Roth 457b vs regular 457? and other questions!

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philipmk
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Roth 457b vs regular 457? and other questions!

Post by philipmk » Sat Aug 01, 2020 4:05 pm

PGY2 radiology resident at a new hospital that is offering residents a 457b or 457b with a roth but they have NO matching. I am looking for advice on moving forward. 

For some background I have already maxed out a roth account for the previous 2 years at Vanguard. I have approximately $10,000 in checking account, $13,500 in a high yield savings account, and another $10,000 in TD ameritrade brokerage account. 

Would you use a roth 457b or a regular 457b?

Also are there any changes you would make to how I have my finances spread out right now? 

tashnewbie
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Re: Roth 457b vs regular 457? and other questions!

Post by tashnewbie » Sat Aug 01, 2020 4:09 pm

What’s your income/tax bracket? I assume your income will greatly increase when you become an attending, so it might make sense to use Roth 457b now, but the key comparison is between current marginal tax brackets and the expected ones in retirement.

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philipmk
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Re: Roth 457b vs regular 457? and other questions!

Post by philipmk » Sat Aug 01, 2020 4:14 pm

Current income is right at $60,000. I have medical school debt but am currently enrolled in REPAY and I am making repayments based off my current income. I was wondering if contributing to Regular 457b would reduce my loan repayments? And if it does would the roth 457b as well?

My income and tax bracket will be significantly higher in 4 years for sure.

retiredjg
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Re: Roth 457b vs regular 457? and other questions!

Post by retiredjg » Sat Aug 01, 2020 4:21 pm

philipmk wrote:
Sat Aug 01, 2020 4:14 pm
My income and tax bracket will be significantly higher in 4 years for sure.
Use Roth for now. Traditional later.

lakpr
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Re: Roth 457b vs regular 457? and other questions!

Post by lakpr » Sat Aug 01, 2020 4:44 pm

I will go the other way. Contribute to the Traditional 457 plan, to get you enough into the 12% tax bracket, then invest in taxable. Looks like that's about $8k (since $52k is the 12% threshold for a single).

With a Traditional 457 plan, the idea is simple: you escape the taxes now, and when you withdraw from it in the future, you pay taxes then. No penalties. Simple, easy to understand. In a way, the Traditional 457 plan functions like a self-insurance for ONE of the biggest emergencies there is: job-loss.

With a Roth 457 plan, the equation gets complex. Withdrawals from the Roth-457 plan are treated as proportional withdrawals from the contributions and earnings, if withdrawn prior to age 59.5. You are then expected to pay taxes on the 'gains' portion of the withdrawal. It requires you to keep meticulous records on what you contributed and when.

In other words, the "Roth-457" plan functions more like a non-deductible Traditional IRA, except that there aren't any penalties. But the responsibility of proving your contributions remains on you, so burdens you with keeping meticulous records.

Your plan also may impose restrictions such as making you withdraw from both Traditional 457 and Roth 457 proportionally, if you do a Roth-457 contribution now and Traditional-457 contribution later. Which complicates the tax computations even further, in case there is a withdrawal from the plan prior to age 59.5.

Would you rather not keep your sanity during tax time?

Edited again to add: of course, if you are absolutely sure that you will not touch the Roth-457 plan contributions prior to age 59.5, sticking to Roth-457 plan now makes sense.

Investing in taxable account while you are in 12% bracket is advantageous, you can do Tax Gain Harvesting at 0% capital gains tax rate; you need to hold what you bought for at least 1 year.

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Re: Roth 457b vs regular 457? and other questions!

Post by retiredjg » Sun Aug 02, 2020 8:30 am

philipmk wrote:
Sat Aug 01, 2020 4:05 pm
PGY2 radiology resident at a new hospital that is offering residents a 457b or 457b with a roth....
Let's back up and talk about this 457 plan. Is this a governmental or non-governmental plan?

I'm not even sure it is possible to have a Roth non-governmental plan. But a governmental hospital is not something we see very often.

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Re: Roth 457b vs regular 457? and other questions!

Post by retiredjg » Sun Aug 02, 2020 8:34 am

lakpr wrote:
Sat Aug 01, 2020 4:44 pm
With a Roth 457 plan, the equation gets complex. Withdrawals from the Roth-457 plan are treated as proportional withdrawals from the contributions and earnings, if withdrawn prior to age 59.5. You are then expected to pay taxes on the 'gains' portion of the withdrawal. It requires you to keep meticulous records on what you contributed and when.
All this is easily avoided by simply rolling the Roth 457 to Roth IRA (when leaving this job) where the contributions will be available immediately with no tax or penalty.

Yes, there is some record keeping but it is fairly trivial. And a person needs to keep records of all contributions to Roth anyway.

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Mountain Doc
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Re: Roth 457b vs regular 457? and other questions!

