Author Topic: Help me choose between 457b and Taxable account  (Read 2477 times)

fiveoh

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Help me choose between 457b and Taxable account
« on: April 06, 2013, 01:55:44 PM »
Maxed IRAs, 403B, and HSA.  My next option is either a taxable account or 457B.  I need some help choosing between the two. 

Taxable account:

Vanguard S&P ETF
15% tax bracket

457B:

tax deferred until withdrawal, can withdraw at anytime with no penalties as far as I understand, I plan on being in the same 15% tax bracket when I withdraw it.

Limited investment options but they do have vanguard VTSMX(total stock market index fund) so I would probably use that.

Overall administrative fees = almost 1% a year(charged by the company that manages it + the .18% vanguard fee)

So if I plan on needing this money in 15 years... which account am I better off putting the money into?

Honest Abe

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Re: Help me choose between 457b and Taxable account
« Reply #1 on: April 06, 2013, 07:10:35 PM »
You can access the money as long as you're not with the same employer.... do you plan to still working for the same organization in 15 years?

arebelspy

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Re: Help me choose between 457b and Taxable account
« Reply #2 on: April 06, 2013, 07:49:57 PM »
Always max the 457 before the 403.  They're the exact same with the exception of the 457 being accessible without penalty once you are no longer with that same employer.

So your question should be, IMO, taxable versus 403.
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fiveoh

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Re: Help me choose between 457b and Taxable account
« Reply #3 on: April 06, 2013, 08:30:16 PM »
Always max the 457 before the 403.  They're the exact same with the exception of the 457 being accessible without penalty once you are no longer with that same employer.

So your question should be, IMO, taxable versus 403.

The 403 has no admin fees which is why Im using that one first.  I was planning on using the Roth pipeline. 

I don't plan on working there in 15 years.  Either way with a 403/457 or taxable which is the best option?

Another Reader

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Re: Help me choose between 457b and Taxable account
« Reply #4 on: April 06, 2013, 09:21:17 PM »
+1 for Arebelspy.  The 457 plan is very flexible.  Yep, the fees are awful, but the ability to withdraw without penalty once you terminate employment can't be beat.  In your shoes, I would max both plans out and use the 457 plan assets before the 403b assets.  You may not need a Roth pipeline if you have enough in the 457 plan.

Also, it might be worth asking the HR folks to reconsider the 457 plan provider next time the contract comes up for renewal because of the administrative fees.

TheDude

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Re: Help me choose between 457b and Taxable account
« Reply #5 on: April 06, 2013, 09:39:44 PM »
You would be nuts not to contribute to the 457 imho. I really really hope my wife's school gets a 457 this year.

If I were in your shoes I would take the time to make a spreadsheet. Assume the taxes structure of today is the same as the future and see which option is better. I assume it will be the 457 but you should do the math.

Hamster

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Re: Help me choose between 457b and Taxable account
« Reply #6 on: April 06, 2013, 11:09:56 PM »
Just remember that unlike a 403b or 401k, money you leave in a 457 belongs to your employer until it is distributed. Prob not a concern if it is a government job, but if it's a private employer, you could lose the money if they become insolvent.

fiveoh

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Re: Help me choose between 457b and Taxable account
« Reply #7 on: April 07, 2013, 06:01:38 AM »
Just remember that unlike a 403b or 401k, money you leave in a 457 belongs to your employer until it is distributed. Prob not a concern if it is a government job, but if it's a private employer, you could lose the money if they become insolvent.

I wasn't aware of this.  Thanks for the heads up.

I like the spreadsheet answer, guess I'll take some time to do that today. 

fiveoh

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Re: Help me choose between 457b and Taxable account
« Reply #8 on: April 07, 2013, 06:27:04 AM »
So maybe I'm doing this wrong help me out here... I made a spreadsheet to compare the two..using 10,000 as a nice even number to figure this out

Taxable account I pay 15% on the money right away(no tax free treatment) and then 15% on the GAINS at the time of sale.  correct?   

This works out to $1500 now.  After 15 years at 5% the investment had grown to 19799 for a gain of 9799.  Now I pay 15% on the 9799 or an additional 1469.

Total tax burden : 1500 + 1469= 2969

457b

10000 invested now... no taxes to start with.  After 15 years at 5% the investment is now 19799 but I have to pay taxes on the whole amount.

Total tax burden : 19799 * .15 = 2969

What is the advantage to the taxfree growth of the 457b?  Overall I'm still paying the same taxes on the money, its just delayed.  With the additional fees associated with the 457b, the taxable account will actually come out ahead. 

