The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: bruteforce65 on January 04, 2016, 07:34:32 PM
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I recently started a new government job in Pennsylvania which offers a pension and a 457. I have the option to make traditional or roth deferrals into the 457, but I am having a difficult time deciding which makes the most sense for my situation. I am currently 26 years old. I max out my Roth IRA and plan to max out the 457. I am hoping to use the 457 to bridge the gap between early retirement age and the age at which I will have access to my pension.
My biggest concern is that if I make roth deferrals I may lose the ability to take distributions before 59 1/2. Can anyone shed some light on what type of contributions make the most sense from a FIRE point of view?
Thanks.
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Someone with the actual numbers will need to chime in here, but it almost always 100% of the time makes sense to do the Traditional/pre-tax instead of the roth. That is because you can drop your taxable income now, and minimize taxes in the future via your lower MMM cost of living.
I'm not familiar with the Roth 457 rules, so I can't really speak to that, but two things come to mind. 1) one of the major benefits of the 457 (as I understand them) is withdrawals after employment severance without penalty regardless of age. It would be a shame to loose one of the major benefits of the 457. 2) As evidenced by all the threads about mega back door roth iras, etc, there is usually a loophole for getting the money out and minimizing/avoiding penalties. It sounds like you've got some research to do.
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+1 on going traditional. Both traditional and Roth 457 plans let you withdraw prior to 59 1/2 without penalty once you terminate from your employer, so there's no difference there. You only lose the early withdraw benefit if you roll the 457 into an IRA. People roll 401k's into an IRA and do Roth conversions so they can withdraw prior to 59 1/2 without penalty, but the 457 plan already lets you do that. The only difference between Roth 457 and traditional is taxes, and since your tax rate will almost certainly be lower once you FIRE, traditional is likely the better choice. I'd probably also switch your IRA to traditional as well to take advantage of further tax savings.
I'm trying to do something similar with my 457 plan/pension, which is proving to be harder to figure out that I'd like. Are you planning to spend down all of your 457 and IRA until the pension kicks in?
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Thanks for the replies. I am also trying to figure that out at the moment. I am struggling to find a good explanation of how the pension works for early retirees. In a lot of ways it would be easier to calculate things if I didn't have a pension...