Disclaimer: yes, we will ultimately verify with the broker before doing anything with tax implications.
My girlfriend and I have a plan where in lieu of paying into social security, the 6.2% (or whatever it is, I think it doesn’t include medicare) goes straight into a 457(b) run by a private company. It can then be withdrawn directly from there.
2 questions:
I understand that taking cash out incurs regular tax, but it does not have the 10% penalties that 401(k) and 403(b) plans do. Does this mean that the money can be withdrawn and pocketed with minimal penalty, keeping in mind neither of us are of retirement age?
Does the answer to the above remain the same whether you voluntarily pay into a 457 or whether it is a alternative plan that is in lieu of paying into to FICA?
I’m not 100% certain, but I thought 457(b) plans are only for state and local government employees (and certain non-profits). Back in the 1990s, Congress put state and local employees under FICA.
However, state and local employees could opt out if they already had an approved plan. This was mainly done to prevent issues with employees switching from one type of retirement account to another. As far as I know, 457(b) plans are usually setup by the state, and aren’t run by private companies. I pretty much thought everyone has to be under FICA – except for the few exempt categories.
If this is a Social Security alternative plan like the one in New York state, there is no early cashing out. Period. Unlike the 401k and similar plans, you cannot borrow against it or withdraw money.
Exactly what is this type of plan? Are you or your girlfriend state employees or work for a non-profit?
Do you also get the matching 6.2% that your company pays? Come to think of it, do you even get that back from Social security, or does that go toward the cost of administering the plan (or whatever)?
I don’t have a stub in front of me to verify if it is exactly 6.2%, but I have a memory that it is. At any rate, it is nowhere near 12.4%. I have no idea where that goes, but administration as you suggest might be a part of it. They told me nothing about what will happen with my paycheck, it just showed up one day as something like “ING ALT” (ING being the administrator). This 457 contribution only shows up on about 2-4 of my paychecks per year, the rest of the time I am exempt from FICA.
http://www.irs.gov/retirement/article/0,,id=172437,00.html
Is your plan truly a FICA replacement plan (you don’t pay FICA) or a retirement program similar to 401(k), where FICA is also taken out of your paycheck? You would do well to get an answer from your employer/broker in writing. Also check with your employer to see if they are required (by law?) to contribute to your plan. A cursory look on the web indicates that that not all states have enabling legislation requiring an employer to contribute to the plan. If so, that means you are 100 percent funding your own retirement with no assistance from your employer and no fallback FICA. It may also mean the strength/growth of your retirement funding would be your contributions and market forces. If you have considerable working time on your side before retirement (say 30-40 years of continuous employment and corresponding contributions), as well as guts, good luck to you. If you don’t, your risk means if you have negative growth during your tenure, your retirement funds could be worth squat, with no FICA fallback.