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Should I be contributing to a 457 plan?
Old 10-31-2015, 03:52 AM   #1
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Should I be contributing to a 457 plan?

I am a public service employee and my work has always had the option of starting a 457 plan during open enrollment. I haven't given this plan much thought over the years because I have always been more concerned about maxing out my ROTH IRA and saving money for other things. Saving money is a big part of my life and I don't intend on working past 50 years of age. I am currently 29.

Currently I have:
Maxed contributions to ROTH IRA, since 2009
KPERS 401 (a) Defined Benefit Plan $13,000 after 6 years of service (vested)
$10,000+ emergency fund


Basically I have money stashed away already for next years ROTH IRA contribution already and I'm building up enough money to probably start buying more stock products. But I would like to ask if this 457 plan is a "no-brainer" option I should be taking advantage of right now.

Also, if there are other investment opportunities I should be aware of, please let me know.
Thanks!
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Old 10-31-2015, 04:52 AM   #2
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so... putting away $5500 in a roth each year. A good start.
I was in the private sector and did not have access to 457's, but quick look on the web, similar to 401k with the exception of early withdraws do not have penalties. Not enough information really to advise.
Does your 457 have a roth option?
Will your emergency fund cover expenses for 6 to 12 months?
What is your marginal tax bracket? --Does a roth or traditional 457 make more sense.
How is the defined benefit plan structured if you retire at 50 as you suggest? What will the payout be (assume some % of wages late in career)?
How much could you afford to fund the 457?
What are the investment options in the 457?


I would be cautious in assuming defined benefit plans will exist when you retire. I would expect them to be converted somewhere along the way. I worked for a company that had one of the most over funded pension plan in the '90s, Plan was frozen years ago and retirement healthcare removed from the benefits. Many government entities have been reevaluating their plans. I would expect this to continue.
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Old 10-31-2015, 05:22 AM   #3
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You are fortunate to have access to a public agency 457 plan. These are fabulous opportunities for the future early retiree. Deferred compensation plans are unique in that they are not qualified retirement plans, but deferral of your pay. Taxes are deferred, but there is no penalty for taking distributions before age 59 1/2, so only the tax due. Your money will compound until you separate from employment with your agency. Depending on the plan, you can roll the account over into an IRA, or begin taking money out at that point.

Look carefully at the investment options. Some have good choices, others are annuity-based plans with high fees. If your plan is halfway decent, unless there is a reason to put the money to use elsewhere, I would start contributing heavily.

At the last agency I worked, my equivalent manager of another division retired at 60 with a pension around 90 percent plus nearly $1MM in his deferred compensation account. He worked there for 35 years, but his wife did not work. He had a paid-for home in the Bay Area, a six figure pension, fully funded IRA's for both spouses, and the 457 plan assets.
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Old 10-31-2015, 08:23 AM   #4
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I think tax deferred savings makes the most sense if your current marginal tax rate exceeds your expected marginal tax rate in retirement.

If your marginal tax rate is currently the same or lower than what you expect when you are retired, then I would stay with Roth and taxable accounts. If your marginal tax rate currently is higher than what you expect in retirement, then in most cases it is preferable to save on a tax-deferred basis.

I presume that the 457 plan does not have a match like some 401k plans do. If it does then it would probably be a slam dunk to at least save enough to maximize the match.
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Old 10-31-2015, 07:52 PM   #5
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If you are looking for company, I'm your guy. I work for the state of Nevada. I have a pension, but max out my 457 Plan because I plan to retire at 50. We can make withdrawals prior to age 59 1/2 in our plans. For me...a huge bonus. I'm only 39 now, so my max is $18k per year. My plan offers Vanguard funds. It's a slam dunk in my case.


