Investing in wife's 403b/457b

[Daniel1973]

Hello,
My wife will be returning to work as a teacher after taking a year off to stay at home with our daughter when she was born.  My wife has the option for a 403b and 457b.  The plans are administered by TSA Consulting Group.  From a quick look, the options for her 403b look much better than the options for her 457b.  The 403b options include Vanguard and I was thinking of using a low cost index fund, something like the Spartan Total Market Index Fund by Fidelity –FSTVX, expense ratio of 0.07%.
My first question is whether or not we should be contributing to either of her options.  We already max my 401k as a Roth 401K, and we also max out a Roth for my wife and I at $5500 each.  Our financial information is shown below.

Second, if we should begin contributing to the 403b/457b in addition to our current retirement savings, which would you recommend, and which investment options?  Are the 457b options bad enough to avoid it?  I know the 457b is typically advantageous due to being to withdraw it penalty free after retirement at any age (from what I understand).

Third, with us being in the 25% federal tax bracket, I am not sure if Roth vs traditional is appropriate.  My wife and I will both have pensions in retirement, as well as SS, but that alone will most likely not put us into the six figure income in retirement.  Other than the tax rate now vs tax rate in retirement issue, is it also a factor as to how much the investment will grow that plays into the Roth vs Traditional discussion, with the higher growth leading more to the Roth side of the discussion?

Here is our financial information:

Emergency Fund: Yes, six months
Tax rate: 25% Federal, 4.24% State
State of residence: Az
Age: 41 (Him)  Early 30s (Her)
Desired asset allocation: 80% stocks, 20% bonds
Desired international allocation: 30% stocks

Total portfolio is mid-six figures.
Current Retirement Assets:
Taxable Expense Ratio Percentage
VTI - Vanguard Total Stock Market ETF (0.05%) 2%

His 401K
Bond Market Index Fund (0.06%) 6%
S&P 500 Index Fund (0.05%) 42%
International Index Fund (0.13%) 13%
Russell 200 Index Fund (0.07%) 14%

His Roth at Vanguard
VBTLX - Vanguard Total Bond Market Index Fund Admiral Shares (0.08%) 3%
VTIAX - Vanguard Total International Stock Index Admiral Fund (0.14%) 4%
VTSAX - Vanguard Total Stock Market Index Fund Admiral Shares (0.05%) 10%

Her Roth at Vanguard
VBMFX - Vanguard Total Bond Market Index Fund Investor Shares (0.20%) 0.7%
VGTSX - Vanguard Total International Stock Index Fund Investor Shares (0.22%) 0.8%
VTSAX - Vanguard Total Stock Market Index Fund Investor Shares (0.05%) 2%

Contributions
New Annual Contributions
$18000 his 401K +( additional employer match of 6%)
$5500 His Roth IRA
$5500 Her Roth IRA

Available Funds
Funds available in his 401K
Lifecycle Funds:
Fund Expense Ratio
Lifecycle Retirement Fund .32%
Lifecycle 2020 Fund .35%
Lifecycle 2025 Fund .36%
Lifecycle 2030 Fund .37%
Lifecycle 2035 Fund .38%
Lifecycle 2040 Fund .38%
Lifecycle 2045 Fund .38%
Lifecycle 2050 Fund .39%
Lifecycle 2055 Fund .40%

Index Funds:
Fund Expense Ratio
Bond Market Index Fund .06%
Balanced Index Fund .07%
S&P 500 Index Fund .05%
International Index Fund .13%
Russell 2000 Index Fund .07%

Actively Managed Funds:
Fund Expense Ratio
Stable Value Fund .29%
Global Bond Fund .36%
Diversified Real Asset Fund .72%
U.S. Large Companies Fund .31%
Global Equity Fund .68%
International Companies Fund .63%
U.S. Small/Mid Companies Fund .69%
Science and Technology Fund .65%

[forummm]

I can't find the options for her 457b. Suggest summarizing them in the post if that's possible.

[Cheddar Stacker]

If I understood correctly, you have a half million ish in Roth accounts? If so the 457 early withdrawal rule is irrelevant since you can draw all your roth contributions tax/penalty free before 59.5.

I would then choose the better of the 2 options based solely on investments available and employer matches.

In the 25% bracket you should consider switching some/all of your retirement contributions from Roth to Traditional. I would put them ALL in Traditional, including your 401k and your wife's 403b/457.

Lastly, you don't have to choose between the 457/403, you can put $18k/year in both. You guys have $65k in tax deferral space between you. Take advantage.

[Daniel1973]

I can't find the options for her 457b. Suggest summarizing them in the post if that's possible.

The website for her retirement options is a bit confusing.  For the 457(b) accounts, it looks like they are managed by a company named Security Benefit Group.  They state they offer the following, but I have not had an easy time finding the details of investment options on the website:


Fixed Annuities

Fixed annuities offer a way to protect your money from market risks and potential downturns that could make it difficult to retire like you want. Besides being free from the ups and downs of the markets, fixed annuities earn a guaranteed minimum rate of interest for your savings.
 
