Pension vs. 457 plan

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Pension vs. 457 plan

Post by anon1 »


Looking for some general guidance. I work for a government entity that offers a pension. There's a 5% mandatory pension contribution, tax-free, and you can contribute another 10%, taxed, for a 15% total. They also offer a 457 plan which is deducted tax free. I contribute the mandatory 5% and am now in a position to contribute more to my savings. I'm in my early 40s and my spouse just recently went back to work. Am I better off adding more to my pension contribution or opening a 457 plan? Within the 457 plan, I would probably choose a Vanguard target retirement account.
Any thoughts or insight would be appreciated.
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Re: Pension vs. 457 plan

Post by chevca »

Both would be preferable. But, I'm guessing you're asking because you can only do one or the other.

It kind of depends on some things. How stable is your government entity? If they're shaky, you may not want to put all your eggs in that basket. When will you retire? If you were to say retire in your 50's and the pension wouldn't start until you're 60 or whatever, the 457 gives you an option to get that money to bridge the gap... penalty free if under 59/12 also.

As you know, with the 457 you get to pick how it's invested. The 457 is your money and not at the whim of the government as to changes in the pension plan or whatever.

If you want to feel a little more in control of things, do some of both and start the 457. If you just want the pension plan to take care of everything, contribute more to the pension.

By the way, very few things are "tax free". These monies would be tax deferred. I'm guessing that's what you meant, but just want to be sure.
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Re: Pension vs. 457 plan

Post by Wakefield1 »

I believe some local governments are offering a Roth style 457 plan (after tax contributions but when timely redemptions are made,tax free.
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Re: Pension vs. 457 plan

Post by Jade A.B. »

Also, compare the benefits with the employer-only vs the employer+ employee pensions. At the end of the day, my employer+ employee pension had more own-occupation disability and earlier health insurance included. (FWIW, I maxed out both.)
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Re: Pension vs. 457 plan

Post by sergeant »

I would try to max out both. If you have to only pick one I would look at the pension's funding level. If well-funded I would max the pension first and work as much OT as possible to fully max the 457b.
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Re: Pension vs. 457 plan

Post by krow36 »

anon1 wrote: Mon Nov 05, 2018 8:31 pm I work for a government entity that offers a pension. There's a 5% mandatory pension contribution, tax-free, and you can contribute another 10%, taxed, for a 15% total.
I could very well be wrong about this but neither the "tax-free" part, nor the "taxed" part sounds correct to me. I would think that both your mandatory 5% contribution and a voluntary further 10% contribution would be "tax-deferred". You don't take a deduction on these contributions because they are not added into your W2 salary. When you take a distribution in retirement, you'll be taxed. That's the same as the 457, unless you contribute to a Roth 457.

Do you know the formula that's used to calculate the pension? (# of years worked X ?% X highest average salary over ? years)?? Some state pensions are in very bad shape. Have you checked out funding of your government entity? If you tell us the government entity, we might be able to help you check it out? Hopefully it's in reasonable shape, and if so it would be a good idea to max out the pension first, and then the 457 if possible.
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