Making the Most of Your 457(b) Plan

Retirement planning for physicians and other highly compensated professionals often goes beyond the basics of a 401(k) or 403(b). For eligible employees, the non-governmental 457(b) plan offers an additional and valuable opportunity to defer income, invest strategically, and help reduce taxes while working.

But with greater opportunity comes greater complexity. Here’s what you need to know about how the 457(b) plan works, and why working with a trusted advisor can help you unlock its full potential.

What Is the 457(b) Plan?

Many hospitals offer a non-governmental 457(b) plan, also known as a non-qualified deferred compensation plan. This plan is designed specifically for certain highly compensated employees, such as physicians, and allows them to defer a portion of their income now to enhance future retirement income potentially.

While the account is IRS-recognized and tax-deferred, it differs from traditional retirement accounts in one significant way: the employer owns the account. You control how much of your income you defer. The assets contributed technically belong to the employer/business until they’re paid out to you.

Despite that technicality, the plan can be an excellent retirement savings vehicle with the proper guidance.

How It Works

Like other employer-sponsored retirement plans, you contribute pre-tax dollars, reducing your annual taxable income and allowing your investments to grow tax-deferred. In 2025, you can contribute up to $23,500 to a 457(b) plan. This limit is separate from your 401(k) or 403(b) contribution limits, meaning you may be able to increase both annually for a total of $47,000 of pre-tax contributions (and if you are over the age of 50 you can contribute an additional $7,500 of pre-tax dollars – for a maximum of $54,500).

A unique benefit of the 457(b) is the early access to funds. Unlike other retirement plans, which typically require you to wait until age 59½, the 457(b) allows you to start withdrawals as soon as you separate from your employer, without penalty.

Flexibility in Withdrawals, With a Caveat

The flexibility of the 457(b) plan can be one of its strongest features, but also one of its most significant risks if not handled properly.

When you retire or leave the organization, you’ll have just 90 days to make an election on how your 457(b) funds will be distributed. If you don’t, you’ll be issued a lump sum check, which could lead to a significant, one-time unexpected tax bill. Since every dollar distributed is taxed as ordinary income, poor timing can push you into a higher tax bracket or impact your Social Security benefits. Working with your financial advisor may be critical. Since distribution timing is so important the right strategy is may be necessary. For example, you can:

• Spread distributions over multiple years to avoid tax spikes, typically up to 10 years.
• Coordinate withdrawals with Social Security or Required Minimum Distributions (RMDs).
  • Withdrawals that align with your income needs while planning for future RMDs (required minimum distributions) is a crucial planning step that needs to be addressed from an income tax and cash flow perspective.
• Create a tax-efficient retirement income plan that balances your 457(b)-investment allocation with other investment and retirement accounts.

Why the 457(b) Plan Matters

If you’re a physician, executive or highly compensated employee, the 457(b) plan gives you robust control over your retirement savings strategy. With tax deferral, investment flexibility, and early access to funds, it may play a vital role in helping you meet your long-term goals.

However, its non-qualified nature and strict post-employment rules may make it essential to plan carefully. A misstep, like missing the 90-day election window, can possibly have lasting financial consequences.

Partner With a Professional

Whether you’re increasing contributions, choosing investments, or planning income distributions, the Sequoia Financial Group team is here to help. Our experienced advisors understand the unique structure of 457(b) plans and can help you:

• Create a tailored tax and investment strategy.
• Plan transitions into retirement with precision.
• Manage distributions for lower tax impact and help increase income.

Conclusion

Your hard work deserves a strategy that works just as hard. Contact Sequoia Financial Group today to make the most of your 457(b) and financial future.