The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: sultee on May 13, 2017, 08:47:30 AM
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Mustachians,
I know that topics similar to this have been covered, but I am very new to the public sector and I am looking to make a priority list for where my money is going. I know that I have access to a 403b, 457, HSA, and IRA/Roth IRA. In addition, I will have a pension when I retire. Would it be best to max IRAs first before moving to the 403b/457 due to early retirement penalties? So far this is what I'm thinking, so please help me out:
1. IRA Max
2. 403b Max
3. 457 leftover?
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The 457 can be great for an early retiree because there is no 10% early withdrawal tax. If anything is matched by your employer, do that first. HSA should be pretty high up there because it's tax-free both ways. 457 probably next after that.
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Our 457b plan allows us penalty free withdrawal at any time after you become separated from your employer, be it early retirement, layoff, or firings. And its pre-tax on your pay stub so you get a nice tax break on it as well. It's a state managed trust, so should my city go tits up (pretty likely lol), my money will still be there.
I think a good investment order would be:
Pension contribution (usually a mandated non-adjustable amount)
Any employer matched funds (kinda rare in public service because they are already making deposits to the pension)
Max HSA if you have one
Max 457b
Other IRA's like Roth, etc...
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Investment Order (https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153) may be helpful.
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I'd recommend putting money into the 457 first (since as other have mentioned you can pull the money out at any age without penalty).
HSA is triple tax deferred so a good second option.
The 403b and IRA as going to be pretty much equivalent so use whichever one has lower fees first.
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Investment Order (https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153) may be helpful.
This is helpful, but with the HSA, should I dump money into that? As in, can that money be moved to other account and be used for things other than healthcare??
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Investment Order (https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153) may be helpful.
This is helpful, but with the HSA, should I dump money into that? As in, can that money be moved to other account and be used for things other than healthcare??
It can be used "only" for healthcare until you reach age 65, at which point distributions can be used for anything. If, after age 65, the distributions are used for non-medical purposes, they are taxed the same way a traditional IRA distribution is taxed.
Given that "healthcare issues happen", and at worst the HSA acts as a tIRA, the HSA gets the nod for a higher priority.
See 2016 Publication 969 - p969.pdf (https://www.irs.gov/pub/irs-pdf/p969.pdf) for more.
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Another strategy I've heard for using the HSA is that, since there is no expiration date for getting reimbursed for acceptable medical expenses, you can just pay for medical costs out of pocket, save all the receipts in a folder somewhere, and then have the ability to pull at least that much money out of your HSA at any time going forward.
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I will just repeat that the rules for the 457 are magical and I wish I'd known about them earlier. I've been maxing out my 403 for a while and only just this year started adding $1000/month to the 457. If I can't max that one out in the next few years, I'll probably switch which account is getting the most money.
I don't have the option of an HSA, so I can't comment on that.
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I'd been doing HSA max before 457 because I can get HSA funds into Vanguard.
But I think I was wrong about the rules. I'd been thinking I could use HSA funds for health insurance premiums in early retirement, and it looks like that's only while using COBRA or while on unemployment (and Medicare after 65, but at that point I can access all the retirement funds). So I may switch to making the 457 the priority after the match on the HSA.
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I think a good investment order would be:
Pension contribution (usually a mandated non-adjustable amount)
Any employer matched funds (kinda rare in public service because they are already making deposits to the pension)
Max HSA if you have one
Max 457b
Other IRA's like Roth, etc...
Mine is similar:
Pension
HSA (preference for the HSA over the 457b because the HSA is exempt from FICA)
457b to get me into the 15% tax bracket
Roth IRA
after-tax savings
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The order might also be influenced by your investment options. If you have access to a low-cost 457 plan, I would max that out before maxing out the 403b. Here's my own investment order (teacher):
1. Pension (automatic)
2. Max out 457
3. Max out HSA (if I ever have access to one- right now I don't have a high-deductable plan)
4. Max out 403B
5. Buy years for the pension (if this is an option for you)
This would change for me if I didn't have fiduciary for both my 457 and 403B. Most teachers in my area go for annuities because they are 'guaranteed' for life, but the rates on them are 2-3%!! My 457 plan (NOT an annuity) is only .4% plus anything Vanguard charges (.07-.18 for me depending on the fund).
Also, it's worth noting that it might change depending on what a significant other has access to.
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But I think I was wrong about the rules. I'd been thinking I could use HSA funds for health insurance premiums in early retirement, and it looks like that's only while using COBRA or while on unemployment (and Medicare after 65, but at that point I can access all the retirement funds).
Depends on the source of the insurance.
Starting at age 65 you can use Health Savings Account (HSA) funds to pay for your portion of premiums associated with employer sponsored retiree health insurance. (https://www.bogleheads.org/forum/viewtopic.php?f=2&t=213456&p=3276744#p3276744)
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As a fellow teacher, check out the fees. I'm offered both a 403B and a 457. The district pays all the fees for the 403B, and the 457 has a fee of about 1.5%. You may have to call the HR office or vendor as it is often not clear.
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I will just repeat that the rules for the 457 are magical and I wish I'd known about them earlier. I've been maxing out my 403 for a while and only just this year started adding $1000/month to the 457. If I can't max that one out in the next few years, I'll probably switch which account is getting the most money.
I don't have the option of an HSA, so I can't comment on that.
Now that you understand the principles of the 457, have you quit contributing to the 403? I don't have enough income to max both so I'm working on trying to max one to keep myself in the 15% tax bracket and I don't want to distribute ineffectively.
I will be talking to my HR on fees related to 403 and 457 to see if they differ enough for that to weight the decision.