Thoughts on only putting money into a 457 and 403(b). Does anyone do it?

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jw2s
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Thoughts on only putting money into a 457 and 403(b). Does anyone do it?

Post by jw2s » Tue Jun 19, 2018 9:24 am

Hello everyone,
I max out my 457 every year. My wife started a new job and has a 403(b) option now. After reading and reading and reading, I'm still unsure if it would be wise for her to max out her 403(b) or possibly set up a Roth IRA so that we can cover 'both bases' insofar as taxes go. Or split a roth/403(b). I've read that both a Roth and a taxable account, in the end, are the same amount, so it really doesn't matter. Pay me(gov't) now or pay me later I guess. I'm in the camp of putting $18,500/yr in the market and letting it sit and gain(and lose and gain...) and figure out the taxes on it later when I need to use it. I don't know where we will retire or what the future holds. I'm banking on being in a lower tax bracket at retirement so deferred comp seems right in my head.
Now, maxing out a Roth is $5,500/yr and I'll never have to pay taxes on it again. So, I guess it depends on how much that $5,500 makes in the 20 yrs in the market.

Any other BH use only taxable retirement accounts?
If so, why?
Do you mix in a Roth too? If so, why?

soccerrules
Posts: 953
Joined: Mon Nov 14, 2016 4:01 pm

Re: Thoughts on only putting money into a 457 and 403(b). Does anyone do it?

Post by soccerrules » Tue Jun 19, 2018 9:44 am

SAVE
General guidance is SAVE as much as you can as early in your career and let the greatness of compounding interest be your best friend. Especially in your late 40's and 50's where it really gets going.
Save this way!
1) Tax Deferred Company plans to maximize company matching (FREE money)
2) Roth IRA ($5,500 per person)- check Income thresholds, may need to do backdoor Roth contribution
3) Back to Tax Deferred Company plan to hit maximum for year ($18,500 per person)
4) Then extra money can go Taxable Accounts
5) Then maybe 529's (yes if state offers tax deduction)

Also Roth IRA is better that Taxable. When withdrawing from Roth (post age 59.5) everything is tax free. Withdrawing from taxable (assume in stocks/bonds) you will pay ST or LT capital gains tax in the year you withdraw. You will also likely be paying taxes on dividends (in Taxable account) each year throughout your life. Also with Roth you can withdraw your contributions (not earnings) prior to 59.5 without penalty as long as you meet the 5 year rule. (some use it as part EF, I would not)

Also with tax deferred space each year-- if you do not fill it up, you will lose the opportunity for that year. Take advantage of the tax deferred space each year.
Don't let your outflow exceed your income or your upkeep will be your downfall.

NightFall
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Re: Thoughts on only putting money into a 457 and 403(b). Does anyone do it?

Post by NightFall » Tue Jun 19, 2018 10:00 am

I would read more about the advantages of retirement accounts. A 403b is similar in nature to a 401K. In many ways, it is similar to your 457 as well. There is a difference though. The assets of your 457 are held in trust by your employer. If your 457 is a governmental one, you should be fine. These are the good types of 457 accounts. If not, you might think twice about using a 457 over a 403b. Technically, the assets are not yours in a 457 until you withdraw them. If your employer goes bankrupt, your 457 is subject to their creditors and may be taken. That can't happen with a 403b because those are your assets.... not your employers. This controlling difference leads to interesting effects in the tax code, such as 457 and 403b's having separate voluntary contribution limits (currently $18.5K each per person).

In general, if you expect to be in a lower tax bracket in retirement, place money into traditional accounts. That includes the 403b and maybe your 457. Read about the differences between taxable and Roth accounts. In most cases (Livesoft will bring up tax loss harvesting in taxable), Roth accounts are better than taxable. For traditional vs roth, it depends on your current marginal rate versus your marginal rate in retirement (which you can only guess at) as to which type of retirement account is better for you.

As to whether anyone does it... I suspect the majority of posters on this site maximize all retirement accounts available to them.

Topic Author
jw2s
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Re: Thoughts on only putting money into a 457 and 403(b). Does anyone do it?

