457 plan in MN

[huskie92]

Hi all!

So, I am a public school teacher in MN and I currently contribute minimally to my 403b that I set up years ago when I was young and had no money. Now, my wife and I are looking into contributing more since we max her 401k every year. We never did much with my 403b since I also have a pension when I retire as well. However, now that we have the money it seems that this When going back through my benefits I noticed that my district lists the 457 MN Deferred Compensation Plan as a participating vendor. When I checked the site out here is what I found...

Why Choose MNDCP?

• No IRS Early Withdrawal Tax Penalty - One advantage the MNDCP has over other types of plans (i.e., 401(k), 403(b), 401(a), or IRA's) is that your withdrawals are not subject to the IRS 10% tax penalty usually assessed on withdrawals made before age   59 ½ .


• Low Fees — Take advantage of the competitive fees that result from MNDCP's economies of scale. This allows more of your money the potential for growth.


• No commissions or sales charges – The administrators of MNDCP are public employees, just like you, and receive no financial incentives for increased participation.


• Low minimum contributions — Contribute as little as $10 each paycheck.


• Matching contributions – Some employers or bargaining units match a portion of your contributions. Ask your employer if they offer matching contributions.


• It's your money — All account assets are held in trust for your exclusive benefit. Your account assets are never subject to the claims of creditors in the event of the State or public employer's bankruptcy.

Should I be using this plan instead of or along with my 403b through Fidelity that I set up years ago?  To me this looks like one of the "good" governmental 457 plans I was just reading about.

Thanks!

[The White Coat Investor]

No. Use it in addition to the 403b or not at all. 403bs are generally dramatically superior to 457s in many aspects, particularly distribution options.

https://www.whitecoatinvestor.com/should-you-use-your-457b/

That said, this does sound like it's probably one of the "good 457s" but I'd still use the 403b first.

[MnSaver]

We are also in Mn and it sounds like your district allows you to do either/both. In our case, we max out both 403 (Fidelity) and 457 (MNDCP), so you can defer $37K per year as a teacher if you can afford it. The MNDCP 457 has decent fund options and also allows you to go outside to a brokerage option if you wish. Keep in mind that teachers who started after 1999 in Mn no longer have the rule of 90; however, by doubling up on 403/457 you can build a bridge between early retirement and the time when you collect your pension without penalty at 66. PM me if you wish to discuss further or meet-up!

 

PS: watch the match! Wife's district matches on 403, not 457!

 

[Dreamgiver]

Depending on your household income and expenses, I'd try to max both of them out if possible. 403b first, then 457b (pending match, if one is available). My wife is a speech pathologist and we max out her 401a, 403b, and 457b. Her paycheck is very small but it does not matter to us. She basically works to provide health insurance and a nice chunk of retirement income (in addition to her mental well-being, of course).

I like to run my numbers on turbotax before I send everything to the CPA. Before we maxed out her retirement accounts, I had to send almost the equivalent to the IRS upon tax time since they would not take enough out of her paycheck (her individual bracket is much lower than mine). I figured we might as well keep that money in a tax-deferred account. Does it make sense?

[huskie92]

Wow, if we maxed everything that would be $54k per year! I would have to check the tax implications of that. We are currently in the 32% bracket and that might bring us down into the 25% bracket. That would be helpful. I guess I will have to figure that out. We live primarily on our salaries and don't have to dip into any bonus money unless we have an unusually large purchase so we could swing it. Do my contributions have to come from my paycheck or can they be paid at the end of the year in a lump sum? Are the tax implications different?

[MnSaver]

Contributions will come out of each paycheck. Saving 54K pre-tax should lower your effective rate, with the knowledge that you will pay that tax in the future when you withdraw. Another option to consider is Roth 403/457: our district offers both and so we do 5K Roth 403 and 32K pre-tax in 403/457. We cannot do a back-door Roth, due to pro rats, hence the Roth 403.

[PhysicianOnFIRE]

huskie92 wrote:

Wow, if we maxed everything that would be $54k per year! I would have to check the tax implications of that. We are currently in the 32% bracket and that might bring us down into the 25% bracket.

Click to expand...

Tax brackets in that range for 2018 are 24% (up to $315,000 MFJ) and 32% ($315,001 to $400,000).

We've also got 7.05% to 9.85% MN state income tax depending on income.

• 5.35% on the first $36,650 of taxable income.


• 7.05% on taxable income between $36,651 and $145,620.


