401k, 403b, 457, and pension?

[shyplastic]

At my public sector job, I'm vested in the pension and have savings in the 401k (no match). The options seem to be reasonable, low fee index funds (renamed BlackRock options) and is administered by Empower (née Prudential). There's also a 403b administered by Fidelity that has Vanguard target index date options, and the Vanguard index mutual funds (in addition to some actively managed versions), and a 457b that has the same options as the 403b.

I'm treating the pension as the fixed income portion of my savings, so the target date funds are too conservative for my preferences.

Is there any particular advantage to the 403b over the 401k? For the first time this year, I've made plans to max out my 401k (thanks for the encouragement Bogleheads!). Is there any reason to consider doing a rollover?

Am I correct that I could be putting away even more if I start contributing to the 457b?

[FiveK]

There are some small differences between 401k and 403b accounts related to "catch-up" contributions, but otherwise it is the investment options and fees within your specific 401k and 403b that matter most.

Yes, 457b contributions may be made in addition to 401k/403b contributions.

Appears you have a very good set of plans, despite the "no match".

[retiredjg]

Do you have a Roth option in the 401k or 457?

With a pension, you will not need nearly as much in tax-deferral as a person without a pension. For you, putting some (or even a lot) into Roth accounts might make more sense.

Yes, you can save more by using the 457 - the 457 has its own limit. However, unless it is Roth or you plan to retire very early, it may not be a great idea.

There's not enough information to really comment other than to say that it is possible to save too much in tax-deferred accounts. Tax-deferral is a great and wonderful thing, but that does not mean that "more is better".

[shyplastic]

There is a Roth option in the 401k, but since I'm in my prime earning years, it seems like I shouldn't be using that?

I have an external Roth (also maxed). I'd been using the pension balance as the "bond" balance. maybe that's not right?

[FiveK]

There is a Roth option in the 401k, but since I'm in my prime earning years, it seems like I shouldn't be using that?

All depends on the marginal tax rate you save this year by making traditional contributions, vs. the marginal tax rate you expect withdrawals based on those contributions to incur in the future.

For a quick estimate of the latter, calculate: (current pre-tax balance) * (1 + i)^n * WR
where
i = real return on pre-tax investments, %
n = number of years until retirement
WR = withdrawal rate from pre-tax accounts after retirement, %/yr

Reasonable guesses for i, n, and WR can vary widely within (and even outside) the following ranges:
i - from 2% to 6% (depends on market behavior and asset allocation within the pre-tax accounts)
n - from ? to ? (very dependent on individual circumstances)
WR - from 3% (e.g., those who think the "4% rule" is optimistic) to 8% (e.g., those who want to reduce pre-tax balances before starting SS and RMDs)

Add the annual pension amount you expect to receive in "n" years and see in what current tax bracket that total would be.

If you do that, what do you get?

[shyplastic]

This should result in a number that estimates my annual income from investments, right? I should compare the result with the tax bracket bands? I think it puts me right at the cusp of the low end of the same tax bracket that I'm in, maybe slightly in the next lower bracket.

I need to run these a few times and confirm some of the numbers.

I also note that 457 plans allow for early distributions without penalties, and the https://www.irs.gov/pub/irs-tege/rollover_chart.pdf seems to indicate that 401k to 457b might be possible?

[FiveK]

I also note that 457 plans allow for early distributions without penalties, and the https://www.irs.gov/pub/irs-tege/rollover_chart.pdf seems to indicate that 401k to 457b might be possible?

Yes, but.... See Pros or Cons of Moving 401K to 457B - Bogleheads.org.

[FiveK]

This should result in a number that estimates my annual income from investments, right? I should compare the result with the tax bracket bands? I think it puts me right at the cusp of the low end of the same tax bracket that I'm in, maybe slightly in the next lower bracket.

I need to run these a few times and confirm some of the numbers.

