Author Topic: 457/401k ROTH or 401k Pre-Tax  (Read 1366 times)

skeeder

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457/401k ROTH or 401k Pre-Tax
« on: December 08, 2016, 08:27:50 AM »
So...I'm looking to increase my contributions at work.  Normally, I'd put more into the ROTH 401k and go on with my day, but my combined income is getting close to breaching the 75k mark which would increase our federal taxes by 10%.  So hurray!  :) :(

Anyways, I work in a governmental environment that has the 3 options, I listed in the title available to me.
ROTH 401k (Currently at 5% (My contribution)
PRETAX 401k (Currently at 9% (Employer Money))
PRETAX 457 (Currently at 0%)

I know that the 457 plan's main benefit over the 401k is that I can pull money out without waiting until I'm 59.5, but I'm unsure if I'm missing something.

I want to increase my contribution from 5% to 6%, my question is if it would make sense to do the 457 plan given my hope to retire by 50 (or sooner) or would it be wiser to stick with the more diverse option of the Pre-Tax 401k?


MDM

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Re: 457/401k ROTH or 401k Pre-Tax
« Reply #1 on: December 08, 2016, 11:54:44 AM »
The choice of Roth vs. traditional is determined mostly by your current marginal tax savings rate vs. your expected marginal withdrawal tax payment rate.  See Traditional versus Roth - Bogleheads for more.

Not sure what you mean by "the more diverse option." 

See Investment Order for more details on that topic.

skeeder

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Re: 457/401k ROTH or 401k Pre-Tax
« Reply #2 on: December 08, 2016, 12:14:56 PM »
MDM, I was specifically trying to figure out if the 457 would be a better option over the 401k for pre-tax money.

Most information I have found doesn't really provide many differences.  I just don't want to find out after the fact I missed something.

MDM

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Re: 457/401k ROTH or 401k Pre-Tax
« Reply #3 on: December 08, 2016, 12:23:19 PM »
MDM, I was specifically trying to figure out if the 457 would be a better option over the 401k for pre-tax money.

Most information I have found doesn't really provide many differences.  I just don't want to find out after the fact I missed something.
The 457 has the "can be withdrawn immediately upon the leaving the employer" benefit you mentioned.  Otherwise, one must look to the fund options within each plan to determine which is better.

sol

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Re: 457/401k ROTH or 401k Pre-Tax
« Reply #4 on: December 08, 2016, 12:25:44 PM »
MDM, I was specifically trying to figure out if the 457 would be a better option over the 401k for pre-tax money.

Most information I have found doesn't really provide many differences.  I just don't want to find out after the fact I missed something.

As an investment vehicle, the 457 is generally better than the 401k.  If you had the same investment options in both plans, I'd recommend the 457.

But 457 plans sometimes come with limited investment options.  If it would force you into high fee managed funds, you need to consider whether or not the additional cost is worth the flexibility.  The earlier you intend to retire, the better a 457 looks.

robartsd

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Re: 457/401k ROTH or 401k Pre-Tax
« Reply #5 on: December 08, 2016, 01:14:36 PM »
I know that the 457 plan's main benefit over the 401k is that I can pull money out without waiting until I'm 59.5, but I'm unsure if I'm missing something.
With a 457 there is no need to wait until age 59.5 to withdraw funds provided that you are no longer working for the sponsor employer. As long as you do continue to work for the sponsor employer, you would pay a penalty for withdraw until you reach age 70.5. With a 401(k) early withdraw penalties apply until 59.5 regardless of employment status.

What is the difference between a 401(k) plan and a 457 plan?

Reasons Roth could yield more after-tax money at withdraw:
  • tax rates were rasied between accumulation and retirement
  • moved to higher tax location between accumulation and retirement
  • retirement spending exceeds current taxable income

Reasons to contribute to Roth anyway:
  • Roth contributions used to justify smaller taxable emergency fund (usually Roth IRA only)
  • Roth contributions planned to bridge from Retirement to penalty free access to tax-deferred savings
  • Current (or for IRAs future - preserve traditional IRA for backdoor Roth) income prevents tax-deferred contributions
  • Maximum Roth contribution is effectively higher than maximum Traditional contribution (pay taxes with after-tax money)

As I don't think any of these factors apply to your Roth 401(k) contributions, I'd recommend making all your future contributions tax-deferred.
« Last Edit: December 09, 2016, 09:00:00 AM by robartsd »

skeeder

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Re: 457/401k ROTH or 401k Pre-Tax
« Reply #6 on: December 08, 2016, 01:36:16 PM »
Thanks for your help, the 457 plan in this particular case has the same investment funds with the same fees as the 401k.