Which 457b option is the best of my choices? Or should I go the taxable brokerage route?

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HistoryTeacher1129
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Joined: Sun Feb 17, 2019 3:37 pm

Which 457b option is the best of my choices? Or should I go the taxable brokerage route?

Post by HistoryTeacher1129 » Thu Jan 30, 2020 7:59 pm

Hello everyone. Looking forward to the insights of the group!

34 years old. 11th year teacher (3rd in CA)

Last week, my Payroll & Benefits director let me know that our district would now be offering CalSTRS Pension 2 457 (Roth option also) to our certificated staff. I realize this is not as sexy as having Fidelity, Vanguard, etc. as direct vendors, but the fees are considerably lower than our other options in the 457.

Current 457 Plan Options:
AIG Retirement Services (VALIC)
AXA Equitable Life Insurance Company
National Life Group
Pacific Life
PlanMember Services
CalSTRS Pension 2 (VOYA)
CalPERS 457 (VOYA)

The two lowest fee plans for 457’s are CalSTRS and CalPERS. Every other plan is above 0.7%, even for passive index funds, after administration fees.

Ex: CalSTRS Pension 2 457’s lowest fee option: Vanguard Total Stock Market Index at 0.27% Fee (0.02 Vanguard + 0.25% CalSTRS) -VS- CalPERS 457’s lowest fee option: State Street Russell All Cap Index Fund at 0.41% Fee.

My two questions for our experienced group members here:

1) Would a 0.27-0.30% fee cause you to forego the 457 option, and instead move to focusing on a taxable brokerage account?

2) Does anyone have any recommendations on my other 457 plan options? From my research, CalSTRS Pension 2 is looking like the best option of the group.

Helpful info for your insights:
Already max a Roth 403 with Fidelity. Also max a Roth IRA through Vanguard. No HSA option in my school district. Mortgage is paid off. Contributing to son’s 529.

lakpr
Posts: 3950
Joined: Fri Mar 18, 2011 9:59 am

Re: Which 457b option is the best of my choices? Or should I go the taxable brokerage route?

Post by lakpr » Thu Jan 30, 2020 8:32 pm

No, a 0.2% additional fee would not dissuade me at all from contributing to the plan.

I would suggest that you contribute to the CAL-STRS 457 plan on a Traditional basis. Not a Roth basis. I wrote this in another post, just today in the morning, outlining my reason why a Traditional 457 contribution makes sense than Roth 457 contribution.

viewtopic.php?f=1&t=302237
Additionally, with the 457b plan, I would suggest deferring only on a Traditional basis. I have written this multiple times in the past -- the advantage of 457b plan is that the withdrawals from that account are accessible at any time, there is no age 59.5 restriction. The only condition is that you should separate from the employer. So in a sense, deferring money into 457b plan is an emergency fund, an insurance against the biggest emergency that could be -- job loss.

Withdrawals from a Traditional 457b are taxable as ordinary income .... this concept is easy to understand. Tax-deferred going in, taxable coming out. But withdrawals from a Roth 457b, if you happen to withdraw prior to age 59.5, the withdrawal is taxed as a proportional withdrawal of your contributions and growth, and the growth portion is taxable anyway. It thus acts like a non-deductible traditional IRA, not quite Roth. Therefore it becomes imperative on you to keep records of how much you contributed to the plan over the years, should such unfortunate situation where you need to withdraw from the 457 plan arise. I think that complication is just not worth the headache. If there is a restriction of age 59.5 that you must follow, won't you rather take that deal in a 401k plan?
The person who I was addressing had a 401k + 457 instead of a 403b + 457, but the same line of reasoning applies to you as well.

Lastly: WOW!! You achieved all that at just age 34? Paid mortgage off, in California, and maxing Roth 403b ??? That's excellent!!

petulant
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Re: Which 457b option is the best of my choices? Or should I go the taxable brokerage route?

Post by petulant » Thu Jan 30, 2020 10:09 pm

No. The tax drag from having your dividends and interest taxed in a brokerage account will be in the 25 bps - 50 bps range anyway, but you won't get a tax deduction there.

Signal13
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Joined: Fri Jan 24, 2020 5:06 pm

Re: Which 457b option is the best of my choices? Or should I go the taxable brokerage route?

