WEBVTT 00:00:00.000 --> 00:00:02.859 Welcome back to the Deep Dive. Today, we're going 00:00:02.859 --> 00:00:05.480 to step away from the usual, you know, the corporate 00:00:05.480 --> 00:00:08.980 world of the 401k. Right. And we're diving straight 00:00:08.980 --> 00:00:11.859 into the retirement plans that are really the 00:00:11.859 --> 00:00:14.220 backbone for public service. We're talking about 00:00:14.220 --> 00:00:15.939 the financial engine that supports our teachers, 00:00:16.120 --> 00:00:20.199 our city workers, hospital staff, nonprofit employees. 00:00:21.640 --> 00:00:26.100 The often I think. Very misunderstood 403b and 00:00:26.100 --> 00:00:29.039 457 plans. That's absolutely right. I think for 00:00:29.039 --> 00:00:30.620 a lot of people, especially if you're new to 00:00:30.620 --> 00:00:32.740 the public sector or the nonprofit world, you 00:00:32.740 --> 00:00:34.659 just look at these plans and think, OK, it's 00:00:34.659 --> 00:00:36.939 just a substitute for a 401k. A different name 00:00:36.939 --> 00:00:39.920 for the same thing. Exactly. But as we unpack 00:00:39.920 --> 00:00:43.780 the detailed source material you've shared, we 00:00:43.780 --> 00:00:46.039 find they're not just structurally unique. They 00:00:46.039 --> 00:00:48.140 have some really surprising flexibilities and 00:00:48.140 --> 00:00:51.119 crucially, some very specific financial and legal 00:00:51.119 --> 00:00:53.299 risks. And those risks are tied to. directly 00:00:53.299 --> 00:00:55.560 to who your employer is, which is a scary thought. 00:00:55.659 --> 00:00:57.719 It is. So our mission today for you, the listener, 00:00:57.859 --> 00:01:00.179 is to give you the definitive checklist, but 00:01:00.179 --> 00:01:03.799 fast. We want to demystify these plans, lay out 00:01:03.799 --> 00:01:06.239 all the critical compliance quirks and really 00:01:06.239 --> 00:01:08.219 highlight the advantages. And the disadvantages. 00:01:08.620 --> 00:01:10.900 And the severe disadvantages. We're looking at 00:01:10.900 --> 00:01:14.159 regulatory documents, IRS guidance, legislative 00:01:14.159 --> 00:01:17.299 history, all to get to the core of how these 00:01:17.299 --> 00:01:20.340 plans really work. And, you know. If we start 00:01:20.340 --> 00:01:22.620 at that 30 ,000 foot view, the high level comparison, 00:01:23.000 --> 00:01:26.159 you do see a common ground. Okay. Both the 403B 00:01:26.159 --> 00:01:29.719 and the 457, they run on employee salary deferrals. 00:01:29.819 --> 00:01:32.599 You put money in pre -tax, it goes tax deferred, 00:01:32.599 --> 00:01:34.620 and then you pull it out. The core engine of 00:01:34.620 --> 00:01:37.159 retirement savings. That's the one. And when 00:01:37.159 --> 00:01:39.340 you do finally take distributions in retirement, 00:01:39.540 --> 00:01:41.920 that money is typically taxed as ordinary income, 00:01:42.099 --> 00:01:44.739 just like a traditional IRA or 401k. And both 00:01:44.739 --> 00:01:46.519 plans also have that same rule for when you have 00:01:46.519 --> 00:01:49.040 to start taking money out, right? The RMDs. Yep. 00:01:49.060 --> 00:01:51.920 Thanks to some rule changes back in 2020, both 00:01:51.920 --> 00:01:55.040 plans are subject to required minimum. distributions 00:01:55.040 --> 00:01:58.159 or RMDs starting at age 72. So that's the common 00:01:58.159 --> 00:02:00.319 ground. But that's pretty much where it ends. 00:02:00.439 --> 00:02:03.079 The divergence in who can have them and how they're 00:02:03.079 --> 00:02:06.760 billed, it's immediate and it's critical to understand. 00:02:07.000 --> 00:02:09.500 It really is. The 403B, for instance, that's 00:02:09.500 --> 00:02:11.900 specifically for public education organizations, 00:02:12.379 --> 00:02:16.180 501c3 nonprofits, cooperative hospitals, and 00:02:16.180 --> 00:02:18.139 even self -employed ministers. Very specific 00:02:18.139 --> 00:02:21.060 slice of the workforce. Very. And its tax treatment 00:02:21.060 --> 00:02:24.539 used to be... Well, less flexible than a 401k. 00:02:24.580 --> 00:02:27.560 But that all changed after EGTRA. The Economic 00:02:27.560 --> 00:02:30.539 Growth and Tax Relief Reconciliation Act of 2001. 00:02:30.900 --> 00:02:33.699 That's the one. That act really brought the 403b's 00:02:33.699 --> 00:02:35.939 rules much more in line with the 401k structure 00:02:35.939 --> 00:02:38.400 we all know. And then there's the 457, which 00:02:38.400 --> 00:02:40.979 you sometimes see offered right alongside a 403b 00:02:40.979 --> 00:02:43.020 for public employees. But it's a different animal. 00:02:43.180 --> 00:02:46.379 A completely different animal. The 457 is what's 00:02:46.379 --> 00:02:48.639 called a non -qualified deferred compensation 00:02:48.639 --> 00:02:51.960 plan. It's for governmental employers. State 00:02:51.960 --> 00:02:54.159 and local agencies, cities, public universities. 00:02:54.400 --> 00:02:56.360 Isn't the important part. And certain specific 00:02:56.360 --> 00:02:58.479 non -governmental employers. And that distinction, 00:02:58.659 --> 00:03:00.939 governmental versus non -governmental. That's 00:03:00.939 --> 00:03:02.919 the pivot point for our entire discussion today. 00:03:03.139 --> 00:03:05.919 Because that one word changes everything about 00:03:05.919 --> 00:03:08.319 the security and the risk you're taking on. Everything. 00:03:08.379 --> 00:03:11.259 OK, let's unpack the 403B first. Let's see why 00:03:11.259 --> 00:03:13.699 its life is so different. Absolutely. Let's start 00:03:13.699 --> 00:03:16.539 with the 403B. You know, when people talk about 00:03:16.539 --> 00:03:18.840 this plan, you still hear its old name all the 00:03:18.840 --> 00:03:22.919 time. The tax sheltered annuity. The TSA. That 00:03:22.919 --> 00:03:26.080 name, that TSA moniker, it tells you everything 00:03:26.080 --> 00:03:28.500 about where this plan came from. Historically, 00:03:28.520 --> 00:03:31.240 the plan was restricted to just annuity investments, 00:03:31.500 --> 00:03:34.400 a fixed stream of payments. But that's not true 00:03:34.400 --> 00:03:37.500 anymore, is it? Not for decades. One of the surprising 00:03:37.500 --> 00:03:39.919 things our sources make clear is that since 1974, 00:03:40.360 --> 00:03:42.460 participants have been able to invest in mutual 00:03:42.460 --> 00:03:44.840 funds, too. But the name stuck. The name stuck. 