Brokerage or Non-governmental 457(b)

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Topic Author
last-definition
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Joined: Sun Jan 10, 2021 8:05 pm

Brokerage or Non-governmental 457(b)

Post by last-definition »

My order of operations for investing are: maxed out Roth IRA on Jan 1, Roth 403(b) (contributing $3250/month for the first six months of the year to max it out) and maxing HSA from payroll deduction throughout the year. I am left with about $1200 (after taxes) a month, which I use to live.

When I get to the end of June, I will have the extra $3250/month that can no longer be added to my Roth 403(b). My university (good financial health) offers a non-government 457(b) with low-cost Vanguard funds (I use VFIAX with this vendor for the 403(b)). Would you invest the $3250 for the second half of the year in the non-governmental 457(b) or put in a brokerage account? I have about $30K in savings (aside from a 20K emergency fund that I am not touching for anything) that I plan to put in VTSAX. Should I put my future earnings in this brokerage account as well? Trying to consider the best ways to save on taxes and have as much control as possible in the future.
am
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Joined: Sun Sep 30, 2007 9:55 am

Re: Brokerage or Non-governmental 457(b)

Post by am »

What bracket are you in now and what do you anticipate it will be when you use the non gov 457b? I believe that’s your savings. Not being taxed now, tax deferred growth, and then paying tax on the money later. Of course the money in a non gov 457b account is not yours until it’s payed to you. If the employer runs into financial trouble, your behind a lot of creditors before getting your money.
retire2022
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Re: Brokerage or Non-governmental 457(b)

Post by retire2022 »

last-definition wrote: Sun Jan 10, 2021 8:09 pm My order of operations for investing are: maxed out Roth IRA on Jan 1, Roth 403(b) (contributing $3250/month for the first six months of the year to max it out) and maxing HSA from payroll deduction throughout the year. I am left with about $1200 (after taxes) a month, which I use to live.

When I get to the end of June, I will have the extra $3250/month that can no longer be added to my Roth 403(b). My university (good financial health) offers a non-government 457(b) with low-cost Vanguard funds (I use VFIAX with this vendor for the 403(b)). Would you invest the $3250 for the second half of the year in the non-governmental 457(b) or put in a brokerage account? I have about $30K in savings (aside from a 20K emergency fund that I am not touching for anything) that I plan to put in VTSAX. Should I put my future earnings in this brokerage account as well? Trying to consider the best ways to save on taxes and have as much control as possible in the future.
last-definition

are you aware non governmental 457 cannot be transferred to IRA? Are you sure this is non-government?

https://www.bogleheads.org/wiki/457(b)

Non-Government Plans: Tax-exempt organizations that are non-governmental (hospitals, charitable organizations, unions, among others) must generally limit participation to a select group of management or highly compensated employees. This is due to the rules under Title I of the Employee Retirement Income Security Act of 1974 (ERISA).

ERISA generally requires that a private retirement plan providing benefits to employees be funded by a trust or annuity contract. The rules, however, require that private 457(b) plans be unfunded in order to obtain tax benefits. Therefore, a plan will violate ERISA unless an exception applies. This provision means that the 457 plan assets are the property of the sponsoring employer and are subject to the employer's general creditors, until paid out to plan participants.[5]

Each 457 plan is required to have a written plan document. It is essential to refer to this document for the details on how your 457 plan operates, including the investment options offered by the plan, fees and expenses, and specific withdrawal options.



see chart for transfers

IRS Publication 590a page 22

https://www.irs.gov/pub/irs-pdf/p590a.pdf
Topic Author
last-definition
Posts: 5
Joined: Sun Jan 10, 2021 8:05 pm

Re: Brokerage or Non-governmental 457(b)

Post by last-definition »

am wrote: Sun Jan 10, 2021 8:54 pm What bracket are you in now and what do you anticipate it will be when you use the non gov 457b? I believe that’s your savings. Not being taxed now, tax deferred growth, and then paying tax on the money later. Of course the money in a non gov 457b account is not yours until it’s payed to you. If the employer runs into financial trouble, your behind a lot of creditors before getting your money.
Thanks for the response. I am in the 22% tax bracket. I am not sure on where I will be when I have the non gov 457(b) due to the RMD. My concern is that (if all goes well with my investments) the RMD on the 457(b) will be high, and it will be taxed at the ordinary income rate versus the captial gains rate in the brokerage account where I can control the distributions. Do you think the benefits of saving on taxes now and the tax-deferred growth outweigh the creditor issues and the future tax rate issue?
Topic Author
last-definition
Posts: 5
Joined: Sun Jan 10, 2021 8:05 pm

