Author Topic: Help me understand my retirement options  (Read 3519 times)

Miskatonic

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Help me understand my retirement options
« on: April 19, 2016, 01:26:11 PM »
Iím a state government employee.

My state has one of the most well-funded pension systems in the country. Thatís reassuring, but who knows what the future brings. Thereís a mandatory 6% contribution per paycheck and the state matches in full. Iíve been in my position for less than a year, so Iím not vested yet.

I also have a 457 that Iíve been contributing to. It has a smattering of Vanguard investment options. Iíve currently got 75% in VINIX and 25% in VBTIX. Of the other offerings, VIEIX, VSMAX, and VTIAX are the only options Iíd also consider. Should I stay all in VINIX, or would it be smart to diversify my stocks more? Am I too heavy in bonds?

I was pretty excited about all this, then I did some digging and discovered there is an annual 0.21% asset fee for using the 457 on top of the fees from the index funds I hold. That really sent me for a loop. Is this normal? Does the fact that itís a tax advantaged account make up for this stupid fee? The no early withdrawal penalty from a 457 is attractive to me, since I want to retire early.

I could also start contributing to a 403b. Havenít set this up yet, because there are ten vendors I can choose from. Vanguard is my first choice, and Fidelity is second. Thatís all well and good, but for those two vendors ONLY there is an annual account fee for $40 + 0.1% on assets! AgainÖis this normal?

Itís all very frustrating. I was just starting to get excited and now it feels like Iím being swindled.

dandarc

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Re: Help me understand my retirement options
« Reply #1 on: April 19, 2016, 01:34:45 PM »
The fees have to be horrendous to outweigh the tax advantages, typically.  An extra .21% isn't so bad.  Nor is $40 + 0.1%.  Lobby for lower fees, but keep contributing - don't cut your nose off to spite your face.

Keep in mind, this is temporary - your 457 will be one of the first accounts you draw from when you retire early, and your 403B you can roll over to an IRA when you separate from the employer.

Are you comfortable with 75% S&P500 and 25% Total bond?  If yes, then you're good - that is a perfectly reasonable allocation.  If not, why not?  Too risky for you?  Not risky enough?  Other things going on financially that you want to account for?

Miskatonic

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Re: Help me understand my retirement options
« Reply #2 on: April 19, 2016, 01:55:33 PM »
Thank you, that's what I needed to hear. This is new territory for me, so I wasn't sure what to think. I'll keep contributing and drop a bug in someone's ear about the fees.

As for the allocation, I defaulted into a Target Retirement fund which I wanted out of, so just I went with my gut and that's how I came to the 75/25. I'm very aware that I need to put together a personal investment strategy, or whatever it's called. That's in the pipeline. I'll rebalance once I have a better idea of my risk tolerance.

Miskatonic

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Re: Help me understand my retirement options
« Reply #3 on: April 20, 2016, 01:59:40 PM »
Sorry for the double post, and (in all likelihood) stupid question. My 457 has a Roth option. I already have a Roth IRA. Is there an advantage to contributing to one over the other? The only reason I can surmise is if someone was more interested in making after-tax contributions and wanted to max both accounts. I'm not sure that's the best path for me. Anything else I'm missing?

Gin1984

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Re: Help me understand my retirement options
« Reply #4 on: April 20, 2016, 02:10:24 PM »
Do you also have a 403b? 
And the Roth depends on when you will retire and your income, tbh.  Most people here would not do it because they are retiring early but with a pension you may end up not wanting to pay additional taxes in retirement.

Miskatonic

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Re: Help me understand my retirement options
« Reply #5 on: April 20, 2016, 02:17:43 PM »
I do have a 403b, but I haven't started contributing yet. Since the 457 doesn't have an early withdrawal penalty, (and I do want to retire early) I started putting money in that first. I'm not in a position to max contributions yet because I'm finishing off the last of my student debt. Once that's done, I will start going full bore. Is there a reason to max the 403b before the 457 that I'm missing? I don't get a match in either account.

dandarc

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Re: Help me understand my retirement options
« Reply #6 on: April 20, 2016, 02:27:24 PM »
Roth vs. Traditional, regardless of if your account is an IRA, 401K, 457B or other generally boils down to what your marginal tax rate is now vs. the tax rate upon withdrawal.

If you think your future tax rate will be higher on withdrawal, then you pick Roth.  If you think your future tax rate lower, then traditional makes the most sense.

This being an early retirement forum, many of us are projecting that on withdrawal, we'll be taking out quite a bit less than we're making during the accumulation phase.  If I am retired and therefore have the choice, why would I create 100% of my pre-retirement income by withdrawing from accounts when I am spending only 50% or less than that amount?  If my income is 50% of what I'm paying today, what will my tax rate be on that income?  Not sure, but I'm personally betting lower than my tax rate today.

