The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: desertadapted on September 06, 2018, 05:18:50 PM
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Please help me work out some math/deep thinking. I am trying to decide whether to max 457(b) or instead invest in a post-tax account and am having trouble deciding.
I currently max out my 457(b), 401, and Roth IRA. My federal tax rate after all allowed deductions/credits, is 8-9%. I am 9 years from FIRE. Over 70% of my equities are in 401/Trad IRA. Approximately 10% are in Roth. 20% are in 457(b). The 457(b) will be accessible to me at FIRE, distributed as ordinary income. I will need to survive 7-8 years before hitting 59 ½.
I can’t figure out how to decide whether from a tax perspective it is more efficient to continue fully funding the 457 (ordinary income withdrawals), or use the same money to invest post-tax, with the increase taxed at capital gains rate. My low tax rate will increase without the fully funded 457(b). I’m assuming from 9 to 14%, which is a WAG. Many of you are smart and mathy and fabulous – suggestions are appreciated.
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Those appear to be "average" or "effective" tax rates. If so, forget them - it's the marginal tax rate (https://www.bogleheads.org/wiki/Marginal_tax_rate) you would save now, vs. the marginal tax rate you would pay when withdrawing, that matters.
Some resources:
Traditional versus Roth - Bogleheads (https://www.bogleheads.org/wiki/Traditional_versus_Roth)
The '401k vs Taxable' tab in the case study spreadsheet (http://forum.mrmoneymustache.com/forum-information-faqs/case-study-spreadsheet-updates/)
Investment Order (https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153)
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In addition to the current vs future marginal rates MDM notes, another consideration is whether this is a governmental plan (you work for a state government organization) or not. Governmental 457(b)'s are just about the best thing since sliced bread (if the investment options are decent), while non-governmental 457(b)'s are subject to the creditors of the institution.
Not your question, but since you say "I will need to survive 7-8 years before hitting 59 ½," I think it's worth pointing out How to withdraw funds from your IRA and 401k without penalty (https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/)
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@MDM I will work on the case study spreadsheet and see what it yields - very much appreciated.
@terran I agree, government 457(b)'s are awesome.