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Contribute to bad 457b or invest in taxable account?

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  • Contribute to bad 457b or invest in taxable account?

    Hi all,

    Financial background: I'm currently in my 2nd year of a 4 year emergency medicine residency in California, single w/ no dependents and no plans to change either any time soon. I have about 140k in unsubsidized loans at 5.625%, but am enrolled in the REPAYE program so I pay about $100/month, and 50% of the difference between my monthly payment and my monthly interest is forgiven by the government. This effectively brings my interest rate down to about 3.24%.

    During residency we make about 55-60k before taxes, but once I graduate I expect to be making in the 300k range. I have a mandatory 4.5% contribution to a 457b plan, matched at 3% by my employer. I can make additional contributions, but they are not matched, and the money is invested in a very low yield fund (average 1.6% over last 10 years). I have no say over what is done with that money. I have 3 months worth of expenses as an emergency fund.

    I have a Roth IRA that I max out at $5.5k/year, but I have about $3k left over in my budget that I'd like to invest. Should I increase my contributions to the 457b despite the bad interest rate, with the plan being to roll it over into my Roth IRA after graduating (and therefore preserving the tax benefits), or simply invest in a taxable account with a higher expected earnings rate but no tax benefits?

  • #2
    I think it'd be hard to justify socking money away for a long time and getting only 1.6%.  You could easily beat that with a taxable and over a long period the earnings on that money would make up for the extra tax you owe now.  Are you going for PSLF?  If not, loans may be a good place to put the money.  Otherwise, taxable.

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    • #3
      A mandatory 457(b) contribution? That's odd, but even it is wasn't mandatory, you should never turn down free money. I'd fund the 457(b) with just enough to get that 3% match, but no more.

      If you have additional money to invest and you've exhausted other tax advantaged accounts you may have, like a personal Roth IRA or an HSA, then taxable is not a bad place to put your money. That money is very liquid and can be accessed at any time. You may eventually want to access it for a down payment on a home or to pay off those student loans if PSLF goes kaput some day.

      Cheers!

      -PoF

      p.s. Yes, I copied and pastied my response from Bogleheads.

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      • #4
        No 401k/403b? Odd. Is this a private or public 457b?

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        • #5
          Your 457b has one fund option and it has performed that badly over the last few years?

          I think you might be missing out on some information here.

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          • #6
            Looks like the 457b is used as a loan IOU back the system at low rates.  Wonder how that shows up on their financial statements.  Not so unlike Kaiser requiring 'promissary notes' from its doctors each year back to the company.  At least those notes paid a fair amount between CD/Bond rates.

            Like PoF -- do yours to get the match, then done with it.

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            • #7
              Crikey! Pass on the 457b. You don't need the deduction at this tax bracket and you can do far better on your own. On to the taxable account.

              11 Reasons You Need a Taxable Investment Account
              Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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              • #8
                You could always sue for some better options

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                • #9




                  You could always sue for some better options
                  Click to expand...


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

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                  • #10
                    Thanks for all the advice. I think I'm going to go ahead and invest in a taxable account. I get the benefit of likely higher growth as well as the flexibility of using that money any time I want it.

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