• 7.85% on taxable income of between $145,621 and $258,260.


• 9.85% on taxable income of $258,261 and above

A governmental 457(b) is usually a pretty good deal as long as it offers decent investment options.

Best,

-PoF

[DMFA]

You speak as if saving $55k a year is a lot of money. By the 20% rule of thumb, if you make over $275,000, it's not enough.

[huskie92]

DMFA wrote:

You speak as if saving $55k a year is a lot of money. By the 20% rule of thumb, if you make over $275,000, it’s not enough.

Click to expand...

Right you are. Didn’t think of it that way. I need to work on altering my perspective.

[huskie92]

 

Regarding the 20% rule for saving...Where do things like employer matches and profit sharing come in to play? Also, being a public school teacher I do have a pension for when I retire. How to I handle that with respect to the rule?

[MnSaver]

We count all sources (match, profit share, etc) into savings rate. For planning purposes, I am conservative and don't count pension in savings rate nor do I count the pension account balance. The MNTRA website has a calculator that you can use to estimate pension in $, and then you can do some math to back into %. A good place for you to start is www.minnesotatra.org.

I probably should count pension in savings rate and net worth, but we decided that we will be conservative in estimates now and then spend more later if we have "too much". You might find that pension plus two social securities will cover a large % of your needed spending after 66. In our case, what we are really saving for is 56-66, as there is a significant penalty (4.5%-5.5% per year) to taking the pension payout prior to MNTRA full retirement age of 66 (for those hired after 1989). I value the pension as having 1.5MM saved. While my kids won't inherit it, 60K per year income from pension equates to pulling 4% off that 1.5MM annually. Since there is risk of pension funding/future cuts, I discount the estimate by 20%.

[DMFA]

huskie92 wrote:

 

Regarding the 20% rule for saving…Where do things like employer matches and profit sharing come in to play? Also, being a public school teacher I do have a pension for when I retire. How to I handle that with respect to the rule?

Click to expand...

Both the numerator and denominator.  So if you save $20,000 and earn $100,000, but your employer gives a 5% match ($5,000), then instead of 20k/100k = 20% it's (20k+5k)/(100k+5k) = 25k/105k = 23.8%.  For that reason I find it better just to ignore it, really, and count it as a bonus.

Like all rules of thumb, the 20% rule has *many* limitations. It came to be given that, assuming the following parameters:

• Savings: 20% of gross income


• Term: 30 years of savings


• Rate of gain: 5%


• Rate of withdrawal in retirement: 4%


• Resulting pretax retirement income = 56% of pretax pre-retirement income

This involves many other assumptions, such as:

• Inflation is baked into your income each year


• Increasing contributions with increased income


• You will be working for 30 years


• You will only replace 56% of pretax income (prob all you need given no more need to contribute 20%, ideally no more mortgage, lower tax bracket and some tax-free or LTCG investments)

So its limitations become more obvious in the following situations (not an exhaustive list):

• Retirement income will come from other sources, such as a pension (your case) or real estate


• You will be working less than 30 years (early retirement)


• You will be withdrawing less than 4% of assets each year (likely needed for early retirement)


• You want to replace either more than or less than 56% of pretax income


• A large portion of your retirement withdrawals will come from Roth or taxable (lower tax rate than usual income)


• You will expect a different rate of gain than 5%

So people might say "you're not saving 20%?!?!? OMG!  You're under-saving!" or something, but if you're going to invoke a concept (like I do very often with the 20% rule), you've got to know its nuts and bolts.  The point is income in retirement.  If you're covered by a pension, that takes the place of some of that income, and then you figure out how much you need to save over how long in order to get it.  So if you want $100,000 per year, and a pension would provide $40,000 a year, and you think you'd withdraw 4% (1/25) annually in retirement, you'd need 25 * (100,000 - 40,000) = 25 * 60,000 = $1,500,000 to enable that income. [Again that doesn't address its taxability, but we're not going too deep here.]  One could phrase this as meaning that the pension is essentially like having 25x its value in your portfolio, but that's a bit of a stretch since it's illiquid.

So some people throw it out completely because they want to get down to the granular level to find out exactly how much post-tax money is going to come out of retirement accounts and into their bank accounts each month/year in retirement.  Cool.  Go for it.  But for the person who doesn't want to get super-detailed into it all, which is most people, then go ahead and stick to the 20% rule of thumb.