Post by Mountain Doc » Sun Aug 02, 2020 8:50 am

retiredjg wrote:
Sun Aug 02, 2020 8:34 am
lakpr wrote:
Sat Aug 01, 2020 4:44 pm
With a Roth 457 plan, the equation gets complex. Withdrawals from the Roth-457 plan are treated as proportional withdrawals from the contributions and earnings, if withdrawn prior to age 59.5. You are then expected to pay taxes on the 'gains' portion of the withdrawal. It requires you to keep meticulous records on what you contributed and when.
All this is easily avoided by simply rolling the Roth 457 to Roth IRA (when leaving this job) where the contributions will be available immediately with no tax or penalty.

Yes, there is some record keeping but it is fairly trivial. And a person needs to keep records of all contributions to Roth anyway.
I'm pretty sure contributions to a Roth 457b that are subsequently rolled into a Roth IRA are not immediately available for withdrawal without tax or penalty in the same way direct contributions to a Roth IRA are. Instead, you'll have to wait 5 years for the rollover amount to become available.

OP, do you work for an academic hospital associated with a state university? If so, this is likely a governmental 457b. You should look into this before deciding to contribute, because a non-governmental 457b introduces a risk that the money could be lost if your hospital goes bankrupt.

Normally the rule of thumb for residents is to contribute to Roth accounts because you will likely be in a higher income tax bracket in retirement than during residency. However, the traditional 457b has some great advantages that no other account brings (including the Roth 457b) - specifically that the money can be withdrawn penalty free at any age after you leave the employer. That makes it a great emergency fund throughout your career and an amazing account to have if you plan to retire early. I went with the traditional 457b during residency.

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Re: Roth 457b vs regular 457? and other questions!

Post by retiredjg » Sun Aug 02, 2020 10:51 am

Mountain Doc wrote:
Sun Aug 02, 2020 8:50 am
I'm pretty sure contributions to a Roth 457b that are subsequently rolled into a Roth IRA are not immediately available for withdrawal without tax or penalty in the same way direct contributions to a Roth IRA are. Instead, you'll have to wait 5 years for the rollover amount to become available.
I don't see how that is possible. When you roll something to Roth IRA, Roth IRA rules apply. Roth IRA does not have a 5 year wait on contributions that were after tax when they were made.

My understanding is that Roth 457 contributions would roll to Roth IRA basis (available immediately) and that the earnings that occurred inside the Roth 457 would roll into the earnings bucket of the Roth IRA (available with no tax or penalty when the Roth IRA is qualified - 59.5 and 5 tax years since first Roth IRA contribution).

If I'm wrong, it would not be the first time :happy But I think what I said is correct.

There certainly has been a lot of confusion over Roth 457 in the last year or so. I'm thinking about starting a thread on it.

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Re: Roth 457b vs regular 457? and other questions!

Post by Mountain Doc » Sun Aug 02, 2020 10:59 am

retiredjg wrote:
Sun Aug 02, 2020 10:51 am
Mountain Doc wrote:
Sun Aug 02, 2020 8:50 am
I'm pretty sure contributions to a Roth 457b that are subsequently rolled into a Roth IRA are not immediately available for withdrawal without tax or penalty in the same way direct contributions to a Roth IRA are. Instead, you'll have to wait 5 years for the rollover amount to become available.
I don't see how that is possible. When you roll something to Roth IRA, Roth IRA rules apply. Roth IRA does not have a 5 year wait on contributions that were after tax when they were made.

My understanding is that Roth 457 contributions would roll to Roth IRA basis (available immediately) and that the earnings that occurred inside the Roth 457 would roll into the earnings bucket of the Roth IRA (available with no tax or penalty when the Roth IRA is qualified - 59.5 and 5 tax years since first Roth IRA contribution).

If I'm wrong, it would not be the first time :happy But I think what I said is correct.

There certainly has been a lot of confusion over Roth 457 in the last year or so. I'm thinking about starting a thread on it.
I hope you're right! I'll see if I can find a source.

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philipmk
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Re: Roth 457b vs regular 457? and other questions!

Post by philipmk » Sun Aug 02, 2020 5:01 pm

retiredjg wrote:
Sun Aug 02, 2020 8:30 am
philipmk wrote:
Sat Aug 01, 2020 4:05 pm
PGY2 radiology resident at a new hospital that is offering residents a 457b or 457b with a roth....
Let's back up and talk about this 457 plan. Is this a governmental or non-governmental plan?

I'm not even sure it is possible to have a Roth non-governmental plan. But a governmental hospital is not something we see very often.
I work at a major public hospital, I had no clue the roth was an option until offered....I just went and double checked through fidelity and verified it.

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philipmk
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Re: Roth 457b vs regular 457? and other questions!

