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457 vs ROTH vs Brokerage
Old 08-01-2015, 05:40 PM   #1
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457 vs ROTH vs Brokerage

I'm stuck on where to send my savings first. I've been deferring to a traditional 457(b) which according to its website the money is protected from being raided by the City should bad things happen. I've needed the tax savings, but now I'm thinking of venturing out into post-tax accounts.

There is a ROTH 457 available. I like this one because 1) it's so easy from my paycheck to account and 2) I can take distributions upon separating from city service without worrying about 10% IRS penalty on earnings before 59 1/2. I don't like that there is RMD, unlike the ROTH IRA.

I'm leaning towards the ROTH IRA, however I plan on retiring at 55 and although I don't believe I'll be needing distributions (I'm covered by a healthy pension) just in case I don't want to be restricted by any SEPP.

My other thought is to use a brokerage and just treat it as a normal account. I have enough discipline not to raid it. I don't like that I'd be taxed on dividends though. I've used Robinhood which doesn't have any trading fees. I've used it and am very pleased. Turn around on sales and depositing takes about a week, which is where I'm sure they make their $ from, but I'm not worried about that considering my time horizon is 20 years.
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Old 08-01-2015, 10:32 PM   #2
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I'm in your situation, though I won't be able to get the pension until age 60. You may be in my situation where it looks like I will be stuck in the same tax bracket after retirement due to the pension + SS income. I've settled into doing all four (457(b) traditional & Roth, Roth IRA, and Brokerage). I like the idea of having multiple buckets of funds available to me so I can try to avoid any spikes in taxes (due to extra withdrawals) in any year. You'll have to decide how important that ability is for you.
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Old 08-05-2015, 10:36 AM   #3
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Originally Posted by MrNickel View Post
I'm stuck on where to send my savings first. I've been deferring to a traditional 457(b) which according to its website the money is protected from being raided by the City should bad things happen. I've needed the tax savings, but now I'm thinking of venturing out into post-tax accounts.

There is a ROTH 457 available. I like this one because 1) it's so easy from my paycheck to account and 2) I can take distributions upon separating from city service without worrying about 10% IRS penalty on earnings before 59 1/2. I don't like that there is RMD, unlike the ROTH IRA.

I'm leaning towards the ROTH IRA, however I plan on retiring at 55 and although I don't believe I'll be needing distributions (I'm covered by a healthy pension) just in case I don't want to be restricted by any SEPP.
I suggest reading your plan documents again.

I've looked at our plan documents and from what I understand, Roth 457 is more restrictive than Roth IRA. You're not allowed to take distributions (regardless if it's contributions or earnings) before age 59 1/2. That said, if you rollover your Roth 457 to a Roth IRA, your Roth 457 contributions are treated the same as your Roth IRA contributions. No waiting period to withdraw or anything unlike with a conversion, plus no RMDs.

Retirement Plans FAQs on Designated Roth Accounts
Quote:
What is a qualified distribution from a designated Roth account?

A qualified distribution is generally a distribution that is made after a 5-taxable-year period of participation and is either:
  1. made on or after the date you attain age 59½
  2. made after your death, or
  3. attributable to your being disabled.
If a distribution is made to your alternate payee or beneficiary, then your age, death or disability is used to determine whether the distribution is qualified. The only exception is when the alternate payee or surviving spouse rolls over the distribution to his or her own employer’s designated Roth account, in which case their own age, death or disability is used to determine whether the distribution is qualified.

A qualified distribution from a designated Roth account is not included in your gross income.

Since I make designated Roth contributions from after-tax income, can I make tax-free withdrawals from my designated Roth account at any time?

No, the same restrictions on withdrawals that apply to pre-tax elective contributions also apply to designated Roth contributions. If your plan permits distributions from accounts because of hardship, you may choose to receive a hardship distribution from your designated Roth account. The hardship distribution will consist of a pro-rata share of earnings and basis and the earnings portion will be included in gross income unless you have had the designated Roth account for 5 years and are either disabled or over age 59 ½.
Personally, I'm contributing a lion share to traditional 457(b) (can be withdrawn without penalty at any time upon separation from service). After that is Roth IRA, then Roth 457(b) in that order. Given there's no age restriction on the traditional 457(b), it's a nice source of funds if ever I decide to retire earlier than 55. Alas, I'm not making enough right now to also save to a taxable brokerage account.

That said, with the expected COLA pension, the taxable account isn't really going to be much help in terms of managing taxes. Dividends and realized gains from mutual funds and ETFs (whether qualified/long-term or not) will probably be a bigger annoyance come tax time. At least you have more control with distributions from 457(b) and they're far more predictable.

Mind, retiring at 55 gives you 15 years before RMD age so you've got a lot of time to do Roth conversions to try to minimize unnecessary RMDs.
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Old 08-05-2015, 11:22 AM   #4
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I suppose I want most of when I retire is predictability and ease. I don't have a family history of diminished faculties but you never know. I make all the financial decisions and don't want to unnecessarily burden the kids.


Only three ways to get to other side of that hill: climb up, go around or dig through. I won't pretend it's not there.
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Old 08-05-2015, 12:02 PM   #5
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I suppose I want most of when I retire is predictability and ease. I don't have a family history of diminished faculties but you never know. I make all the financial decisions and don't want to unnecessarily burden the kids.
Unless you die prior to retirement (in which case, I hope you have sufficient term life insurance), that part can be accomplished with the help of an estate planner and/or financial adviser when you feel like you'd like to let go of the reins.
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Old 08-06-2015, 02:17 AM   #6
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All my co-workers jest me because I'm constantly thinking about my critical mass and say I'll be dead when my retirement countdown app hits T-1 day. Good chance my countdown is 3,650 days sooner then theirs.

On the other hand I'm looking into term life insurance just in case they're right.


Only three ways to get to other side of that hill: climb up, go around or dig through. I won't pretend it's not there.
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