The estimate is of your "total" annual income in retirement - note the inclusion of your expected pension. It probably won't be correct (e.g., it ignores bank interest and taxable dividends, etc.) but within the accuracy of your estimates for i, n, and WR it is likely good enough.

If you do expect significant other "unavoidable" income (e.g., you plan to own many rental units, expect a large inherited IRA, etc.) you should add those, but otherwise the "pension + pre-tax withdrawals" will be the bulk of your taxable income in retirement, especially if you delay SS benefits, so that's a reasonable number to use.

Of course, if you look at the results for low vs. high guesses for all of i, n, and WR, you'll likely see a very wide range. Take your best guesses for this year, act accordingly, then repeat annually, using whatever knowledge you gain along the way.

[MrCheapo]

I'm treating the pension as the fixed income portion of my savings, so the target date funds are too conservative for my preferences.

Most of these target funds trade of overseas, domestic and bond/cash which evolves over time. Mine at 30+ years out is 35/55/10 and as you get closer to retirement the last number increases at the cost of the first two. Find the time frame which matches your risk given your pension. Mine is a 2050 targeted fund even though I'll be 80 by then. Why? Because my pension covers most of my expences.

[MathWizard]

You can contribute the max in both the 403b and 457b.

I am surprised that you also have a 401k as well, that is typically private whereas 403b is for non-profit or teachers, but I believe the contribution limit applies to the sum of what you put in the 403b and 401k.

[retiredjg]

I also note that 457 plans allow for early distributions without penalties, and the https://www.irs.gov/pub/irs-tege/rollover_chart.pdf seems to indicate that 401k to 457b might be possible?

The 401k money does not become available for early withdrawal without a penalty. It is accounted for separately.

[Peter Foley]

Note especially the difference in withdrawal limitations and penalties with respect to the type of retirement account. No penalties for withdrawals regardless of age after separation from employment for a 457b account. 403b's are a bit more flexible than 401k's. These differences do not matter if you are going to work until you are 60 years old. If you are thinking of retiring earlier, the 457b is usually the best choice.

I agree with the statement that if you are eligible for a pension don't go overboard on tax deferred savings. Having money in a Roth gives one a lot of flexibility in terms of controlling taxes in retirement, both income tax and Medicare B premiums.

[shyplastic]

I'm treating the pension as the fixed income portion of my savings, so the target date funds are too conservative for my preferences.

Most of these target funds trade of overseas, domestic and bond/cash which evolves over time. Mine at 30+ years out is 35/55/10 and as you get closer to retirement the last number increases at the cost of the first two. Find the time frame which matches your risk given your pension. Mine is a 2050 targeted fund even though I'll be 80 by then. Why? Because my pension covers most of my expences.

Including my pension plan's "balance" as my fixed income puts me at 30% fixed income already, when I think I should be at 10% or so. The VFIFX (Vanguard 2050) is already at 9.6% bonds total, and I don't mind adjusting my allocations manually.

[calwatch]

You can contribute the max in both the 403b and 457b.

I am surprised that you also have a 401k as well, that is typically private whereas 403b is for non-profit or teachers, but I believe the contribution limit applies to the sum of what you put in the 403b and 401k.

That’s not super unusual. Although government agencies were barred from the 401k when the code provision for 457 was enacted, anyone who had existing plans had them grandfathered in.

[MathWizard]

You can contribute the max in both the 403b and 457b.

I am surprised that you also have a 401k as well, that is typically private whereas 403b is for non-profit or teachers, but I believe the contribution limit applies to the sum of what you put in the 403b and 401k.

That’s not super unusual. Although government agencies were barred from the 401k when the code provision for 457 was enacted, anyone who had existing plans had them grandfathered in.

Of course, but the poster implied that he/she had access to all 3, besides the pension, given the question of which to contribute to.
Also note the mention of no match.

[Doc7]

My spouse has 401(a), 403b and 457.

Recently any increase we have to retirement savings go to the 457 (my 401K, our Roth IRAs, and our HsA are maxed) rather than her other accounts because of the simpler early retirement methods for the 457. Wish I had started thinking about that 3 years ago when she got access.

