Roth vs. 457 (401k, etc.)

[Skylark]

The limits for the Roth are going up quite a bit, I believe in 2005 we will be able to deposit $5000 per person.

So next year I will have the opportunity to max out a 457 plan at $12,000, and a Roth at $10,000.

That is more than I will have available to invest so I have to figure out which plan is better and how to allocate the investment.

The way I am looking at this is after retirement, the 457 is better as long as it is part of income which is less than the amount subject to income tax. Roth is the way to go for anything above that.

So if I add up my projected defined benefit pension plus social security and any other taxable income, and compare that to the maximum amount of income I can make before paying taxes, it will give me an idea of how much 457 funds I would need per year.

To estimate how much income I would need from the Roth, I would take my retirement income goal less the maximum income I can have before paying taxes.

So if I compare these estimated amounts for the 457 and Roth, it should give me a rough idea of the proportion to allocate my investment in the two plans.

Does this make any sense? If so does it sound like the right way to estimate how I should allocate my investment?

 

[10sPlayer]

The limits for the Roth are going up quite a bit, I believe in 2005 we will be able to deposit $5000 per person.  

Actually the Roth Contribution limits are:

2004 = $3K
2005 -> 2007 = $4K
2008 = $5K
2009 -> beyond = indexed

catch up for age of over 50:
-> 2005 = $500
2006 -> beyond = $1000

 

[yelnad]

Related question about my 403b:

OK - the limit is $12,000 a year in contributions. right?

Does this include my employers contributions? I pay 5% and my employer pays 9%. I think that only adds up to about $5000 a year.

I don't think I can up the amount automatically taken out of my paycheck (the 5%). So in order to get to the $12k anually, I would have to send the money in on my own, right? And that would go into my "Self-remitter" annuity as opposed to my annuity through my employer?

Like Skylark, would the money I put in on my own be better in the 403b or the Roth?

Excuse my ignorance.

 

[gindie]

yelnad-
You might be able to put $13K into your 403 this year (that's the limit for 401K) and they are going up $1K per year until $15K, I believe. In any event, these are limits just for your own contributions.

 

[Bob_Smith]

Related question about my 403b:

OK - the limit is $12,000 a year in contributions. right?

Yelnad, the absolute limit is $19,000 for 2004. There is a great deal of confusion about this. You can contribute $13,000 as long as you earn that much without any problem. But there are also two "catch-up" provisions.

1) If you have 15+ years of service you may be able to contribute an additional $3000 under the "15 year rule".
2) If you will be age 50 or more by 12/31/2004 you can also contribute another $3000.

So the total you can contribute to a 403(b) is $13,000 unless you qualify for the 15 year rule which would bump it up to $16,000. If you also happen to be 50 or more the total is $19,000.

Annuities are almost always the least desirable place to put 403(b) contributions. I was able to convince my employer to let me use Vanguard where I invested in index funds. If I were you I'd be looking for a way out of that annuity. Here's a site that has much of what you'll want to know about 403b's:

http://www.403bwise.com/

 

[yelnad]

The 403bwise website is very useful. Thanks for pointing it out to me...I'll be combing through it.

I'm not sure I have another choice other than TIAA-CREF. I think my other option when I started here (in higher education) was a state employees retirement (SERS) plan, but I already had TIAA-CREF from my last institution, and at the time did not think I would be here long. In higher education I was taught that unless you plan on remaining in your current state for the rest of your work life, you should go with TIAA-CREF.

I think SERS is more like a pension? It says the annuity amount is determined by (if I retire at 60 or higher; reduced is younger):

2.5% * #years service * average of 3 highest years salary

"SERS provides the opportunity to purchase service to increase your pension and a fixed benefit based on formula. TIAA-CREF offers immediate vesting, flexibility in vesting contributions and, in many cases, the ability to transfer the account from one institution to another. Both systems provide excellent retirement benefits."

Now, I will probably be in PA at least until retirement. I just turned 30.

Did I make the wrong decision? I guess it doesn't matter because I just found this on the HR website:

"The choice of a retirement plan, once made, is irrevocable. An employee may not change retirement plans."

 

[yelnad]

P.S. It does say that I can contribute to my TIAA-CREF 403(b) on my own: "TIAA-CREF permits a participant to make additional payments on a voluntary basis above the mandatory 5% at any time he or she chooses to do so."

 

[yelnad]

AH HA!

OK - now I'm getting somewhere. So in addition to my 403(b), I can also either add more to a 403(b) tax-deferred annuity plan on my own (through Equitable, Fidelity, TIAA-CREF, Valic, or Vanguard) OR to a a 457(b) deferred compensation plan through TIAA-CREF or Valic.

Why does HR make it so hard to find this information? I've been searching for it for months and was never sent to the right place. Grrr.