Re: Brokerage or Non-governmental 457(b)

Post by last-definition »

retire2022 wrote: Sun Jan 10, 2021 9:01 pm
last-definition wrote: Sun Jan 10, 2021 8:09 pm My order of operations for investing are: maxed out Roth IRA on Jan 1, Roth 403(b) (contributing $3250/month for the first six months of the year to max it out) and maxing HSA from payroll deduction throughout the year. I am left with about $1200 (after taxes) a month, which I use to live.

When I get to the end of June, I will have the extra $3250/month that can no longer be added to my Roth 403(b). My university (good financial health) offers a non-government 457(b) with low-cost Vanguard funds (I use VFIAX with this vendor for the 403(b)). Would you invest the $3250 for the second half of the year in the non-governmental 457(b) or put in a brokerage account? I have about $30K in savings (aside from a 20K emergency fund that I am not touching for anything) that I plan to put in VTSAX. Should I put my future earnings in this brokerage account as well? Trying to consider the best ways to save on taxes and have as much control as possible in the future.
last-definition

are you aware non governmental 457 cannot be transferred to IRA? Are you sure this is non-government?

https://www.bogleheads.org/wiki/457(b)

Non-Government Plans: Tax-exempt organizations that are non-governmental (hospitals, charitable organizations, unions, among others) must generally limit participation to a select group of management or highly compensated employees. This is due to the rules under Title I of the Employee Retirement Income Security Act of 1974 (ERISA).

ERISA generally requires that a private retirement plan providing benefits to employees be funded by a trust or annuity contract. The rules, however, require that private 457(b) plans be unfunded in order to obtain tax benefits. Therefore, a plan will violate ERISA unless an exception applies. This provision means that the 457 plan assets are the property of the sponsoring employer and are subject to the employer's general creditors, until paid out to plan participants.[5]

Each 457 plan is required to have a written plan document. It is essential to refer to this document for the details on how your 457 plan operates, including the investment options offered by the plan, fees and expenses, and specific withdrawal options.



see chart for transfers

IRS Publication 590a page 22

https://www.irs.gov/pub/irs-pdf/p590a.pdf
Thanks for the info. Yes, I am sure it is a non-governmental 457(b), which is what is giving me issues. I also know that it cannot be transferred, which is another downside. It would be a no brainer if I could do a Roth, governmental 457(b), but that is not my case.
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willthrill81
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Re: Brokerage or Non-governmental 457(b)

Post by willthrill81 »

If your university is in good financial health, I would be strongly tempted to contribute to the 457 plan unless you are already on track to be in the 22% bracket in retirement from your existing contributions.

I have a hard time believing that you 457 plan participants would be completely left out in the cold in the event that the university went under, but that is a non-zero risk.

Where 457 plans really shine is for early retirement, since you can make penalty free withdrawals after separating from service with no age limitation. And since there is more risk with a non-government 457 plan, drawing that down first in retirement makes the most sense anyway. I have a government 457 plan and am planning on doing precisely that.

How far out are you from potential retirement? The closer you are, the lower the risk.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
am
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Joined: Sun Sep 30, 2007 9:55 am

Re: Brokerage or Non-governmental 457(b)

Post by am »

last-definition wrote: Tue Jan 12, 2021 1:13 pm
am wrote: Sun Jan 10, 2021 8:54 pm What bracket are you in now and what do you anticipate it will be when you use the non gov 457b? I believe that’s your savings. Not being taxed now, tax deferred growth, and then paying tax on the money later. Of course the money in a non gov 457b account is not yours until it’s payed to you. If the employer runs into financial trouble, your behind a lot of creditors before getting your money.
Thanks for the response. I am in the 22% tax bracket. I am not sure on where I will be when I have the non gov 457(b) due to the RMD. My concern is that (if all goes well with my investments) the RMD on the 457(b) will be high, and it will be taxed at the ordinary income rate versus the captial gains rate in the brokerage account where I can control the distributions. Do you think the benefits of saving on taxes now and the tax-deferred growth outweigh the creditor issues and the future tax rate issue?
I use my non gov 457B. My institution has highly rated bonds and is a nationally known system. I am in the 35% bracket and anticipate being in a lower one In retirement. My 457B has flexible distribution options. I max out all my tax deferred accounts and contribute to taxable each year. Those are all the reasons why you would want to use a non gov 457B.
Topic Author
last-definition
Posts: 5
Joined: Sun Jan 10, 2021 8:05 pm

Re: Brokerage or Non-governmental 457(b)

Post by last-definition »

willthrill81 wrote: Tue Jan 12, 2021 1:22 pm If your university is in good financial health, I would be strongly tempted to contribute to the 457 plan unless you are already on track to be in the 22% bracket in retirement from your existing contributions.

