Have a 401a, 403b, and 457? What to do!?!
Physicians are high income professionals who optimally defer income into retirement plans during peak earning years.
If you have access to a 401a, 403b, and 457 plan then you either work for the government or a not-for-profit hospital system. Which account should you use and in which order?
Well, that depends on if you are a governmental or non-governmental employee! I’m gobsmacked by the poor quality of information on the internet on the topic. So, let’s discuss physician retirement accounts: 401a, 403b, and 457b plans.
Governmental vs Non-Governmental Retirement Plans
As I mentioned in the introduction, there is a huge difference in the plans depending on if you are a governmental (local, state or non-VA federal) or non-governmental employee.
If you are a non-governmental employee (that is, you work in a not-for-profit hospital), then you have some unpacking to do. The rest of the blog is for you. But if you work for the government, your decision is pretty easy!
Let’s get the Governmental physicians out of the way first.
Governmental Physician Retirement Plans
The Thrift Savings Plan (TSP) is pretty awesome for accumulation but consider ditching it come de-accumulation. While there are only 5 offerings (Large Cap, Small Cap, International, Bonds, and a cool “G Fund”), they are inexpensive, and sometimes less is more (especially with passive funds and low costs). In addition, there are target date funds which are fine for many in accumulation.
During de-accumulation, distributions from the TSP can be tricky. What I don’t like about the TSP is they sell your funds pro-rata for distributions. So, say you own stocks and the G fund and want to take a distribution while the market is down 50%. Optimally, you would sell just the G fund and leave your stocks alone. When you take a distribution from the TSP, however, they sell an equal amount of both. (Of course, since money is fungible, you can always re-balance after the distribution… but one point of a distribution is to rebalance your account.) They used to only allow one distribution a year and it had to come equally from Roth and non-Roth, but apparently this is now a resolved issue.
The TSP is a federally qualified defined contribution plan. Aside from a few quirks, you can consider it exactly like a 401k. Use it!
The TSP has a Roth option. It comes with a 1% free match, and a total of 5% match.
Max out your TSP if you are a VA physician. Do the Roth if you are making less than usual or if you are a supersaver. And for the love of god get the federal pension and health care!
Other Governmental Physicians
Non-VA governmental physicians might work for local, state, or federal healthcare facilities. This means you have a governmental 457 (as opposed to a non-governmental 457… you must know the difference).
The governmental 457 is awesome and should be maxed out after you get your match. It just might be the best retirement plan in existence! There is no penalty for early withdrawals once you separate from service, and the governmental 457 can just be rolled into an IRA if you want.
So, do this: get your match (usually by contributing to a 403b, but it could be the 401a). After you have your match, fill up your 457b. Next, if you still want more tax-deferral, go back and fill up the rest of your 403b or 401a. Remember the 457 limits are completely separate from the other retirement plan limits. That means 19.5k plus 19.5k plus the match.
There might be a Roth option somewhere in the mix.
And, as a bonus for Governmental plans, you may be able to put in an extra 15k in your 403b the 3 years prior to traditional retirement. This is just for governmental 403b plans! Here is what the IRS says about these plans. And Here as well.
Finally, for you governmental physicians of the world, please do not invest in TIAA or in annuities in your pre-tax retirement accounts! Avoid annuities in tax-sheltered accounts. There are very few exceptions to that rule. Avoid TIAA because it is chock full of hidden fees and screwed over teachers for generations (and sadly continues to do so to this day).
Physician Retirement Plans if You Work at a Not-For-Profit Hospital
The 401, 403, 457 dance gets more complicated when you work at a not-for-profit hospital. The first decision you need to make: should I invest in the non-governmental 457?
Should I Invest in the Non-Governmental 457?
In short, the NG457 is not your asset, may have bad distribution options, and you should only use one if you know what you are getting yourself into.
If you do use your 457, you can defer an additional $19,500 a year. Please understand that the 457 limits are entirely separate from the other retirement plan limits. A NG457 can be useful in early or traditional retirement, but a NG457 is generally not a good idea early in your career.