Post by Signal13 » Fri Jan 31, 2020 9:58 am

Those 457 fees are very low. I've been in a 457 plan for 30+ years and done very well with much higher fees on many of my fund choices. I would also advise going for the traditional CalS TRS 457 (Not Roth). It's got a very nice mix of Vanguard funds available to choose from.

Good Luck!!

Topic Author
HistoryTeacher1129
Posts: 36
Joined: Sun Feb 17, 2019 3:37 pm

Re: Which 457b option is the best of my choices? Or should I go the taxable brokerage route?

Post by HistoryTeacher1129 » Sun Feb 02, 2020 3:50 pm

lakpr,

I was thinking that the fees weren’t egregious. I also read your posting to another individual’s question. That makes sense about your thoughts on traditional vs Roth, in regards to losing a job. We have job loss/emergency savings for my job set aside. My wife’s “income” comes from our four rental properties she had prior to ever meeting one another and her store. Quite a bit of write-offs.

Currently, I’m fine with having the IRA, 403, and 457 accounts all in Roths. Personally, I have about $203k in Roth 457/403/IRA accounts, as of Fridays dip. When our MAGI begins to creep up, we will readjust and consider more towards a traditional route with 403s and/or 457s. Definitely not discounting what you’re pointing out… and I do believe we will go the traditional route in the not so distant future. Something to ponder with my wife, after this next tax season. Really like to keep dumping as much into Roth accounts, while I can.

Topic Author
HistoryTeacher1129
Posts: 36
Joined: Sun Feb 17, 2019 3:37 pm

Re: Which 457b option is the best of my choices? Or should I go the taxable brokerage route?

Post by HistoryTeacher1129 » Sun Feb 02, 2020 3:57 pm

petulant,

I'm definitely not as well versed in taxable brokerage accounts. I think the next step will be on do we want to pay down the rental mortgage debt quicker or find another investment vehicle. My wife thought she wanted to sell her rental property, due to some flooding that occurred 3 years ago. I let her know that if we/she sold the property, we would never be able to buy back in to a property like this again (4 units in a mid-town area of a major California city).

The only thing I could think on why to do a taxable brokerage, is to tap into that account, rather than any of my tax-advantaved accounts (Roth 457, Roth 403, Roth IRA) if I were to retire early from teaching and waiting for my pension to kick in. California teachers do no pay into or receive Social Secutiry, either.
petulant wrote:
Thu Jan 30, 2020 10:09 pm
No. The tax drag from having your dividends and interest taxed in a brokerage account will be in the 25 bps - 50 bps range anyway, but you won't get a tax deduction there.

Topic Author
HistoryTeacher1129
Posts: 36
Joined: Sun Feb 17, 2019 3:37 pm

Re: Which 457b option is the best of my choices? Or should I go the taxable brokerage route?

Post by HistoryTeacher1129 » Sun Feb 02, 2020 4:03 pm

Signal13,

Thank you for the response! Well, the nice thing about your 457 plan, even if it higher than your liking.. once you retire, you can roll that accumulation into a Roth IRA, correct? I'm sure you've planned that all out though, after 30+ years. That is impressive. Most people can't stick with it.

I currently have about $203k in my Roth accounts (didn't begin investing until year 5 of 11 in teaching teaching. I think we will go the traditional route, when our MAGI begins to creep up. My wife's rental properties (I say hers, because they were her own before we met) and business had write-offs and losses during tax season. Even in California, our MAGI is "comfortable" enough for us to go the Roth route for now. I understand why you would point out the traditional route though!
Signal13 wrote:
Fri Jan 31, 2020 9:58 am
Those 457 fees are very low. I've been in a 457 plan for 30+ years and done very well with much higher fees on many of my fund choices. I would also advise going for the traditional CalS TRS 457 (Not Roth). It's got a very nice mix of Vanguard funds available to choose from.

Good Luck!!

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ruralavalon
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Re: Which 457b option is the best of my choices? Or should I go the taxable brokerage route?

Post by ruralavalon » Sun Feb 02, 2020 4:12 pm

1) Would a 0.27-0.30% fee cause you to forego the 457 option, and instead move to focusing on a taxable brokerage account?
No.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Topic Author
HistoryTeacher1129
Posts: 36
Joined: Sun Feb 17, 2019 3:37 pm

Re: Which 457b option is the best of my choices? Or should I go the taxable brokerage route?

Post by HistoryTeacher1129 » Sun Feb 02, 2020 4:27 pm

I can also finally roll my $122k from my previous emplyer's Roth 457 into my newly opened CalSTRS Pension 2 Roth 457.