00:03:44.979 --> 00:03:47.919 And I think that habit of calling it a TSA, of 00:03:47.919 --> 00:03:49.400 seeing it just through that insurance product 00:03:49.400 --> 00:03:52.280 lens, it still persists. So to be clear on eligibility, 00:03:52.620 --> 00:03:55.680 we're talking public education, 501c3s, hospitals, 00:03:55.960 --> 00:03:58.520 ministers. It's fundamentally built for a service 00:03:58.520 --> 00:04:00.699 -oriented workforce. And that's what leads to 00:04:00.699 --> 00:04:02.719 the single biggest structural difference between 00:04:02.719 --> 00:04:05.800 a 403b and a 401k. And that's the ERISA question. 00:04:06.400 --> 00:04:08.620 ERISA, the Employee Retirement Income Security 00:04:08.620 --> 00:04:12.729 Act of 1974. The big federal law meant to protect 00:04:12.729 --> 00:04:15.370 our retirement savings. Exactly. But here's the 00:04:15.370 --> 00:04:18.990 key. 403B plans are not required to be what's 00:04:18.990 --> 00:04:21.750 called technically qualified plans under the 00:04:21.750 --> 00:04:25.430 tax code or governed by ERISA. Hold on. How can 00:04:25.430 --> 00:04:27.910 a major retirement plan not be governed by the 00:04:27.910 --> 00:04:29.889 main law designed to protect retirement plans? 00:04:30.029 --> 00:04:32.410 That sounds like a huge security risk for the 00:04:32.410 --> 00:04:34.509 employee. It sounds totally counterintuitive, 00:04:34.509 --> 00:04:37.790 right? But for the employer, especially a small 00:04:37.790 --> 00:04:40.670 nonprofit or a public school, it's a massive 00:04:40.670 --> 00:04:44.310 administrative gift. How so? If the 403B is not 00:04:44.310 --> 00:04:47.389 an ERISA plan, which is... pretty common if the 00:04:47.389 --> 00:04:50.050 employer isn't making contributions. It gets 00:04:50.050 --> 00:04:52.910 to sidestep a lot of the really expensive technical 00:04:52.910 --> 00:04:55.470 hassles of a 401k. Like what? What's the biggest 00:04:55.470 --> 00:04:57.610 one? The biggest relief is getting rid of the 00:04:57.610 --> 00:05:00.170 complex non -discrimination testing for salary 00:05:00.170 --> 00:05:03.329 deferrals. All right. So with 401ks, they have 00:05:03.329 --> 00:05:06.089 to run these intricate annual tests to prove 00:05:06.089 --> 00:05:07.889 the plan isn't just favoring the high earners. 00:05:07.930 --> 00:05:10.550 It's a huge headache for HR. A massive burden. 00:05:10.689 --> 00:05:13.110 So instead of all that complex testing, 403bs 00:05:13.110 --> 00:05:14.990 have something called the Universal Availability 00:05:14.990 --> 00:05:17.139 Standard. And what does that mean? It's much 00:05:17.139 --> 00:05:20.160 simpler. It just means that generally all employees 00:05:20.160 --> 00:05:22.579 have to be allowed to make salary deferral contributions 00:05:22.579 --> 00:05:24.839 as long as they meet some basic age and service 00:05:24.839 --> 00:05:28.839 rules. It's about broad access, not complex proportional 00:05:28.839 --> 00:05:31.850 testing. And that's simplicity. must save these 00:05:31.850 --> 00:05:34.649 organizations a ton of money and time. It absolutely 00:05:34.649 --> 00:05:37.730 does. That's why the 403B is so popular in these 00:05:37.730 --> 00:05:41.689 sectors. Non -ARISA 403Bs have way simpler and 00:05:41.689 --> 00:05:44.050 cheaper annual reporting. They file a simpler 00:05:44.050 --> 00:05:47.430 version of the IRS Form 5500. And the big one. 00:05:47.529 --> 00:05:49.949 And the big one. They get to avoid the super 00:05:49.949 --> 00:05:52.610 expensive, time -consuming, independent auditor 00:05:52.610 --> 00:05:55.649 requirement that applies to most big 401ks with 00:05:55.649 --> 00:05:58.689 over 100 participants. That reduction in compliance 00:05:58.689 --> 00:06:00.819 burden, it's often the deciding factor. factor. 00:06:01.120 --> 00:06:03.000 Okay, let's pivot to the employee side. Let's 00:06:03.000 --> 00:06:05.339 talk about getting your money out. Like a 401k, 00:06:05.519 --> 00:06:07.279 the money is supposed to be for retirement, so 00:06:07.279 --> 00:06:09.040 it's locked up for a while. That's right. If 00:06:09.040 --> 00:06:11.139 you're under age 59 and a half, you generally 00:06:11.139 --> 00:06:13.639 can't take an early withdrawal, not unless a 00:06:13.639 --> 00:06:15.579 specific triggering event happens. And those 00:06:15.579 --> 00:06:17.180 events are things like... Our sources always 00:06:17.180 --> 00:06:20.060 list the same ones. A proven financial hardship, 00:06:20.279 --> 00:06:23.360 a disability, or leaving your job separation 00:06:23.360 --> 00:06:25.899 from service. That's the firewall to keep the 00:06:25.899 --> 00:06:27.939 money in there. But if one of those things does 00:06:27.939 --> 00:06:30.079 happen and you need the money... you're going 00:06:30.079 --> 00:06:32.360 to get hit with a pretty painful tax consequence. 00:06:32.699 --> 00:06:35.240 That's the mandatory discouragement built right 00:06:35.240 --> 00:06:37.980 into the system. If you take an early withdrawal, 00:06:38.240 --> 00:06:41.680 first, the whole amount is taxed as ordinary 00:06:41.680 --> 00:06:44.600 income. And then on top of that, the IRS hits 00:06:44.600 --> 00:06:47.040 you with a mandatory 10 % federal tax penalty. 00:06:47.360 --> 00:06:49.480 It ensures that even if you're taking it out 00:06:49.480 --> 00:06:51.879 for a hardship, there's a steep price to pay. 00:06:52.269 --> 00:06:53.750 And, you know, before we move on from this, I 00:06:53.750 --> 00:06:55.649 want to touch on a compliance detail that I thought 00:06:55.649 --> 00:06:58.449 was fascinating. The written plan requirement. 00:06:58.610 --> 00:07:01.129 It sounds like the IRS had to step in and force 00:07:01.129 --> 00:07:03.569 some organization on these plans. Yes, this is 00:07:03.569 --> 00:07:06.490 a great look into how regulations evolve. Historically, 00:07:06.490 --> 00:07:08.509 a lot of these plans were super decentralized. 