Contribute to a govt 457(b)?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
trav867
Posts: 18
Joined: Wed Mar 29, 2017 8:54 pm

Contribute to a govt 457(b)?

Post by trav867 » Wed Mar 29, 2017 9:40 pm

Hi everyone, I'm a long time lurker, first time poster. A little about me- 31 married, no kids, I have a very secure government job and my wife is a self employed CPA. Our gross income in 2016 was 240k and, having just filed our 2016 taxes, our effective combined rate was 30%. Because of this, I'm looking to reduce our taxable income for 2017.

I had disregarded my employer's 457(b) program because of the high fees through VOYA and mediocre fund choices, but there is a new option for a 2.75% APY through a local credit union that cause me to give the whole plan another look. Maxing out ($18,000 for 2017) seems like a good option but I wanted to get the opinion of this community.

1.) 457b through credit union, 2.75% return. Insured through NCUA and no annual fee.
2.) 457b through Voya and accepting the .5% fee. Vanguard Institutional Index (VINIX) would likely be my fund choice.
3.) don't participate in any 457(b)

We currently have about 200k in a 3 fund portfolio (thanks bogleheads!), 40% in a taxable acct, 60% tax advantaged. 8 years left on our mortgage at 4.375% and 10k in student loan debt at 2.3%

Thanks in advance for your opinions.

DSInvestor
Posts: 10780
Joined: Sat Oct 04, 2008 11:42 am

Re: Contribute to a govt 457(b)?

Post by DSInvestor » Wed Mar 29, 2017 10:07 pm

Welcome to the forum. What retirement plan is your wife using? If she can use a Solo 401(k), that would allow for very large contributions. The contribution limit for Solo 401k is 54K for tax year 2017. Solo 401k would allow 18K of employee salary deferral plus employer profit share (20% of net business income if schedule C or 25% of S-Corp W-2 wages). Fidelity has a great Self Employed 401k plan that has no fees and offers very low cost index funds with expense ratios comparable to Vanguard.

If she does not have a retirement plan for her self employed business, it would be possible to open a SEP-IRA now and contribute for tax year 2016 to reduce your 2016 tax liability. For tax year 2017 and beyond, Solo 401k may be a better choice if she is eligible for it.

If she does not have a retirement plan for 2016 tax year and your W-2 retirement plan is not checked, you may be able to fully deduct Traditional IRA contributions 5.5K each. The deadline for 2016 Traditional IRA contributions is April 18, 2017.
Wiki

trav867
Posts: 18
Joined: Wed Mar 29, 2017 8:54 pm

Re: Contribute to a govt 457(b)?

Post by trav867 » Wed Mar 29, 2017 10:32 pm

Thanks, in fact for 2016 we set up a solo 401(k) for her. She was previously employed by a large corporation so we're learning about small business as we go.

We contributed 18k as a deferral + 10k profit, or 25% of her $40,000 "salary." These were ROTH contributions.

In addition, I contributed $5,500 to an IRA which was non-deductible because of income phase out, and did a backdoor conversion to a ROTH.

DSInvestor
Posts: 10780
Joined: Sat Oct 04, 2008 11:42 am

Re: Contribute to a govt 457(b)?

Post by DSInvestor » Wed Mar 29, 2017 10:45 pm

trav867 wrote:Thanks, in fact for 2016 we set up a solo 401(k) for her. She was previously employed by a large corporation so we're learning about small business as we go.

We contributed 18k as a deferral + 10k profit, or 25% of her $40,000 "salary." These were ROTH contributions.

In addition, I contributed $5,500 to an IRA which was non-deductible because of income phase out, and did a backdoor conversion to a ROTH.
If you're concerned about high current taxes, it may be better to contribute make Traditional employee salary deferral to her Solo 401k for 2017 tax year. The employer profit share is always Traditional. The tax savings for 18K Traditional 401k contribution is likely enough to fund her backdoor into Roth IRA for 5.5K or make extra principal payments to the mortgage/student loans.
Wiki

trav867
Posts: 18
Joined: Wed Mar 29, 2017 8:54 pm

Re: Contribute to a govt 457(b)?

Post by trav867 » Thu Mar 30, 2017 8:46 am

Interesting.. per our accountant (not my CPA wife) we converted the profit share portion to a roth but it sounds like maybe this isn't allowed?

It does seem like traditional contributions make more sense going forward.

Do you have an opinion on the 457 plan?

DSInvestor
Posts: 10780
Joined: Sat Oct 04, 2008 11:42 am

Re: Contribute to a govt 457(b)?

Post by DSInvestor » Thu Mar 30, 2017 10:03 am

trav867 wrote:Interesting.. per our accountant (not my CPA wife) we converted the profit share portion to a roth but it sounds like maybe this isn't allowed?