401a, 403b, 401k: Other Retirement Plans for Non-Profit Hospitals
After you figure out if you want to invest in your NG457, the next problem to tackle is how your retirement plan is set up. You might have a 403b that matches into a 401a, a stand-alone 401a (which both you and your employer fund), or a 401k that has the chassis of a 401a.
Yes, not-for-profit hospitals are starting or switching to 401k plans which were typically reserved for corporate for-profit entities. After some tax law changes in 2006, you can have a stand-alone 401k plan and the match goes right into that 401k.
Prior to this and still most commonly, hospitals set up a 403b plan for your employee contributions ($19,500 a year), and the match goes into a 401a. A 403b could take your employer’s match, but if they do it that way there is no vesting and the money is yours right away! Of course, they want you to have to vest so you stick around for at least 6 years after signing. Golden handcuffs lite.
To understand vesting and all of the basics of 401k plans, please read my blog on the basics of 401k investing. This includes the basics for the 403b and 401a. Use these plans to the maximal if you need tax deferral.
If you have a 403b and a 401a, your hospital may switch you to a 401k in the near future. Let’s look next at this evolution.
Non-Profit Hospital Retirement Plan Evolution
F****** is a large retirement plan provider for the non-profit hospital space, and they are trying to “modernize” hospital retirement plans. Instead of a 401a and 403b, they are trying to get hospitals to go to a 401k plan.
To boot, this is slightly confusing because your plan will say “XYZ Hospital 401k Plan” but in the small print it will say 401a plan. This is why I say it is built on a 401a chassis, but now you can have vesting of employer contributions all in one single plan. These plans are just different subsections of IRS code in section 401, so it doesn’t really matter all that much.
F specifically recommends 403b/401a plan consolidation in the above document. They say these plans are at risk of noncompliance, more expensive, and are confusing. Instead, they suggest switching to a 401k or a safe harbor 401k.
If this happens to you, your 401a will be frozen or terminated. If frozen, you will still need to vest. And if terminated, they will vest all your money and you can transfer it into your 401k. Which option do you think most employer will take?
Comparing Physician Retirement Plans
Just to nail things down, let’s go over the most common comparisons. Remember, this is not applicable if you are a Governmental physician.
401a vs 401k
This is the account where you get your match. Of course, with the 401k, it is also where you do your contribution.
401a vs 457b
The non-governental 457b plan is an entirely different beast and requires separate considerations. Do not confuse a NG457 with any other type of plan.
401a vs 403b
You might have both of these plans. This is where you will contribute your employee funds (403b) and get your employer match (401a).
401k vs 457b
These plans, aside from the independent $19,500 you can contribute each year, have almost nothing else in common.
401k vs 403b
See the discussion about the evolution of physician retirement plans, above.
If you work at a church, then don’t read this. There are blogs devoted to your plans.
If you are a teacher, then avoid TIAA and annuities inside retirement accounts and do your best to figure out the rest. Again, there are blogs devoted to helping teachers overcome the past abuses they have been put through by the retirement industry.
Summary: Physician’s Retirement Plans: 401a, 403b, and 457b plans
These plans are all employer-sponsored retirement plans that allow you to defer income.
The 401a plans are particularly confusing, as they can be called money-purchase or profit-sharing retirement plans. The functionality of these plans depends on if you are employed by the government or a not-for-profit hospital.
The 403b plans were initially designed to house annuities, but then gained functionality to allow custodial investments in mutual funds. Now, they are a dying breed, and for the most part will be relegated to history.
The 401k plan (which may be built on a 401a chassis) is the future for not-for-profit hospitals.
Finally, 457 plans are to be treated with extreme care if non-governmental, and beloved if governmental. Remember, contribution limits for 457 plans and other employer retirement plans are separate, so consider filling up both!
Yes, all are tax deferred. Which should you invest in and in what order? The answer depends on if you are a employee of the government or not.