00:07:08.970 --> 00:07:11.290 You'd have an organization with multiple vendor 00:07:11.290 --> 00:07:14.029 contracts and no single unifying document. Chaos. 00:07:14.269 --> 00:07:17.490 Total chaos. So the IRS finally said enough. 00:07:18.220 --> 00:07:21.019 They mandated that all plans must have a formal 00:07:21.019 --> 00:07:24.579 written plan document. On December 9, 2008, they 00:07:24.579 --> 00:07:27.160 gave sponsors a one -year reprise to get it done. 00:07:27.279 --> 00:07:29.600 Why give them a year? Well, it was an acknowledgement 00:07:29.600 --> 00:07:32.300 of just how messy it was. They knew it would 00:07:32.300 --> 00:07:34.660 be impossible for everyone to formalize decades 00:07:34.660 --> 00:07:37.839 of informal agreements overnight. But... And 00:07:37.839 --> 00:07:40.220 the sources stress this. Even with the reprieve 00:07:40.220 --> 00:07:42.680 on the paperwork, the plan still had to operate 00:07:42.680 --> 00:07:44.939 in compliance with all the rules. It was the 00:07:44.939 --> 00:07:47.819 government basically saying it's time to professionalize 00:07:47.819 --> 00:07:49.800 this system. Exactly. It had just gotten too 00:07:49.800 --> 00:07:51.980 loose. That's a great summary. Now let's get 00:07:51.980 --> 00:07:55.040 into how the legal security of the 403B has fundamentally 00:07:55.040 --> 00:07:57.339 changed for the better. This is where it gets 00:07:57.339 --> 00:08:00.139 really interesting for me. The whole bankruptcy 00:08:00.139 --> 00:08:03.639 barrier before 2005. This is so important because 00:08:03.639 --> 00:08:06.480 it explains why not having a RESA status used 00:08:06.480 --> 00:08:08.939 to be this point of extreme vulnerability for 00:08:08.939 --> 00:08:11.680 employees. So what was the rule before 2005? 00:08:12.060 --> 00:08:14.139 Before the Bankruptcy Abuse Prevention and Consumer 00:08:14.139 --> 00:08:18.420 Protection Act, or BAPCPA, a non -RESA 403B was 00:08:18.420 --> 00:08:20.740 generally not protected property. It wasn't something 00:08:20.740 --> 00:08:23.439 a debtor could claim as exempt. So if a teacher 00:08:23.439 --> 00:08:27.220 in a non -RESA plan declared bankruptcy, they 00:08:27.220 --> 00:08:29.220 could literally lose... lose their entire retirement 00:08:29.220 --> 00:08:32.220 savings to creditors. That's terrifying. It was 00:08:32.220 --> 00:08:34.279 a massive risk and the legal landscape was a 00:08:34.279 --> 00:08:37.139 total mess. The safety of your savings depended 00:08:37.139 --> 00:08:39.559 entirely on the nitty gritty details of how your 00:08:39.559 --> 00:08:42.590 employer set up the plan. The Henry Barnes case 00:08:42.590 --> 00:08:45.409 from 2001 just highlights this confusion perfectly. 00:08:45.690 --> 00:08:47.789 Okay, walk us through that case. It sounds like 00:08:47.789 --> 00:08:50.330 a perfect example. In Barnes, the person had 00:08:50.330 --> 00:08:53.649 a 403B account. The judge ruled that the money 00:08:53.649 --> 00:08:56.210 invested in a fixed income annuity could be seized 00:08:56.210 --> 00:08:59.029 by creditors. Why? Because it lacked the specific 00:08:59.029 --> 00:09:01.789 trust language and anti -alienation clauses needed 00:09:01.789 --> 00:09:05.519 for protection. But, get this, the variable account 00:09:05.519 --> 00:09:07.759 within the same plan was ruled to be protected 00:09:07.759 --> 00:09:10.059 under a different part of the code. So depending 00:09:10.059 --> 00:09:11.799 on which subaccount your money was in, you could 00:09:11.799 --> 00:09:14.019 lose it all. Precisely. It was a lottery. Back 00:09:14.019 --> 00:09:16.440 then, having that Arisa anti -alienation clause 00:09:16.440 --> 00:09:19.100 was the gold standard. It gave your assets the 00:09:19.100 --> 00:09:21.120 same kind of protection as a spendthrift trust, 00:09:21.379 --> 00:09:24.279 making them untouchable by creditors. This gap 00:09:24.279 --> 00:09:27.600 created a really unfair situation. And Congress 00:09:27.600 --> 00:09:31.080 finally stepped in with BAPCPA in 2005 to fix 00:09:31.080 --> 00:09:34.840 it. Yes. That 2005 reform was a landmark. It 00:09:34.840 --> 00:09:38.120 extended federal bankruptcy protection to 403Bs, 00:09:38.139 --> 00:09:41.220 to IRAs, to other retirement plans, shielding 00:09:41.220 --> 00:09:43.240 them from creditors. Regardless of whether they 00:09:43.240 --> 00:09:46.159 were arrests or not. Exactly. It closed a huge 00:09:46.159 --> 00:09:48.919 security gap for public servants. It was a massive 00:09:48.919 --> 00:09:51.279 win for financial security in the nonprofit and 00:09:51.279 --> 00:09:53.679 education world. That's incredibly reassuring. 00:09:54.009 --> 00:09:57.190 So today, you can pretty much assume year 403b 00:09:57.190 --> 00:10:00.389 has federal bankruptcy protection. Now let's 00:10:00.389 --> 00:10:02.250 talk about a more modern feature that really 00:10:02.250 --> 00:10:05.450 boosted its appeal. the Roth revolution. The 00:10:05.450 --> 00:10:07.710 Roth option completely changed the tax planning 00:10:07.710 --> 00:10:11.629 game. Starting in 2006, 403b plans, just like 00:10:11.629 --> 00:10:14.649 401ks, could add designated Roth accounts. For 00:10:14.649 --> 00:10:16.389 anyone who might be less familiar, just explain 00:10:16.389 --> 00:10:18.649 that fundamental trade -off, traditional versus 00:10:18.649 --> 00:10:21.490 Roth. Sure. With a traditional pre -tax contribution, 00:10:21.929 --> 00:10:24.230 you get your tax break today. You pay less tax 00:10:24.230 --> 00:10:26.990 now, but you pay ordinary income tax on everything 00:10:26.990 --> 00:10:29.509 when you withdraw it later. Roth is the opposite. 