High Expense Employer Plan: Pre-Tax or Roth?

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Topic Author
TXAGBH
Posts: 41
Joined: Sun Oct 05, 2014 1:15 pm
Location: DFW

High Expense Employer Plan: Pre-Tax or Roth?

Post by TXAGBH » Sun Sep 09, 2018 5:08 pm

My employer has a terrible 457 plan with the "cheapest" fund being their own in-house total stock market at a hefty 0.97% ER.
There is now the option to make traditional pre-tax or roth designated contributions.
My marginal tax rate is 22%. No state income tax. Assume my marginal tax bracket at retirement will stay the same.

My thinking is that since the ER is high, theoretically, it would be better to make traditional pre-tax contributions due to the ER drag this account will have, and then invest the tax savings in a Roth IRA at Vanguard. Assuming my marginal tax bracket at retirement is 22%, then Uncle Sam would have shouldered some of the 0.97% ER drag (0.2134% if my math is correct :twisted: ) on the account when I take distributions in retirement.

Is this reasoning sound? If not, what am I missing.

gostars
Posts: 439
Joined: Mon Oct 09, 2017 7:53 pm

Re: High Expense Employer Plan: Pre-Tax or Roth?

Post by gostars » Sun Sep 09, 2018 6:18 pm

A 457b is often a secondary plan to a 403b or 401k. Do you have another option you could be using first?

Topic Author
TXAGBH
Posts: 41
Joined: Sun Oct 05, 2014 1:15 pm
Location: DFW

Re: High Expense Employer Plan: Pre-Tax or Roth?

Post by TXAGBH » Sun Sep 09, 2018 6:21 pm

The state pension is primary, and participation is mandatory at a fixed % of salary. The 457 plan is secondary to the pension plan, but there are no other secondary options.

gostars
Posts: 439
Joined: Mon Oct 09, 2017 7:53 pm

Re: High Expense Employer Plan: Pre-Tax or Roth?

Post by gostars » Sun Sep 09, 2018 6:53 pm

Interesting, I thought everyone using Texas TRS and ERS had both available. Do you mind sharing what kind of employer it is?

Would your contribution amounts depend on on which one you selected? For example, if you made pre-tax contributions of $10,000 versus making Roth contributions of $7,800 (i.e. the same % of gross income less 22% tax), then I don't think it matters. You would pay less in fees on on the Roth side due to the lower account balance, but still probably end up at the same place down the road once taxes are accounted for. Someone else has probably done the math on this though.

Topic Author
TXAGBH
Posts: 41
Joined: Sun Oct 05, 2014 1:15 pm
Location: DFW

Re: High Expense Employer Plan: Pre-Tax or Roth?

Post by TXAGBH » Sun Sep 09, 2018 7:37 pm

gostars wrote:
Sun Sep 09, 2018 6:53 pm
Interesting, I thought everyone using Texas TRS and ERS had both available. Do you mind sharing what kind of employer it is?

Would your contribution amounts depend on on which one you selected? For example, if you made pre-tax contributions of $10,000 versus making Roth contributions of $7,800 (i.e. the same % of gross income less 22% tax), then I don't think it matters. You would pay less in fees on on the Roth side due to the lower account balance, but still probably end up at the same place down the road once taxes are accounted for. Someone else has probably done the math on this though.
It is a local government. No, the contribution amount would be maxed ($18,500) regardless of which option is selected.

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FiveK
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Re: High Expense Employer Plan: Pre-Tax or Roth?

Post by FiveK » Sun Sep 09, 2018 11:05 pm

TXAGBH wrote:
Sun Sep 09, 2018 5:08 pm
My employer has a terrible 457 plan with the "cheapest" fund being their own in-house total stock market at a hefty 0.97% ER.
There is now the option to make traditional pre-tax or roth designated contributions.
My marginal tax rate is 22%. No state income tax. Assume my marginal tax bracket at retirement will stay the same.

My thinking is that since the ER is high, theoretically, it would be better to make traditional pre-tax contributions due to the ER drag this account will have, and then invest the tax savings in a Roth IRA at Vanguard. Assuming my marginal tax bracket at retirement is 22%, then Uncle Sam would have shouldered some of the 0.97% ER drag (0.2134% if my math is correct :twisted: ) on the account when I take distributions in retirement.

Is this reasoning sound? If not, what am I missing.
The ER affects growth, whether in traditional or Roth. To a first approximation, the commutative property of multiplication says it thus makes no difference to your choice.

ER aside, if your marginal tax bracket at retirement will be 22% even if you never make another traditional contribution, then Roth will be better due to the effect described in Maxing out your retirement accounts. But do confirm that expected 22% number with some back-of-the-envelope estimates first.

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