Author Topic: Alternate Retirement or Taxable Investment Account  (Read 2606 times)

blk784

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Alternate Retirement or Taxable Investment Account
« on: December 19, 2014, 09:23:37 AM »
Question: Tax sheltered retirement or investment account or both?

Background: I am 28, single, homeowner, no kids, with a state job which has a pension plan and offers retirement at 30 years of service.  I already have 5.5 years in and really enjoy what I do and plan on continuing until I have 30 years of service or maybe more (pension keeps growing with each year of service).  I am in process of paying down debt and reassessing my finances in order to get serious about saving/investing more.

Goals: With little savings, I want to get the ball rolling and make my money work for me.  I want it to produce income that I can start drawing from when I am around 40 (if I choose to), but also continue to grow and help me sustain my lifestyle well into my actual retirement years.  With that said, would it still be wise to open an IRA or something of that nature that I can't touch until 59.5 along with an investment account? Or just go for the investment account (say vanguard index funds) in order to have access to it at any time? 

Conclusion: With my state pension, I have a guaranteed income till I die which should be more than enough to live on, but would a tax sheltered retirement account that I cant get to till 59.5 save me enough in taxes to consider having?

matchewed

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Re: Alternate Retirement or Taxable Investment Account
« Reply #1 on: December 19, 2014, 09:34:00 AM »
If your pension is truly guaranteed and there is no way for the state to change it at all, if you will without a doubt stay in that job for thirty years and never change your mind, then by all means use a taxable account. But remember you'll be paying taxes on that money and you'll have saved far more money by using a retirement account. Also remember that the first two points are not guarantees, there are no guarantees. Your pension could change, you might not stay in that job for the next thirty years; having a retirement account means the money is still accessible prior to 59.5 years of age with current rules, therefore you can still have flexibility while saving more money than using a taxable account.

BarkyardBQ

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Re: Alternate Retirement or Taxable Investment Account
« Reply #2 on: December 19, 2014, 09:49:39 AM »
I've been working for public education since I was 18, started working into state pension at 20 and assumed I'd work until 50. Recently married, my wife and I decided that early retirement was a much better option. We now plan to retire in 10 years at 40. State pension is good, but if you want to secure your future options (you can't determine what will change those) then you should also secure your own retirement. Your pension IS NOT guaranteed, plenty of retired people can tell you the horror stories of what happened to theirs. If you set yourself up for retirement, your pension will be an amazing supplement. Multiple revenue/income streams secures your retirement. With that said...

If you're state employed, see if you can get a 457b or a 403b. But the 457b it is the ultimate retirement account for government employees. You can contribute 18000 in 2015, and when you do leave, especially if you leave your job early you can start withdrawing from it then, instead of 59.5. If you get any other jobs, part time that offer a 401k you can contribute the max of 18k to both. If you defer enough income to bring your modified adjusted gross income below the Traditional or Roth IRA income limits, you can then tack on another 5500 to retirement accounts. Some government employers offer the ability to get a 457b and a 401k!
« Last Edit: December 19, 2014, 09:54:52 AM by zdravé »

blk784

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Re: Alternate Retirement or Taxable Investment Account
« Reply #3 on: December 19, 2014, 10:44:42 AM »
I do understand that there are no guarantees and do want to have multiple income streams during my retirement years.  My employer does offer a 457(b) plan through VALIC, Fidelity, and TIAA-CREF so I will be looking into that.

BarkyardBQ

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Re: Alternate Retirement or Taxable Investment Account
« Reply #4 on: December 19, 2014, 10:48:55 AM »
Fidelity Spartan Funds! They closely match Vanguard funds in goals, performance and expenses.

pzxc

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Re: Alternate Retirement or Taxable Investment Account
« Reply #5 on: December 19, 2014, 10:53:08 AM »
457 is the solution you want.  I also have a state job (California), and when your employer is the state a 457 plan is the bee's knees.  It's almost exactly like a 401k, except that you can withdraw from it without penalty AT ANY AGE - after you separate from state service.  So you can't take money out without penalty while you continue to work for the state, but if you do an early retirement (at any age), like say age 35 or 40, the money is totally available to you as if you were 59.5 years of age and it were a 401k.

The only drawback to 457 plans that I am aware of, is that because they are "deferred compensation" plans and not true retirement plans, the funds in your account belong to your employer, not to you -- what this means is that if your employer were to go bankrupt, the money in your 457 would go to the creditors of your employer before it comes to you.  That's bad.  HOWEVER -- if your employer is a state government, it's extremely unlikely they will ever go bankrupt!   Most 457 plans belong to city governments, which can and DO go bankrupt, or to not-for-profits, same thing they do go bankrupt.  When has a state in the United States declared bankruptcy?  Never- SO FAR. :)

Psychstache

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Re: Alternate Retirement or Taxable Investment Account
« Reply #6 on: December 19, 2014, 10:58:11 AM »
If you're state employed, see if you can get a 457b or a 403b.

This is inaccurate. The contribution limits are separate, so you can (in 2015) contribute 18k to a 403b AND 18k to a 457 for a total deferral of 36k that is tax sheltered, a great way to save bukus of dollars and reduce your tax liability.

BarkyardBQ

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Re: Alternate Retirement or Taxable Investment Account
« Reply #7 on: December 19, 2014, 11:19:21 AM »
The only drawback to 457 plans that I am aware of, is that because they are "deferred compensation" plans and not true retirement plans, the funds in your account belong to your employer, not to you -- what this means is that if your employer were to go bankrupt, the money in your 457 would go to the creditors of your employer before it comes to you.  That's bad.  HOWEVER -- if your employer is a state government, it's extremely unlikely they will ever go bankrupt!   Most 457 plans belong to city governments, which can and DO go bankrupt, or to not-for-profits, same thing they do go bankrupt.  When has a state in the United States declared bankruptcy?  Never- SO FAR. :)

This depends on the Employer. Be sure to ask your benefits department if the money is vested/yours or if it's the employers. With my employr, my contributions to my 457 are mine, if they go bankrupt I keep my 457 value.

If you're state employed, see if you can get a 457b or a 403b.

This is inaccurate. The contribution limits are separate, so you can (in 2015) contribute 18k to a 403b AND 18k to a 457 for a total deferral of 36k that is tax sheltered, a great way to save bukus of dollars and reduce your tax liability.

It is not inaccurate. His employer may offer one or both. With a 457b he can max out the contributions to the 457b and a 403b or a 401k, but if he is only allowed a 403b or a 457b, then a 457b is the best choice. If you continued to read my post I suggested that a contribution max of 18k was possible to a 401k and the 457b. I did however leave out the possibility of having both a 403b and 457b, but not the possibility of a 457b and a 401k.
« Last Edit: December 19, 2014, 11:23:27 AM by zdravé »