00:10:29.769 --> 00:10:32.129 You contribute with after -tax money, so you 00:10:32.129 --> 00:10:35.049 pay the tax today. But the huge benefit is that 00:10:35.049 --> 00:10:37.809 later on, withdrawals of both your contributions 00:10:37.809 --> 00:10:41.610 and all the earnings are 100 % tax -free. That 00:10:41.610 --> 00:10:44.370 must be a huge planning tool for people, especially 00:10:44.370 --> 00:10:46.289 if they think their tax bracket will be higher 00:10:46.289 --> 00:10:48.889 in retirement. It's a game changer, as long as 00:10:48.889 --> 00:10:51.070 you meet the two big rules. Which are? The money 00:10:51.070 --> 00:10:53.029 has to have been in the plan for at least five 00:10:53.029 --> 00:10:55.710 taxable years, the five -year rule, and you have 00:10:55.710 --> 00:10:58.679 to be at least 59 and a half. If you check those 00:10:58.679 --> 00:11:01.200 boxes, you have a guaranteed tax -free income 00:11:01.200 --> 00:11:04.299 stream in retirement. Fantastic. Okay, one last 00:11:04.299 --> 00:11:08.480 niche case for this section. Church plans. They 00:11:08.480 --> 00:11:10.580 seem to operate in their own little world. They 00:11:10.580 --> 00:11:13.200 really do. A church plan is defined as a retirement 00:11:13.200 --> 00:11:16.179 plan set up by a tax -exempt church or an association 00:11:16.179 --> 00:11:19.240 of churches for its employees. They exist outside 00:11:19.240 --> 00:11:21.600 the standard rulebook. So what's their status 00:11:21.600 --> 00:11:24.210 when it comes to ERISA? They are specifically 00:11:24.210 --> 00:11:27.629 not subject to ERISA and they stay that way unless 00:11:27.629 --> 00:11:30.889 the organization makes a voluntary and importantly 00:11:30.889 --> 00:11:33.549 irrevocable election to be covered by it. And 00:11:33.549 --> 00:11:35.330 because they're outside ERISA, what does that 00:11:35.330 --> 00:11:38.250 mean practically? It means they avoid a ton of 00:11:38.250 --> 00:11:40.580 administrative work. They don't have to file 00:11:40.580 --> 00:11:44.000 the big annual IRS form 5500. They don't have 00:11:44.000 --> 00:11:46.600 to distribute all those summary reports and plan 00:11:46.600 --> 00:11:48.659 descriptions to participants. And a financial 00:11:48.659 --> 00:11:51.200 break, too. A big one. If they have a defined 00:11:51.200 --> 00:11:54.200 benefit plan, they aren't required to pay termination 00:11:54.200 --> 00:11:56.659 insurance to the Pension Benefit Guarantee Corporation. 00:11:57.279 --> 00:12:00.399 It's a profoundly streamlined world that reflects 00:12:00.399 --> 00:12:03.419 their unique status. OK, that gives us a really 00:12:03.419 --> 00:12:06.500 comprehensive picture of the 403B. Let's shift 00:12:06.500 --> 00:12:08.720 gears completely now and talk about the 457. 00:12:08.809 --> 00:12:11.250 plan. This one operates with a totally different 00:12:11.250 --> 00:12:13.190 philosophy, especially when it comes to getting 00:12:13.190 --> 00:12:16.029 your money. Right. If the 403b is for nonprofits 00:12:16.029 --> 00:12:20.049 and schools, the 457, this non -qualified deferred 00:12:20.049 --> 00:12:23.029 comp plan, is generally the tool for governmental 00:12:23.029 --> 00:12:26.629 employers, state agencies, cities, towns. And 00:12:26.629 --> 00:12:27.909 there's an interesting group of people who can 00:12:27.909 --> 00:12:30.429 participate in a 457 that might not be able to 00:12:30.429 --> 00:12:33.870 in a 401k. Yes, this is a neat structural difference. 00:12:34.250 --> 00:12:39.149 Unlike 401ks and 403bs, a 457 457 plan, both 00:12:39.149 --> 00:12:41.289 the governmental and the non -governmental kind, 00:12:41.549 --> 00:12:44.090 can allow independent contractors to participate. 00:12:44.429 --> 00:12:46.029 That's a nice little perk for governments that 00:12:46.029 --> 00:12:49.049 use a lot of contractors. It is. But the single 00:12:49.049 --> 00:12:51.669 most attractive feature, the real aha moment 00:12:51.669 --> 00:12:54.129 for employees, is the withdrawal flexibility. 00:12:54.870 --> 00:12:58.350 This is what makes the governmental 457 so unique. 00:12:58.690 --> 00:13:00.769 This is the big one. This is the big one. A governmental 00:13:00.769 --> 00:13:04.429 457 plan has no 10 % penalty for withdrawal before 00:13:04.429 --> 00:13:06.549 the age of 55. Which is just a radical difference 00:13:06.549 --> 00:13:08.419 from every other. other retirement plan out there 00:13:08.419 --> 00:13:11.179 which mostly use that 59 and a half rule. Why? 00:13:11.759 --> 00:13:14.980 Why does this one plan get this massive loophole? 00:13:15.080 --> 00:13:17.120 It really goes back to its history. It was defined 00:13:17.120 --> 00:13:19.860 from the start as a non -qualified deferred compensation 00:13:19.860 --> 00:13:22.340 plan, not a fully qualified retirement trust 00:13:22.340 --> 00:13:24.480 like a 401k. Because it was built differently. 00:13:24.659 --> 00:13:26.779 It inherited this massive flexibility benefit. 00:13:27.000 --> 00:13:29.220 It was designed to let government employees defer 00:13:29.220 --> 00:13:31.259 income without all the qualified plan rules. 00:13:31.440 --> 00:13:34.179 And this came along with it. So just to be crystal 00:13:34.179 --> 00:13:37.210 clear. If a city employee leaves their job at 00:13:37.210 --> 00:13:40.070 age 52, they can start taking money from their 00:13:40.070 --> 00:13:44.409 457 right away without that 10 % penalty. Exactly. 00:13:44.590 --> 00:13:47.429 Which makes the governmental 457 an incredible 00:13:47.429 --> 00:13:50.350 tool for planning an early retirement. It's often 00:13:50.350 --> 00:13:53.110 called a bridge strategy. A bridge to what? A 00:13:53.110 --> 00:13:56.850 bridge to age 59 and a half. You use your 457 00:13:56.850 --> 00:14:00.549 funds penalty -free to live on until your 401k 00:14:00.549 --> 00:14:04.330 or 403b money becomes accessible without penalty. 00:14:04.649 --> 00:14:06.330 Now, what's the catch? Because there's always 00:14:06.330 --> 00:14:08.309 a catch. You avoid the penalty, but you don't 00:14:08.309 --> 00:14:10.330 avoid all the taxes. That's the critical balance. 