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Taxable account versus maxing out non gov 457b?

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  • Taxable account versus maxing out non gov 457b?

    Employed early to mid career physician here.  I have no debt, max out 401k, HSA, 529s 20k/yr, back door roths for myself and spouse, solo 401k for wife (varies on her income), 10k in non gov 457b for AA2 rated employer, and 45-50k or so into taxable.   Wondering if I should keep things the same or max out non gov 457b to 18k and reduce taxable investing?  Non gov 457b has low cost index funds, distribution options to 20 yrs and AA2 rated employer?  I am far from the next bracket and have a good chance of sticking with current employer for a while.  Thanks.

  • #2

    • What tax bracket are you in?

    • Do you also pay local and/or state income taxes?

    • By "sticking with current employer" do you mean that you will remain in whatever is your current tax bracket during this part of your career?

    • You put $10k into 457b and $45 - $50k into taxable annually? Is taxable joint?

    • What are capital expenditure plans over the next 5 years? Buy a house, replace car(s), etc?

    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

    Comment


    • #3
      I would max out the 457(b). It sounds like a good fund, and as a radiologist (presumably in a >30% tax bracket), you want to defer as much tax as possible.

      Comment


      • #4
        I, too, have a non govt 457b and will max it out before a taxable to get the tax break. Recommend getting the tax break.

        Comment


        • #5




          • What tax bracket are you in?

          • Do you also pay local and/or state income taxes?

          • By “sticking with current employer” do you mean that you will remain in whatever is your current tax bracket during this part of your career?

          • You put $10k into 457b and $45 – $50k into taxable annually? Is taxable joint?

          • What are capital expenditure plans over the next 5 years? Buy a house, replace car(s), etc?


          Click to expand...


          33% bracket.   Pay state tax of about 4% and property tax.  By sticking with current employer I mean there is a good chance I will not leave and be stuck with a distribution decision.  Yes taxable account is a joint account.  Capital replacements may be to replace a car but I can save money for that separate from taxable account.

          I am wondering if I will come out ahead with the 457b versus low cost index investing in taxable?  At distribution I will pay marginal bracket on the 457b while taxable may be at low long term capital gains and qualified dividends.  Although the risk of the non gov 457b is tiny (aa2 rated nationally known employer), it is still kind of concerning to defer your pay and leave it on the books of the employer.  Also, there is always a chance I may have to leave in the future without a place to roll the account over.

           

          Comment


          • #6
            As long as you can arrange for a distribution schedule from your 457b for after you retire, ideally spread out over 10+ years, I'd go with the 457b. Really a small decision in the grand scheme of things though.

            Comment


            • #7







              • What tax bracket are you in?

              • Do you also pay local and/or state income taxes?

              • By “sticking with current employer” do you mean that you will remain in whatever is your current tax bracket during this part of your career?

              • You put $10k into 457b and $45 – $50k into taxable annually? Is taxable joint?

              • What are capital expenditure plans over the next 5 years? Buy a house, replace car(s), etc?


              Click to expand…


              33% bracket.   Pay state tax of about 4% and property tax.  By sticking with current employer I mean there is a good chance I will not leave and be stuck with a distribution decision.  Yes taxable account is a joint account.  Capital replacements may be to replace a car but I can save money for that separate from taxable account.

              I am wondering if I will come out ahead with the 457b versus low cost index investing in taxable?  At distribution I will pay marginal bracket on the 457b while taxable may be at low long term capital gains and qualified dividends.  Although the risk of the non gov 457b is tiny (aa2 rated nationally known employer), it is still kind of concerning to defer your pay and leave it on the books of the employer.  Also, there is always a chance I may have to leave in the future without a place to roll the account over.

               
              Click to expand...


              The problem with attempting to forecast future tax brackets, laws, and plans is that you really don't know the answers. At best, you can guess about tax brackets and laws and make a fairly educated guess about goals, but even they will change. You can base a plan only upon what you know now and adjust as you go along. Planning is dynamic. There is no way to determine if you will "come out ahead" given the hard facts at your disposal, which is really all that matters. (I don't even consider a "risk" of having a 457, the chances are so minuscule that you will lose your $$.)

              Given that, I see a binary decision to save taxes now or build up a taxable account. If you wI'll invest the taxes saved into a taxable account, that is what I would recommend. If the taxes saved would bloat your budget and disappear into consumption, then I would recommend the taxable account. This is usually ignored in the decision of saving taxes today versus later.

              As an aside, keep in mind that a joint taxable account will receive only a 50% step-up in basis upon the death of one account holder.
              Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

              Comment


              • #8
                Johanna, question on your last point. Our taxable Vanguard acct and home are owned jointly under our revocable living trust. Does this 50% basis step up rule apply to assets held in revocable living trusts?

                Comment


                • #9




                  Johanna, question on your last point. Our taxable Vanguard acct and home are owned jointly under our revocable living trust. Does this 50% basis step up rule apply to assets held in revocable living trusts?
                  Click to expand...


