Tax efficient mutual fund vs 457 for retirement

[nephron116]

My husband and I both just finished our training and have our first attending jobs  We are trying to be smart and start saving 20% of our income towards retirement.  Our new jobs both offer a combination of 403b and 457, which is great.  We have maxed out our 403b, but I have some concerns with the 457 account.  First, the should the institution go bankrupt (highly unlikely), the funds can be seized.  Second, once we decide to start withdrawing funds from the 457 account, we have to withdraw everything in 5 years.  I imagine if you have enough savings in the 457 that could put you in a high tax bracket when you are ready to retire.  Is there any advantage to instead saving the rest of our retirement savings in a tax efficient mutual fund instead of the 457 that comes with these caveats.  Thanks.

[jfoxcpacfp]

Congratulations! The advantages to saving in a 457 now are:

• tax deduction for contributions,


• match (if available), and


• tax-deferred growth.

The chance you will both remain at the same job until retirement is slim. At the point you change jobs, you could roll the 457's to IRA's. Or, if you have had a chance to set up a SOLO-k with some side income, r/o to the 401ks.

Yes, there are advantages to saving in a taxable account (total control, flexibility, reduced rates for LTCG and dividends, and step-up on basis at death) but I would probably recommend saving to one in addition to your 403b's and 457's. Of course. this is just general advice and your financial plan should drive your decisions.

[conniebird]

I use my hospital's 457b (just started to after pondering the pros/cons for several months).

 

The 5 year pay out is the real issue I think - are you sure this is the case? Every plan is different, I had to ask my plan several times to get the right answer and got a copy of the actual form to request withdrawals so I know what they said is true. You may want to do the same.

 

 

[jfoxcpacfp]

conniebird wrote:

The 5 year pay out is the real issue I think – are you sure this is the case? Every plan is different, I had to ask my plan several times to get the right answer and got a copy of the actual form to request withdrawals so I know what they said is true. You may want to do the same.

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We have a client w/a 5-year payout so probably not so uncommon. That was a good idea to review a copy of the actual form.

[PhysicianOnFIRE]

I would do both. Max out the 457(b) and start a taxable account. I've rolled over a 457(b) from one institution to another, so don't assume you'll be stuck with that plan for life. Even if you stick with your current employer forever, the plan administrator may change, and you'll have new payout plans and fund options.

I would also recommend living on one salary or half of the combined salaries, and putting 50% of your pay towards retirement (or accumulated debts). Spending all of one attending's pay, you can live very, very well while investing in your future at a much faster clip.

Best,

-PoF

 

[TheGipper]

If we're talking about a non-governmental 457b, these are typically NOT eligible to rollover to an IRA, just another non-govt 457b if your plan and the accepting plan allow.

5 yr distribution window is not ideal. 10yr window that lets you delay the distribution start date is much better. Ideally, you'd want to delay distribution until after you (and spouse) retire, ideally spread over 10 years if funds are substantial to minimize taxes.

If you are in or near the top marginal tax bracket, I'd still probably use it anyway though.

[Josh0731]

Don't hesitate at all to use the 457 and max it out. Tax-free growth is a big deal, especially if you are young and there are years of compounding ahead of you.  The risks involved are unlikely.  Having the problem of too much money at retirement is not really a problem.  Even if you had to take a 5-year draw down of the account because you left your job it still isn't the end of the world, just put the draw downs in a taxable account.  I suppose the only situation that would give me pause is if you were genuinely apprehensive about the job and thought there was a realistic chance you might not be there in 2-3 years.

[jfoxcpacfp]

TheGipper wrote:

If we’re talking about a non-governmental 457b, these are typically NOT eligible to rollover to an IRA, just another non-govt 457b if your plan and the accepting plan allow.

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Good catch, s/h mentioned. On the positive side, nephron116, note that you can take early distributions from the 457 at any age w/o the 10% penalty, which I s/h included in the benefits list.

[nephron116]

Thank you for feedback.  This is a non-govermental 457 so it can apparently be rather challenging/impossible to switch to another instutition or an IRA.  I will check forms to see if everything truly has to be withdrawn in 5 years.

I suppose part of the reason I am considering a tax efficient mutual fund is that I have heard some people advise that it is wise to have some retirement savings post-tax to avoid a huge tax bill when pulling out retirement funds.  I'm not sure if this is sound advice.

[jfoxcpacfp]

nephron116 wrote:

I suppose part of the reason I am considering a tax efficient mutual fund is that I have heard some people advise that it is wise to have some retirement savings post-tax to avoid a huge tax bill when pulling out retirement funds.  I’m not sure if this is sound advice.

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Sorry, I hit the "like" button before I hit quote, in case you're wondering why I singled out your post - no way to undo  :P

You are correct that it can be very beneficial to have a taxable account, not just at retirement, but in planning for long-term goals before then. What and how and how much really depends upon the dictates of your personal financial plan, which serves as your roadmap for financial decisions like these.

[TheGipper]

If you're in the top marginal tax bracket (which it is likely you are or are close to as a married attending physician couple), you should pretty much always max out your tax deferred space before considering a taxable account, or Roth 401k for that matter.  That said, unless you are older and have a large defined benefit/cash balance plan opportunity, you are very likely to be able to contribute considerably to a taxable account after maxing out tax-deferred space.  You will have plenty of time to Roth convert and withdraw from your tax-deferred accounts after you retire and while your income is low, before RMDs and SS, at a much lower effective rate than current marginal tax rate.

[PhysicianOnFIRE]

If you are choosing between either funding a 457(b) and starting a taxable account, and choosing to save 20% of 2 physician salaries, what plans to do have for the rest of your earnings? We're talking 160% of a physician's salary. If you're aggressively paying down student loans or saving up for a large down payment or cash purchase of a home, your plan might make sense. Or perhaps you live in an extremely high cost of living area.

Otherwise, I question how smart it is to save 20% while foregoing either a 457(b) or a taxable account investment.

[nephron116]

Thank you for everyone's input.  Just to clarify, we will be saving about 50% of our income overall.  We have targeted 20% towards retirement.  The remaining will go to a combination of paying my med school loans, saving in a college 529 for our new baby and saving for a down payment for a house.

[PhysicianOnFIRE]

nephron116 wrote:

Thank you for everyone’s input.  Just to clarify, we will be saving about 50% of our income overall.  We have targeted 20% towards retirement.  The remaining will go to a combination of paying my med school loans, saving in a college 529 for our new baby and saving for a down payment for a house.

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Excellent.

Live on one income (or less) and start securing your financial future with the rest. I don't like to separate out "retirement saving" from "saving". If you're not spending it now, you're saving it for your future. In the future, your savings might fund living expenses, a home purchase, a Boat  8-) , etc...

Good luck on your journey!

-PoF