Author Topic: Would it be better to fund a 457 plan or fund taxable investments?  (Read 3356 times)

rudged

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A rule of thumb I've run across is that if you have money to save, you should prioritize your investing strategies as follows:

1. 401K (or 403(b)) until you reach the company match.
2. Max out your Roth IRA
3. Max out your 401K (or 403(b)).
4. If you still have money to invest, pursue taxable investing (e.g. a Vanguard index fund)

With regard to the above I've maxed my 403(b) contributions and am now paying down my mortgage, which I plan to pay off in about three years time. My question has to do with how to invest the money I have been using previously to pay (and pay down) my mortgage. I work at a university that offers both 403(b) and 457 retirement plans, and as I understand it, I can fund both. So should my next priority be funding a 457 plan? or should I pursue taxable investments? I'm 53, married and at the moment plan to continue working after reaching financial independence.

Gin1984

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Re: Would it be better to fund a 457 plan or fund taxable investments?
« Reply #1 on: January 30, 2016, 07:57:19 PM »
Fund your 457 before taxable.

rudged

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Re: Would it be better to fund a 457 plan or fund taxable investments?
« Reply #2 on: January 30, 2016, 07:58:10 PM »
Thanks!

GrOW

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Re: Would it be better to fund a 457 plan or fund taxable investments?
« Reply #3 on: January 30, 2016, 08:05:34 PM »
You may find that funding your 457 before 403b is the way to go. Or 403b to match, then 457, then tira or 403b depending on investment option fees, then whichever didn't win previously, and then...taxable.

rudged

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Re: Would it be better to fund a 457 plan or fund taxable investments?
« Reply #4 on: January 30, 2016, 08:13:34 PM »
Thanks. I remember when I first set the retirement account up that the advisor strongly advised that we fund the 403(b) first and only after we maxed it out should we consider the 457. I think it may have had to do with the options within the 457 plan.

randymarsh

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Re: Would it be better to fund a 457 plan or fund taxable investments?
« Reply #5 on: January 30, 2016, 11:07:17 PM »
457 is cool because you can take money out before 59.5 and you don't pay the 10% penalty. Great account that most people don't have access to.

rudged

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Re: Would it be better to fund a 457 plan or fund taxable investments?
« Reply #6 on: January 31, 2016, 12:10:18 PM »
Thanks for your reply. I guess one of the reasons I hesitated was that I might wind up with greater income tax liability when I'm required to start minimum 403(b) distributions, i.e. my taxable income will be higher than it is now. I'm thinking perhaps when I start the 457 I should concurrently convert some of my 403(b) assets into Roth IRAs.

Gin1984

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Re: Would it be better to fund a 457 plan or fund taxable investments?
« Reply #7 on: January 31, 2016, 01:00:45 PM »
Thanks for your reply. I guess one of the reasons I hesitated was that I might wind up with greater income tax liability when I'm required to start minimum 403(b) distributions, i.e. my taxable income will be higher than it is now. I'm thinking perhaps when I start the 457 I should concurrently convert some of my 403(b) assets into Roth IRAs.
Maybe you will pay higher taxes after 70.5, but you can pull from your 457 sooner and not pay the higher rates.  I would also put money in a Roth but not taxable unless you have maxed everything else.

PhysicianOnFIRE

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Re: Would it be better to fund a 457 plan or fund taxable investments?
« Reply #8 on: January 31, 2016, 01:20:55 PM »
If you have a high decuctible health plan with HSA option, fund the HSA before 457 or taxable. 

HSA is triple tax free when used for health care costs.

Otherwise, 457 is a great option.  You can start withdrawing from it right after you retire, regardless of age. 

MDM

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Re: Would it be better to fund a 457 plan or fund taxable investments?
« Reply #9 on: January 31, 2016, 05:36:06 PM »
A rule of thumb I've run across is that if you have money to save, you should prioritize your investing strategies as follows:

1. 401K (or 403(b)) until you reach the company match.
2. Max out your Roth IRA
3. Max out your 401K (or 403(b)).
4. If you still have money to invest, pursue taxable investing (e.g. a Vanguard index fund)

Adding some details:

In the lists below, thinking "first your 457 (if you have one), then your 401k and/or 403b" wherever "401k" appears is likely correct,
because 457 withdrawals may occur without penalty immediately after retirement.  If, however, 457 investment options are much
worse than in the 401k/403b the priority is less clear.

Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).

WHAT
0. Establish an emergency fund to your satisfaction
1. Contribute to 401k up to any company match
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.
3. Max HSA
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)
6. Fund mega backdoor Roth if applicable
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.
8. Invest in a taxable account with any extra.

WHY
0. Give yourself at least enough buffer to avoid worries about bouncing checks   
1. Company match rates are likely the highest percent return you can get on your money   
2. When the guaranteed return is this high, take it.   
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.   
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see   
   http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
   if you want even more details on that topic).  See also
   http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-overwhelming-student-loan-debt-how-would-you-get-started/msg868845/#msg868845
   and other posts in that thread about exceptions to the rule.
5. See #4 for choice of traditional or Roth for 401k   
6. Applicability depends on the rules for the specific 401k   
7. Again, take the risk-free return if high enough   
8. Because earnings, even if taxed, are beneficial   

The emergency fund is your "no risk" money.  You might consider one of these online banks: http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001   
      
If your 401k options are poor (i.e., high fund fees) you can check   
   http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/
for some thoughts on "how high is too high?"   

rudged

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Re: Would it be better to fund a 457 plan or fund taxable investments?
« Reply #10 on: February 02, 2016, 09:31:51 AM »
Thanks for your detailed response! Unfortunately I don't have access to an HSA, but I've been told in the next contract negotiations it might become an option.

terran

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Re: Would it be better to fund a 457 plan or fund taxable investments?
« Reply #11 on: February 02, 2016, 10:36:59 AM »
I only skimmed the responses, so someone might have mentioned this, but if not, is your university private or public? Government 457s are all the great things everyone is saying, but private 457s basically make you a creditor of your institution and they are subject to complete loss if the institution goes under. Maybe not a huge risk depending on the creditworthiness of your university, but it is a risk you should consider. By contrast a 403b is officially your money -- nothing anyone can do about that regardless of what happens to your institution.

rudged

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Re: Would it be better to fund a 457 plan or fund taxable investments?
« Reply #12 on: February 06, 2016, 12:42:48 PM »
Thanks for your reply. Our university is public and the person I work with at the University on retirement planning assured me that, as with our 403(b) accounts, 457 plans are owned by the employee, not the university.