Originally Posted by MrNickel
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
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:
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.
- made on or after the date you attain age 59½
- made after your death, or
- attributable to your being disabled.
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.