I was holding off on rolling this over into a Roth IRA, because of the 457 benefits.

Perhaps, allow one pay period (my February paycheck is already set to Roth 457 contribution of $1,950) to hit the CalSTRS Pension 2 Roth 457 account.... and afterwards, switch it to a traditional 457 for the last 9 paychecks of this calendar year (maxing the 19,500). This would allow me to roll my 457 account into a decent 457 program/vendor, and have the power of the 457 still.. rather than rolling that old employer's $122k into a Roth IRA and kissing that benefit goodbye. :happy

That seems doable! I get that California is a higher taxed state. I just need to get a Roth 457 account started there, so I can roll that old emplyer's Roth 457 rolled. Decent idea?

Thanks for your insights, per usual!
HistoryTeacher1129 wrote:
Sun Feb 02, 2020 3:50 pm
lakpr,

I was thinking that the fees weren’t egregious. I also read your posting to another individual’s question. That makes sense about your thoughts on traditional vs Roth, in regards to losing a job. We have job loss/emergency savings for my job set aside. My wife’s “income” comes from our four rental properties she had prior to ever meeting one another and her store. Quite a bit of write-offs.

Currently, I’m fine with having the IRA, 403, and 457 accounts all in Roths. Personally, I have about $203k in Roth 457/403/IRA accounts, as of Fridays dip. When our MAGI begins to creep up, we will readjust and consider more towards a traditional route with 403s and/or 457s. Definitely not discounting what you’re pointing out… and I do believe we will go the traditional route in the not so distant future. Something to ponder with my wife, after this next tax season. Really like to keep dumping as much into Roth accounts, while I can.

petulant
Posts: 954
Joined: Thu Sep 22, 2016 1:09 pm

Re: Which 457b option is the best of my choices? Or should I go the taxable brokerage route?

Post by petulant » Sun Feb 02, 2020 5:33 pm

HistoryTeacher1129 wrote:
Sun Feb 02, 2020 3:57 pm
petulant,

I'm definitely not as well versed in taxable brokerage accounts. I think the next step will be on do we want to pay down the rental mortgage debt quicker or find another investment vehicle. My wife thought she wanted to sell her rental property, due to some flooding that occurred 3 years ago. I let her know that if we/she sold the property, we would never be able to buy back in to a property like this again (4 units in a mid-town area of a major California city).

The only thing I could think on why to do a taxable brokerage, is to tap into that account, rather than any of my tax-advantaved accounts (Roth 457, Roth 403, Roth IRA) if I were to retire early from teaching and waiting for my pension to kick in. California teachers do no pay into or receive Social Secutiry, either.
petulant wrote:
Thu Jan 30, 2020 10:09 pm
No. The tax drag from having your dividends and interest taxed in a brokerage account will be in the 25 bps - 50 bps range anyway, but you won't get a tax deduction there.
Saving in the 457 accounts is better because you get tax advantages and can pull the money out without penalty before 59 1/2, unlike IRA and 401(k) accounts.

Ron Ronnerson
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Joined: Sat Oct 26, 2013 6:53 pm
Location: Bay Area

Re: Which 457b option is the best of my choices? Or should I go the taxable brokerage route?

Post by Ron Ronnerson » Mon Feb 03, 2020 11:30 am

I'm a California teacher and have a 457b (as well as a 403b) with CalSTRS Pension 2. Sure, the fees could be a little bit lower but they are really not too bad. I wouldn't (and don't) let a total expense ratio of 0.27% deter me from making use of the CalSTRS 457b.

By the way, I generally like Roth accounts, particularly in cases where there will be a pension and one is currently in a low tax bracket. I do think it would be good to look at your numbers carefully and decide if it might make sense to switch some of the contributions to traditional accounts. For example, if you could go down to a lower tax bracket or qualify for tax credits by contributing to a traditional account, it may be worthwhile. The size of your expected pension and expected future tax brackets would be considerations as well. While you don't have to provide the specifics about your income and tax brackets if you're not looking for feedback between traditional and Roth accounts, it may be a question worth asking on this forum. Feel free to ignore this suggestion if you already have a good understanding of this topic.

Topic Author
HistoryTeacher1129
Posts: 36
Joined: Sun Feb 17, 2019 3:37 pm

Re: Which 457b option is the best of my choices? Or should I go the taxable brokerage route?