Post by jw2s » Tue Jun 19, 2018 10:06 am

Thank you soccerrules and nightfall

I do save. A lot by everyone else's standards, but to Bogleheads, not enough! I max out my 457. My employer does not match anything. I am aware of a 457 not being mine until I retire. I feel safe as my employer is governmental and isn't going anywhere. I lump 457, 401K and 403(B) into the same lot as they are taxed later.

My wife's new employer will match so we plan on at least putting the match into the 403(B).
You're saying next we should both max out ROTH IRA's? We are able to contribute to a ROTH.
Then put whatever else remains into the rest of her 403(B) to max it out?

There is so much information to sort through. I was under the impression that I would only pay income taxes on the taxable accounts when I retire. You're saying I also pay ST/LT capital gains taxes on the year I use them? Good to know...

I don't recall paying taxes on dividends in my deferred comp every year? I put money in and it simply sits there. I do not sell or trade.

I don't plan on withdrawing anything from retirement accounts so I do not factor this into it. We have 6-12 month emergency fund in a MMA. We keep the emergency fund 'stocked.'

NightFall
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Re: Thoughts on only putting money into a 457 and 403(b). Does anyone do it?

Post by NightFall » Tue Jun 19, 2018 10:20 am

jw2s wrote:
Tue Jun 19, 2018 10:06 am
I was under the impression that I would only pay income taxes on the taxable accounts when I retire. You're saying I also pay ST/LT capital gains taxes on the year I use them? Good to know...

I don't recall paying taxes on dividends in my deferred comp every year? I put money in and it simply sits there. I do not sell or trade.
You don't pay taxes on dividends in your 457. The money there grows tax free (one of the benefits of a retirement account). The money is taxed when you withdraw it assuming it is a traditional account.

For a taxable account... like etrade or something... yes, you pay taxes every year in general. You pay taxes on ST and LT capital gains. Those gains can come from dividends or from the fund buying and selling positions throughout the year if it's a mutual fund even if you are just a buy-and-hold person. So taxable accounts usually don't grow tax free. There is some drag on their returns. Note that you only pay taxes on the *gains* in a taxable account. If you put $1000 into Apple and later sell it for $10000, you pay taxes on the $9000 in gains.

Topic Author
jw2s
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Re: Thoughts on only putting money into a 457 and 403(b). Does anyone do it?

Post by jw2s » Tue Jun 19, 2018 10:34 am

I forgot to add a tidbit.

I do have a pension, so I will be getting taxed on that, too. I will be taxed on my pension as well as my 457 when I retire.

This makes me want to add a Roth for both myself and my wife so we have some income that is not taxed at retirement. Does this seem logical or am I missing something else?

spencer99
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Re: Thoughts on only putting money into a 457 and 403(b). Does anyone do it?

Post by spencer99 » Tue Jun 19, 2018 12:35 pm

jw2s wrote:
Tue Jun 19, 2018 10:34 am
I forgot to add a tidbit.

I do have a pension, so I will be getting taxed on that, too. I will be taxed on my pension as well as my 457 when I retire.

This makes me want to add a Roth for both myself and my wife so we have some income that is not taxed at retirement. Does this seem logical or am I missing something else?
When employed I also had access to 457, 403, and future pension. The pension precluded my being in a lower marginal tax bracket in retirement (especially after beginning RMDs and Social Security). My approach: I projected my income for the year, contributed enough to tax advantaged accounts (retirement and other) to drop into the 15% tax bracket and everything saved after that went into a Roth (I used both an individual and employer Roth). With your pension you want to be very careful you are not saving 12% in taxes now and paying 22% (or higher) when you withdraw in retirement.

S

Charon
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Re: Thoughts on only putting money into a 457 and 403(b). Does anyone do it?

Post by Charon » Tue Jun 19, 2018 12:40 pm

I do both Roth IRA contributions and tax-deferred 403(b) (and 457, during these couple years when I have extra income). I don't know if my tax rate will be lower in retirement, so the Roth is a hedge against income tax rates rising, and also something that will let me avoid large RMDs later in life. (I started the Roth contributions when my income was very low, so it was a no brainer to go Roth at the time. Downside was my income was very low, so I wasn't able to contribute much.)

