CT State 457 plan??

[ctmustache]

Hi Mustachians

I'm fortunate enough to work for the State of Connecticut, and am enrolled in the Alternate Retirement Plan (5% fixed contribution with 8% match). My wife and I had also maxed out our Roth IRAs in 2012, and were looking to re-characterize them before April as traditional IRAs if tax deductible. Turns out we earn too much for mine to be deductible, but my wife's would be (she doesn't current participate in her employers 401K - no match and high fees). Therefore, we plan to re characterize her IRA and leave mine as a Roth.

We need to save more as we become more Mustachian, and need to do this in most tax advantaged way that we can. The State of CT also offers a 457, deferred compensation plan - https://ctdcp.prepare4myfuture.com/einfo/planinfo.aspx?page=homehome&cl=ingcustomct&pl=CT457PU&domain=ingcustom.accp.ingplans.com. My current intent is to max my contribution to this in 2013. However, I'd really appreciate some fellow Mustachians' thoughts on this.

We're both about 30, with the aim of becoming financial independent in about ten years. One baby and another on the way. I earn about $75k and my wife about $50k.

Is there anything to preclude funds contributed to this plan from being rolled into the "Roth IRA Pipeline"? Anything else I should watch out for? I'm familiar with the investment options in the 457, and there is a 0.10% third party admin fee in addition to the fund fees.

Many Thanks!

[Another Reader]

The good news about a 457 plan is that there are no penalties for taking the money out, once you separate from service.  Because it is deferred compensation, not a retirement contribution, you just pay the tax when you take the money out.  No Roth pipeline needed.  They even have a Roth option per the website.  These are wonderful plans for providing income between early retirement and age 59 1/2.

The really good news is you seem to have a lot of decent funds to pick.  See here:  https://ctdcp.prepare4myfuture.com/einfo/planinfo.aspx?cl=INGCUSTOMCT&pl=CT457PU&page=investmentsinvestmentoptions&domain=ingcustom.accp.ingplans.com&s=k3e0vvji2ip1fxszbtjzriya&d=b57c46d307744ad1e1882874816a20bd57133629&mrgstr=0.  If the page does not open, you may have to access it from the main page by typing in "ING."  The plan is managed by ING, and I don't know if CapitalOne acquired that part of the business.  They get the 0.10 percent to send you the glossy brochures and maintain the accounts.

I'd sign up for the maximum amount in a heartbeat.

I don't understand why you would recharacterize your wife's IRA.  Are the tax savings by having a deductible IRA that great?

[ctmustache]

Thanks AR. Recharacterizing saves paying income tax now on 5k. Just a matter of timing when we pay and we are willing to bet we will be at a lower rate when independent. did I oversimplify and miss something?

[Another Reader]

You may or may not be in a lower tax bracket when you retire.  If you are taking a lot of deductions and exemptions today that you might not be eligible for when you retire, the flexibility of the Roth might make more sense.  Do the math both ways before you make a final decision.

[ctmustache]

I signed up for the 457 and now seems like a good time to see if anyone can offer advice on my investment choices. My contributions are set up to invest as follows:

Investment Name Election
0798 TIAA-CREF Intl Equity Index Fnd Ins 27.00%
0799 Vanguard Total Bnd Mrkt Ind F Inst 10.00%
1228 Vanguard Instit Index Fnd Inst Pl 63.00%

I used to use the target 2045 Vanguard fund, but to the best of my knowledge the three elections above do the same thing but at a lower cost. Any thoughts?

Thank you!

[Another Reader]

The 63 percent is in what is basically a S&P 500 index fund.  No exposure to small or mid-cap companies.

The 10 percent in the bond index fund has a low expense ratio.  However, I would look at the Pimco fund to see if Bill Gross outperformed the Vanguard folks over the last 10 years. 

There are not a lot of choices in international funds.  This one is mostly Europe and developed Asia.  The expenses are low and they own a lot of the standard large cap European companies.

You probably can't go really wrong with these choices.  Look at the IRA and alternate pension investments to see if you are happy with your overall asset allocation.

[ctmustache]

Thank you. I truly appreciate you taking the time to help me out!

[Another Reader]

If you want to broaden your US stock market exposure but stick with an index fund, take a look at the TIAA-CREF Equity Index Fund.  Although it is labeled a large cap blend, the index it follows is the Russell 3000.  That would give you some exposure to smaller companies, if you don't have that somewhere else and would like to include it.  The expenses are higher than Vanguard.  You could also consider the TIAA-CREF small cap blend index fund and the Vanguard mid-cap index if you decide to broaden your equity exposure.  In your shoes, I would consider doing this with a small part of the 63 percent, but again, the S&P index fund is a fine choice, and it depends on what you have in your other accounts.

I really have to commend the State of Connecticut for requiring ING to offer decent quality funds.  Other states, counties, and cities should require the same for their 457 plans.