457(b)s, 401(k)s and IRAs -- oh my!

Q: I work for a public hospital and my retirement account is a 457(b). I’ve been told that technically my employer and not I own the money in 457(b) accounts. Is that correct?

A: There is a technicality in 457 accounts -- and it depends on whether it is a "private" or public/governmental plan.

For government plans here's the legality:

Public governmental 457 plans, on the other hand, are required to be funded. As required by IRC section 457(g), those funds must be held in trust for the exclusive benefit of plan participants and their beneficiaries.

But for "private" plans:

ERISA generally requires that a private retirement plan providing benefits to employees be funded by a trust or annuity contract. The rules, however, require that private 457(b) plans be unfunded in order to obtain tax benefits.

It is this "unfunded" aspect that means for certain 457 plans, you're really a creditor of your employer! So it all depends on which type of 457 plan you have. You should consult the employee benefits office and also the plan sponsor, which is required to give you that info.

Q: I’ll be 56 soon. I’d like to be in position to retire in five years. I currently have a very healthy 401(k) and planned lump sum coming from my employer of 40 years. I currently have two major debts: a home mortgage and a home equity loan totaling $125,000, with reasonable interest rates.

My question is: What is the proper strategy for retirement? Should I pay off the loans the first year to eliminate them in future years thus needing less income following their elimination? Should I expect to pay them off over a period of years, much faster than they would have been paid given current monthly payments? Should I do the payment plus principle method to accelerate their elimination?

I would just like to have a strategy that optimizes putting my wife and me in the best position to keep my funds from being eaten up by taxes.

A: I'll give you my approach, though you might get a different answer from others. I say you should not retire before you have paid down your mortgage debt! In fact, I believe that's a critical ingredient in the retirement decision (along with bridging health insurance until Medicare steps in). I understand the desire to have a deduction against your ordinary income, via the interest you pay on your mortgage. So if you're planning to retire in 10 years, then ask your bank to do an amortization of your loan(s) and tell you how much you'd have to pay every month to be debt-free in 10 years. And by the way, if the home equiy loan has a floating rate, I'd attack that immediately -- while rates are still "reasonable"!!

Q: I am over 50 and have a pension and 401(k) at work. I contribute 15 percent of my income to the 401(k). My question is: Should I add the additional $5,000 to my 401(k) or put in my existing Roth that I contribute $150 a month to?

Another concern is that I have prepaid two years in CollegeIllinois for my junior in high school. I want to have two more years paid off before he starts. Should I continue with CollegeIllinois or another vehicle the state offers for college savings? This decision affects the savings for my retirement plans and I would appreciate any advice.

My wife has a 403(b) plus her pension also.

A: Well, first, congratulations on all that saving! Will you qualify for a Roth IRA in 2007 -- with under $150,000 in gross income (yourself and your wife)? If so, yes you can put in $5,000 for 2007, since you're over age 50 (and next year you can put in $6,000 if over 50). You should contribute to your company plan up to the point where they match it -- after all, that's "free money" -- and diversify appropriately. Above that amount, I'd switch to the Roth IRA -- just so you'll have some tax-free money at retirement, when who knows what the tax rates will be!

If your student plans to go to school in Illinois, I'd stick with the CollegeIllinois prepaid tuition plan -- but remember that only covers tuition, and not room and board, books and other expenses. If you STILL have extra money, then open an account in Illinois' BrightStartSavings.com to save money tax-free for those other expenses.