Author Topic: First job -- 457 Roth or Trad in a high tax state/city?  (Read 1121 times)

kierkegaard

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First job -- 457 Roth or Trad in a high tax state/city?
« on: December 21, 2016, 07:43:16 PM »
Hello everyone!

I've been a lurker of this forum for a while now, even before the forum change! Created a schwab HYC because of advice noted from here. Anyway, i'm finally here registered to make my first post and start the journey to ER.

Background:

I'm 22 years old, live in NYC, head of household, no debt, salary of 45k a year pre-tax, plan to do freelance work as ER -- possibly making over my current salary but not planning on it, also not set on living in NYC for the rest of my years.

I'm working for the city and there is no employer matched 401k, but we do have a 457 plan which works well for ER and if I contribute 7.5% of my salary to it I auto opt out of paying for social security benefits. Here is the breakdown of the four plans I can choose from.

To the question! As someone living in NYC, would you -- knowing all the information listed above, recommend I stick with the traditional 457?

My thinking was, since i'm in the 15% tax bracket as HoH, I should mostly fund a Trad 457. When I move out and am no longer HoH but instead a single-filler, mostly fund a Roth 457. How does this sound to you more seasoned folk?

Extra question would be the obvious one you've heard countless times, should I start funding a Roth IRA or Trad IRA -- I always read the wonders of the Roth but as a New Yorker i'm a bit weary.

Anyway, thanks for helping me out and I hope to learn as much as I can going forward from you all!

MustacheAndaHalf

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Re: First job -- 457 Roth or Trad in a high tax state/city?
« Reply #1 on: December 21, 2016, 07:57:30 PM »
You're solidly in the 15% tax bracket, both for head of household and for the deductions/exemptions involved.  I'd consider going with the Roth 457 or your own Roth IRA.  Note the tax plan on Trump's website eliminates "head of household" and allows just single or married, but you'd likely be in the 15% bracket anyways.

When you opt out of social security, do you start on a path towards a pension?  If you're unlikely to get a pension (you might move, or none is offered), I'd take a closer look at the impact of opting out of social security.  Two people who contribute the same total amount towards social security will receive different retirement payments if one contributes 30 years while the other contributes 20 years.  So skipping social security payments might hurt your retirement.

The plan document you linked doesn't show actual funds.  The key thing is expense ratios and diversification.  Do the funds in your plan charge much more than 0.50% in "expense ratio"?  Or much less?  The worst expenses tend to cluster at 1% while the best are much closer to 0.05%.  Besides low expenses, you'd want to make sure you have a US stock index fund ("total market" or "S&P 500") and international stock index fund.

kierkegaard

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Re: First job -- 457 Roth or Trad in a high tax state/city?
« Reply #2 on: December 21, 2016, 08:24:34 PM »
I'd consider going with the Roth 457 or your own Roth IRA.  Note the tax plan on Trump's website eliminates "head of household" and allows just single or married, but you'd likely be in the 15% bracket anyways.

When you opt out of social security, do you start on a path towards a pension?  If you're unlikely to get a pension (you might move, or none is offered), I'd take a closer look at the impact of opting out of social security...  So skipping social security payments might hurt your retirement.

The plan document you linked doesn't show actual funds.  The key thing is expense ratios and diversification.  Do the funds in your plan charge much more than 0.50% in "expense ratio"?  Or much less?  The worst expenses tend to cluster at 1% while the best are much closer to 0.05%.  Besides low expenses, you'd want to make sure you have a US stock index fund ("total market" or "S&P 500") and international stock index fund.

You know, I completely forgot about Trump's plan -- that would put me in the 10% bracket regardless -- thank you!

As for the pension, these plans are supplemental -- but I don't plan to work for the city long enough to actually get a pension (ten years), and as for SS I plan on working post-retirement, so skipping out for the next 5 years should be fine?

As for expense ratio charges, they can be found here -- mid-cap is what i'm looking at right now but i'm but a child, what do I know! :)
« Last Edit: December 21, 2016, 08:31:52 PM by kierkegaard »

seattlecyclone

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Re: First job -- 457 Roth or Trad in a high tax state/city?
« Reply #3 on: December 22, 2016, 11:49:12 AM »
A traditional 457 is a great vehicle for early retirement because you can withdraw at any time after leaving employment, owing tax at your current marginal rate but no early withdrawal taxes. The Roth 457 is less great for early retirement, because the portion of your early withdrawal attributable to gains will be taxed at your current marginal rate.