Roth 457 vs. Roth IRA

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geospatial
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Roth 457 vs. Roth IRA

Post by geospatial » Fri Jul 07, 2017 7:50 am

I've been doing some preliminary research comparing Roth 457 plans vs. Roth IRAs. A couple of years ago my employer's deferred compensation plan began offering a Roth 457 and I'm trying to figure out if I should take advantage of that or find a different institution to start the IRA with. As far as I can tell they are functionally similar, with the primary difference being that one can invest up to the $18,000 federal limit for deferred comp if using a Roth 457 whereas the Roth IRA is subject to the current $5,500 limit. Beyond that, I think my only other consideration is the types of funds available. If going the Roth 457 route, I don't have access to Vanguard funds or even a total market fund. The best I can do is a S&P 500 index fund (ER = .01%), an International Index fund (ER = .09%, indexed to MSCI All-Country World Ex-USA IMI), and a small cap index fund (ER = .03%, indexed to Russell 2000). The small print also states "Your Plan also assesses an administrative fee of 1/100th of 1%, or .01%" which is above and beyond the ER. Based on the ERs and admin fee, and the fact that they are no-load, are those options better than their Vanguard counterparts? If so, does that make the Roth 457 the superior choice based on cost and the higher contribution limit?

Also, if there are other differences I'm unaware of, please share. Thank you.

MrNewEngland
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Re: Roth 457 vs. Roth IRA

Post by MrNewEngland » Fri Jul 07, 2017 7:59 am

If you have a 457 plan I am guessing that you are a government employee and you may also have a pension. One thing to think about with the 457 plan is that you can access it without penalty after your employment terminates for any reason. So if you're thinking about early retirement the 457 will be easier to access.

FWIW I do both, although I can't max them both out.

KlangFool
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Re: Roth 457 vs. Roth IRA

Post by KlangFool » Fri Jul 07, 2017 8:02 am

geospatial wrote:I've been doing some preliminary research comparing Roth 457 plans vs. Roth IRAs. A couple of years ago my employer's deferred compensation plan began offering a Roth 457 and I'm trying to figure out if I should take advantage of that or find a different institution to start the IRA with. As far as I can tell they are functionally similar, with the primary difference being that one can invest up to the $18,000 federal limit for deferred comp if using a Roth 457 whereas the Roth IRA is subject to the current $5,500 limit. Beyond that, I think my only other consideration is the types of funds available. If going the Roth 457 route, I don't have access to Vanguard funds or even a total market fund. The best I can do is a S&P 500 index fund (ER = .01%), an International Index fund (ER = .09%, indexed to MSCI All-Country World Ex-USA IMI), and a small cap index fund (ER = .03%, indexed to Russell 2000). The small print also states "Your Plan also assesses an administrative fee of 1/100th of 1%, or .01%" which is above and beyond the ER. Based on the ERs and admin fee, and the fact that they are no-load, are those options better than their Vanguard counterparts? If so, does that make the Roth 457 the superior choice based on cost and the higher contribution limit?

Also, if there are other differences I'm unaware of, please share. Thank you.
geospatial,

I do not understand why do you make this comparison? The most logical choice is to contribute to the Trad. 457 and put the tax savings into Roth IRA. You get the best of both worlds: Tax deferred and Roth accounts.

KlangFool

Topic Author
geospatial
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Re: Roth 457 vs. Roth IRA

Post by geospatial » Fri Jul 07, 2017 8:40 am

MrNewEngland wrote:If you have a 457 plan I am guessing that you are a government employee and you may also have a pension. One thing to think about with the 457 plan is that you can access it without penalty after your employment terminates for any reason. So if you're thinking about early retirement the 457 will be easier to access.

FWIW I do both, although I can't max them both out.
I am a govt. employee, but due to the heavily backloaded nature of the pension formula I'll likely be working till my early 60's. I make voluntary contributions into deferred compensation to supplement my retirement, just in case. I'd rather have "too much" and not need it than need it and not have it available. Even though right now I estimate I'll be in the same tax bracket in retirement, it's possible it could be higher, so I'd like to hedge my bets a little. My voluntary contributions to date have been solely to the traditional 457, but I would like to have a Roth for some tax-free growth. Therefore I'm weighing my options between the employer sponsored Roth or looking elsewhere at a Roth IRA, and want to do whichever is better for me. I expect to contribute to both traditional and Roth, but can decide how much to put into each up to the limit.

