403b's and 457b's and HSAs, Oh my! + early retirement

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Topic Author
soulpatch
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Joined: Thu Dec 06, 2018 1:37 pm

403b's and 457b's and HSAs, Oh my! + early retirement

Post by soulpatch » Tue Jul 02, 2019 9:02 pm

Howdy folks,

I fired my investment advisor about a year ago and have never looked back. After reading a lot of books and getting some help on this forum from you Bogleheads, I've felt comfortable with my investments.

But now there is a new wrinkle. I recently took a new job in Washington State, and now I have a lot of new choices to make. My new employer offers:

State Retirement Plan - I contribute 7.5% and they match 7.5%, no brainer (pre-tax)
Supplemental 403b - so I can max out the State retirement plan and get to the annual contribution total of $19k (pre-tax)
Washington State Deferred Compensation Program (DCP/457b) - I can contribute $19k separately (pre-tax)
HSA - If I choose the high deductible health plan, I can contribute to an HSA; employer match of $1,400/yr w/ $125/yr wellness incentive (contribution limit $7k pre-tax)

So I was previously only aiming to get to $19k with my 401k and $19k with my wife's 403b. Then I'd max out Roth IRAs for both my wife and myself ($6k each). Then I'd put any extra in a taxable account. However, I am interested in early retirement, which makes both the DCP/457 and HSA attractive (previously the taxable account and the principal on the Roths were attractive, and they still are).

In theory I believe I could now max out my State Plan/403b ($19k + 7.5% match), max out the DCP/457b ($19k), max out my wife's 403b ($19k + 5% match), max out the HSA ($7k + $1525 employer contribution), and max out Roths ($6k each). That would be $64k in pre-tax investing plus another $12k in post tax Roths. But now I am putting nothing in a taxable account. By my calculations, at my most frugal, I can only drum up $80k to invest. And assuming some unanticipated costs I cannot have my cake and eat it too.

So here is what I would like from the Boglehead universe - your opinions on what to prioritize and why.

Obviously I first prioritize my state retirement plan (matched 7.5%) and at least the 5% for my wife's 403b to get the matches. But what then? Thanks in advance for helping me prioritize, and especially for explaining *WHY* you make your recommendation.

NOTE: Since I do not formally start this job until mid-August, I do not currently have access to investment choices for any of these vehicles, although I know the state plan and supplemental 403b is managed by Fidelity. The 457 appears to be a state managed plan and I don;t know about the HSA at all yet.

Spirit Rider
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Re: 403b's and 457b's and HSAs, Oh my! + early retirement

Post by Spirit Rider » Tue Jul 02, 2019 10:18 pm

soulpatch wrote:
Tue Jul 02, 2019 9:02 pm
In theory I believe I could now max out my State Plan/403b ($19k + 7.5% match), max out the DCP/457b ($19k), max out my wife's 403b ($19k + 5% match), max out the HSA ($7k + $1525 employer contribution), and max out Roths ($6k each). That would be $64k in pre-tax investing plus another $12k in post tax Roths. But now I am putting nothing in a taxable account. By my calculations, at my most frugal, I can only drum up $80k to invest. And assuming some unanticipated costs I cannot have my cake and eat it too.

So here is what I would like from the Boglehead universe - your opinions on what to prioritize and why.

Obviously I first prioritize my state retirement plan (matched 7.5%) and at least the 5% for my wife's 403b to get the matches. But what then? Thanks in advance for helping me prioritize, and especially for explaining *WHY* you make your recommendation.
The maximum HSA contribution (2019 = $7K) includes the employer contribution. Your maximum personal contribution = $7K - $1525.

You have a good understanding of your total maximum contributions from all plans combined. I would prioritize in the following order for early retirement:
  1. State retirement plan (100% match, one time enrollment)
  2. Both 403b plans up to the max match (free money is always a good thing)
  3. Max the HSA (triple tax benefit)
  4. Max the 457b (If retiring before age 55, penalty free distributions any age after separation)
  5. Max both Roth IRAs (max flexibility, contributions can be withdrawn at any time)
  6. Max spouse's 403b (some balance in accounts)
  7. Max your 403b
Some might sway 4 and 5.

