Invest with ICMA or not... fees/taxes question

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Invest with ICMA or not... fees/taxes question

Post by BFive55 »

As a public employee we have access to a 457 via ICMA. There is a index fund similar to the VSTAX.

My income fluctuate because of overtime (yay government work!) but I assume a salary of about $69,000 -after- my mandatory pension contributions are taken out.

I try to invest $600 a month into my Vanguard taxable account. This is after I put my money into a Roth and max that out.

Tax wise, would it benefit me more to invest in ICMA or to continue with Vanguard? I ask because a calculator I used showed I could lower my tax bill by around $1,500/year by contributing to a 457, which I could then invest. The problem I have is that while I would lower my tax burden, the fees for ICMA are a bit higher than Vanguard. If I understand the ICMA website, it is a .4% management fee on the first $100,000 then .35% on the next $100,000 then .25% on the next $300,000 then 0 on anything above $500,000.

Compared to VTSAX of 0.04%... ... 109441.pdf According to that investing into the Vanguard Total Stock Market Fund is an option at ICMA... but if I did that would be a VTSAX fee of 0.04% PLUS the ICMA fees of 0.4%, correct?

I currently have a bit over $50,000 invested into VTSAX. I don't think I can do all the math to determine if it's worth it... but if anyone knows, is it worth it to go 457 instead and if the tax savings would make up for the massive fee increase?
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Re: Invest with ICMA or not... fees/taxes question

Post by PFInterest »

457 likely will win in your scenario.
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Re: Invest with ICMA or not... fees/taxes question

Post by Flanders »

It looks like Guided Pathways is a managed account per the fee disclosure document located at your link and I do not think you would need to enroll in it (it's optional). The Vanguard funds' expense ratios would be excellent at .04% without the added asset management fees. The fee disclosure document also mentions a brokerage account at TD Ameritrade. You might want to investigate that option, but I think it would hard to beat VTSAX at .04%.
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Re: Invest with ICMA or not... fees/taxes question

Post by Mudpuppy »

So the question is whether to switch the $600/month that you are currently putting into a taxable account to your governmental 457(b) plan. Beyond lowering your taxable income, a governmental 457(b) plan has the advantage that you can withdraw funds at any age without a tax penalty once you separate from the employer. But the expenses will be higher with your current 457(b) plan provider than in your taxable account due to the administrative.

We don't quite have enough information to run the numbers for you on taxable vs. the 457(b) because we don't know your filing status (single, married filing jointly, etc.), your state tax situation, or your AGI. We also can't really calculate how this change would impact your tax liability for the taxable account. So we can't confirm whether your taxes will lowered by $1500 a year or not.

However, let's take the $1500 tax savings at face value and look at your cost differentials between the two account options. These are simplistic calculations (not taking into effect compounding), but just looking on a one year basis. Someone else with the inclination to run the more complex future-projecting scenarios can also do those.

Your 457(b) plan has a very good set of Vanguard funds:
  • Vanguard Wellington Fund (ER 0.18%)
  • Vanguard Total Bond Market Index Fund (ER 0.05%)
  • Vanguard Total Stock Market Index Fund (ER 0.04%)
  • Vanguard Institutional Index Fund (ER 0.04%)
  • Vanguard Extended Market Index Fund (ER 0.09%)
  • Vanguard Total International Stock Index Fund (ER 0.10%)
Since you have the same underlying fund fee for the total stock market fund (or institutional index fund), the difference in costs is then the administrative fee. A 0.40% administrative fee on $7200 per year is $28.80 per year, with additional costs incurred in future years since there will also be an administrative fee on earnings. But even so, the additional costs due to the administrative fee are outweighed by the tax savings of contributing to a tax-deferred retirement account, particularly if you redirect the tax savings into additional retirement savings.

So use the taxable account for your medium-term savings needs, such as a house down payment, your next car purchase, and so on. For retirement savings, the 457(b) plan is a better option, even with the administrative fee, due to the tax savings.
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Re: Invest with ICMA or not... fees/taxes question

Post by Cop51 »

the .40% management fee is something ICMA is auto enrolling you in but you can opt out of that fee at anytime and manage your account yourself. I currently use ICMA-RC for both my 457 account, and my ROTH IRA. I have considered not using it for my ROTH IRA just because ER (expense ratios) for index funds are found .3-.7% when Vanguard is .05-.25% for similar index funds. The high fees for the 457 account will outweigh any taxable account in the long run.
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