I don't know if NightFall is really correct that "the majority of posters on this site maximize all retirement accounts available to them". In my case, with IRA, 403(b), and 457 available, I could theoretically contribute 60% of my gross income to retirement. Even if I could do that and live, I wouldn't. That's just excessive. Most people need to save more for retirement, but perhaps with Bogleheads the danger lies more in saving too much now at the expense of current life.

(I do admit that many posters on this site have far higher incomes than I do, and no 457 access, so they really could max out retirement accounts with only a reasonable portion of their income. But I'm thinking the most vocal people are also preferentially those who are very well off, which gives people a skewed opinion of what's normal here.)

Northern Flicker
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Re: Thoughts on only putting money into a 457 and 403(b). Does anyone do it?

Post by Northern Flicker » Tue Jun 19, 2018 12:51 pm

jw2s wrote:
Tue Jun 19, 2018 10:34 am
I forgot to add a tidbit.

I do have a pension, so I will be getting taxed on that, too. I will be taxed on my pension as well as my 457 when I retire.

This makes me want to add a Roth for both myself and my wife so we have some income that is not taxed at retirement. Does this seem logical or am I missing something else?
Having some Roth funds gives you flexibility to adjust withdrawals as needed to keep the non-Roth withdrawals in a lower tax bracket. I think which vehicles to use would in part depend on the investments and expense ratios in the plans.
Index fund investor since 1987.

fposte
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Re: Thoughts on only putting money into a 457 and 403(b). Does anyone do it?

Post by fposte » Tue Jun 19, 2018 12:51 pm

Do you have Roth options for your 457 and/or 403b? That should be in the consideration mix too, if so.

I'm in a similar position to you, with a pension, a 403b and a 457 with Roth options in both, plus an IRA. My 403b/457 are both inexpensive with excellent choices.

As far as I'm concerned, this means that the specifics of where it's better to put the money in a given moment vary over the years, and that deciding to put the money somewhere matters far more than getting the exact optimal location for the moment. It's a good thing to have good options, but there's a risk of being stymied into inaction by too many good choices.

However: if your pension is like mine, it means you don't have the Roth conversion window in retirement that many do; people who retire without a pension don't have regular taxable income coming in and drop to lower tax brackets that make conversions especially advantageous, but I will have taxable income immediately on retiring. It therefore makes sense for me to do some Roth contributions to the 457 now rather than swelling the pre-tax 457 even more, since conversion of those pre-tax accounts upon retirement is going to be a slow, incomplete, and only somewhat advantageous process.

Edit: Well, this is pretty much what spencer99 said more succinctly two posts above mine.
Last edited by fposte on Tue Jun 19, 2018 1:01 pm, edited 1 time in total.

boglewill34
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Re: Thoughts on only putting money into a 457 and 403(b). Does anyone do it?

Post by boglewill34 » Tue Jun 19, 2018 1:00 pm

A thing to keep in mind about a Roth 457 option, at least in my 457 plan the Roth is subject to RMDs, unlike private 457s. That could come into play in that decision.

fposte
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Re: Thoughts on only putting money into a 457 and 403(b). Does anyone do it?

Post by fposte » Tue Jun 19, 2018 1:02 pm

boglewill34 wrote:
Tue Jun 19, 2018 1:00 pm
A thing to keep in mind about a Roth 457 option, at least in my 457 plan the Roth is subject to RMDs, unlike private 457s. That could come into play in that decision.
Roth plans in 401ks, 403bs, and 457s are all subject to RMDs, but you can roll them into Roth IRAs at retirement.

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Ben Mathew
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Re: Thoughts on only putting money into a 457 and 403(b). Does anyone do it?