I better not die right after retiring! I've saved for years to be able to enjoy the money and time. (This is one of my fears)
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Old 10-31-2015, 08:50 PM   #6
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First contribute to any retirement plan you have with an employer match. You might be doing that already if you are a Public employee as they are often mandatory. Then YES!!!! fund the 457 plan as it is tax deferred, reduces your taxable income and you can often get at the money without penalty when you leave your employer whatever your age.

I was able to retire at 54 because I contributed to a state pension plan, 457, 403b and ROTH every year
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Old 10-31-2015, 10:02 PM   #7
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Quote:
Originally Posted by pb4uski View Post
I think tax deferred savings makes the most sense if your current marginal tax rate exceeds your expected marginal tax rate in retirement.

If your marginal tax rate is currently the same or lower than what you expect when you are retired, then I would stay with Roth and taxable accounts. If your marginal tax rate currently is higher than what you expect in retirement, then in most cases it is preferable to save on a tax-deferred basis.

I presume that the 457 plan does not have a match like some 401k plans do. If it does then it would probably be a slam dunk to at least save enough to maximize the match.

From my personal experience you are spot on. And in my situation it made little sense to fund anything in tax deferred accounts. I spent many a year in the 15% tax bracket, but retired right at the top edge of 25% bracket that I retired from working. Any reasonable withdrawal from a tax deferred account would have spilled me over into 28% tax bracket in retirement. Wouldn't make much sense to save 15% in taxes only to pay them out at 28%. Depends on the amount of pension and of course what an early poster said about possibility of the pension being frozen or eliminated.


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Old 11-02-2015, 09:10 AM   #8
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Quote:
Originally Posted by Tykimeister View Post
I am a public service employee and my work has always had the option of starting a 457 plan during open enrollment. I haven't given this plan much thought over the years because I have always been more concerned about maxing out my ROTH IRA and saving money for other things. Saving money is a big part of my life and I don't intend on working past 50 years of age. I am currently 29.
A couple of questions, does your 457 plan have a Roth option? Also, will you have pension at age 50?

If yes to both questions, contribute to Roth 457. Otherwise, depending on your AGI, I recommend contributing partly to tax deferred 457 and partly to Roth 457.

If you're not eligible for pension at age 50, then part of your traditional 457 account will actually have no tax going in and no tax going out (standard deduction+exemption). Win-win.

Note, I'm not sure if it's the same with your 457 plan but for ours, the Roth 457, we have to wait until 59.5 to withdraw. The tax deferred 457 we can withdraw anytime without penalty after separation from service.
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Old 11-02-2015, 09:36 AM   #9
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You should contribute to your 457 plan before you contribute to a ROTH.
Take advantage of the tax deferral.
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Old 11-02-2015, 10:15 AM   #10
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You should contribute to your 457 plan before you contribute to a ROTH.
Take advantage of the tax deferral.
But tax deferral only makes sense if your current tax bracket is more than your expected tax bracket in retirement... if your current tax bracket is the same or lower than what you expect in retirement then after-tax savings makes more sense. IOW, it makes no sense to defer today at 10% or 15% and pay 25% later on.

For example, my DS is just starting out and in a low tax bracket so tax deferred savings doesn't make much sense for him. As he climbs the ladder and earns more then it may change.
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Old 11-03-2015, 10:54 AM   #11
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Originally Posted by pb4uski View Post
But tax deferral only makes sense if your current tax bracket is more than your expected tax bracket in retirement... if your current tax bracket is the same or lower than what you expect in retirement then after-tax savings makes more sense. IOW, it makes no sense to defer today at 10% or 15% and pay 25% later on.

For example, my DS is just starting out and in a low tax bracket so tax deferred savings doesn't make much sense for him. As he climbs the ladder and earns more then it may change.
I agree. Both my 20-something kids are contributing to their 401K only to the extent necessary to maximize employer match. Then, they max-out the Roth IRA. When cashflow allows savings beyond that, they are both building the after-tax account further, because they are in a low tax bracket. As their earnings grow and they are in a higher bracket, it would make sense to shift back to the 401K at that time.
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