Author Topic: Taxed twice on Roth 457b?  (Read 424 times)

Valvore

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Taxed twice on Roth 457b?
« on: November 09, 2018, 08:16:27 AM »
457b accounts are absolutely fantastic for early retirement because there are no early withdrawal penalties. You would just need to pay ordinary income tax on the withdrawals. I am currently maxing my traditional 457b. My employer will be offering a ROTH 457b next year. From what I've read from the plan and online the roth may not be a good option for early retirees. Early withdrawals from a Roth 457 plan are also not subject to a ten percent penalty. However, early withdrawals ARE subject to ordinary income taxes. Withdrawals from a Roth 457 plan after age 59 1/2 are both tax-free and penalty free.

I pay taxes upfront, then contribute to the roth 457b. Then that money is taxed again if I withdraw before 59 1/2. So I paid taxes twice on this money? Am I missing something?

Should I contribute to traditional only? The tax-free withdrawals after 59 1/2, even on gains, is tempting though. Should I split my contributions between roth and tradtional? Thoughts and opinions welcome.

terran

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Re: Taxed twice on Roth 457b?
« Reply #1 on: November 09, 2018, 08:55:54 AM »
Interesting, I didn't know that.

http://defcomp.nv.gov/Resources/FAQ-Roth_457/ seems to indicate that non-qualified distributions (before 59.5) will be taxed for the portion taken from earnings but not the portion taken from contributions. This is like a Roth IRA, except that ordering rules in an IRA mean distributions come from contributions before earnings, while it sounds like they come out pro-rata (proportionally) from the 457. Unlike an IRA, but like a traditional 457, there is no early withdrawal penalty (just the tax).

So, yes, I'd say you're right -- traditional is better than Roth for an early retiree. Traditional of all types is usually better for an early retiree anyway though, so it might be a moot point.

TomTX

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Re: Taxed twice on Roth 457b?
« Reply #2 on: November 10, 2018, 02:48:10 PM »
I was just discussing this with our provider - and the previous poster is correct. Roth 457 just seems to be a bad plan for and early retiree.