00:14:10.389 --> 00:14:13.029 The 10 % penalty is waived, yes, but the entire 00:14:13.029 --> 00:14:14.809 withdrawal is still subject to ordinary income 00:14:14.809 --> 00:14:16.929 tax. So you're paying tax, but you're avoiding 00:14:16.929 --> 00:14:19.509 that punitive extra tax. Which makes it a much, 00:14:19.529 --> 00:14:21.950 much better deal for an early withdrawal. And 00:14:21.950 --> 00:14:24.629 just like the 403b, the 457 also got the Roth 00:14:24.629 --> 00:14:26.690 treatment. It did just a little bit later. The 00:14:26.690 --> 00:14:29.629 Small Business Jobs Act of 2010 allowed 457B 00:14:29.629 --> 00:14:32.389 plans to add Roth accounts starting January 1st, 00:14:32.389 --> 00:14:35.649 2011. The mechanics are identical. Pay tax now 00:14:35.649 --> 00:14:38.009 for tax -free growth and withdrawals later. Okay, 00:14:38.070 --> 00:14:40.370 now we get to the power section. This is where 00:14:40.370 --> 00:14:42.750 the governmental 457 really separates itself 00:14:42.750 --> 00:14:45.250 and lets public servants save at a rate that 00:14:45.250 --> 00:14:47.769 most corporate employees can only dream of. We're 00:14:47.769 --> 00:14:49.490 talking about stacking and catch -up provisions. 00:14:49.889 --> 00:14:52.509 And this all comes down to one single piece of 00:14:52.509 --> 00:14:56.840 legislation. EGTRA back in 2001. If you remember 00:14:56.840 --> 00:15:00.419 nothing else, remember how EGTRA completely changed 00:15:00.419 --> 00:15:03.539 the game for the governmental 457. Before EGTRA, 00:15:03.679 --> 00:15:05.659 there was a major limit, wasn't there? A huge 00:15:05.659 --> 00:15:08.080 constraint. Before then, if you were lucky enough 00:15:08.080 --> 00:15:11.120 to have access to both a 457 plan and a 401k 00:15:11.120 --> 00:15:14.059 or 403b, which is common at big public universities, 00:15:14.179 --> 00:15:16.440 for instance, your contribution limits had to 00:15:16.440 --> 00:15:18.779 be coordinated. Meaning you had one maximum amount 00:15:18.779 --> 00:15:20.720 and you had to split it between the two accounts. 00:15:20.860 --> 00:15:22.820 You couldn't max out both. That's right. You 00:15:22.820 --> 00:15:25.139 were stuck with one single maximum deferral. 00:15:25.220 --> 00:15:27.200 It really limited how much people could save. 00:15:27.399 --> 00:15:30.639 But EGTRA 2001 came along and got rid of that 00:15:30.639 --> 00:15:32.940 coordination limit, but only for governmental 00:15:32.940 --> 00:15:36.490 457 plans. created the famous double dip. That 00:15:36.490 --> 00:15:39.169 is the pivotal insight. After that, a government 00:15:39.169 --> 00:15:41.470 employee could contribute the maximum elective 00:15:41.470 --> 00:15:44.889 deferral to their 401k or 403b and a completely 00:15:44.889 --> 00:15:47.090 separate maximum amount into their governmental 00:15:47.090 --> 00:15:50.730 457. So using the 2021 limits from our sources, 00:15:50.909 --> 00:15:54.909 that would mean $19 ,500 into your 403b and then 00:15:54.909 --> 00:15:58.769 another $19 ,500 into your 457. A total of $39 00:15:58.769 --> 00:16:01.629 ,000 in pre -tax deferrals, you instantly double 00:16:01.629 --> 00:16:03.809 your savings capacity. That is an incredible 00:16:03.809 --> 00:16:06.289 amount of financial leverage. It truly is. Now, 00:16:06.289 --> 00:16:10.070 there's one little... nuance your 401k and 403b 00:16:10.070 --> 00:16:12.049 limits are still coordinated with each other 00:16:12.049 --> 00:16:15.049 you can't max out both of those right the 457 00:16:15.049 --> 00:16:17.429 is the distinct account that you get to stack 00:16:17.429 --> 00:16:19.610 on top and now we get to layer the catch -up 00:16:19.610 --> 00:16:22.610 provisions on top of this and the 457 world has 00:16:22.610 --> 00:16:25.070 two very different types of catch -ups let's 00:16:25.070 --> 00:16:27.200 start with the first one Type 1 is the one we're 00:16:27.200 --> 00:16:29.200 all familiar with. It's the age 50 catch -up, 00:16:29.220 --> 00:16:32.019 an extra amount, $6 ,500 in the 2021 example. 00:16:32.120 --> 00:16:34.820 That's similar to a 401k. But the key here is 00:16:34.820 --> 00:16:36.559 that this is only available under governmental 00:16:36.559 --> 00:16:39.500 457 plans. So if you're over 50 and you work 00:16:39.500 --> 00:16:42.100 for the state, you can put that age 50 catch 00:16:42.100 --> 00:16:44.480 -up into both your 403b and your governmental 00:16:44.480 --> 00:16:48.019 457. No, you can use an age 50 catch -up in your 00:16:48.019 --> 00:16:51.220 403b and another one in your 457. It's fantastic. 00:16:51.720 --> 00:16:54.379 But then you have catch -up type 2. The complex 00:16:54.379 --> 00:16:57.240 one. The complex one. This is available in both 00:16:57.240 --> 00:17:00.000 governmental and non -governmental plans, and 00:17:00.000 --> 00:17:02.120 it's for employees who are within three years 00:17:02.120 --> 00:17:04.660 of their normal retirement age. And how is this 00:17:04.660 --> 00:17:07.400 one different? It's designed to be a massive 00:17:07.400 --> 00:17:11.079 final push. The potential contribution is equal 00:17:11.079 --> 00:17:13.859 to the full employee deferral limit. So another 00:17:13.859 --> 00:17:18.819 $19 ,500 using those 2021 figures. But there's 00:17:18.819 --> 00:17:20.740 a big string attached. It depends on your history. 00:17:20.880 --> 00:17:24.019 A huge string. This cash up is strictly limited 00:17:24.019 --> 00:17:26.359 to your unused deferral limits from previous 00:17:26.359 --> 00:17:29.119 years. So if you've been maxing out your 457 00:17:29.119 --> 00:17:31.160 every single year you've worked there. You can't 00:17:31.160 --> 00:17:33.619 use this feature. It's gone. It's designed. for 00:17:33.619 --> 00:17:36.019 people who were late savers or who couldn't afford 00:17:36.019 --> 00:17:38.400 to max out earlier in their career. It's one 00:17:38.400 --> 00:17:40.900 last chance to catch up in a big way. That is 00:17:40.900 --> 00:17:43.940 a powerful tool for late career savers. So let's 00:17:43.940 --> 00:17:45.480 put it all together. Let's talk about the maximum 00:17:45.480 --> 00:17:48.099 theoretical potential here. Right. So imagine 00:17:48.099 --> 00:17:50.240 you're over 50. You're within three years of 00:17:50.240 --> 00:17:52.680 retirement. You have access to both plans and 00:17:52.680 --> 00:17:55.200 you have that unused deferral capacity in your 00:17:55.200 --> 00:17:57.539 457. You can layer everything on top of each 00:17:57.539 --> 00:18:00.119 other. Everything. So on the 401k or 403b side. 00:18:00.619 --> 00:18:04.279 You have your elective maximum, $19 ,500, plus 00:18:04.279 --> 00:18:07.740 your age 50 catch -up, another $6 ,500. So that's 00:18:07.740 --> 00:18:11.380 $26 ,000 right there. Okay, $26 ,000 on one side. 00:18:11.440 --> 00:18:14.119 Now, on the 457 side, you get your standard elective 00:18:14.119 --> 00:18:18.079 maximum of $19 ,500, plus the full potential 00:18:18.079 --> 00:18:20.119 of that type 2 catch -up, which is another $19 00:18:20.119 --> 00:18:24.660 ,500. So that's $39 ,000 on the 457 side. Exactly. 