Can't decide which investment plans to choose

[FIREball567]

Hey guys! I feel more educated after posting in the forum last week and reading more about retirement funds. My problem is I still can't figure out whether I want my contributions to be traditional or roth. As a NYC teacher, I qualify for a full pension at 63 years old (60+% of future final salary) I make $90K and the max salary now is $120K but it increases every few years because of my powerful union. After reading about early retirement, I now don't plan to work until I'm 63. As long as I complete 20 years in the system, I'll get full retiree health benefits and a small pension. That is what I'm aiming for.

So far my only contribution for retirement is $56K in a 403B. In addition to an IRA, I am allowed to participate in 2 of the 3 choices below. I'm in my early 30's and wife mid 20's.

1) Traditional / Roth – 401K – Deferred Compensation Plan up to $18,500. $80 administrative fees each year and 0.04% annualized asset-based fee.
            A) Target funds with fees of 0.18%.
            B) - Equity Index Fund managed by The Bank of New York Mellon (0.01% expense ratio)
                - Mid-Cap Equity Index Fund by State Street Global Advisors (0.02% expense ratio)
                - Small-Cap Equity Fund by State Street, Wellington, T. Rowe, and Dimensional Fund Advisors (0.40% expense ratio).
               - International Equity Fund managed by State Street, Mondrian, Partners Lrd, Baillie Gifford, and Copper Rock (0.32% expense ratio)
               - Other options that are more balanced but I'm not interested in.

2) Traditional / Roth – 457 – Deferred Compensation Plan up to $18,500. The options and fees are the same as above.
*If I choose both 401K and 457, I will only pay the $80 administrative fee once each year.

3) Tax Deferred Annuity 403B – Up to $18,500 each year. This plan has a 7% guaranteed interest “fund” with no fees. They also have their own investment funds with fees but I can’t go wrong with the guaranteed 7%. Also when I withdraw in the future, I won’t have to pay federal or state taxes. Only city tax.

So I can either choose the 401K & 457 or the 457 & 403B(guaranteed 7% interest) and put in a combined $36,000 each year.

Which of these choices would you select?
Would you choose tax-advantage or roth in both? Most teachers advise me to put it in roth because of the max pension which will put me in a high tax bracket in the future but since I only plan to stay 20 years and get the minimum pension w/health benefits, my income will be lower. My wife is a few years younger and just started her career so she’ll definitely be working when I plan to retire (filing married joint).

My wife and I also will be maxing out our Vanguard IRAs with VTSAX so whichever tax selection we select in our retirement funds will also be used for our IRA.

Thank you all for reading and your expert advice will be greatly appreciated!

[MDM]

Don't know about NY state tax, but it would be surprising to find that the IRS lets you not pay tax now on 403b contributions, and then not pay tax on 403b withdrawals.

If you want to make an informed guess, compare your marginal tax saving rate on traditional contributions now to the marginal tax rate you expect to pay when withdrawing from traditional accounts.  See Investment Order for one way to do this.

[FIREball567]

Don't know about NY state tax, but it would be surprising to find that the IRS lets you not pay tax now on 403b contributions, and then not pay tax on 403b withdrawals.

If you want to make an informed guess, compare your marginal tax saving rate on traditional contributions now to the marginal tax rate you expect to pay when withdrawing from traditional accounts.  See Investment Order for one way to do this.

It's a little perk for being in the plan. No fed tax and as long as I live in NY, no state tax.

[MDM]

Don't know about NY state tax, but it would be surprising to find that the IRS lets you not pay tax now on 403b contributions, and then not pay tax on 403b withdrawals.

If you want to make an informed guess, compare your marginal tax saving rate on traditional contributions now to the marginal tax rate you expect to pay when withdrawing from traditional accounts.  See Investment Order for one way to do this.

It's a little perk for being in the plan. No fed tax and as long as I live in NY, no state tax.

That would be more than a little perk.  How sure are you that it is real?  E.g., in https://www.trsnyc.org/memberportal/WebContent/publications/tdaBook (don't know if that is your specific plan, but it seems at least similar) one finds "Distributions generally are federally taxable and may be subject to state and local taxes."

[dandarc]

I'd go 401k/457b personally. 7% guaranteed sounds great - but over a sufficiently long time (say 20+ years), that is not that good compared to expected stock market returns. And usually this is not as guaranteed as it might sound - if a few years from now, returns have been poor and taxes can't be raised to make up the difference, then expect that 7% guarantee to go down.

[FIREball567]

I'd go 401k/457b personally. 7% guaranteed sounds great - but over a sufficiently long time (say 20+ years), that is not that good compared to expected stock market returns. And usually this is not as guaranteed as it might sound - if a few years from now, returns have been poor and taxes can't be raised to make up the difference, then expect that 7% guarantee to go down.

Thanks for the reply. Do you think they should both be traditional or roth? I know the 7% would not be as good compared to the stock market over 20-30 years but does having no federal and state taxes outweigh that decision to skip the 403B?

[dandarc]

I don't think you're right about that being federal and state tax-free on withdrawal. That would be an extremely unusual thing for a 403B.

Traditional vs. Roth - marginal tax rate today vs. marginal tax rate on withdrawal is the 1 sentence answer. If on withdrawal you expect taxes to be higher than when you contribute, you go Roth, otherwise you go traditional. One big factor for you specifically - are you willing to relocate to a state with lower income taxes once you pull the plug? If so, that's a hard push towards traditional, although your specific situation could still mean Roth is a better decision for you.

[FIREball567]

I don't think you're right about that being federal and state tax-free on withdrawal. That would be an extremely unusual thing for a 403B. I couldn't believe it at first but I called up my retirement hotline and they confirmed it. It's called Tax Deferred Annuity by the Teacher's Retirement Service of NYC.

Traditional vs. Roth - marginal tax rate today vs. marginal tax rate on withdrawal is the 1 sentence answer. If on withdrawal you expect taxes to be higher than when you contribute, you go Roth, otherwise you go traditional. One big factor for you specifically - are you willing to relocate to a state with lower income taxes once you pull the plug? If so, that's a hard push towards traditional, although your specific situation could still mean Roth is a better decision for you.

I see. That makes sense. I haven't decided yet since my wife is gone and will still be working when I plan to retire. I'm just planning to work until I'm 48 which will qualify me to be vested, receive health benefits during retirement, and get 35% of my future final salary which will most likely be around $130 to $140K. The only caveat is I won't be able to collect until 55 (reduced pension of 48% of the 35% final salary) to 63 (full pension of 35%).

[MDM]

I don't think you're right about that being federal and state tax-free on withdrawal. That would be an extremely unusual thing for a 403B.

I couldn't believe it at first but I called up my retirement hotline and they confirmed it. It's called Tax Deferred Annuity by the Teacher's Retirement Service of NYC.

Trust your original disbelief.  The hotline person either misunderstood your question or simply gave you an incorrect answer.

Do read https://www.trsnyc.org/memberportal/WebContent/publications/tdaBook.  What does that tell you?

[FIREball567]

I don't think you're right about that being federal and state tax-free on withdrawal. That would be an extremely unusual thing for a 403B.

I couldn't believe it at first but I called up my retirement hotline and they confirmed it. It's called Tax Deferred Annuity by the Teacher's Retirement Service of NYC.

Trust your original disbelief.  The hotline person either misunderstood your question or simply gave you an incorrect answer.

Do read https://www.trsnyc.org/memberportal/WebContent/publications/tdaBook.  What does that tell you?

Thanks! This is helpful. I'll going to a pension meeting in a few weeks so I'll be sure to bring it up.