I have a hard time believing that you 457 plan participants would be completely left out in the cold in the event that the university went under, but that is a non-zero risk.

Where 457 plans really shine is for early retirement, since you can make penalty free withdrawals after separating from service with no age limitation. And since there is more risk with a non-government 457 plan, drawing that down first in retirement makes the most sense anyway. I have a government 457 plan and am planning on doing precisely that.

How far out are you from potential retirement? The closer you are, the lower the risk.
I am still far from retirement (I'm 30, second year on the job and began investing last year). I just want to make sure I consider the taxes on withdrawals, given the RMD with the 457, which is why I am thinking about whether it could be better controlled with a brokerage account, despite the up-front tax benefit that the 457 provides. I may need to do more math on my situation since it is not as clear cut as my other decisions.
Topic Author
last-definition
Posts: 5
Joined: Sun Jan 10, 2021 8:05 pm

Re: Brokerage or Non-governmental 457(b)

Post by last-definition »

am wrote: Tue Jan 12, 2021 1:47 pm
last-definition wrote: Tue Jan 12, 2021 1:13 pm
am wrote: Sun Jan 10, 2021 8:54 pm What bracket are you in now and what do you anticipate it will be when you use the non gov 457b? I believe that’s your savings. Not being taxed now, tax deferred growth, and then paying tax on the money later. Of course the money in a non gov 457b account is not yours until it’s payed to you. If the employer runs into financial trouble, your behind a lot of creditors before getting your money.
Thanks for the response. I am in the 22% tax bracket. I am not sure on where I will be when I have the non gov 457(b) due to the RMD. My concern is that (if all goes well with my investments) the RMD on the 457(b) will be high, and it will be taxed at the ordinary income rate versus the captial gains rate in the brokerage account where I can control the distributions. Do you think the benefits of saving on taxes now and the tax-deferred growth outweigh the creditor issues and the future tax rate issue?
I use my non gov 457B. My institution has highly rated bonds and is a nationally known system. I am in the 35% bracket and anticipate being in a lower one In retirement. My 457B has flexible distribution options. I max out all my tax deferred accounts and contribute to taxable each year. Those are all the reasons why you would want to use a non gov 457B.
Thanks! Do you have any strategies in mind on how you will handle withdrawals to handle the taxes once you retire?
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willthrill81
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Re: Brokerage or Non-governmental 457(b)

Post by willthrill81 »

last-definition wrote: Tue Jan 12, 2021 10:34 pm
willthrill81 wrote: Tue Jan 12, 2021 1:22 pm If your university is in good financial health, I would be strongly tempted to contribute to the 457 plan unless you are already on track to be in the 22% bracket in retirement from your existing contributions.

I have a hard time believing that you 457 plan participants would be completely left out in the cold in the event that the university went under, but that is a non-zero risk.

Where 457 plans really shine is for early retirement, since you can make penalty free withdrawals after separating from service with no age limitation. And since there is more risk with a non-government 457 plan, drawing that down first in retirement makes the most sense anyway. I have a government 457 plan and am planning on doing precisely that.

How far out are you from potential retirement? The closer you are, the lower the risk.
I am still far from retirement (I'm 30, second year on the job and began investing last year). I just want to make sure I consider the taxes on withdrawals, given the RMD with the 457, which is why I am thinking about whether it could be better controlled with a brokerage account, despite the up-front tax benefit that the 457 provides. I may need to do more math on my situation since it is not as clear cut as my other decisions.
A tax-deferred account like a 457 will beat a taxable brokerage account nearly every time, but it is worthwhile to run the math to see this for yourself and in the event that other factors change this in your situation.

And keep in mind that if you retire early, you can likely spend down the 457 before RMDs begin so that's not even an issue.

To be honest, RMDs are generally only a genuine problem for those that really 'over-saved' while working. They are not the bugaboo that many treat them to be.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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