457(b) Plans for Physicians: Retirement Planning Hidden Gems
By Jared Andreoli, CFP®, CSLP®
For physicians, navigating retirement planning can feel more complex than interpreting an ambiguous medical chart. The sheer volume of options, ranging from individual IRAs to profit-sharing plans and 401(k)s, can be daunting for anyone with a demanding career. It’s no wonder that even the most financially savvy doctors sometimes overlook valuable tools like 457(b) plans for physicians.
This article explains what a 457(b) plan is and how it can play a smart role in your overall retirement strategy. By making the details easier to understand and showing where it fits alongside other savings tools, we hope to help you see how this often-overlooked option could strengthen your financial future.
What Is the 457(b) Plan?
A 457(b) plan is a tax-advantaged retirement savings plan for employees of state and local governments, as well as certain non-profit organizations, notably hospitals and healthcare systems like the Medical College of Wisconsin and the Marshfield Clinic Health System.
These plans, which were created in accordance with Section 457 of the Internal Revenue Code, allow qualified workers to postpone a portion of their pay on a pre-tax or after-tax (Roth) basis. Earnings accrue tax-deferred until they are withdrawn in retirement.
While sharing features with other employer-sponsored retirement plans like 401(k)s and 403(b)s, the 457(b) has some unique characteristics.
In contrast to 401(k)s, which are available to employees of for-profit companies, and 403(b)s, which are primarily for employees of public education institutions and certain other non-profits, eligibility for the 457(b) is specifically designed for governmental and qualifying non-profit healthcare businesses.
Unique Benefits of 457(b) Plans for Physicians
One of the more significant benefits of 457(b) plans for physicians is the absence of the usual 10% early withdrawal penalty of 401(k) and 403(b) plans for withdrawals taken before age 59½.
This feature provides critical flexibility for physicians thinking about early retirement or phasing out of full-time practice, because it allows them to access their 457(b) funds without penalty upon separation from service, regardless of their age.
Another unique benefit to consider: similar to 401(k) and 403(b) plans, 457(b) plans for physicians have elevated contribution limits. The ability to contribute to both a 403(b) and a 457(b) (if provided by the same company) is a huge benefit for qualified doctors, essentially doubling their yearly retirement contribution capability.
Lastly, for individuals who are within three years of their normal retirement age, 457(b) plans often include a unique “three-year catch-up” option that allows even greater contributions during these critical final working years.
Potential Pitfalls and Considerations
Despite the fact that 457(b) plans provide several benefits, physicians (particularly those employed by non-governmental non-profit healthcare institutions) need to be mindful of the risks.
In contrast to governmental 457(b) plans, where assets are normally held in trust or custodial accounts for the benefit of the employees, non-governmental plans are exposed to the potential claims of the employer’s creditors.
This means that the money in the physician’s 457(b) plan could be at risk in the event (albeit unlikely) that the employer files for bankruptcy or has severe financial difficulties. This absence of the same level of safeguard as governmental 457(b)s or other qualified retirement plans is a critical distinction physicians would be wise to consider.
The restricted investment alternatives offered by 457(b) plans may also be a disadvantage. In contrast to self-directed brokerage accounts or even certain 401(k)s, the hospital or corporation sponsoring the 457(b) plan may limit the investment options available to participants. This may make it more difficult for doctors to diversify their holdings in accordance with their personal risk tolerance and financial goals.
Another consideration is that upon separation from service, certain 457(b) plans may have obligatory distribution provisions. This could force a physician to accept distributions shortly after leaving their job, triggering unexpected tax obligations, particularly if they do not need the funds right away.
How the 457(b) Fits Into a Physician’s Retirement Plan
For high-income physicians, particularly those eligible for both a 457(b) and a 403(b) through their non-profit employer, the 457(b) can be a strong tool to aggressively increase retirement savings.
Physicians can essentially double their yearly tax-advantaged dollar contributions by making smart contributions to both plans up to their respective annual limits, as opposed to only using one retirement plan.
This dual approach, along with contributions to Roth IRAs (if income allows) and possibly taxable brokerage accounts for extra flexibility, allows for a multi-faceted retirement savings strategy.
Importantly, a physician’s entire retirement portfolio’s tax diversity is greatly enhanced by using the 457(b) plan. Physicians can strategically position themselves to manage their retirement tax obligations by using pre-tax contributions to the 457(b) and possibly Roth contributions to a 403(b) or Roth IRA.
Start Utilizing the 457(b) Plan for Physicians
The 457(b) plan for physicians is an effective yet underutilized tool. When strategically integrated into a larger retirement plan, it can expedite financial independence. The key is to speak with a fiduciary financial advisor who can weigh the pros and cons as they apply to your financial goals.
At Simplicity Financial LLC, we have the knowledge and experience to help you fit this powerful retirement strategy into your unique lifestyle and personal situation.
Get started by scheduling a free consultation, or reach out to us by emailing jared.andreoli@simplicityfinancialllc.com or calling 414-207-6473.
About Jared
Jared Andreoli, CFP®, CSLP®, is president and financial planner at Simplicity Financial, a fee-only RIA dedicated to helping early-career physicians conceptualize their financial picture and achieve their financial goals. Jared specializes in devising individualized financial road maps for clients, and he loves nothing more than a full day meeting with clients who value his partnership to solve problems—big and small.
After college, Jared spent six years working as a mutual fund administrator for a large company. While he learned an immense amount about the financial world, he was missing the personal connection of working with individual clients. Combining his passion for finance and personal connection, he established Simplicity Financial in 2017.
Jared has a degree in finance with a concentration in financial planning from Western Kentucky University, along with the CERTIFIED FINANCIAL PLANNER®, CFP® and a Certified Student Loan Planner (CSLP®) certifications. Outside of work Jared enjoys cooking and traveling. He played baseball in college and still coaches occasionally. He and his wife recently welcomed a daughter, who occupies most of their time. To learn more about Jared, connect with him on LinkedIn.