Post by HistoryTeacher1129 » Fri Feb 14, 2020 4:22 pm

Ron Ronnerson wrote:
Mon Feb 03, 2020 11:30 am
I'm a California teacher and have a 457b (as well as a 403b) with CalSTRS Pension 2. Sure, the fees could be a little bit lower but they are really not too bad. I wouldn't (and don't) let a total expense ratio of 0.27% deter me from making use of the CalSTRS 457b.

By the way, I generally like Roth accounts, particularly in cases where there will be a pension and one is currently in a low tax bracket. I do think it would be good to look at your numbers carefully and decide if it might make sense to switch some of the contributions to traditional accounts. For example, if you could go down to a lower tax bracket or qualify for tax credits by contributing to a traditional account, it may be worthwhile. The size of your expected pension and expected future tax brackets would be considerations as well. While you don't have to provide the specifics about your income and tax brackets if you're not looking for feedback between traditional and Roth accounts, it may be a question worth asking on this forum. Feel free to ignore this suggestion if you already have a good understanding of this topic.
Great feedback, from a fellow teacher in California! I did sign up for the CalSTRS Pension 2 457b last week, and feel great about it. I also agree with you, that my pension is something that looms in my mind, because that is taxable income. I am already in a Roth 403 with my current district that is up to $46k, and will be newly starting the 457 (currently a Roth). I plan on changing the 457 and perhaps even the 403 to a pre-tax, just to begin saving a bit on taxes in CA.

I currently make $95,000 (after all the stipends for extra duties) in my 11th year. Our married filing jointly AGI is a bit challenging to predict, because my wife is a business owner. Writing off losses on that, and our rental property is a goofy thing to predict where we will be each year, currently. She is in year 2 of her business, so we're a few away from seeing consistency there.

When I was teaching in Arizona, I was comfortable going 100% Roth (lower taxes). I am still comfortable going 100% Roth, but I do think a mixture of Roth and pre-tax accounts is a better hedge for the unknowns of the future tax brackets and how much will be there in my pension and other investments.

Topic Author
HistoryTeacher1129
Posts: 36
Joined: Sun Feb 17, 2019 3:37 pm

Re: Which 457b option is the best of my choices? Or should I go the taxable brokerage route?

Post by HistoryTeacher1129 » Fri Feb 14, 2020 4:24 pm

petulant wrote:
Sun Feb 02, 2020 5:33 pm
HistoryTeacher1129 wrote:
Sun Feb 02, 2020 3:57 pm
petulant,

I'm definitely not as well versed in taxable brokerage accounts. I think the next step will be on do we want to pay down the rental mortgage debt quicker or find another investment vehicle. My wife thought she wanted to sell her rental property, due to some flooding that occurred 3 years ago. I let her know that if we/she sold the property, we would never be able to buy back in to a property like this again (4 units in a mid-town area of a major California city).

The only thing I could think on why to do a taxable brokerage, is to tap into that account, rather than any of my tax-advantaved accounts (Roth 457, Roth 403, Roth IRA) if I were to retire early from teaching and waiting for my pension to kick in. California teachers do no pay into or receive Social Secutiry, either.
petulant wrote:
Thu Jan 30, 2020 10:09 pm
No. The tax drag from having your dividends and interest taxed in a brokerage account will be in the 25 bps - 50 bps range anyway, but you won't get a tax deduction there.
Saving in the 457 accounts is better because you get tax advantages and can pull the money out without penalty before 59 1/2, unlike IRA and 401(k) accounts.
Thank you for that insight! I have heard about people using their 457 (and even Roth IRA) as their emergency funds. I don't wish to do that, and keep a healthy emergency fund, but I do understand that unforeseen events do occur in our lives. That definitely is an advantage of 457s. I have been pondering on rolling my old employer's Roth 457 funds into my Roth IRA or my newly opened CalSTRS Pension 2 Roth 457 account.

lakpr
Posts: 3950
Joined: Fri Mar 18, 2011 9:59 am

Re: Which 457b option is the best of my choices? Or should I go the taxable brokerage route?