[BackToSchoolDad]

If the 457 is government and the fees/fund selection are reasonable I'd prioritize that over the 401k.

The ability to withdraw after employment ends is hugely beneficial. I plan to use our 457 as an early retirement fund, but it can also double as an emergency fund if you lose your job.

[retiredjg]

There is a Roth option in the 401k, but since I'm in my prime earning years, it seems like I shouldn't be using that?

It depends on the total circumstances of your situation which we don't know.

The pension argues for more Roth. Also, most people do not need to save more than 1 tax-deferred work plan per person, so using two of them may end up being too much. But not knowing more about your situation, there is no way to guess.

I have an external Roth (also maxed). I'd been using the pension balance as the "bond" balance. maybe that's not right?

Some people do this, but I don't recommend it myself. When the bad times come, your portfolio is going to drop like a rock because you will be near 100% stocks. Even with 10% bonds it will drop quite a bit but at least there is a little buffering and you can use your 10% in bonds to rebalance all the way down. You cannot use your pension to rebalance.

[trallium]

One nice thing about the 457(b) is that there is no 10% penalty for withdrawing before 59.5.

[shyplastic]

One nice thing about the 457(b) is that there is no 10% penalty for withdrawing before 59.5.

As mentioned above, it appears that this does not apply to funds rolled-over from a different plan, but could be useful for future contributions.

[shyplastic]

There is a Roth option in the 401k, but since I'm in my prime earning years, it seems like I shouldn't be using that?

It depends on the total circumstances of your situation which we don't know.

The pension argues for more Roth. Also, most people do not need to save more than 1 tax-deferred work plan per person, so using two of them may end up being too much. But not knowing more about your situation, there is no way to guess.

I have an external Roth (also maxed). I'd been using the pension balance as the "bond" balance. maybe that's not right?

Some people do this, but I don't recommend it myself. When the bad times come, your portfolio is going to drop like a rock because you will be near 100% stocks. Even with 10% bonds it will drop quite a bit but at least there is a little buffering and you can use your 10% in bonds to rebalance all the way down. You cannot use your pension to rebalance.

This is interesting. I guess I may have made some small mistakes along the way, but at worst only marginal issues. Still thinking I'm 15-20 years from retirement. I'll throw 10% into bonds in there: I already had rebalancing turned on....

[shyplastic]

If the 457 is government and the fees/fund selection are reasonable I'd prioritize that over the 401k.

The ability to withdraw after employment ends is hugely beneficial. I plan to use our 457 as an early retirement fund, but it can also double as an emergency fund if you lose your job.

When you say "prioritize" does that mean it would be reasonable to stop contributing to the 401k entirely and start contributing to the 457b?

I don't have specific plans to retire before age 60, but at age 50 I can retire with 87% pension, or 100% pension at age 53. Hypothetically, that's less than 10 years away.

[FiveK]

When you say "prioritize" does that mean it would be reasonable to stop contributing to the 401k entirely and start contributing to the 457b?

See Prioritizing investments and Investment Order for more on that.

[BackToSchoolDad]

When you say "prioritize" does that mean it would be reasonable to stop contributing to the 401k entirely and start contributing to the 457b?

I don't have specific plans to retire before age 60, but at age 50 I can retire with 87% pension, or 100% pension at age 53. Hypothetically, that's less than 10 years away.

If you're happy with the fees and fund selection, I think that's eminently reasonable and what I would do in your situation.

[trallium]

One nice thing about the 457(b) is that there is no 10% penalty for withdrawing before 59.5.

As mentioned above, it appears that this does not apply to funds rolled-over from a different plan, but could be useful for future contributions.

Why would one expect rolled-over funds to magically lose the age restriction? Then the plan would surely be abused?

But the 457 has a second limit that is different from the 401/403 limit. You can double up on retirement funds, and then have the 457 set aside for your 50s.