00:18:24.720 --> 00:18:27.880 Add the $26 ,000 from the 401k, and you're at 00:18:27.880 --> 00:18:30.670 a potential deferral of $65 ,000. thousand dollars 00:18:30.670 --> 00:18:33.029 in a single year sixty five thousand dollars 00:18:33.029 --> 00:18:35.450 it's just it's a completely different level of 00:18:35.450 --> 00:18:37.329 savings it transforms your retirement runway 00:18:37.329 --> 00:18:39.529 it's a level of financial leverage that's pretty 00:18:39.529 --> 00:18:41.269 much uniquely available to certain government 00:18:41.269 --> 00:18:44.029 employees an unmatched tool a powerhouse okay 00:18:44.029 --> 00:18:46.130 now we need to pump the brakes we've just praised 00:18:46.130 --> 00:18:48.589 the governmental 457 but now we get to what i 00:18:48.589 --> 00:18:50.210 think is the most critical part of this entire 00:18:50.210 --> 00:18:53.950 deep dive the great divide the great divide this 00:18:53.950 --> 00:18:55.990 is where we separate the golden rules of the 00:18:55.990 --> 00:18:58.210 governmental plan from the severe restrictions 00:18:58.210 --> 00:19:01.829 and frankly, the massive risks of the non -governmental 00:19:01.829 --> 00:19:05.089 457. This is the major caution point for you, 00:19:05.190 --> 00:19:08.230 the listener. And it's fascinating how the entire 00:19:08.230 --> 00:19:10.970 regulatory structure treats risk and security 00:19:10.970 --> 00:19:14.170 based on one thing, your employer's tax status. 00:19:14.910 --> 00:19:17.170 Let's start with the governmental 457 again, 00:19:17.230 --> 00:19:19.349 the flexible one. In terms of moving your money 00:19:19.349 --> 00:19:22.160 around, how portable is it? Extremely. Governmental 00:19:22.160 --> 00:19:24.799 457s are generally treated like other qualified 00:19:24.799 --> 00:19:27.519 plans for mobility. You can roll them into 401K, 00:19:27.640 --> 00:19:31.380 403Bs, and IRAs with very few restrictions once 00:19:31.380 --> 00:19:33.339 you leave your job. And why is that so important 00:19:33.339 --> 00:19:35.539 for an employee? Because it lets you consolidate 00:19:35.539 --> 00:19:37.680 your savings later in life. It lets you take 00:19:37.680 --> 00:19:39.480 advantage of better investment options in an 00:19:39.480 --> 00:19:42.039 IRA. It means the money is truly yours and it 00:19:42.039 --> 00:19:44.759 can follow you. It's secure. It's portable. It's 00:19:44.759 --> 00:19:47.859 protected. Okay. Now for the dark side. The non 00:19:47.859 --> 00:19:50.660 -governmental 457 plan. These are the ones offered 00:19:50.660 --> 00:19:52.980 by large non -profits, some hospital groups. 00:19:53.259 --> 00:19:55.339 This is where you need to see the big red flashing 00:19:55.339 --> 00:19:58.019 warning sign. The first restriction is the rollover 00:19:58.019 --> 00:20:00.980 limitation. It's severe. What is it? Money in 00:20:00.980 --> 00:20:03.880 a non -governmental 457 plan can only be rolled 00:20:03.880 --> 00:20:07.079 into another non -governmental 457 plan. You 00:20:07.079 --> 00:20:09.680 cannot, under any circumstances, roll it to a 00:20:09.680 --> 00:20:14.000 401k, a 403b, or an IRA. So your money is captive. 00:20:14.279 --> 00:20:16.619 If you leave that job and go to a regular corporation, 00:20:16.839 --> 00:20:19.980 those savings are just... They are stuck. But 00:20:19.980 --> 00:20:21.559 that's not even the biggest risk. The biggest 00:20:21.559 --> 00:20:24.440 risk is asset protection. Or rather, the complete 00:20:24.440 --> 00:20:26.940 lack of it. What do you mean? Funds in a non 00:20:26.940 --> 00:20:30.240 -governmental 457 plan are not set aside in a 00:20:30.240 --> 00:20:32.640 trust for the exclusive benefit of the employee. 00:20:32.839 --> 00:20:36.069 Hold on. I, as an employee... defer my salary. 00:20:36.250 --> 00:20:38.470 I take home less money in my paycheck. Yeah. 00:20:38.589 --> 00:20:40.369 But that money doesn't legally belong to me. 00:20:40.490 --> 00:20:42.309 Not in the way you think. The Internal Revenue 00:20:42.309 --> 00:20:44.170 Code requires that money to remain the legal 00:20:44.170 --> 00:20:46.190 property of the employer. It's a liability on 00:20:46.190 --> 00:20:48.089 their balance sheet, like any other debt they 00:20:48.089 --> 00:20:50.089 owe. Why on earth would it be structured that 00:20:50.089 --> 00:20:52.670 way? It puts all the risk on the employee. Because 00:20:52.670 --> 00:20:54.670 that's the only thing that makes the tax deferral 00:20:54.670 --> 00:20:57.029 work. If the funds were put in a separate account 00:20:57.029 --> 00:20:59.789 just for you, the IRS would say you've constructively 00:20:59.789 --> 00:21:01.849 received them and you'd have to pay tax on the 00:21:01.849 --> 00:21:04.720 whole amount immediately. The tax deferral only 00:21:04.720 --> 00:21:06.359 works because the money is still technically 00:21:06.359 --> 00:21:08.700 the employer's. Which brings up the existential 00:21:08.700 --> 00:21:11.839 question. Yeah. What happens if my nonprofit 00:21:11.839 --> 00:21:14.619 employer goes bankrupt? This is the moment the 00:21:14.619 --> 00:21:17.220 risk becomes real. Those funds are available 00:21:17.220 --> 00:21:19.880 to the employer's general creditors. You, the 00:21:19.880 --> 00:21:21.859 employee with your life savings in that plan, 00:21:22.039 --> 00:21:24.980 are just another unsecured junior creditor. You 00:21:24.980 --> 00:21:26.599 could lose everything. You could lose everything. 