Post by lakpr » Fri Feb 14, 2020 4:28 pm

HistoryTeacher1129 wrote:
Fri Feb 14, 2020 4:24 pm
Thank you for that insight! I have heard about people using their 457 (and even Roth IRA) as their emergency funds. I don't wish to do that, and keep a healthy emergency fund, but I do understand that unforeseen events do occur in our lives. That definitely is an advantage of 457s. I have been pondering on rolling my old employer's Roth 457 funds into my Roth IRA or my newly opened CalSTRS Pension 2 Roth 457 account.
Just be aware that withdrawals from Roth 457, prior to age 59.5, are treated as proportional withdrawals of the contributions and earnings. Earnings are still taxable, the contributions portion is not. In other words, behaves like a non-deductible Traditional IRA. The only difference is that there are no penalties

And the burden is on you to prove you contributed $x to the Roth 457 plan over the years, and determine what exactly is the amount of taxable earnings.

For this reason, if you have access to 457 plan, contribute to it in a Traditional form. The equation becomes much easier. Tax-deferred going in, entire amount taxable coming out. No paperwork needed to track the basis

If you have the Roth 457 at a previous employer, do NOT touch that money until you reach 59.5. After age 59.5 the entire amount becomes magically qualified and fully tax-free, at which time either you can rollover to a Roth IRA or keep it in place and be secure in the knowledge that withdrawals from that Roth 457 plan are completely tax free.

Ron Ronnerson
Posts: 1420
Joined: Sat Oct 26, 2013 6:53 pm
Location: Bay Area

Re: Which 457b option is the best of my choices? Or should I go the taxable brokerage route?

Post by Ron Ronnerson » Sat Feb 15, 2020 11:22 pm

HistoryTeacher1129 wrote:
Fri Feb 14, 2020 4:22 pm
Ron Ronnerson wrote:
Mon Feb 03, 2020 11:30 am
I'm a California teacher and have a 457b (as well as a 403b) with CalSTRS Pension 2. Sure, the fees could be a little bit lower but they are really not too bad. I wouldn't (and don't) let a total expense ratio of 0.27% deter me from making use of the CalSTRS 457b.

By the way, I generally like Roth accounts, particularly in cases where there will be a pension and one is currently in a low tax bracket. I do think it would be good to look at your numbers carefully and decide if it might make sense to switch some of the contributions to traditional accounts. For example, if you could go down to a lower tax bracket or qualify for tax credits by contributing to a traditional account, it may be worthwhile. The size of your expected pension and expected future tax brackets would be considerations as well. While you don't have to provide the specifics about your income and tax brackets if you're not looking for feedback between traditional and Roth accounts, it may be a question worth asking on this forum. Feel free to ignore this suggestion if you already have a good understanding of this topic.
Great feedback, from a fellow teacher in California! I did sign up for the CalSTRS Pension 2 457b last week, and feel great about it. I also agree with you, that my pension is something that looms in my mind, because that is taxable income. I am already in a Roth 403 with my current district that is up to $46k, and will be newly starting the 457 (currently a Roth). I plan on changing the 457 and perhaps even the 403 to a pre-tax, just to begin saving a bit on taxes in CA.

I currently make $95,000 (after all the stipends for extra duties) in my 11th year. Our married filing jointly AGI is a bit challenging to predict, because my wife is a business owner. Writing off losses on that, and our rental property is a goofy thing to predict where we will be each year, currently. She is in year 2 of her business, so we're a few away from seeing consistency there.

When I was teaching in Arizona, I was comfortable going 100% Roth (lower taxes). I am still comfortable going 100% Roth, but I do think a mixture of Roth and pre-tax accounts is a better hedge for the unknowns of the future tax brackets and how much will be there in my pension and other investments.
It sounds like you have a good handle on things. As your salary increases over the years and once your wife's business is established more, your income is likely to be higher in the future (hopefully, anyway). So, I can see why you've been prioritizing Roth. I think your plan to do a mix of Roth and traditional is good but do run the numbers to see what makes most sense in your particular situation in terms of how much to put in pre-tax vs. Roth. There is an impression that California taxes are high but they're actually progressive. Since your future pension(s) will factor into the decision, the CalSTRS Pension Calculator is worth playing with also. Just speaking generally, the bigger your expected pension, the more it favors investing in Roth accounts.

AkwardDoct@rd
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Joined: Tue Aug 11, 2015 11:59 pm

Re: Which 457b option is the best of my choices? Or should I go the taxable brokerage route?

Post by AkwardDoct@rd » Sat Feb 15, 2020 11:49 pm

1) Would a 0.27-0.30% fee cause you to forego the 457 option, and instead move to focusing on a taxable brokerage account?
My fee was 1.5% and still when to the 457

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