Am I doing something wrong here?

Honest Abe

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Re: Help me choose between 457b and Taxable account
« Reply #9 on: April 07, 2013, 06:31:32 AM »
Interesting insight. The only problem I see with that calculation is that the dividends that you received four times a year will be taxed. Dividend distribution has a big part to play in the growth of a portfolio.

arebelspy

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Re: Help me choose between 457b and Taxable account
« Reply #10 on: April 07, 2013, 07:07:27 AM »
How did your 10k (in 457) grow to the same amount as your 8,500 (in taxable)? (You said they both end at 19799).

I think therein lies your mistake.

Also don't forget your tax rates may be different.
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fiveoh

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Re: Help me choose between 457b and Taxable account
« Reply #11 on: April 07, 2013, 08:07:42 AM »
How did your 10k (in 457) grow to the same amount as your 8,500 (in taxable)? (You said they both end at 19799).

I think therein lies your mistake.

Also don't forget your tax rates may be different.

Well you are right in that I would have to invest 11500 in the taxable to = the 10k in the 457 but it still seems like the overall taxes would be the same, it is just front loaded more on the taxable. 

Edit: I guess I would need to account for the interest from the 1500 extra from the 457 which would be another 1500 earned so I guess that does come out ahead.
« Last Edit: April 07, 2013, 08:15:22 AM by fiveoh »

arebelspy

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Re: Help me choose between 457b and Taxable account
« Reply #12 on: April 07, 2013, 08:18:05 AM »
That's the advantage of the tax deferred account- the amount growing is much bigger because it's your money + the government's taxes growing.

Sconce you already have the (simplistic) spreadsheet, run the numbers on if you put 10k deferred versus paying 1500 taxes on it and invest that 8500.

EDIT: you seem to have edited your post while I was tying my reply.  You are correct.
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fiveoh

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Re: Help me choose between 457b and Taxable account
« Reply #13 on: April 07, 2013, 09:50:57 AM »
New numbers...

8500 invested in taxable account @ 5% per year = 16829
16829-8500=8329 gain
8329 * .15 = 1249 in taxes

16829 - 1249 = 15580 is the value of the investment after taxes

10000 invested in 457 @ 5% year = 19799
taxes = 19799 * .15 = 2969
19799 - 2969 = 16829 is the value of the investment after taxes

HOWEVER, when I add in the 1% yearly fees on the 457... total fees after 15 years come out to 2057. 

16829-2057 = 14772. 

The taxable account actually comes out ahead because of the 1% fees. 

Honest Abe

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Re: Help me choose between 457b and Taxable account
« Reply #14 on: April 07, 2013, 10:10:36 AM »
You need to tax your dividend distributions on a yearly basis in your taxable account.

fiveoh

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Re: Help me choose between 457b and Taxable account
« Reply #15 on: April 07, 2013, 10:21:30 AM »
You need to tax your dividend distributions on a yearly basis in your taxable account.

You are right.  I'll estimate average 2.5% yield for the market so .025 * my tax rate of .15 = .00375% per year.  After 15 years it comes out to $655.  If I subtract this from the Taxable value 15580-655= 14925 vs 14772 for the 457.

The taxable still comes out ahead slightly and it offers greater flexibility unless I'm missing something else big here. 


Honest Abe

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Re: Help me choose between 457b and Taxable account
« Reply #16 on: April 07, 2013, 10:49:59 AM »
This is a great discussion... I ran the numbers a few times.. it seems that there is less advantage to using your 457b when you are in a 15% bracket as opposed to a 28% bracket. As I type this I realize how obvious this sounds but I hadn't given it much thought before.


Perhaps a tax-deferred account is much less advantageous for those in the lower bracket. Curious to hear the thoughts of others.

fiveoh

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Re: Help me choose between 457b and Taxable account
« Reply #17 on: April 07, 2013, 12:03:22 PM »
This is a great discussion... I ran the numbers a few times.. it seems that there is less advantage to using your 457b when you are in a 15% bracket as opposed to a 28% bracket. As I type this I realize how obvious this sounds but I hadn't given it much thought before.


Perhaps a tax-deferred account is much less advantageous for those in the lower bracket. Curious to hear the thoughts of others.


If it wasn't for the 1% of admin fees on my plan the 457 would be the clear winner.  It makes me mad that I have to pay that... They are doing nothing except taking my money and buying a vanguard etf with it.