EdLaFave
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Re: 403b's and 457b's and HSAs, Oh my! + early retirement

Post by EdLaFave » Wed Jul 03, 2019 11:41 am

1. I’m curious how your state retirement plan works. What investment options are available? What are the costs? What are the contribution limits/rules? What are the tax implications?
2. You’ve used language that seems to link the state retirement plan with a 403b, what’s going on here?
3. List the approved 403b vendors.
4. What are the fees for the state sponsored 457b and what investment options are available to you?
5. You’ve mentioned having a 457b, 403b, and 401k with your new employer. What’s going on here? Most employers do not offer all 3. Who is the 401k with and what at the fees?
6. You seem to be using the term “Roth” to refer to a Roth IRA. Just know Roth is not an IRA specific term, it is a term that describe the tax conditions of a tax advantaged account.
7. It is very likely in your best interest to max out every tax advantaged account before using a taxable account.
8. If you list all of the information in a more organized way, I’m happy to get into all of the details with you.

deikel
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Re: 403b's and 457b's and HSAs, Oh my! + early retirement

Post by deikel » Wed Jul 03, 2019 12:14 pm

1) I would take the HSA decision based on your need for medical insurance and not wiggle the dog with the tax tail....are you OK with a high deductible health insurance plan ? Or to phrase it another way, don't get lured into a lousy HDHP plan with am HSA just for the tax reasons, investigate the healthcare plans offered in detail- that answer is independent of the rest IMO

2) order of contribution:

-all matches first, of course, because of the match being free money on the table
- 457b next, because it would work great if you ever wanted to retire early or draw money at times of need - if you left your employment, its a very flexible tool to have
- Roth IRAs next (I assume you are above the IRA limit, if not, IRA for tax savings since you always put in top tax dollars and take out bottom tax dollars - its almost always a win), Roth also gives you flexibility for early retirement and money withdrawal
- 401k, 403b above the match and to the max - same then IRA, tax advantage, less easy to access in early retirmenent

whatever is left might go to HSA (tax advantage) or brokerage (higher flexibility) depending on above heath care

That's how I do it anyways, but opinions are a dime a dozen these days
Everything you read in this post is my personal opinion. If you disagree with this disclaimer, please un-read the text immediately and destroy any copy or remembrance of it.

lakpr
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Re: 403b's and 457b's and HSAs, Oh my! + early retirement

Post by lakpr » Wed Jul 03, 2019 12:42 pm

Contributing to the 457b plan actually insulates one against one of the major reasons for emergency fund: job loss. If you do have a job loss then you can withdraw from the 457 plan with no penalties (taxes due of course) for living expenses. I would make that the higher priority or at least one of the high priorities in choosing which accounts to fill. The need for an emergency fund decreases, so where you might have saved 6 months expenses, you could reduce it to just holding 3 months expenses, for example.

Not having any money to invest in taxable accounts is a good thing! Frees you from having to feed in annoying 1099 forms into your tax software (if you do taxes yourself) or even having to gather them in the first place (if you outsource taxes to a preparer/CPA). Just ordinary checking and savings accounts only to worry about.

Topic Author
soulpatch
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Joined: Thu Dec 06, 2018 1:37 pm

Re: 403b's and 457b's and HSAs, Oh my! + early retirement

Post by soulpatch » Wed Jul 03, 2019 4:22 pm

@Spirit Rider, thanks for the recommendations. Seems about what I had thought although others raise good points about making sure the health plan is suitable and not choosing a health plan based on the HSA.