                  Yes, it does, unless your joint living trust is 
drafted 
so 
that 
upon 
the 
first 
spouse's
 death
 the 
amount
 of 
the 
entire
 property 
is
 included 
in
 the
 decedent 
spouse's
 estate. However, if you have a taxable estate tax issues, this would raise the value of the taxable estate.
                  Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                  Comment


                  • #10
                     










                    • What tax bracket are you in?

                    • Do you also pay local and/or state income taxes?

                    • By “sticking with current employer” do you mean that you will remain in whatever is your current tax bracket during this part of your career?

                    • You put $10k into 457b and $45 – $50k into taxable annually? Is taxable joint?

                    • What are capital expenditure plans over the next 5 years? Buy a house, replace car(s), etc?


                    Click to expand…


                    33% bracket.   Pay state tax of about 4% and property tax.  By sticking with current employer I mean there is a good chance I will not leave and be stuck with a distribution decision.  Yes taxable account is a joint account.  Capital replacements may be to replace a car but I can save money for that separate from taxable account.

                    I am wondering if I will come out ahead with the 457b versus low cost index investing in taxable?  At distribution I will pay marginal bracket on the 457b while taxable may be at low long term capital gains and qualified dividends.  Although the risk of the non gov 457b is tiny (aa2 rated nationally known employer), it is still kind of concerning to defer your pay and leave it on the books of the employer.  Also, there is always a chance I may have to leave in the future without a place to roll the account over.

                     
                    Click to expand…


                    The problem with attempting to forecast future tax brackets, laws, and plans is that you really don’t know the answers. At best, you can guess about tax brackets and laws and make a fairly educated guess about goals, but even they will change. You can base a plan only upon what you know now and adjust as you go along. Planning is dynamic. There is no way to determine if you will “come out ahead” given the hard facts at your disposal, which is really all that matters. (I don’t even consider a “risk” of having a 457, the chances are so minuscule that you will lose your $$.)

                    Given that, I see a binary decision to save taxes now or build up a taxable account. If you wI’ll invest the taxes saved into a taxable account, that is what I would recommend. If the taxes saved would bloat your budget and disappear into consumption, then I would recommend the taxable account. This is usually ignored in the decision of saving taxes today versus later.

                    As an aside, keep in mind that a joint taxable account will receive only a 50% step-up in basis upon the death of one account holder.
                    Click to expand...


                    I am not sure I follow.  By contributing the max 18k I will lower my income by 18k.  I am not sure what you mean by investing the taxes saved?   Will I see the 7k I saved or will the accounting department at my employer simply adjust the taxation on each check to account for less taxable income?

                    I like that it costs about 11k to get 18k invested.  18k In tax deferred beats 11k in taxable no matter what tax rates are in the future.  The only things making me hesitate is that if I leave my current employer, I would have to make a distribution decision before retirement.  I could take a 20 yr distribution and keep most of the money still growing and reinvest the yearly distribution into taxable, or just take a lump sum and reinvest the remainder into taxable.  I would probably still come out ahead over taxable in both scenarios.

                    I also hate to have to depend on the solvency of my employer for potentially the next 40 yrs.  Given the rapidly changing nature of healthcare, who knows what will happen?  On the other hand, tax exempt organizations with Moody's bond ratings of AA2 have a negligible default rate of <.2% over 10 yrs.  It is also hard to imagine my nationally known employer going into bankruptcy.  And even than, I read that the recovery rate averages 67% for bond holders.

                     

                    Comment


                    • #11
                      I think you are wayyy overthinking this.  Odds are you are in a higher tax bracket now than you will be in retirement.  Odds are that your employer will not become insolvent.  I would contribute to the 457 without hesitation to get the significant tax break and tax-free growth.  But if you're that anxious about then don't do it.  Taxable accounts have certain advantages too.  Pick your place on the risk/benefit spectrum and go there.

                      Comment


                      • #12


                        I am not sure I follow.  By contributing the max 18k I will lower my income by 18k.  I am not sure what you mean by investing the taxes saved?   Will I see the 7k I saved or will the accounting department at my employer simply adjust the taxation on each check to account for less taxable income?
                        Click to expand...


                        All I was saying was that you are not comparing apples to apples if you save taxes but don't actually save the taxes.
                        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                        Comment


                        • #13
                          Just wanted to make sure you saw this post:

                           

                          https://www.whitecoatinvestor.com/should-you-use-your-457b/
                          Helping those who wear the white coat get a fair shake on Wall Street since 2011

                          Comment


                          • #14
                            I didn't bother with my 457 because I was worried about whether the company would be around in 20-30 years, and because I wasn't able to predict my ideal withdrawal schedule.  The chance  of it costing me more in taxes seemed to be about 50-50.

                            Compared to a Roth, a taxable account, if not sold, will have a drag of about 0.6% a year ( the tax on qualified dividends), with an additional 1.5-2% a year if you sell (for capital gains).  For a 0.6% annual "expense ratio" I decided to go with a taxable account.   I will be able to use the tdividends from that account later to pay the taxes for Roth conversions.  For me, the step up after death will eliminate the capital gains tax.

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