Roth vs. Traditional w/pension

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Countermoon
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Roth vs. Traditional w/pension

Post by Countermoon » Fri Apr 07, 2017 11:57 am

Hi everyone.

I'm trying to determine the optimal choice between Roth and Traditional for my government-sponsored 457(b) knowing that I am almost certain to receive a pension (possibly two) when I retire. A conservative estimate for the pension's value is $60K/year, though it could end up being $80K+. My basic assumptions are:

1.) 30 years in the pension system which would give me the option to leave government service at age 52 and begin drawing the pension at 62. Obviously, the value would increase if I worked until my pension eligibility age of 62.
2.) Final salary of $100,000 (nominal dollars) which, considering I currently earn $75K, is quite conservative.

There's a chance that a second pension could enter the picture if I wind up marrying my long-term girlfriend. If she also remains in the system for ~30 years, it would be reasonable to assume a pension of more than $80K due to her earning potential (attorney).

In this scenario wouldn't it make more sense to make Roth 457(b) contributions? Pensions and SS alone would push us into the 25% or 28% brackets which would limit our ability to control our tax situation.

FYI, I'm also opening a Roth IRA this year. I am in the 25% tax bracket which I understand to be sort of a wash for Trad vs. Roth IRA. If I wind up marrying my girlfriend we would be over the income limit for a deductible Trad.

Thanks for taking a look at this!

TravelforFun
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Re: Roth vs. Traditional w/pension

Post by TravelforFun » Fri Apr 07, 2017 12:14 pm

Yes I would contribute to Roth 457b now because it does not look like your tax rate is going to decrease in retirement and you don't want to be forced into withdrawing from your tax deferred accounts when you hit 70.5.

dharrythomas
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Re: Roth vs. Traditional w/pension

Post by dharrythomas » Fri Apr 07, 2017 12:23 pm

Your analysis is reasonable. I like Roth IRAs for a number of reasons. Others think they are a mistake UNLESS you have a pension. There appears to be a consensus that Roth accounts are a good choice in the situation you describe.

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FiveK
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Re: Roth vs. Traditional w/pension

Post by FiveK » Fri Apr 07, 2017 3:32 pm

Countermoon wrote:... leave government service at age 52 and begin drawing the pension at 62.
During those ten years, how much of a traditional balance could you convert to Roth at relatively low tax rates?

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ruralavalon
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Re: Roth vs. Traditional w/pension

Post by ruralavalon » Fri Apr 07, 2017 3:50 pm

Yes Roth contributions will probably be better for you.

What is your age? What balance do you currently have in traditional accounts?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Nate79
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Re: Roth vs. Traditional w/pension

Post by Nate79 » Fri Apr 07, 2017 9:41 pm

Are these pension values in today's dollars? Tax brackets are inflation indexed so that is critical to understand.

Countermoon
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Re: Roth vs. Traditional w/pension

Post by Countermoon » Sun Apr 09, 2017 2:58 pm

ruralavalon wrote:Yes Roth contributions will probably be better for you.

What is your age? What balance do you currently have in traditional accounts?
I'm 28. This is a bit embarrassing but I only have about $5K in my 457(b) and it's almost 100% Roth. I'll be opening a Roth IRA this year and will put in at least $3K. I am still paying off some consumer debt (small personal loan, car loan) so I am directing a lot of dollars toward paying it off.
Nate79 wrote:Are these pension values in today's dollars? Tax brackets are inflation indexed so that is critical to understand.
Yes, these are today's dollars. I receive various COLAs and performance increases so the pension won't be calculated on a frozen salary from decades prior.

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ruralavalon
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Re: Roth vs. Traditional w/pension

Post by ruralavalon » Sun Apr 09, 2017 4:42 pm

Countermoon wrote:
ruralavalon wrote:Yes Roth contributions will probably be better for you.

What is your age? What balance do you currently have in traditional accounts?
I'm 28. This is a bit embarrassing but I only have about $5K in my 457(b) and it's almost 100% Roth. I'll be opening a Roth IRA this year and will put in at least $3K. I am still paying off some consumer debt (small personal loan, car loan) so I am directing a lot of dollars toward paying it off.
Nate79 wrote:Are these pension values in today's dollars? Tax brackets are inflation indexed so that is critical to understand.
Yes, these are today's dollars. I receive various COLAs and performance increases so the pension won't be calculated on a frozen salary from decades prior.
Don't be too embarrassed, many people your have less.

Try to increase your savings rate, and keep it as high as you can comfortably sustain.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Zedon
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Re: Roth vs. Traditional w/pension

Post by Zedon » Sun Apr 09, 2017 11:17 pm

I am in a similar boat but half way to retirement. I will get a sizeable pension, currently at least 75k in todays dollars with COLA.I have just barely been maxing my 457b, If I had a little more I would switch to Roth 457b, but it's hard for me to see it get taxed and not have a full 457b so for now I have been doing traditional. It's a question I continually wrestle with. If tax rates actually change in the near future it may push me one way or the other.
But it does seem that roth is the way to go if you know its 25 or 28%.

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