Post by philipmk » Sun Aug 02, 2020 5:10 pm

Mountain Doc wrote:
Sun Aug 02, 2020 8:50 am
retiredjg wrote:
Sun Aug 02, 2020 8:34 am
lakpr wrote:
Sat Aug 01, 2020 4:44 pm
With a Roth 457 plan, the equation gets complex. Withdrawals from the Roth-457 plan are treated as proportional withdrawals from the contributions and earnings, if withdrawn prior to age 59.5. You are then expected to pay taxes on the 'gains' portion of the withdrawal. It requires you to keep meticulous records on what you contributed and when.
All this is easily avoided by simply rolling the Roth 457 to Roth IRA (when leaving this job) where the contributions will be available immediately with no tax or penalty.

Yes, there is some record keeping but it is fairly trivial. And a person needs to keep records of all contributions to Roth anyway.
I'm pretty sure contributions to a Roth 457b that are subsequently rolled into a Roth IRA are not immediately available for withdrawal without tax or penalty in the same way direct contributions to a Roth IRA are. Instead, you'll have to wait 5 years for the rollover amount to become available.

OP, do you work for an academic hospital associated with a state university? If so, this is likely a governmental 457b. You should look into this before deciding to contribute, because a non-governmental 457b introduces a risk that the money could be lost if your hospital goes bankrupt.

Normally the rule of thumb for residents is to contribute to Roth accounts because you will likely be in a higher income tax bracket in retirement than during residency. However, the traditional 457b has some great advantages that no other account brings (including the Roth 457b) - specifically that the money can be withdrawn penalty free at any age after you leave the employer. That makes it a great emergency fund throughout your career and an amazing account to have if you plan to retire early. I went with the traditional 457b during residency.

I work for a large public academic hospital that is associated with an undergraduate university. I have been looking online and it's definitely not governmental related from what I can tell. I know to never say never but this hospital would likely never go bankrupt because it is the major hospital for the state with essentially every training program imaginable.

Thank you and everyone else for all of your help and input

retiredjg
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Re: Roth 457b vs regular 457? and other questions!

Post by retiredjg » Sun Aug 02, 2020 5:44 pm

philipmk wrote:
Sun Aug 02, 2020 5:10 pm
I work for a large public academic hospital that is associated with an undergraduate university. I have been looking online and it's definitely not governmental related from what I can tell.
A public university? Like a state school? It sounds like it probably is a governmental 457b. That's a good thing. A non-governmental 457 is not always a good plan to use.

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Re: Roth 457b vs regular 457? and other questions!

Post by arcticpineapplecorp. » Sun Aug 02, 2020 7:58 pm

lakpr wrote:
Sat Aug 01, 2020 4:44 pm
I will go the other way. Contribute to the Traditional 457 plan, to get you enough into the 12% tax bracket, then invest in taxable. Looks like that's about $8k (since $52k is the 12% threshold for a single).
If you aren't planning on withdrawing prior to 59.5 then the prorata rule for Roth 457b is moot. And all earnings on Roth 457b are TAX FREE if the distributions are qualified (done 59.5 or later):

http://defcomp.nv.gov/Resources/FAQ-Roth_457/

I do similar to lakpr's suggestion except the taxable part. Instead I do:
Contribute to the Traditional 457 plan, to get you enough into the 12% tax bracket, then invest in Roth457b. Looks like that's about $8k (since $52k is the 12% threshold for a single).

I also max Roth IRA (paying 12% tax since I've deferred all income in 22% into trad 457b).

A dollar put in a Roth account is more valuable than a dollar put in a taxable account.
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

BackToSchoolDad
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Re: Roth 457b vs regular 457? and other questions!

Post by BackToSchoolDad » Sun Aug 02, 2020 8:53 pm

If your loans are under REPAYE and you work for a public hospital, are you planning to pursue PSLF? If you qualify I would go traditional all the way as it will lower your payments and increase the value of future forgiveness.

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Re: Roth 457b vs regular 457? and other questions!

Post by RXfiles » Sun Aug 02, 2020 8:58 pm

BackToSchoolDad wrote:
Sun Aug 02, 2020 8:53 pm
If your loans are under REPAYE and you work for a public hospital, are you planning to pursue PSLF? If you qualify I would go traditional all the way as it will lower your payments and increase the value of future forgiveness.
+1. Traditional. Every dollar you save is 10 cents off your monthly student payment the next year.

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Re: Roth 457b vs regular 457? and other questions!

Post by tioscrooge » Mon Aug 03, 2020 12:34 am

retiredjg wrote:
Sun Aug 02, 2020 5:44 pm
philipmk wrote:
Sun Aug 02, 2020 5:10 pm
I work for a large public academic hospital that is associated with an undergraduate university. I have been looking online and it's definitely not governmental related from what I can tell.
A public university? Like a state school? It sounds like it probably is a governmental 457b. That's a good thing. A non-governmental 457 is not always a good plan to use.
OP

Please read and verify your plan document regarding its governmental status.

