Contribute to bad 457b or invest in taxable account?

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fc_pty
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Contribute to bad 457b or invest in taxable account?

Post by fc_pty » Thu Oct 12, 2017 4:16 pm

Hi all,

Financial background: I'm currently in my 2nd year of a 4 year emergency medicine residency in California, single w/ no dependents and no plans to change either any time soon. I have about 140k in unsubsidized loans at 5.625%, but am enrolled in the REPAYE program so I pay about $100/month, and 50% of the difference between my monthly payment and my monthly interest is forgiven by the government. This effectively brings my interest rate down to about 3.24%.

During residency we make about 55-60k before taxes, but once I graduate I expect to be making in the 300k range. I have a mandatory 4.5% contribution to a 457b plan, matched at 3% by my employer. I can make additional contributions, but they are not matched, and the money is invested in a very low yield fund (average 1.6% over last 10 years). I have no say over what is done with that money. I have 3 months worth of expenses as an emergency fund.

I have a Roth IRA that I max out at $5.5k/year, but I have about $3k left over in my budget that I'd like to invest. Should I increase my contributions to the 457b despite the bad interest rate, with the plan being to roll it over into my Roth IRA after graduating (and therefore preserving the tax benefits), or simply invest in a taxable account with a higher expected earnings rate but no tax benefits?

manuvns
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Re: Contribute to bad 457b or invest in taxable account?

Post by manuvns » Thu Oct 12, 2017 4:29 pm

just put in enough to get the employer match . 5.5k in roth and 3-4k in 457b is enough on 60k income . wait until your income grows to 300k and you can choose where your money get invested.

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grabiner
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Re: Contribute to bad 457b or invest in taxable account?

Post by grabiner » Thu Oct 12, 2017 4:36 pm

Since you are planning to save this money for retirement anyway, you might as well put it in the 457 with the intention of rolling it over in two years. It doesn't matter much what it is invested in for those two years, since the primary benefit is many future years of tax-deferred growth.
David Grabiner

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PhysicianOnFIRE
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Re: Contribute to bad 457b or invest in taxable account?

Post by PhysicianOnFIRE » Thu Oct 12, 2017 5:08 pm

A mandatory 457(b) contribution? That's odd, but even it is wasn't mandatory, you should never turn down free money. I'd fund the 457(b) with just enough to get that 3% match, but no more.

If you have additional money to invest and you've exhausted other tax advantaged accounts you may have, like a personal Roth IRA or an HSA, then taxable is not a bad place to put your money. That money is very liquid and can be accessed at any time. You may eventually want to access it for a down payment on a home or to pay off those student loans if PSLF goes kaput some day.

:beer
-PoF

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Duckie
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Re: Contribute to bad 457b or invest in taxable account?

Post by Duckie » Thu Oct 12, 2017 5:13 pm

fc_pty wrote:Should I increase my contributions to the 457b despite the bad interest rate, with the plan being to roll it over into my Roth IRA after graduating (and therefore preserving the tax benefits), or simply invest in a taxable account with a higher expected earnings rate but no tax benefits?
Is the 457b governmental or non-governmental? You can't roll a non-governmental 457b to an IRA.

tapotti
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Joined: Thu Jun 02, 2011 8:37 pm

Re: Contribute to bad 457b or invest in taxable account?

Post by tapotti » Fri Oct 13, 2017 1:40 am

Are you at a UC system?

I did training at UC Davis. There was a mandatory safe harbor contribution to the DCP plan. That is separate from the 457b plan.

I still use the UC Davis 457b, and the choices seem fine with many index options.

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