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House Blend
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Re: Roth 457 vs. Roth IRA

Post by House Blend » Fri Jul 07, 2017 9:59 am

geospatial wrote:Also, if there are other differences I'm unaware of, please share. Thank you.
One quirk of gov't 457(b) plans is that distributions from a Roth 457(b) before age 59.5 are *not* qualified, and therefore gains are taxable.
See https://www.irs.gov/retirement-plans/re ... h-accounts

Traditional 457(b) distributions do not have this flaw. Of course the distribution is fully taxable in this case, but at least you aren't being taxed on the way in as well, and (unlike a trad IRA) there is no pre-59.5 penalty.

Should not be an issue for you, given that you plan to retire after age 59.5.

And keep in mind that 457(b) accounts have RMDs, so you'll probably want to roll to a Roth IRA eventually.

MrNewEngland
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Re: Roth 457 vs. Roth IRA

Post by MrNewEngland » Fri Jul 07, 2017 10:36 am

House Blend wrote:
geospatial wrote:Also, if there are other differences I'm unaware of, please share. Thank you.
One quirk of gov't 457(b) plans is that distributions from a Roth 457(b) before age 59.5 are *not* qualified, and therefore gains are taxable.
See https://www.irs.gov/retirement-plans/re ... h-accounts

Traditional 457(b) distributions do not have this flaw. Of course the distribution is fully taxable in this case, but at least you aren't being taxed on the way in as well, and (unlike a trad IRA) there is no pre-59.5 penalty.

This just blew my mind. Are you saying if you withdraw from a Roth 457 before you're 59.5 that the withdrawal is taxed?

If that is the case I need to really reconsider what I am doing...

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House Blend
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Re: Roth 457 vs. Roth IRA

Post by House Blend » Fri Jul 07, 2017 10:49 am

MrNewEngland wrote:
House Blend wrote:
geospatial wrote:Also, if there are other differences I'm unaware of, please share. Thank you.
One quirk of gov't 457(b) plans is that distributions from a Roth 457(b) before age 59.5 are *not* qualified, and therefore gains are taxable.
See https://www.irs.gov/retirement-plans/re ... h-accounts

Traditional 457(b) distributions do not have this flaw. Of course the distribution is fully taxable in this case, but at least you aren't being taxed on the way in as well, and (unlike a trad IRA) there is no pre-59.5 penalty.

This just blew my mind. Are you saying if you withdraw from a Roth 457 before you're 59.5 that the withdrawal is taxed?
Not the entire withdrawal, just the gains. And the gains are prorated.

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Re: Roth 457 vs. Roth IRA

Post by Mudpuppy » Fri Jul 07, 2017 1:05 pm

geospatial wrote:Beyond that, I think my only other consideration is the types of funds available. If going the Roth 457 route, I don't have access to Vanguard funds or even a total market fund. The best I can do is a S&P 500 index fund (ER = .01%), an International Index fund (ER = .09%, indexed to MSCI All-Country World Ex-USA IMI), and a small cap index fund (ER = .03%, indexed to Russell 2000). The small print also states "Your Plan also assesses an administrative fee of 1/100th of 1%, or .01%" which is above and beyond the ER. Based on the ERs and admin fee, and the fact that they are no-load, are those options better than their Vanguard counterparts?
House Blend already pointed out the biggest gotcha of Roth 457(b) plans. I'm going to focus instead on this part. These are pretty great investment fund options. Even with the admin fee, you're talking 0.02% for the S&P 500 fund, 0.04% for the small cap fund, and 0.10% for the international fund. That's actually better than what Vanguard offers for equivalent Admiral funds. You can approximate total stock market with a ratio of about 90% S&P 500 and 10% small cap (it will be slightly under-weighted for mid cap stocks, but close enough).