@EdLaFave, you ask a lot of good questions, but since I do not officially start my new job until August 12, I cannot answer all of them...yet! But here are a few responses for you:

1) The state retirement plan appears to be a mandatory 403b plan managed by Fidelity. I put in a mandatory 7.5% of salary and my employer matches that 7.5%. Costs are unknown at this time. But investment options are limited. They include Vanguard Target Retirement Funds, but a limited selection of core funds, including the following (only listing stock funds, not bond funds).
RERGX
CSRIX
DFEVX
DFFVX
HACAX
LADYX
TILCX
VEMIX
VTMNX
VFTNX
VIIIX
VMCPX
VSCIX

2) My employer offers a second plan (called the Voluntary Investment Program or VIP), which is also a 403b. Until I officially start the job I'm not sure how "linked" they are. But there is conflicting information on my employer's plan description and Fidelity's website for the plan. My employer states: "If you have both a UWRP account and a UW Voluntary Investment Program (VIP) account, which are both 403(b) plans, you need to make sure the combined total of all contributions (including the employer match) from both accounts don’t exceed the IRS “annual limits.” Make sure to count the UW matching contributions to your UWRP account when considering the IRS “annual limits.”" In contrast, Fidelity states: "Note: Contributions to the UWRP do not count against your elective deferral limit, with one exception. For employees age 50+ who decide to contribute the additional optional 2.5% to the UWRP, the additional 2.5% DOES count toward your annual deferral limit." I'll have to unpack this seeming contradiction with the benefits people at my employer or with Fidelity.

3) Managed by Fidelity, no other options apparent. Does this answer your question?

4) This I do not know yet. It is Washington State's Deferred Compensation Program run through their Department of Retirement Systems. Until I sign up for an account (which I cannot do yet), I cannot see what investment options are available.

5) Just clarifying that my new job has only 403b/457 options. The 401k was with my previous employer.

6) Yes, I meant Roth IRA.

7) Good point.

8) I may need to wait until I have access to the plan options in August to have a more detailed conversation about the pros and cons of each specific investment vehicle, since I'm operating in somewhat of an information vacuum. But I appreciate your and others' thoughts on the general question despite the lack of specifics. I'm glad to wrap my head around this before I hit the 31 day benefits election window.

@deikel Great point about making sure the health plan works first and foremost, and only then consider the HSA issue. Interesting that your order of contribution places the HSA on the opposite end of the spectrum from @Spirit Rider. I suppose you are less tempted by the "triple tax benefit" or something else?

@lakpr Great point connecting the 457 to job loss and emergency funds. I had not thought of that!

EdLaFave
Posts: 430
Joined: Fri Dec 26, 2014 2:31 am

Re: 403b's and 457b's and HSAs, Oh my! + early retirement

Post by EdLaFave » Wed Jul 03, 2019 5:51 pm

I've never heard of a state run 403b and given that it is managed by Fidelity, it surprises me that there aren't any Fidelity funds available. At any rate, you can build a fully diversified stock portfolio with the following funds:

International
VEMIX Vanguard Emerging Markets = 0.10%
VTMNX Vanguard Developed Markets = 0.05%

Domestic
VIIIX Vanguard Institutional = 0.02%
VMCPX Vanguard Mid Cap = 0.03%
VSCIX Vanguard Small Cap = 0.04%

If this second 403b is the "normal" Fidelity 403b then I documented that here. It is an elite plan and you'd be able to use it to build an excellent low cost portfolio. If instead you only have access to the "state run 403b" then you're also in great shape.

I'm a bit familiar with Washington's DCP. I believe they add on a 0.1283% AUM fee (which is less than ideal, but definitely manageable). They have target date funds that cost roughly 0.14% - 0.16%. They also have excellent individual funds too:

US Large Cap = 0.003%
US Small Cap = 0.0225%
Global Equity = 0.0556%
Emerging Market = 0.12%

Sources for the Washington DCP information:
https://www.drs.wa.gov/dcp/investments.htm
https://www.drs.wa.gov/dcp/assets/DCP-E ... ooklet.pdf

There is a chance you'll have access to a better 457b (perhaps Fidelity's), but the Washington DCP is a good plan and absolutely worth using. I'm now certain that it is in your best interest to max out the 403b and 457b.