Rollovers are not allowed for non-government 457b plans. You may transfer Funds to another nongovernmental 457b if both receiving and transferring plans allow it in accordance with your plan terms.
Whether you think you can or you can not, you will be correct.

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philipmk
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Re: Roth 457b vs regular 457? and other questions!

Post by philipmk » Tue Aug 04, 2020 7:07 am

I have confirmed that the plan is NON-governmental. I also am planning to go for PSLF at this time.

retiredjg
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Re: Roth 457b vs regular 457? and other questions!

Post by retiredjg » Tue Aug 04, 2020 7:27 am

philipmk wrote:
Tue Aug 04, 2020 7:07 am
I have confirmed that the plan is NON-governmental. I also am planning to go for PSLF at this time.
I'm wondering how this is possible. Does the plan itself say it is non-governmental? Or did you make a guess based on whether you see your employer as governmental or non-governmental?

The reason I'm asking is this.

1. From what I have observed over the years, a person who is offered the use of a non-governmental plan also has a 403b plan and sometimes other plans on top of that. You have talked about this 457 as if it is the only thing offered. That does not feel right to me. That feels governmental, like the employer is a county or state.

2. I don't think I've ever heard of a non-governmental Roth 457. I've read one source that says it cannot be done, but I don't like to rely on one source, especially one that I'm not familiar with. But again, a designated Roth account in a non-governmental 457 just feels all wonky - I cannot see how it could exist.


If you are planning to go for PSLF, lowering your income now is apparently the way to go....so you would not want to use Roth anyway if that is a priority for you. However, somewhere along the line you need to figure out just what kind of plan you have and I think (not sure) you have come to the wrong conclusion or been given some bad information.

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Re: Roth 457b vs regular 457? and other questions!

Post by tioscrooge » Tue Aug 04, 2020 5:09 pm

philipmk wrote:
Tue Aug 04, 2020 7:07 am
I have confirmed that the plan is NON-governmental. I also am planning to go for PSLF at this time.
Please see retiredjg response.

The only thing I will add, is to find the actual plan document. Read very carefully, and see if it allows for transfer of funds to another non-governmental 457B plan. If not, what are your options at separation. As you are a resident, you may move away to a different job upon graduation, what happens to the funds that you have contributed to this 457B plan?

In the absence of an ability to transfer it to another 457B plan, you may have to take distribution as taxable income, or keep it at the same organization for certain length of time, as described in your plan document. If you end up joining a for-profit organization, you will not have access to another non-governmental 457B plan for A trustee to trustee transfer.
Whether you think you can or you can not, you will be correct.

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philipmk
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Re: Roth 457b vs regular 457? and other questions!

Post by philipmk » Thu Aug 06, 2020 5:47 am

tioscrooge and retiredjg,

Thank you both for the time and information on all of this. I have been confused as well. I called our benefits center and they were the ones who told me it was non-governmental. I'm planning on calling them again and asking more direct questions and looking into what you recommended and then I will post a follow up response. I have been working a weird schedule the last couple of days.

Thank you both again.

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Re: Roth 457b vs regular 457? and other questions!

Post by retiredjg » Thu Aug 06, 2020 6:04 am

Hmmm. Maybe it is, but it seems somewhat odd to me.

One thing that will clinch it for sure - ask what the distribution options are when you move to another job. Better yet, get the SPD (summary plan description) and read it for yourself. If the distribution options are limited, it may be a non-governmental plan and you may or may not want to use it.

Be sure to ask if there is any other plan available.

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Re: Roth 457b vs regular 457? and other questions!

Post by retiredjg » Thu Aug 06, 2020 7:42 am

Did a little research. To me, this link implies that only a governmental 457 plan can have a designated Roth account (Roth 457).

While it does not specifically say a non-governmental 457 cannot be Roth, I think it is implied. However with all things IRS...sometimes things don't mean what one thinks. :happy

https://www.irs.gov/retirement-plans/re ... h-accounts

Again, My interpretation at this point is that your 457 is governmental (a good thing for you) or it does not have a Roth option.

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FiveK
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Re: Roth 457b vs regular 457? and other questions!

Post by FiveK » Thu Aug 06, 2020 2:13 pm

retiredjg wrote:
Thu Aug 06, 2020 7:42 am
While it does not specifically say a non-governmental 457 cannot be Roth, I think it is implied. However with all things IRS...sometimes things don't mean what one thinks. :happy
Comparison of Tax Exempt 457b Plans and Governmental 457b Plans | Internal Revenue Service seems specific enough: no, a non-governmental 457b does not have the "[a]bility to designate all or portion of salary reduction contribution as a Roth contribution."

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