If your spending is low enough, it is possible to never pay taxes again: http://www.gocurrycracker.com/never-pay-taxes-again/.  If your marginal tax-rate today is 0% or negative, then Roth for new contributions is a slam-dunk.  If your marginal tax rate is positive, then there is a decision to make.

Like everything tax related, and particularly with not knowing what the future holds, there is some nuance here and everything is specific to your situation.

Other factors include:

1.  Can I even deduct the tIRA contribution?  If not, then a Roth IRA, either regular or backdoor if necessary, is the obvious choice there.

2.  Have I already filled my future low-tax brackets with prior contributions and the expected earnings on them?  If so, maybe it makes sense to pay tax today and go Roth.

3.  How do RMDs affect this decision?

4.  How do tax-credits and other deductions affect this?  Correctly calculating marginal tax rates is often not as easy as you think - traditional 401K contributions can qualify you for tax credits like the
Earned-Income credit and Saver's credit (even traditional IRA contributions help with the Saver's credit), so the marginal rate can actually be shockingly high at low incomes.  For example, if your (2016 filing Single) AGI is 18,501 and you have at least $1 of tIRA space left, your Saver's credit can jump from about $400 to around $850 with just 1 additional dollar put into the tIRA - the marginal rate on that dollar is 45,000%!

5.  Will I be retiring to a state with significantly different income taxes?  A lot of people retire to places like Florida that have no state income tax. If I am earning in a state with an income tax, and planning to retire to Florida, that pushes me even further towards Traditional and not Roth.

Anyway, clear as mud, right?  A lot of people draw the line between the 15 and 25% brackets.  For an aspiring early-retiree on a middle-to-high-income, Traditional usually makes more sense (http://www.gocurrycracker.com/roth-sucks/), but you need to consider your individual situation and make the call. 

Here's the good news: Roth vs. Traditional is a question of different levels of good for most people.  You're 90% of the way by asking this instead of "IRA vs. New Truck" - so get the money into a retirement account and working for you ASAP!

dandarc

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Re: Help me understand my retirement options
« Reply #7 on: April 20, 2016, 02:31:17 PM »
I do have a 403b, but I haven't started contributing yet. Since the 457 doesn't have an early withdrawal penalty, (and I do want to retire early) I started putting money in that first. I'm not in a position to max contributions yet because I'm finishing off the last of my student debt. Once that's done, I will start going full bore. Is there a reason to max the 403b before the 457 that I'm missing? I don't get a match in either account.
Investment options are not always the same - it would be very nice to be able to buy the same funds in my wife's 457 as we do in her FRS account (401(a), I believe)!  Although the options are not all that bad in the 457, the FRS ones are just fantastic, so I'd prefer those.

All things being equal, I'd fund the 457 first as well - indeed we do.  We pump wife's 457 contribution up to the maximum allowed to front-load that account.

seattlecyclone

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Re: Help me understand my retirement options
« Reply #8 on: April 20, 2016, 02:50:02 PM »
One big caveat about the Roth 457 option: it seems that if you withdraw prior to age 59Ĺ, you will be taxed on whatever portion of the withdrawal is attributable to earnings within the account (computed on a pro-rata basis). I haven't found an official IRS source on this, but the documentation from the Nevada and South Carolina plans (among others) agree that this is the case.

dandarc

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Re: Help me understand my retirement options
« Reply #9 on: April 20, 2016, 03:00:21 PM »
seattle - I did not know that about Roth 457s.  Thinking that since the primary reason to go 457 is to withdraw early, and the primary reason to go Roth is to not pay taxes on withdrawals and given that a portion of your early withdrawals is subject to tax, a Roth 457 doesn't make a ton of sense for most people.

Miskatonic

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Re: Help me understand my retirement options
« Reply #10 on: April 20, 2016, 03:00:41 PM »
dandarc - Thank you for the detailed response! I clearly have some homework to do!

The investment options in my 457 are limited but seem decent to this newbie. I have no choice of how my pension is invested, which I assumed was normal. As for the 403b, I still don't like the $40 + 0.1% fee for using Vanguard for Fidelity, especially since I don't have much to put in it right now, making the $40 more significant. It'll make less of a difference when I'm ready to max, I suppose. I could also go with TIAA-CREF or Ameriprise.

seattlecyclone - Good catch. I will do some digging.

seattlecyclone

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Re: Help me understand my retirement options
« Reply #11 on: April 20, 2016, 03:30:35 PM »
seattle - I did not know that about Roth 457s.  Thinking that since the primary reason to go 457 is to withdraw early, and the primary reason to go Roth is to not pay taxes on withdrawals and given that a portion of your early withdrawals is subject to tax, a Roth 457 doesn't make a ton of sense for most people.

I tend to agree. If you're going to go Roth for some of your retirement savings, the 403(b) and IRA are probably better options for this.