Author Topic: Roth or Traditional 457K?  (Read 534 times)

Spicolli

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Roth or Traditional 457K?
« on: January 30, 2019, 12:18:04 PM »
I was hoping for some feedback on my current funding of my 457K. I'm almost 52 and will retire at 55. My wife (who will retire about the same time) and myself will both have inflation-adjusted pensions that should cover our normal expenses in retirement (about $170K to start). We'll also have rental income of about $20K. Our combined 401/457Ks will cover things like the occasional new car, RV, emergency expenses, etc. and they currently have about $550K in them with over 90% of that in traditional accounts. We're in the 24% tax bracket. 

My question is, since we're so heavily tilted in traditional accounts, should we focus more on boosting our Roths these last few years before retirement? My thinking is we should since we'll probably be in the same tax bracket in retirement and that would give us more flexibility...especially when RMDs start to happen. Your thoughts?

bacchi

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Re: Roth or Traditional 457K?
« Reply #1 on: January 30, 2019, 12:42:02 PM »
When can you start drawing from the pensions?

What are your estimated expenses in retirement?


Spicolli

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Re: Roth or Traditional 457K?
« Reply #2 on: January 30, 2019, 02:07:33 PM »
When can you start drawing from the pensions?

What are your estimated expenses in retirement?

Pensions would start right away...so no gap years where we could easily do conversions (good problem to have).

Estimated expenses in retirement should be right around, or a little less than, our pension and rental income.
« Last Edit: January 30, 2019, 02:12:37 PM by Spicolli »

seattlecyclone

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Re: Roth or Traditional 457K?
« Reply #3 on: January 30, 2019, 02:13:24 PM »
For most folks on this forum I would say that traditional is a no-brainer since if you're living off of your savings you're going to be having income less than or equal to what you spend in retirement. If you're able to save while you're working, that implies a retirement income lower than your working income.

However since you expect to get a rather significant amount of pension income, I think that going with Roth for at least some of your future contributions makes a lot of sense. For a 401(k) definitely.

The 457 is a bit of a different situation. Do you expect to make any early withdrawals from it? If so, go with traditional. These accounts have a unique feature where there's no 10% extra tax on early withdrawals. This is true whether you have a traditional or Roth 457, but you will pay taxes on the earnings in the Roth account if you withdraw early, which sort of defeats the purpose of having a Roth account.

Spicolli

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Re: Roth or Traditional 457K?
« Reply #4 on: January 30, 2019, 02:41:44 PM »
The 457 is a bit of a different situation. Do you expect to make any early withdrawals from it? If so, go with traditional. These accounts have a unique feature where there's no 10% extra tax on early withdrawals. This is true whether you have a traditional or Roth 457, but you will pay taxes on the earnings in the Roth account if you withdraw early, which sort of defeats the purpose of having a Roth account.

Early withdrawals meaning before we retire or before 59.5? We have no early withdrawals planned while we're working but definite possibility of buying an RV before 59.5. If we had money in both the traditional and Roth 457, couldn't we just withdraw from the traditional and not touch the Roth or is that not possible?

szmaine

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Re: Roth or Traditional 457K?
« Reply #5 on: February 03, 2019, 11:32:53 AM »
Yes, you definitely can do that. My plan is to do a series of rollovers from tax deferred to Roth before rmd’s kick in, filling up my tax bracket to avoid getting into a higher bracket from rmd’s. Then not touch the Roth unless I had to.

Boofinator

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Re: Roth or Traditional 457K?
« Reply #6 on: February 03, 2019, 11:49:58 AM »
Congrats, you won the game and are set for life. With that kind of pension, you really can't go wrong with whichever path you take.

(I tend to always recommend Traditional if one is above the 0% tax bracket, as it gives more options down the road. But it doesn't look like you need those options, so choose one and enjoy!)