Early Retirement Thoughts
Fact check me on this, but I think you can pull money out of the 457b without paying any early withdrawal fees.

I know you can pull money out of 401k/403b/IRA accounts without paying any early withdrawal fees (google 72t).

You don't need to fund a taxable account in order to have access to funds in early retirement. So don't voluntarily give up the superior tax treatment of tax advantaged accounts.

Charon
Posts: 137
Joined: Thu May 03, 2018 12:08 pm

Re: 403b's and 457b's and HSAs, Oh my! + early retirement

Post by Charon » Wed Jul 03, 2019 6:05 pm

I was going to chime in that the 457 DCP info is available online, but EdLaFave beat me to it. The other thing I'd add to the discussion is to ask if you have a pension option? When I started in WA state higher ed, I had a semi pension plan option (TRS plan 3), where my contribution went to a 401(a), and the employer contribution went into a state pension system. It required 10 years to be vested, so I opted against it since I wasn't 100% sure of my employment stability, but now I really regret it. It's not many who have access to pension plans these days.

Topic Author
soulpatch
Posts: 14
Joined: Thu Dec 06, 2018 1:37 pm

Re: 403b's and 457b's and HSAs, Oh my! + early retirement

Post by soulpatch » Wed Jul 03, 2019 7:40 pm

Charon wrote:
Wed Jul 03, 2019 6:05 pm
The other thing I'd add to the discussion is to ask if you have a pension option? ...It required 10 years to be vested, so I opted against it since I wasn't 100% sure of my employment stability, but now I really regret it. It's not many who have access to pension plans these days.
Yes, I have access to a pension option, but I also think 10 years is too long to vest. I’m 42 now and hoping to at least partially retire before 50. Plus my position at UW is soft money. So I imagine I’m in exactly your shoes. If I’m there longer than 10 years, I may regret it. But the downside risk (and the necessary commitment) seems high.

Topic Author
soulpatch
Posts: 14
Joined: Thu Dec 06, 2018 1:37 pm

Re: 403b's and 457b's and HSAs, Oh my! + early retirement

Post by soulpatch » Thu Jul 04, 2019 12:05 am

Charon wrote:
Wed Jul 03, 2019 6:05 pm
The other thing I'd add to the discussion is to ask if you have a pension option? When I started in WA state higher ed, I had a semi pension plan option (TRS plan 3), where my contribution went to a 401(a), and the employer contribution went into a state pension system.
Egads! You are right. I’m eligible for PERS-3 and it is tempting. 10 years to vest or 5 years if 12 of those months were after age 44. That is not bad. But then it adds a 401a mandatory contribution to the mix! All good problems to have to be sure, but I’ll have to noodle on this some more.

For reference: viewtopic.php?t=209491

terran
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Re: 403b's and 457b's and HSAs, Oh my! + early retirement

Post by terran » Thu Jul 04, 2019 8:58 am

soulpatch wrote:
Wed Jul 03, 2019 4:22 pm
2) My employer offers a second plan (called the Voluntary Investment Program or VIP), which is also a 403b. Until I officially start the job I'm not sure how "linked" they are. But there is conflicting information on my employer's plan description and Fidelity's website for the plan. My employer states: "If you have both a UWRP account and a UW Voluntary Investment Program (VIP) account, which are both 403(b) plans, you need to make sure the combined total of all contributions (including the employer match) from both accounts don’t exceed the IRS “annual limits.” Make sure to count the UW matching contributions to your UWRP account when considering the IRS “annual limits.”" In contrast, Fidelity states: "Note: Contributions to the UWRP do not count against your elective deferral limit, with one exception. For employees age 50+ who decide to contribute the additional optional 2.5% to the UWRP, the additional 2.5% DOES count toward your annual deferral limit." I'll have to unpack this seeming contradiction with the benefits people at my employer or with Fidelity.
I'm fairly familiar with 403(b) plans that include a mandatory contributions, so I think I can clear up your confusion. Basically, the two statements (your future employer and Fidelity) aren't actually contradictory. The former is saying that your mandatory contribution and the employer match count towards the annual addition limit (2019 = $56k), and the latter is saying that your mandatory contribution and the employer match do not count towards the salary deferral limit (2019 = $19k).