Post by Ben Mathew » Tue Jun 19, 2018 1:35 pm

jw2s wrote:
Tue Jun 19, 2018 9:24 am
Hello everyone,
I max out my 457 every year. My wife started a new job and has a 403(b) option now. After reading and reading and reading, I'm still unsure if it would be wise for her to max out her 403(b) or possibly set up a Roth IRA so that we can cover 'both bases' insofar as taxes go. Or split a roth/403(b). I've read that both a Roth and a taxable account, in the end, are the same amount, so it really doesn't matter. Pay me(gov't) now or pay me later I guess. I'm in the camp of putting $18,500/yr in the market and letting it sit and gain(and lose and gain...) and figure out the taxes on it later when I need to use it. I don't know where we will retire or what the future holds. I'm banking on being in a lower tax bracket at retirement so deferred comp seems right in my head.
Now, maxing out a Roth is $5,500/yr and I'll never have to pay taxes on it again. So, I guess it depends on how much that $5,500 makes in the 20 yrs in the market.

Any other BH use only taxable retirement accounts?
If so, why?
Do you mix in a Roth too? If so, why?
I think your use of the term "taxable account" and "taxable retirement accounts" can be confusing. You can slot your investment accounts into three categories:

1. Taxable: no special tax treatment.

2. Traditional tax-shielded accounts: Income tax deduction for contribution. Money grows tax-free while in account. Income tax paid at withdrawal.

3. Roth tax-shielded accounts: No income tax deduction for contribution. Money grows tax-free while in account. No income tax due at withdrawal.

If I understand correctly, you are trying to choose between maxing out a Traditional 403(b) account vs a Roth IRA. Whether a Roth or traditional account nets you more depends on your marginal tax rate at contribution vs withdrawal. If the tax rate when you're contributing is lower than the tax rate when you're withdrawing, then a Roth is better. But for most people, the tax rate will be lower when they're withdrawing because they're retired and have little income. So most people will probably come out ahead with traditional accounts. That's why I think the default should be a traditional account unless you're maxed out and want to contribute more. If you want to contribute more than the annual contribution limit in a given year, you should switch to a Roth because $1 in a Roth account is effectively larger than $1 in a traditional account (because it's post tax money).

So, applying all this to your case: It doesn't sound like you're maxed out because you still have space in your IRAs after your wife maxes out her 403(b). So in your case, I'd max out your wife's traditional 403(b) at work (as long as it offers low cost index fund options.) If you can save more, do so in a traditional IRA. If you'll max out all your traditional accounts in a given year want to save even more, switch to Roth accounts. If you want to save even more, convert your past traditional IRAs to Roth IRAs and pay the income tax on that. If you want to save even more than that, consider 529 college savings plans (if you have kids) or HSAs if you qualify. If you want to save even more, that's when you're finally forced to save in taxable accounts.

Topic Author
jw2s
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Re: Thoughts on only putting money into a 457 and 403(b). Does anyone do it?

Post by jw2s » Tue Jun 19, 2018 2:19 pm

This is great stuff. Thank you all for your input.

Spencer99 you're right. I may not drop into a lower tax bracket at retirement due to my pension and RMD. I do not have social security yet. I have to work one more quarter in the private sector to qualify for it. This factors in now, too. If I collect SS, it may bump my taxes up in retirement.
fposte wrote:
Tue Jun 19, 2018 12:51 pm

As far as I'm concerned, this means that the specifics of where it's better to put the money in a given moment vary over the years, and that deciding to put the money somewhere matters far more than getting the exact optimal location for the moment. It's a good thing to have good options, but there's a risk of being stymied into inaction by too many good choices.

It therefore makes sense for me to do some Roth contributions to the 457 now rather than swelling the pre-tax 457 even more
I agree that you should put it somewhere other than a bank account. I have great choices for my 457(currently enrolled in all Vanguard low ER funds). I do not have a Roth option with it. I'm leaning towards opening a Vanguard Roth IRA and maxing it out every year now to hedge against the pension and RMD's in retirement.
Ben Mathew wrote:
Tue Jun 19, 2018 1:35 pm
So, applying all this to your case: It doesn't sound like you're maxed out because you still have space in your IRAs after your wife maxes out her 403(b). So in your case, I'd max out your wife's traditional 403(b) at work (as long as it offers low cost index fund options.) If you can save more, do so in a traditional IRA. If you'll max out all your traditional accounts in a given year want to save even more, switch to Roth accounts. If you want to save even more, convert your past traditional IRAs to Roth IRAs and pay the income tax on that. If you want to save even more than that, consider 529 college savings plans (if you have kids) or HSAs if you qualify. If you want to save even more, that's when you're finally forced to save in taxable accounts.
This is a lot for me to take in Ben Mathew. You're suggesting maxing out my 457(which I am now) AND maxing out my wife's 403(b). Then a traditional IRA before a Roth IRA? This is where I become confused. Two maxed out tax-deferred accounts and adding another one to it on top of a pension? It seems like in retirement I'd be paying a lot of taxes?

fposte
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Re: Thoughts on only putting money into a 457 and 403(b). Does anyone do it?