00:21:26.880 --> 00:21:29.240 So the governmental 457 is secure and portable. 00:21:29.440 --> 00:21:32.559 The non -governmental 457 is basically a high 00:21:32.559 --> 00:21:35.859 -stakes unsecured IOU from your employer. That's 00:21:35.859 --> 00:21:37.839 the perfect way to put it. Its value depends 00:21:37.839 --> 00:21:40.180 entirely on the long -term financial health of 00:21:40.180 --> 00:21:42.779 your employer. It is nothing like the ironclad 00:21:42.779 --> 00:21:46.599 protection of a 401k or 403b trust. Now, let's 00:21:46.599 --> 00:21:48.779 talk about the specific type of this plan, the 00:21:48.779 --> 00:21:52.359 457b. It gets a nickname right, a top hat plan. 00:21:52.579 --> 00:21:55.140 Who is this high -risk vehicle for? This is where 00:21:55.140 --> 00:21:57.019 Arisa actually comes back into the picture, but 00:21:57.019 --> 00:22:00.319 in a restrictive way. Arisa says these non -governmental 00:22:00.319 --> 00:22:03.819 457B plans must be limited to a select group 00:22:03.819 --> 00:22:06.339 of more highly compensated employees. So this 00:22:06.339 --> 00:22:08.839 isn't for everyone, like a 403B? Not at all. 00:22:08.880 --> 00:22:11.660 It's exclusively for executives or key people. 00:22:11.819 --> 00:22:14.920 The sources suggest that the compensation limits 00:22:14.920 --> 00:22:18.079 used for 401K testing, you know, in the low six 00:22:18.079 --> 00:22:20.900 figures, would probably be an acceptable standard. 00:22:21.259 --> 00:22:24.240 Hence the nickname Top Hat. It's for the top 00:22:24.240 --> 00:22:27.140 brass. Exactly. The thinking is that executives 00:22:27.140 --> 00:22:29.420 are in a better position to understand the heightened 00:22:29.420 --> 00:22:31.920 risk and to assess their organization's financial 00:22:31.920 --> 00:22:34.500 health. Okay, let's move to the most complex 00:22:34.500 --> 00:22:38.079 and maybe the riskiest version of all, the 457F 00:22:38.079 --> 00:22:40.380 structure. This sounds like financial engineering 00:22:40.380 --> 00:22:43.700 at its most extreme. The 457F plan exists because 00:22:43.700 --> 00:22:45.779 these nonprofits are limited in what they can 00:22:45.779 --> 00:22:48.119 offer. This is their alternative, a way to attract 00:22:48.119 --> 00:22:51.200 and retain top talent with big compensation packages. 00:22:51.460 --> 00:22:53.500 What's the main appeal for the executive who 00:22:53.500 --> 00:22:56.700 would use a 457F? Two things. First, it's tax 00:22:56.700 --> 00:23:00.039 deferred. And second, and this is crucial, it 00:23:00.039 --> 00:23:02.680 can exceed the normal annual contribution limits. 00:23:03.019 --> 00:23:05.599 It's for those highly paid executives who have 00:23:05.599 --> 00:23:08.400 already maxed out everything else. So if an employer 00:23:08.400 --> 00:23:11.299 is deferring a huge amount of money way over 00:23:11.299 --> 00:23:14.359 the limit, what's the mechanism that makes the 00:23:14.359 --> 00:23:17.329 tax deferral legal? It's a heavy -handed mechanism 00:23:17.329 --> 00:23:19.869 called the Substantial Risk of Forfeiture, the 00:23:19.869 --> 00:23:23.369 SRF. This is the central high -stakes gamble 00:23:23.369 --> 00:23:25.970 of the whole plan. Okay, what does Substantial 00:23:25.970 --> 00:23:28.730 Risk of Forfeiture mean in plain English? It 00:23:28.730 --> 00:23:30.970 means you have to face a real possibility of 00:23:30.970 --> 00:23:34.150 losing all the money. The IRS says this requires 00:23:34.150 --> 00:23:36.910 two things. First... The money has to remain 00:23:36.910 --> 00:23:39.309 available to the organization's creditors. Same 00:23:39.309 --> 00:23:41.470 old solve and see risk. Same old risk. And second, 00:23:41.650 --> 00:23:44.130 it must be subject to a strict vesting schedule. 00:23:44.289 --> 00:23:45.930 So you have to stay with the company for a certain 00:23:45.930 --> 00:23:47.809 number of years or you lose it all. Absolutely. 00:23:47.970 --> 00:23:50.349 If you leave before you're fully vested, the 00:23:50.349 --> 00:23:52.549 money is forfeited. It goes back to the organization. 00:23:52.769 --> 00:23:55.309 It's the ultimate golden handcuffs. That's a 00:23:55.309 --> 00:23:57.829 brutal mechanism. So what happens when you finally 00:23:57.829 --> 00:24:01.549 do vest after, say, five or seven years? This 00:24:01.549 --> 00:24:04.019 is the really dramatic part. The second that 00:24:04.019 --> 00:24:06.579 risk of forfeiture is gone, the moment you vest, 00:24:06.859 --> 00:24:10.099 the entire value of everything that's been deferred 00:24:10.099 --> 00:24:13.000 is immediately included in your ordinary income 00:24:13.000 --> 00:24:14.839 for that year. The whole pile of money becomes 00:24:14.839 --> 00:24:17.119 taxable at once. All at once. The tax deferral 00:24:17.119 --> 00:24:20.759 just stops. It can create a massive sudden spike 00:24:20.759 --> 00:24:23.500 in your income and it demands incredibly careful 00:24:23.500 --> 00:24:26.240 tax planning to handle it. So how do organizations 00:24:26.240 --> 00:24:29.549 give the employee some security? to make sure 00:24:29.549 --> 00:24:31.730 the employer doesn't just change its mind while 00:24:31.730 --> 00:24:34.369 still meeting that IRS risk requirement. They 00:24:34.369 --> 00:24:37.289 use something called a rabbi trust. It's a structure 00:24:37.289 --> 00:24:39.430 where the deferred money is put into a trust 00:24:39.430 --> 00:24:42.430 overseen by a third -party trustee. It feels 00:24:42.430 --> 00:24:44.930 safer because the money is physically set aside. 