So, as long as you make less than ($56k - $19k)/(7.5% mandatory + 7.5% match) = $246,666.66 you can still contribute the full $19k in addition to the mandatory contribution and the match.

It sounds like the over 50 2.5% additional contribution, does count towards the salary deferral limit, but for those over 50 there is an additional catch up salary deferral allowed (2019 = $6k), and this amount is also added to annual addition limit. So, for 2019, if you're over 50, you can contribute $25k as salary deferral and $62k between salary deferral, mandatory, and match. If you make under $6k/2.5% = $240,000 it doesn't matter if you make the additional 2.5% contribution and top up with the catch up contribution or just make all of the contribution as catch up. If you make over that amount, then you'll need to decrease your salary deferral as the 2.5% will eat into your regular salary deferral.

Charon
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Re: 403b's and 457b's and HSAs, Oh my! + early retirement

Post by Charon » Fri Jul 05, 2019 5:21 pm

soulpatch wrote:
Thu Jul 04, 2019 12:05 am
Charon wrote:
Wed Jul 03, 2019 6:05 pm
The other thing I'd add to the discussion is to ask if you have a pension option? When I started in WA state higher ed, I had a semi pension plan option (TRS plan 3), where my contribution went to a 401(a), and the employer contribution went into a state pension system.
Egads! You are right. I’m eligible for PERS-3 and it is tempting. 10 years to vest or 5 years if 12 of those months were after age 44. That is not bad. But then it adds a 401a mandatory contribution to the mix! All good problems to have to be sure, but I’ll have to noodle on this some more.

For reference: viewtopic.php?t=209491
The 5 years to vest at your age makes this much more tempting in my opinion. Is the mandatory 401(a) really different from your other options? My 403(b) has a mandatory contribution component, as well as an optional component. So I would expect that in PERS-3 you're putting the mandatory defined contribution into a 401(a) instead of a (functionally equivalent) 403(b)?

But the soft money aspect may well tilt the scales back to pure defined contribution instead of pension. Depends on your projections of the funding environment :/

skitotrees
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Joined: Sun Mar 10, 2019 7:52 pm

Re: 403b's and 457b's and HSAs, Oh my! + early retirement

Post by skitotrees » Tue Jul 09, 2019 5:48 pm

Confirming that the UWRP 403b mandatory contribution and the match don't count towards your 19k.

You can put a full 19k into the UW VIP 403b
If it makes sense for you, I think you can put all or some part of each of these as Roth (post-tax contributions)

The website reads like you can max out to 56k into these accounts, but you can't - the Fidelity advisor told me that VIP will stop paycheck contributions at 19k (another perk - through UW you should have access to a one-on-one Fidelity consultation to look at your plan, which I found moderately helpful).

The DCP is a WA state 457 plan - low expense ratio options suck but there is a S+P 500 fund. You can contribute another 19k pre-tax into this.

Topic Author
soulpatch
Posts: 14
Joined: Thu Dec 06, 2018 1:37 pm

Re: 403b's and 457b's and HSAs, Oh my! + early retirement

Post by soulpatch » Wed Jul 10, 2019 10:15 am

skitotrees wrote:
Tue Jul 09, 2019 5:48 pm
Confirming that the UWRP 403b mandatory contribution and the match don't count towards your 19k.

You can put a full 19k into the UW VIP 403b
If it makes sense for you, I think you can put all or some part of each of these as Roth (post-tax contributions)

The website reads like you can max out to 56k into these accounts, but you can't - the Fidelity advisor told me that VIP will stop paycheck contributions at 19k (another perk - through UW you should have access to a one-on-one Fidelity consultation to look at your plan, which I found moderately helpful).

The DCP is a WA state 457 plan - low expense ratio options suck but there is a S+P 500 fund. You can contribute another 19k pre-tax into this.
Great feedback. Thanks!

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