457 or taxable

[huskie92]

hi all!

So I thought I was good with my contribution plan which includes maxing our 401k, 403b, Backdoor Roth’s, and HSA. Our next move was going to be back to a 457 I have at work but then I thought about our lack of a taxable account and was wondering if that would be a better usage of our funds? I have been so focused on pretax stuff (and rightfully so) but I do know that a solid taxable account is important as well correct? Especially if we may want to retire a few years early? The 457 is gov backed with decent investment options and multiple disbursement options. Thanks very much!

[adventure]

Perhaps you could do both? Perhaps not mathematically perfect (but hard to predict the future), but you'd get into the habit of adding something to taxable. Allows you some option to TLH at some point.

[jhwkr542]

457, take the tax break

[The Physician Philosopher]

Need to know more about your 457 provided to you. I would request the plan documents so that you can determine what the distribution rules are. Is it governmental or non-governmental? If non-governmental, how financially sound is your employer? Also it would be worth looking jnto what fund options you have. Are they low cost index funds or are they high expense ratio loaded mutual funds?

Have to answer those questions first before anyone can direct you with their opinions.

[jhwkr542]

Um...OP answered all those.

[huskie92]

I dug through the plan document and here are the distribution options. The default option is a lump sum. Obviously I wouldn't take that. The plan is through the Minnesota Deferred Compensation Plan. I have also attached a shot of the investment options and associated fees.

(a) A single lump-sum payment of the entire Account Balance;

(b) A single lump-sum payment of a partial portion of the Account Balance;

(c) Installment payments for a period of years (payable on a monthly, quarterly, semi-annual, or annual basis) which extends no longer than the life expectancy of the Participant as permitted under Code §401(a)(9) using the Uniform Lifetime Table at Reg. §1.041(a)(9)-9, A-2 for the Participant’s age on Participant’s birthday for that year. If the Participant’s age is less than age 70, the distribution period is 27.4 plus the number of years that the Participant’s age is less than age 70. The Account Balance for this calculation (other than the final installment payment) is the Account Balance as of the end of the year prior to the year for which the distribution is being calculated;

(d) Partial lump-sum payment of a designated amount, with the balance payable in installment payments for a period of years, as described in subsection (c);

(e) Annuity payments (payable on a monthly, quarterly, semi-annual, or annual basis) for the lifetime of the Participant or for the lifetimes of the Participant and Beneficiary in compliance with Code §401(a)(9); or

(f) Such other forms of installment payments as may be approved by the Administrator consistent with the requirements of Code §401(a)(9).

[The Physician Philosopher]

Oops.  Was reading it on my phone and missed that last sentence while walking out of work!   :roll:  My fault.

[The Physician Philosopher]

Sorry to make you repeat some of that!

I think that I would max out all of the retirement space first before doing a taxable account.  In your position, you have good investment options in your 457 (some of the same I invest in for my 403B, in fact).  If pre-tax could decrease your taxes as well.

Since it is governmental, it is essentially another 401K/403B.  You don't have to worry about the government defaulting and, if they did, well all of us would be hosed no matter what we put our money into.  Your distribution options are pretty good, too.

If you still have money after maxing out your 401K, 403B, Backdoor roths, HSA, and governmental 457...then I'd do a taxable account.

I will tell you that if you are maxing all of those out, you are likely saving a bunch of money.  The more of a saver you are the more beneficial Roth contributions become.

If you have the option in any of those retirement accounts (401K, 403B, 457) to put money in Roth, I'd consider doing that.  I wrote a post on pre-tax versus Roth contributions for 401K/403B.  One of the biggest reasons to do Roth contributions is if you expect to have a ton of money saved.  It sounds like you are heading that way.

Again, my apologies for missing the info at the end of your first post!

[huskie92]

Hah. No worries. I did add a little detail anyways. It looks like a reasonable portfolio could be put together with the Vanguard options provided don’t you think? The fees don’t look terrible either do they? The flat admin fee is what it is I guess.

[huskie92]

Looks like we crossposted there. I read your post. It is very interesting albeit on the cusp of my remedial understanding of all this investing stuff. I do believe my wife’s 401k has the ability to take Roth contributions. She does get a match and profit sharing directly deposited into it as well. This year it was roughly 30k from the two. So, what I think you are saying is that by making her contributions as Roth contributions she will be able to build up tax free money alongside the pretax money deposited by her group? This would obviously affect her taxes correct? We would have to pay taxes on that Roth contributed money?

[The Physician Philosopher]

I'll start the answer with a caveat:  Most people will tell you to put your money into retirement accounts via the standard (pre-tax) method during your peak earning years because your tax situation will be more favorable in retirement.  This means your pre-tax contributions will be taxed at a lower tax rate in retirement than they would have been during your peak earning years. My post goes into this.

That said, my roth comment is based on the fact that you are maxing out a bunch of retirement accounts.  The more money you have in pre-tax contributions in retirement, the higher your required minimum distributions (RMDs) will be when you hit 70.5 years old.  When that happens, if you have a bunch of money saved up, you'll still be in the highest tax bracket when you retire.

Roth contributions do NOT have RMD's.  So, this is beneficial if you have a lot of money saved up where your employer is contributing pre-tax money.

Also, your HSA is triple-tax-free (pre tax in, not taxed in growth, tax free when you take it out as long as used on appropriate expenses).  So, that is a good stealth IRA option.

To answer your other question, yes it will impact your taxes.  Roth contributions are post-tax contributions.  Therefore, you'd miss out on the tax benefit of lowering your AGI through pre-tax contributions.  That said, this may be beneficial if you are saving a lot of money each year (> 30% of your AGI).

[jfoxcpacfp]

huskie92 wrote:

(a) A single lump-sum payment of the entire Account Balance; (b) A single lump-sum payment of a partial portion of the Account Balance; (c) Installment payments for a period of years (payable on a monthly, quarterly, semi-annual, or annual basis) which extends no longer than the life expectancy of the Participant as permitted under Code §401(a)(9) using the Uniform Lifetime Table at Reg. §1.041(a)(9)-9, A-2 for the Participant’s age on Participant’s birthday for that year. If the Participant’s age is less than age 70, the distribution period is 27.4 plus the number of years that the Participant’s age is less than age 70. The Account Balance for this calculation (other than the final installment payment) is the Account Balance as of the end of the year prior to the year for which the distribution is being calculated; (d) Partial lump-sum payment of a designated amount, with the balance payable in installment payments for a period of years, as described in subsection (c); (e) Annuity payments (payable on a monthly, quarterly, semi-annual, or annual basis) for the lifetime of the Participant or for the lifetimes of the Participant and Beneficiary in compliance with Code §401(a)(9); or (f) Such other forms of installment payments as may be approved by the Administrator consistent with the requirements of Code §401(a)(9).

Click to expand...

You should also have the option to roll over to an IRA or to a new employer plan (that accepts rollovers) upon separation from service.

[cgossage]

I agree with @jfoxcpacfp, since it's a Governmental 457 you have the option to roll into an IRA.  This being the case, I would take the lump sum option.

[huskie92]

If I roll it into an IRA as a lump sum I would not be able to access it until 59.5 right? Say, hypothetically, I wanted to retire before 59.5 and potentially use the 457 and Taxable account as a bridge to 59.5 would I not roll it into an IRA then?

[The Physician Philosopher]

Unless it meets one of these rules, a 10% penalty will be given on anything you take out of an IRA before 59.5 years old.

 

TPP