Do you have the same fund options in the traditional 457(b) plan? Perhaps a better plan would be to put $5,500 in a Roth IRA and then whatever else you can afford to contribute, up to $18,000, in the traditional 457(b) plan. That would avoid the gotcha with qualified distributions that exists for Roth 457(b) plans while still allowing you to have Roth funds in your IRA.

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Re: Roth 457 vs. Roth IRA

Post by kinetic2255 » Fri Jul 07, 2017 1:22 pm

I'm eligible for deferred Comp 401(a) and 457(b). Im also looking for multiple buckets to choose from in the event of an early retirement. Here's what I do with high ER's in my plan:
Fund 401(a) to match
Max out Roth through Vanguard
Fund 457(b) (currently to max)

This way I'm still lowering my taxable income and have some diversification in financial institutions.

Topic Author
geospatial
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Re: Roth 457 vs. Roth IRA

Post by geospatial » Fri Jul 07, 2017 1:37 pm

House Blend wrote:
geospatial wrote:Also, if there are other differences I'm unaware of, please share. Thank you.
One quirk of gov't 457(b) plans is that distributions from a Roth 457(b) before age 59.5 are *not* qualified, and therefore gains are taxable.
See https://www.irs.gov/retirement-plans/re ... h-accounts

Traditional 457(b) distributions do not have this flaw. Of course the distribution is fully taxable in this case, but at least you aren't being taxed on the way in as well, and (unlike a trad IRA) there is no pre-59.5 penalty.

Should not be an issue for you, given that you plan to retire after age 59.5.

And keep in mind that 457(b) accounts have RMDs, so you'll probably want to roll to a Roth IRA eventually.
I understand the difference between traditional 457 and roth 457 when it comes to non-qualified distributions. But I'm comparing Roth 457 vs. Roth IRA, and I believe they both have the same limitation... if withdrawing before age 59.5, any original contribution money is still tax free but any earnings are taxed. So when looking for differences between those two options, I don't think it comes into play. I also think in the case of both Roth 457 and Roth IRA, there are no required RMDs, but please correct me if I'm wrong on that.

I have been contributing to traditional 457 for years, so adding the Roth should provide some flexibility post-retirement when trying to make sure I don't end up in a higher tax bracket.

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geospatial
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Re: Roth 457 vs. Roth IRA

Post by geospatial » Fri Jul 07, 2017 1:50 pm

Mudpuppy wrote:House Blend already pointed out the biggest gotcha of Roth 457(b) plans. I'm going to focus instead on this part. These are pretty great investment fund options. Even with the admin fee, you're talking 0.02% for the S&P 500 fund, 0.04% for the small cap fund, and 0.10% for the international fund. That's actually better than what Vanguard offers for equivalent Admiral funds. You can approximate total stock market with a ratio of about 90% S&P 500 and 10% small cap (it will be slightly under-weighted for mid cap stocks, but close enough).

Do you have the same fund options in the traditional 457(b) plan? Perhaps a better plan would be to put $5,500 in a Roth IRA and then whatever else you can afford to contribute, up to $18,000, in the traditional 457(b) plan. That would avoid the gotcha with qualified distributions that exists for Roth 457(b) plans while still allowing you to have Roth funds in your IRA.
Thank you for answering my primary question. Those funds are available for both the traditional and roth designations of the 457 account. I haven't been fully funding up to the max level because I already put over 10% of my salary into my pension, which I expect (or at least hope) to replace 80% of my final income. But I do put over 16% currently into traditional 457, so already 26% of my income is going towards retirement. I could bump it up a little more... maybe to 20% of salary into voluntary deferred comp, but the portion going into traditional vs. roth is at my discretion, and I'd like to optimize that. My first choice though is to confirm that roth 457 is better for me than roth IRA. I keep multiple online bank accts for my emergency fund, partly to maximize whichever has the best interest rate and partly to minimize risk in case anything happened to one of those banks or accounts (despite being FDIC-insured), and I wondered if the same diversification principle might be useful here, keeping traditional with employer and roth with a separate institution in an overabundance of caution. But I have no issue keeping it all in the employer plan if it's unquestionably the best option.