00:24:45.210 --> 00:24:47.089 But there has to be a catch, right, to maintain 00:24:47.089 --> 00:24:49.960 that risk. There is. To avoid immediate taxation, 00:24:50.299 --> 00:24:52.880 the funds in that rabbi trust must remain available 00:24:52.880 --> 00:24:55.319 to the employer's general creditors in case of 00:24:55.319 --> 00:24:58.259 bankruptcy. So the rabbi trust protects you from 00:24:58.259 --> 00:25:00.519 your employer changing their mind, but it offers 00:25:00.519 --> 00:25:02.819 zero protection if the employer goes under. That 00:25:02.819 --> 00:25:05.119 is the perfect summary. It's security against 00:25:05.119 --> 00:25:08.680 corporate whim, not corporate failure. You're 00:25:08.680 --> 00:25:11.319 still an unsecured creditor. And finally, we 00:25:11.319 --> 00:25:12.980 have to look at the legislative context here, 00:25:13.059 --> 00:25:16.579 Section 409A. This came directly out of some 00:25:16.579 --> 00:25:18.279 of the biggest corporate scandals we've ever 00:25:18.279 --> 00:25:21.579 seen. Section 409A was passed in 2004, and it 00:25:21.579 --> 00:25:23.519 was a direct reaction to the kind of executive 00:25:23.519 --> 00:25:26.019 behavior we saw at places like Enron and WorldCom. 00:25:26.319 --> 00:25:28.839 What exactly were the executives at Enron doing 00:25:28.839 --> 00:25:31.980 that Congress wanted to stop? Well, their bonus 00:25:31.980 --> 00:25:35.269 plans had these trigger clauses. These clauses 00:25:35.269 --> 00:25:37.890 allowed key executives to get immediate early 00:25:37.890 --> 00:25:40.990 access to all their deferred compensation if 00:25:40.990 --> 00:25:43.829 the company's financials started to look shaky. 00:25:43.970 --> 00:25:46.009 So they could cash out right before the company 00:25:46.009 --> 00:25:48.029 collapsed, leaving everyone else with nothing. 00:25:48.150 --> 00:25:50.529 A textbook case of self -dealing. They could 00:25:50.529 --> 00:25:52.869 pull their millions out and leave the creditors 00:25:52.869 --> 00:25:56.049 and regular employees holding an empty bag. Section 00:25:56.049 --> 00:25:58.589 409A put a stop to that by creating strict rules 00:25:58.589 --> 00:26:01.289 about when deferred comp can be paid out. It 00:26:01.289 --> 00:26:03.470 prevents executives from using these plans as 00:26:03.470 --> 00:26:05.849 an emergency escape hatch from a sinking ship. 00:26:06.210 --> 00:26:08.710 Exactly. And that context is so important for 00:26:08.710 --> 00:26:10.809 understanding why these plans have such specific 00:26:10.809 --> 00:26:13.490 and sometimes harsh rules today. It's a constant 00:26:13.490 --> 00:26:15.410 balancing act. Okay, let's bring this all home. 00:26:15.690 --> 00:26:17.650 Let's summarize the key takeaways for you, the 00:26:17.650 --> 00:26:19.970 listener, after this deep dive into the world 00:26:19.970 --> 00:26:23.430 beyond the 401k. First, the 403b. It's for nonprofits 00:26:23.430 --> 00:26:26.210 and schools. Its big advantage is administrative 00:26:26.210 --> 00:26:28.750 simplicity, thanks to that non -ERISA status 00:26:28.750 --> 00:26:31.470 and the universal availability rule. Structurally, 00:26:31.569 --> 00:26:34.789 it's very safe, like a 401k, especially after 00:26:34.789 --> 00:26:36.990 it got federal bankruptcy protection in 2005. 00:26:37.450 --> 00:26:40.720 Second, the governmental 457 plan. This is your 00:26:40.720 --> 00:26:43.660 strategic powerhouse. It has two huge advantages, 00:26:43.880 --> 00:26:46.740 that unique pre -55 penalty -free withdrawal 00:26:46.740 --> 00:26:49.819 option and the ability to double dip on deferral 00:26:49.819 --> 00:26:52.200 limits, letting you save massive amounts of money, 00:26:52.279 --> 00:26:55.460 maybe over $65 ,000 a year as you near retirement. 00:26:56.089 --> 00:26:58.789 Third, and this is the big warning, be intensely 00:26:58.789 --> 00:27:01.869 wary of non -governmental 457 plans, the top 00:27:01.869 --> 00:27:04.470 hat plans. They are an unsecured liability. The 00:27:04.470 --> 00:27:07.210 funds legally belong to your employer. Your savings 00:27:07.210 --> 00:27:09.130 are captive and they are totally subject to your 00:27:09.130 --> 00:27:11.470 employer's long -term solvency. It is a financial 00:27:11.470 --> 00:27:15.029 IOU. And fourth, the 457 plans. They are the 00:27:15.029 --> 00:27:17.470 ultimate high wire act. They use that substantial 00:27:17.470 --> 00:27:19.970 risk of forfeiture tied to a vesting schedule 00:27:19.970 --> 00:27:23.089 to defer taxes. And when you vest, you pay tax 00:27:23.089 --> 00:27:26.069 on the entire amount all at once. Even with a 00:27:26.069 --> 00:27:28.509 rabbi trust, the money is never safe from the 00:27:28.509 --> 00:27:30.710 employer's creditors. This whole journey just 00:27:30.710 --> 00:27:33.809 shows how profoundly the legal context, ERISA, 00:27:33.829 --> 00:27:37.809 bankruptcy reform, EGTRA, has shaped these plans. 00:27:38.049 --> 00:27:40.730 The legal classification literally dictates whether 00:27:40.730 --> 00:27:43.210 your retirement savings are a secure asset or 00:27:43.210 --> 00:27:46.130 just an unsecured promise. So as we close, let's 00:27:46.130 --> 00:27:47.769 leave you with this final provocative thought 00:27:47.769 --> 00:27:50.769 to consider. We saw how the 2005 bankruptcy reform 00:27:50.769 --> 00:27:53.230 closed the security gap for the 403B, making 00:27:53.230 --> 00:27:55.970 it safe. But given that these non -governmental 00:27:55.970 --> 00:27:57.990 plans fundamentally rely on your employer not 00:27:57.990 --> 00:28:00.210 going bankrupt with the funds technically remaining 00:28:00.210 --> 00:28:03.269 their property, what is the true long -term cost 00:28:03.269 --> 00:28:05.309 of that tax deferral? And how might a future 00:28:05.309 --> 00:28:07.349 law change the game again, maybe alter investing 00:28:07.349 --> 00:28:09.390 rules or even requiring some asset protection? 00:28:10.009 --> 00:28:11.849 It's something to ponder as you look at your 00:28:11.849 --> 00:28:14.210 own retirement options and the financial health 00:28:14.210 --> 00:28:16.730 of the entity that signs your paycheck. A fascinating 00:28:16.730 --> 00:28:18.829 and critical part of financial planning that 00:28:18.829 --> 00:28:21.150 really demands your attention. Thank you for 00:28:21.150 --> 00:28:23.589 joining us for this deep dive. We hope you feel 00:28:23.589 --> 00:28:26.009 thoroughly informed and maybe a little more prepared 00:28:26.009 --> 00:28:28.170 to assess the true risk in your own retirement 00:28:28.170 --> 00:28:28.710 portfolio.