Post by fposte » Tue Jun 19, 2018 2:21 pm

jw2s wrote:
Tue Jun 19, 2018 2:19 pm
This is great stuff. Thank you all for your input.

Spencer99 you're right. I may not drop into a lower tax bracket at retirement due to my pension and RMD. I do not have social security yet. I have to work one more quarter in the private sector to qualify for it. This factors in now, too. If I collect SS, it may bump my taxes up in retirement.
Do be aware of the Windfall Elimination Provision when you're calculating what you might get from SS on top of the pension.

Edit: fixed link.
Last edited by fposte on Tue Jun 19, 2018 3:07 pm, edited 1 time in total.

Topic Author
jw2s
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Re: Thoughts on only putting money into a 457 and 403(b). Does anyone do it?

Post by jw2s » Tue Jun 19, 2018 2:47 pm

Hi fposte
The link is coming up as bad. Can you repost it?

fposte
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Re: Thoughts on only putting money into a 457 and 403(b). Does anyone do it?

Post by fposte » Tue Jun 19, 2018 3:07 pm

jw2s wrote:
Tue Jun 19, 2018 2:47 pm
Hi fposte
The link is coming up as bad. Can you repost it?
Sorry, fixed now.

CnC
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Re: Thoughts on only putting money into a 457 and 403(b). Does anyone do it?

Post by CnC » Tue Jun 19, 2018 3:12 pm

Max Roth's before maxing tax deferred.


General order of operations.

Get max employer match for pre-tax (not always there for 457's)
Max Roth's
Max pre-tax
At this point you are typically saving 24k a person.

Then look into hsa 529's taxable investing real estate it's up to you.

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Ben Mathew
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Re: Thoughts on only putting money into a 457 and 403(b). Does anyone do it?

Post by Ben Mathew » Tue Jun 19, 2018 3:24 pm

jw2s wrote:
Tue Jun 19, 2018 2:19 pm
Ben Mathew wrote:
Tue Jun 19, 2018 1:35 pm
So, applying all this to your case: It doesn't sound like you're maxed out because you still have space in your IRAs after your wife maxes out her 403(b). So in your case, I'd max out your wife's traditional 403(b) at work (as long as it offers low cost index fund options.) If you can save more, do so in a traditional IRA. If you'll max out all your traditional accounts in a given year want to save even more, switch to Roth accounts. If you want to save even more, convert your past traditional IRAs to Roth IRAs and pay the income tax on that. If you want to save even more than that, consider 529 college savings plans (if you have kids) or HSAs if you qualify. If you want to save even more, that's when you're finally forced to save in taxable accounts.
This is a lot for me to take in Ben Mathew. You're suggesting maxing out my 457(which I am now) AND maxing out my wife's 403(b). Then a traditional IRA before a Roth IRA? This is where I become confused. Two maxed out tax-deferred accounts and adding another one to it on top of a pension? It seems like in retirement I'd be paying a lot of taxes?
Sorry, this was based on your first post where you anticipated lower tax brackets in retirement, which is the typical scenario. I missed the subsequent post where you said you had a pension as well and might therefore be in a higher bracket in retirement. In that case, you might want to build a more detailed model and try to estimate your future tax brackets. The goal is to pay taxes in the years in which your marginal tax rate is lowest by choosing between traditional contributions, Roth contributions, and Roth conversions each year. The optimal solution could end up being a combination--just enough traditional contributions to get you into a lower tax bracket, and then Roth contributions beyond that.

But to keep it in perspective, saving so much that you have a higher income in retirement than in your working years is not a bad "problem" to have! Congratulations!

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