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Re: Roth 457 vs. Roth IRA

Post by Mudpuppy » Fri Jul 07, 2017 3:02 pm

One has to balance diversification with having too many accounts to manage. So there's really no one right answer here. My personal rule of thumb is if I can't fit it into my "heads up display", which is a one-page overview tab on my budget spreadsheet, then I'm probably making it unduly complicated. With respects to retirement accounts, I have the government pension, two employer-sponsored voluntary plans, and one Roth IRA account. And even that feels like a lot to juggle when I'm downloading monthly activity from the voluntary plans and IRA into my asset allocation tracking spreadsheet.

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House Blend
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Re: Roth 457 vs. Roth IRA

Post by House Blend » Fri Jul 07, 2017 3:23 pm

geospatial wrote:
House Blend wrote:
geospatial wrote:Also, if there are other differences I'm unaware of, please share. Thank you.
One quirk of gov't 457(b) plans is that distributions from a Roth 457(b) before age 59.5 are *not* qualified, and therefore gains are taxable.
See https://www.irs.gov/retirement-plans/re ... h-accounts

Traditional 457(b) distributions do not have this flaw. Of course the distribution is fully taxable in this case, but at least you aren't being taxed on the way in as well, and (unlike a trad IRA) there is no pre-59.5 penalty.

Should not be an issue for you, given that you plan to retire after age 59.5.

And keep in mind that 457(b) accounts have RMDs, so you'll probably want to roll to a Roth IRA eventually.
I understand the difference between traditional 457 and roth 457 when it comes to non-qualified distributions. But I'm comparing Roth 457 vs. Roth IRA, and I believe they both have the same limitation... if withdrawing before age 59.5, any original contribution money is still tax free but any earnings are taxed. So when looking for differences between those two options, I don't think it comes into play. I also think in the case of both Roth 457 and Roth IRA, there are no required RMDs, but please correct me if I'm wrong on that.
That's a fair point, but the ordering of withdrawals from Roth 457(b) and Roth IRA are slightly different.

For Roth IRA, contributions come out first. So you have a wide range of amounts that you can take out tax free before you have to worry about non-qualified distributions.

However, a pre-59.5 Roth 457(b) withdrawal behaves like a withdrawal from a post-59.5 nondeductible trad IRA. You have a basis, and the basis and gains are taken out proportionately.

(There's also a 5 year clock involved in making distributions qualified, but I've left out that detail for simplicity.)

Example: You have contributed $40K to a Roth 457(b). Account balance is $100K. You withdraw $10K, prior to 59.5. Then $4K of it is tax free and $6K of it is taxable. Afterwards, your "basis" in the Roth 457(b) is $36K.

As I said before, your gov't Roth 457(b) will have RMDs. So do Roth 401(k) and Roth 403(b) plans. Only Roth IRAs don't. See https://www.irs.gov/retirement-plans/pl ... tions-rmds

But I don't see why any of the above adversely affects you, since you mentioned waiting until 60+ to retire, and you can avoid the RMDs by rolling to a Roth IRA in retirement.

Toadandfriends
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Re: Roth 457 vs. Roth IRA

Post by Toadandfriends » Fri Jul 07, 2017 3:29 pm

Hello,
Since the 18k limit for the 457 is a total cap for the traditional 457 and the Roth 457 combined you might want to go with the Roth IRA. Even if you aren't reaching the limit now you might later. Then you would have to open yet another account. You can put 18k in your trad 457 and 5500 in your Roth IRA, but you will be capped at 18k if you split between the two 457 options.

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geospatial
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Re: Roth 457 vs. Roth IRA

Post by geospatial » Fri Jul 07, 2017 5:30 pm

House Blend wrote:For Roth IRA, contributions come out first. So you have a wide range of amounts that you can take out tax free before you have to worry about non-qualified distributions.

However, a pre-59.5 Roth 457(b) withdrawal behaves like a withdrawal from a post-59.5 nondeductible trad IRA. You have a basis, and the basis and gains are taken out proportionately.

(There's also a 5 year clock involved in making distributions qualified, but I've left out that detail for simplicity.)

Example: You have contributed $40K to a Roth 457(b). Account balance is $100K. You withdraw $10K, prior to 59.5. Then $4K of it is tax free and $6K of it is taxable. Afterwards, your "basis" in the Roth 457(b) is $36K.

