Author Topic: Which retirement accounts should I be using?  (Read 512 times)

the_fella

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Which retirement accounts should I be using?
« on: December 06, 2018, 07:41:55 PM »
I have a self-directed Roth IRA, a taxable brokerage account, and a state run pension. I am a school bus driver, and as such, I pay into SERS (instead of Social Security), a state-run pension for non-teaching school employees (though I work for a private company, not the district itself). Because I pay into SERS, I'm eligible to use my state's 457(b) plan, which I am currently not doing. The company just started offering a 401(k), but they don't offer any type of match, so I don't see the point.

Right now, I am invested only in the Roth and the taxable account, with a focus on the taxable account. Right now, I am in the 0% capital gains bracket, so I don't see the point of dealing with the restrictions of the Roth.

My thinking was that I could start contributing to the 457(b) just to be able to use it to buy service credit in the pension. Regardless of how much credit I have, I won't be able to retire until I'm in my mid 50s at the very earliest (I'm in my late 20s now). You vest after 10 years of credit, but there are mandatory minimum age requirements for retirement, in addition to service credit requirements. I am coming up on three years of earned credit. Purchasing additional credit would allow me the freedom to leave the job and still have the pension to look forward to when I reach retirement age. As I mentioned, I don't pay into SS for this job, so I don't have a ton of SS credit. I have worked here and there in jobs that do pay into SS, though. We do still pay into Medicare.

What are your thoughts? Am I way off the mark, or do you have other ideas? I welcome helpful suggestions!

degrom7

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Re: Which retirement accounts should I be using?
« Reply #1 on: December 06, 2018, 10:15:57 PM »
Definitely contribute as much as you can to the 457. It doesn't have an early withdrawal penalty like a 401k has. If you can max out your 457 and IRA, I would focus on the 401k next. Contributing to a taxable account is the absolute last thing to fund.


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MDM

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Re: Which retirement accounts should I be using?
« Reply #2 on: December 06, 2018, 11:07:18 PM »
Your situation may be uncommon enough that the usual Investment Order doesn't apply.  But before dismissing it entirely, how do you see it?  In other words, does that order make sense to you, and if not, why?

the_fella

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Re: Which retirement accounts should I be using?
« Reply #3 on: December 07, 2018, 07:43:12 AM »
Definitely contribute as much as you can to the 457. It doesn't have an early withdrawal penalty like a 401k has. If you can max out your 457 and IRA, I would focus on the 401k next. Contributing to a taxable account is the absolute last thing to fund.


Why even bother with the 401(k) if the company doesn't offer a match?

MDM

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Re: Which retirement accounts should I be using?
« Reply #4 on: December 07, 2018, 08:15:38 AM »
Why even bother with the 401(k) if the company doesn't offer a match?
The usual reasons: because you don't pay tax on the amount contributed, and it grows tax free until withdrawal.

nereo

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Re: Which retirement accounts should I be using?
« Reply #5 on: December 07, 2018, 09:24:32 AM »
Why even bother with the 401(k) if the company doesn't offer a match?
The usual reasons: because you don't pay tax on the amount contributed, and it grows tax free until withdrawal.

This.  To add to what MDM said - you pointed out that you are in the 0% capitol gains bracket so you "don't see the point" of contributing without a match.
Well there are two reasons you still should:

1) it reduces your taxable income for the year you contribute, which means you can put in more money.  As a simplified example, let's say your marginal tax rate is 15% in 2018.  You could either contribute $1,000 to a your 401(k) OR you could contribute $850 to your taxable accounts - the difference being the taxes you would pay on that earned income in 2018.

2) while you may be in the 0% capitol gains bracket, this likely will not be the case several years from now as i) your assets grow and ii) tax law (potentially) changes.  in other words, both your current and future tax status is important to consider.

frugaliknowit

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Re: Which retirement accounts should I be using?
« Reply #6 on: December 07, 2018, 11:02:55 AM »
1.  What marginal tax bracket are you in?  When you consider Roth versus traditional or retirement account versus non-retirement account, you need to consider your current marginal tax bracket.

2.  How long (guess if needed) do you think you will be with your current employer?

3.  Maybe walk us through the implication of buying service credits (cost/benefit)?

4.  The restrictions on the Roth are minimal compared to the TIRA.