[shyplastic]

One nice thing about the 457(b) is that there is no 10% penalty for withdrawing before 59.5.

As mentioned above, it appears that this does not apply to funds rolled-over from a different plan, but could be useful for future contributions.

Why would one expect rolled-over funds to magically lose the age restriction? Then the plan would surely be abused?

But the 457 has a second limit that is different from the 401/403 limit. You can double up on retirement funds, and then have the 457 set aside for your 50s.

I mostly mentioned that just in case someone in the future didn't read the fine print. Good advice here, thank you!

[p_qrs_t]

There is a Roth option in the 401k, but since I'm in my prime earning years, it seems like I shouldn't be using that?

It depends on the total circumstances of your situation which we don't know.

The pension argues for more Roth. Also, most people do not need to save more than 1 tax-deferred work plan per person, so using two of them may end up being too much. But not knowing more about your situation, there is no way to guess.

I have an external Roth (also maxed). I'd been using the pension balance as the "bond" balance. maybe that's not right?

Some people do this, but I don't recommend it myself. When the bad times come, your portfolio is going to drop like a rock because you will be near 100% stocks. Even with 10% bonds it will drop quite a bit but at least there is a little buffering and you can use your 10% in bonds to rebalance all the way down. You cannot use your pension to rebalance.

Dear Retiredjg,

I have been reading boglehead posts for over a decade, and respect the extensive advice you have given. So please forgive me, but could you elaborate on your statements that too much money in tax deferred plans may not be good, and that most people only need to save in 1 tax deferred work plan?

Thank you again,

p_qrs_t

[retiredjg]

There is a Roth option in the 401k, but since I'm in my prime earning years, it seems like I shouldn't be using that?

It depends on the total circumstances of your situation which we don't know.

The pension argues for more Roth. Also, most people do not need to save more than 1 tax-deferred work plan per person, so using two of them may end up being too much. But not knowing more about your situation, there is no way to guess.

I have an external Roth (also maxed). I'd been using the pension balance as the "bond" balance. maybe that's not right?

Some people do this, but I don't recommend it myself. When the bad times come, your portfolio is going to drop like a rock because you will be near 100% stocks. Even with 10% bonds it will drop quite a bit but at least there is a little buffering and you can use your 10% in bonds to rebalance all the way down. You cannot use your pension to rebalance.

Dear Retiredjg,

I have been reading boglehead posts for over a decade, and respect the extensive advice you have given. So please forgive me, but could you elaborate on your statements that too much money in tax deferred plans may not be good, and that most people only need to save in 1 tax deferred work plan?

Thank you again,

p_qrs_t

I'll give a short version since this thread is mostly about something else.

I have observed that some people end up saving too much in tax-deferred accounts and then have to reverse the process in retirement and then scramble to get money out of tax-deferred before age 72 to avoid really high RMDs. They do this by converting the excess tax-deferred money into Roth IRA.

Some of this is just good planning - Roth conversions of tax-deferred accounts at a lower tax rate in retirement is just a good idea. You end up with more money.

But some people end up with such large tax-deferred balances that all that tax-deferral while working just does not make sense (to me). They don't end up with any benefit for having done all that.

Here's an extreme example. A couple starts saving early, they both save in a 403b and a 457 and they both have a healthy pension. They love their work and don't retire early (which would give years to convert traditional balances into Roth). These people will end up with a problem when RMDs start and after the first one dies, the survivor can easily be in a higher tax bracket than while working. In my mind, it does not make sense to do that.

This is all a balance and all of the variables must be considered. Changing any or several of the variables (in blue) could help prevent the problem.

Many years ago, I thought it was smart to save in every tax-deferred account one could find. After seeing many posts by people who did just that, I no longer think that way.

I am not opposed to people saving in more than one tax-deferred account for a few years. But if a person does this for many years and also has a pension, they are going to have way more in tax-deferred than they need. That's why I suggest that maybe it is not a good idea. Not everyone agrees with this thinking.