As I said before, your gov't Roth 457(b) will have RMDs. So do Roth 401(k) and Roth 403(b) plans. Only Roth IRAs don't. See https://www.irs.gov/retirement-plans/pl ... tions-rmds

But I don't see why any of the above adversely affects you, since you mentioned waiting until 60+ to retire, and you can avoid the RMDs by rolling to a Roth IRA in retirement.
This is exactly the kind of information I hope to learn when I come to this board. Thank you for sharing. When I looked at the plan provider's overview of the Roth 457, they conveniently leave out the part about the basis and gains taken out proportionately if distributed before age 59.5. (see overview here if it's not hiding behind a login: https://dcprovider.com/PDF/mass/SMART_R ... erview.pdf ) And they do confirm your statement about the Roth 457's having an RMD (provided I don't do a rollover to an IRA).

So it looks like these are the things I have to consider...
1. Roth 457s will distribute at least partial earnings if a distribution is taken before age 59.5, and they are taxable, whereas a Roth IRA won't tax distributions before age 59.5 if they consist of contributions only, and they distribute earnings last in that scenario.
2. Roth 457s have an RMD at age 70.5 whereas Roth IRAs don't. (but can be avoided by rolling over to a Roth IRA)
3. I can contribute more to a Roth 457 than a Roth IRA. Roth IRA max is currently $5500/year whereas Roth 457 could be up to $18K, but if I want to also contribute to traditional 457, it counts towards that $18K.
4. The investment options in my particular 457 plan appear to be superior even to Vanguard's offerings in terms of Expense Ratios/admin fees.
5. I can only fund my 457 plan with payroll deductions... no lump sum deposits allowed even if I ever wanted to do that.

I'm still leaning towards the Roth 457 at this stage due to the lower fund expenses, the ability to exceed the IRA limit in contributions if desired, and to minimize the various places I have accounts for bookkeeping sanity. And if I'm fortunate enough to be in a position where I could max the 457, the Roth IRA is still an option. However I am curious if I'd be allowed to do a Roth 457 rollover to a Roth IRA even if I didn't leave my employer, but that's a question I can ask the plan provider.

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celia
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Re: Roth 457 vs. Roth IRA

Post by celia » Fri Jul 07, 2017 6:01 pm

Mudpuppy wrote:One has to balance diversification with having too many accounts to manage. So there's really no one right answer here. My personal rule of thumb is if I can't fit it into my "heads up display", which is a one-page overview tab on my budget spreadsheet, then I'm probably making it unduly complicated. With respects to retirement accounts, I have the government pension, two employer-sponsored voluntary plans, and one Roth IRA account. And even that feels like a lot to juggle when I'm downloading monthly activity from the voluntary plans and IRA into my asset allocation tracking spreadsheet.
The number of accounts you have is irrelevant. NOT opening an account because you already have an account somewhere else is foolish. I would like to see all my accounts on one sheet of paper, but until I can, I'm not going to close accounts just for that purpose.

For example, during the market downfall in 2008, I kept doing Roth conversions, keeping each conversion separate from all the others, since I knew I would recharacterize some of them. By December I think I had 8 Roths, DH had 2, and we each had tIRAs as well as other accounts at our employers. Having all those accounts gave us the flexibility we had to make later decisions when we retired. Even to this day, we have to maintain Inherited IRAs separately. (But we are withdrawing from the Inherited traditional IRA at a fast rate , so it won't impact our taxes at age 70.5. That is a better goal than withdrawing just for the sake of simplification.)

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Re: Roth 457 vs. Roth IRA

Post by Mudpuppy » Fri Jul 07, 2017 7:19 pm

celia wrote:
Mudpuppy wrote:One has to balance diversification with having too many accounts to manage. So there's really no one right answer here. My personal rule of thumb is if I can't fit it into my "heads up display", which is a one-page overview tab on my budget spreadsheet, then I'm probably making it unduly complicated. With respects to retirement accounts, I have the government pension, two employer-sponsored voluntary plans, and one Roth IRA account. And even that feels like a lot to juggle when I'm downloading monthly activity from the voluntary plans and IRA into my asset allocation tracking spreadsheet.
The number of accounts you have is irrelevant. NOT opening an account because you already have an account somewhere else is foolish. I would like to see all my accounts on one sheet of paper, but until I can, I'm not going to close accounts just for that purpose.

