was a great bank to work with) and my salary was direct deposited in it to remove all temptation. We didn’t even have a check book because we didn’t want to be tempted to use that money without a really valid reason. It worked fine, but of course all of that money was taxed before it went into the account.
When we found out about the 457, I started investigating it hard core. I was all about it. However, my employer didn’t offer it as an option, even though it was one of the largest school districts in the state. However, my husband worked for the state government and upon some further checking, we found out he was eligible. It was quite a pain to get set up, and it took us several months. However, because we were living off of only one salary anyway, once he got the paperwork done, we chucked about 80% of his pay in the 457 and just lived off of my salary instead. That allowed us to put the maximum amount away before we moved. By my figures, that gave us an extra $6K or more than we would have had if we continued with the original set up.
How it could work for you
Let’s say you are wanting to leave teaching for a few years – or forever. You have dreams of moving overseas or starting a small business or staying home with the kids. Saving money in a 457 account could help you in a couple of ways.
First, it allows you to save more since you are saving pre-tax dollars. Unlike a 401K or the retirement account, you can receive the money at any time after leaving your employer. (Remember, you have to actually resign, not just take a leave of absence.)
Second, if you do leave teaching, your income will most likely go down. So when you pay taxes on it, you will pay a lower rate. Third, you get to decide when to withdraw the money. For example, if you start a small business, and you start making enough income that you don’t need to withdraw it, you don’t have to. It can continue to grow tax-free until you DO need it.
If you think a 457(b) might be a good option to help you leave teaching, check out this well-written article from The Balance or this one from CNN Money.
Disclamer alert
This is ABSOLUTE BASIC information on a subject I had never really been familiar with. I have checked all this information with my accountant for accuracy, but I am NOT an accountant, and I could have missed something or messed something up. So – disclaimer alert – definitely consult your own accountant or tax professional before you jump into a 457.
Good luck! You’ve got this!
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