401k vs 457?

[rhubarbpie]

In my current job, I have access to both a 401k and a governmental 457. I started the job in late 2021 and last year I contributed more to the 457 than the 401k. For those who don't know, you can contribute the max to both a 401k and a 457 (e.g. $22500 each this year for a total of $45000). I can't swing maxing them both out. The 401k has an employer match up to 6% so I'd contribute at least that much to it no matter what.

This year I started out maxing the 401k and putting the 'rest' in the 457, but now I'm wondering whether my change was a poor choice. The advantage of the 457 is that you can access the money at a younger age, as long as you have left that particular job. The investment options and fees for both accounts are identical. Am I overthinking this? (Of course I"m overthinking this )

[arcticpineapplecorp.]

if the 457b is more flexible because there are no early withdrawal penalties than put more in that (but also contribute to 401k if/when you can, on top).

there are other ways to access retirement funds early:
https://www.madfientist.com/how-to-acce ... nds-early/

also if you have access to an HSA contribute to that if you can because it's the Ultimate Retirement Account

[retiredjg]

It would make more sense to me to put enough in the 401k to get the match and put the rest into 457. Same amount saved. Same fees. More flexibility when you leave the employer.

My question to you....if you are saving more than $22,500 between the two....should some of these contributions be Roth?

[lakpr]

Affirming that yes you are overthinking this. Max out the 457 plan, precisely because it is more flexible, while taking care to capture the complete match in the 401(k) plan.

Maximizing the 401(k) plan and putting the rest in 457 plan is *NOT* a suboptimal choice, as long as the existing balance in the 457 plan can reasonably sustain you until age 59.5.

So if you are 50 years old now, and about 10 years left to go before you attain age 59.5, and your annual expenses are about $70k ... make sure that the 457 plan as at least $700k now. After that, it really does not matter which plan you maximize first.

[rhubarbpie]

Ok, there's a consensus! I will change it back to mostly 457b and partial 401k.

arcticpineapplecorp, I have an HSA from when I had an ACA plan, but I'm not contributing at the moment. I had opted for my employer's non-HDHP plan since the deductible was so much smaller, the monthly cost is not that much more, and I'm anticipating some medical expenses soon. But it's definitely something to consider in the future.

retiredjg, I've gone back and forth about the Roth-trad decision too. I'm in kind of a weird situation at the moment where I have some cash that I'm actually living on while essentially my whole net paycheck is going into the 401k or the 457b until I run out of cash and can't do that anymore. So anything I contribute as Roth 401k lowers the amount I will put in the accounts for the year, since I have to pay the taxes out of my paycheck rather than later. I figured maximizing the amount put in is better, since I can always roll it into an IRA and convert it to a Roth later? (Would love to hear anyone's thoughts on this.) I am doing a Roth IRA contribution each year, though.

lakpr, good point, neither choice is bad, I'm just over-optimizing as usual. I'll be turning 47 shortly so having easy access to some money before 59.5 is a good option to have in my arsenal.

[the_wiki]

If you have the choice, 457b has more flexibility and no downsides, so I would do that. In fact, I wish I had done that earlier. I have worked govt for a long time and built up a large 401k when I was younger before realizing I could have been doing 457b. I have the option of retiring at 53, so that choice may delay me to 55 now as I may not be able to catch up my 457b in time. (I know, cry me a river.... )


Either way, a short time contributing to one or the other is not going to make much difference in the long term, so nothing to beat yourself up over.

If you don't think you will retire before age 55, then it doesn't matter too much. You can use Rule of 55 with 401k if you retire between 55-59.5. SO the main advantage is if you plan to retire really early, as you can withdraw 457b at any time after you leave the agency sponsoring it.

[Teddy Ruxpin]

no downsides

Unless things have changed, isn't there one pretty big downside to nongovernmental 457s, that being they can be seized by creditors of the organization you work for?

Risk of that may be very low but thought I should post for discussion.

[Teddy Ruxpin]

Double post

[the_wiki]

no downsides

Unless things have changed, isn't there one pretty big downside to nongovernmental 457s, that being they can be seized by creditors of the organization you work for?

Risk of that may be very low but thought I should post for discussion.

Important clarification for some, but OP specifically mentioned government.

[tonyclifton]

The 457b also may allow “catch-up” contributions both when over 50 (401k will have this) and a larger amount in the three years prior to retirement (401k will not have this). Can you get the max company match in the 401k and then put everything else in the 457b? That sounds like the best of both worlds plus the free money from your employer.

[retiredjg]

retiredjg, I've gone back and forth about the Roth-trad decision too. I'm in kind of a weird situation at the moment where I have some cash that I'm actually living on while essentially my whole net paycheck is going into the 401k or the 457b until I run out of cash and can't do that anymore. So anything I contribute as Roth 401k lowers the amount I will put in the accounts for the year, since I have to pay the taxes out of my paycheck rather than later. I figured maximizing the amount put in is better, since I can always roll it into an IRA and convert it to a Roth later? (Would love to hear anyone's thoughts on this.) I am doing a Roth IRA contribution each year, though.

Filling more than one tax-deferred account per person for many years is one of the factors that contributes to having "too much" in tax-deferred accounts later on in life. There are many other factors involved so this may or may not be an issue for you.

What happens if you end up with "too much"? For some people, it is sort of a non-event. For others who cannot get enough converted to Roth by age 72, it means paying high taxes when RMDs start, possibly at higher rates than while working.

I don't know where you fit into this spectrum. When I see a poster who is contributing a lot to tax-deferred, I try to bring this potential issue to their attention so they can give it consideration early enough to avoid a problem if there is likely to be one.