For example, during the market downfall in 2008, I kept doing Roth conversions, keeping each conversion separate from all the others, since I knew I would recharacterize some of them. By December I think I had 8 Roths, DH had 2, and we each had tIRAs as well as other accounts at our employers. Having all those accounts gave us the flexibility we had to make later decisions when we retired. Even to this day, we have to maintain Inherited IRAs separately. (But we are withdrawing from the Inherited traditional IRA at a fast rate , so it won't impact our taxes at age 70.5. That is a better goal than withdrawing just for the sake of simplification.)
If you have to maintain separate accounts for specific tax, inheritance, or accounting reasons, such as for the reasons you stated, then sure, maintain separate accounts. But the OP's question, which was the question that I was replying to in my quote above, was if he/she should maintain separate accounts purely for financial provider diversity. That is not a compelling reason in and of itself to have a separate account, particularly if the account adds more complexity. For example, one has to consider if the financial plan is too complex for a spouse, POA, or executor to manage should the OP be incapacitated or worse and then balance that against the reason for adding the account. My heads up display is not just for me. It's also for my POA should I get hit by the proverbial bus.

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Re: Roth 457 vs. Roth IRA

Post by Sylliec » Wed Aug 01, 2018 2:28 pm

Mudpuppy wrote:
Fri Jul 07, 2017 7:19 pm
celia wrote:
Mudpuppy wrote:One has to balance diversification with having too many accounts to manage. So there's really no one right answer here. My personal rule of thumb is if I can't fit it into my "heads up display", which is a one-page overview tab on my budget spreadsheet, then I'm probably making it unduly complicated. With respects to retirement accounts, I have the government pension, two employer-sponsored voluntary plans, and one Roth IRA account. And even that feels like a lot to juggle when I'm downloading monthly activity from the voluntary plans and IRA into my asset allocation tracking spreadsheet.
The number of accounts you have is irrelevant. NOT opening an account because you already have an account somewhere else is foolish. I would like to see all my accounts on one sheet of paper, but until I can, I'm not going to close accounts just for that purpose.

For example, during the market downfall in 2008, I kept doing Roth conversions, keeping each conversion separate from all the others, since I knew I would recharacterize some of them. By December I think I had 8 Roths, DH had 2, and we each had tIRAs as well as other accounts at our employers. Having all those accounts gave us the flexibility we had to make later decisions when we retired. Even to this day, we have to maintain Inherited IRAs separately. (But we are withdrawing from the Inherited traditional IRA at a fast rate , so it won't impact our taxes at age 70.5. That is a better goal than withdrawing just for the sake of simplification.)
If you have to maintain separate accounts for specific tax, inheritance, or accounting reasons, such as for the reasons you stated, then sure, maintain separate accounts. But the OP's question, which was the question that I was replying to in my quote above, was if he/she should maintain separate accounts purely for financial provider diversity. That is not a compelling reason in and of itself to have a separate account, particularly if the account adds more complexity. For example, one has to consider if the financial plan is too complex for a spouse, POA, or executor to manage should the OP be incapacitated or worse and then balance that against the reason for adding the account. My heads up display is not just for me. It's also for my POA should I get hit by the proverbial bus.
My sister just executed my father’s estate and the most challenging aspect to her was dealing with his accounts at Schwab, Vanguard, and Fidelity in addition to his banking accounts.

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Re: Roth 457 vs. Roth IRA

Post by mav12 » Fri Jul 12, 2019 8:25 pm

I'm in my late 30's and used to contribute to Roth 457b through the State work. I'm now with the private employer. Is it worth to roll over Roth 457 b to traditional roth IRA (with, for example Vanguard) ?

I talked to the State and need to confirm, my principle and interest with Roth 457 b, are they taxed and subject to early withdrawal penalties if I were to take the funds out?

Basically, if I were to roll over the funds, I get more options and more control. With the State Roth 457 b, I was told, that I'm not subject to early withdrawal penalties . ? What would you have done?

Thank you

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