It does seem like traditional contributions make more sense going forward.

Do you have an opinion on the 457 plan?
Employer profit share contributions to Solo 401k are always Traditional (the employer takes the deduction as an expense which reduces the net income). These assets can be converted to Roth IRA but I'm not sure if you need a qualifying event (attaining age 59.5, termination of plan, separation from service etc) to be eligible to roll assets out for a Roth conversion. The employee salary deferral assets definitely requires a qualifying event. Different plans have different features. Perhaps your wife's plan allows the rollover or has a in-plan rollover feature.

At your level of income, I think I would try to max out the Traditional Solo 401k, Traditional 457b, Roth IRAs (via backdoor if necessary) and invest in taxable. Look for the lowest cost options in the 457b.
Last edited by DSInvestor on Thu Mar 30, 2017 10:09 am, edited 1 time in total.
Wiki

trav867
Posts: 18
Joined: Wed Mar 29, 2017 8:54 pm

Re: Contribute to a govt 457(b)?

Post by trav867 » Thu Mar 30, 2017 10:06 am

Thanks, I appreciate the feedback.

You're right, I confirmed that the profit share is pre-tax and the business was able to deduct it.

Mudpuppy
Posts: 5889
Joined: Sat Aug 27, 2011 2:26 am
Location: Sunny California

Re: Contribute to a govt 457(b)?

Post by Mudpuppy » Thu Mar 30, 2017 10:47 am

trav867 wrote:1.) 457b through credit union, 2.75% return. Insured through NCUA and no annual fee.
2.) 457b through Voya and accepting the .5% fee. Vanguard Institutional Index (VINIX) would likely be my fund choice.
3.) don't participate in any 457(b)
Option 1 sounds like it would be a stable value/cash equivalent fund. So where does this fit into your desired asset allocation? Do you have a targeted percentage (as either stand-alone or part of your bond slice)?

And while the fees for Option 2 are steep compared to the base price for VINIX, in the overall scheme of employer-sponsored plans, an administrative fee 0.5% ER is not the worst thing. It's not great, particularly compared to what some other government agencies offer, but it's still well-under 1%.

So I would say to chose whichever of these two options fit in best with your desired asset allocation and your investment planning statement.

retiredjg
Posts: 32381
Joined: Thu Jan 10, 2008 12:56 pm

Re: Contribute to a govt 457(b)?

Post by retiredjg » Thu Mar 30, 2017 11:53 am

I suggest the same thing as DSInvestor. Max the traditional 401k, max the traditional 457b, fill Roth IRAs if you can and are willing to use the back door, and put the rest of your retirement money in taxable.

It sounds like your 457b is not as bad as you think. Bad is when the lowest cost choice is 1.5% and even that is still usable because of the tax-deferral.

User avatar
sometimesinvestor
Posts: 1184
Joined: Wed May 13, 2009 6:54 am

Re: Contribute to a govt 457(b)?

Post by sometimesinvestor » Thu Mar 30, 2017 2:46 pm

Stock market has been up for 8 years. Bond prices are clearly high and inflation may be coming. Invest in the high credit union rate and if stocks drop drop what you consider a meaningful amount try your luck with the S+P 500 fund since as noted the .5% rate is not awful and a purchase in the future if stocks go down will outperform a purchase with Vanguard today. Of course if stocks continue to go up my suggestion is wrong but as Damon Runyon wrote the race is not always to the swift but that is the nag on whom you should wager your ducats.(not an exact quote but close enough)

PaulF
Posts: 108
Joined: Wed Aug 06, 2008 10:07 pm
Location: Wisconsin

Re: Contribute to a govt 457(b)?

Post by PaulF » Thu Mar 30, 2017 5:14 pm

If early retirement is a possibility for you, note that you can take distributions from a 457 plan prior to age 59.5 without the 10% penalty assessed on 403b's, 401k's, and IRAs.

trav867
Posts: 18
Joined: Wed Mar 29, 2017 8:54 pm

Re: Contribute to a govt 457(b)?

Post by trav867 » Fri Mar 31, 2017 2:45 pm

Early retirement is a definite possibility. Does anyone know what the IRS considers "retirement?" I can't find a definition through google or the IRS website. https://www.irs.gov/retirement-plans/ir ... tion-plans

retiredjg
Posts: 32381
Joined: Thu Jan 10, 2008 12:56 pm

Re: Contribute to a govt 457(b)?

Post by retiredjg » Fri Mar 31, 2017 4:26 pm

It doesn't matter. You can use the money in a govt 457b without penalty any time after you leave that employer. It does not matter if you are retired or not. A 457b is not tied to retirement or age 59.5.

Post Reply