Advanced Choice Annuity
Security Benefit Choice Annuity
Total Interest Annuity
Lighthouse Select
Premier Choice Annuity® (New York)



Fixed Indexed Annuities

One of the benefits of a fixed index annuity is that you cannot lose money if the market goes down. Your annuity provides the opportunity to choose a fixed interest rate or you can also choose an index interest option. With the index interest options, you have the option to earn an interest rate based in part on the performance of an index. This gives you the potential to earn a little more when the market goes up, but there is no risk of your annuity value declining if the index goes down. In addition, you can add riders that can generate retirement income for life or provide a guaranteed death benefit for your heirs.
 
Foundations Annuity
Security Benefit Secure Income Annuity
Security Benefit Total Value Annuity


Mutual Fund Custodial

Mutual Fund Custodian accounts provide the benefits of a retirement account that is a tax-deductible, tax-deferred retirement savings account and a multi-fund family platform that offers you a variety of investment options and broad diversification. We offer many different types of accounts that help both employer group members and individuals reach their retirement goals.
 
NEA Directinvest®
Security Benefit SecurePoint Retirement®
Security Benefit Advisor Mutual Fund
SFR® Program


Variable Annuities

Designed as a retirement savings and income vehicle, a variable annuity is a combination of an insurance and investment vehicle that offers a variety of investment options.With a variable annuity, you can potentially keep more of what's yours. Your earnings grow tax-deferred.* And because you don't have trading fees or undistributed earnings to report, more of your money can work for you. All of our variable annuities offer investment options from well renowned portfolio managers.

 

*Withdrawals are subject to ordinary income tax and if taken prior to age 59 1/2 may be subject to a 10% IRS penalty tax.
 
EliteDesigns® Variable Annuity
EliteDesigns® Variable Annuity (New York)
EliteDesigns® II Variable Annuity
EliteDesigns® II Variable Annuity (New York)
SecureDesigns® Variable Annuity
SecureDesigns® Variable Annuity (New York)
Security Benefit Advisor 403(b) Program®
Variflex® Variable Annuity

[forummm]

Ugh. I don't know that any of these annuities is the way to go. For me, I would want to put money in and be able to invest it somewhere, and be able to pull that money out whenever. It's too bad if that's not available somehow. Maybe she should ask her benefits people if that's possible.

[Daniel1973]

If I understood correctly, you have a half million ish in Roth accounts? If so the 457 early withdrawal rule is irrelevant since you can draw all your roth contributions tax/penalty free before 59.5.

Our Roth IRAs total a little over $100k, and the majority of my 401K is traditional, as it was only this year that my employer offered the Roth 401K option that I am now contributing to.  So, my Roth 401K only has a few thousand dollars in it, with the traditional portion of my 401K having the majority of the funds.

In the 25% bracket you should consider switching some/all of your retirement contributions from Roth to Traditional. I would put them ALL in Traditional, including your 401k and your wife's 403b/457.

Thank you for this comment.  I have been struggling with the Roth vs Traditional issue for quite some time.  I understand if I will be in a lower tax bracket in retirement, than it would make sense to use a Traditional, whereas if I will be in a higher tax bracket at retirement, I should use a Roth.  However, does it also matter the amount of the earnings in the investment as well?  By this I mean if the earnings are very large, then the Roth option would make sense vs a Traditional since the earnings are very large and would then all be tax free?

Lastly, you don't have to choose between the 457/403, you can put $18k/year in both. You guys have $65k in tax deferral space between you. Take advantage.

I have recently been reading how people with very large incomes can pay little to no taxes at all, which is very interesting.  But, I guess this goes back to the Roth vs Traditional discussion.

Thank you again!

[Daniel1973]

Ugh. I don't know that any of these annuities is the way to go. For me, I would want to put money in and be able to invest it somewhere, and be able to pull that money out whenever. It's too bad if that's not available somehow. Maybe she should ask her benefits people if that's possible.

I am going to have my wife contact her benefits people on Monday to try and get more details on her 457 options.  It seems using the 457(b) would be advantageous since my wife is younger than me, and she could withdrawal the funds without penalty, regardless of her age?

The 403b options seem to be much better, with several companies being offered, including Fidelity.  It also seems like the website talks much more about the 403 vs the 457.

[forummm]

All of these retirement accounts are accessible before 59.5 without penalty. Lookup the Roth Pipeline.

[seattlecyclone]

See https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/ for more information about how to access your retirement accounts early without paying a penalty.

As for Roth vs. traditional, I would say that traditional is a no-brainer for a relatively frugal person who is currently in the 25% tax bracket. The fact that you have a good chunk of your money already invested in Roth accounts adds to this, because any money you take out of those accounts when you retire won't count as income and therefore won't be used to compute your tax bracket.

[Another Reader]

It looks like the 457 plan may offer some form of mutual fund investing without the annuity wrapper.  She should ask her benefits department about the category labeled "Mutual Fund Custodial."

[MDM]

In the 25% bracket you should consider switching some/all of your retirement contributions from Roth to Traditional. I would put them ALL in Traditional, including your 401k and your wife's 403b/457.

Thank you for this comment.  I have been struggling with the Roth vs Traditional issue for quite some time.  I understand if I will be in a lower tax bracket in retirement, than it would make sense to use a Traditional, whereas if I will be in a higher tax bracket at retirement, I should use a Roth.  However, does it also matter the amount of the earnings in the investment as well?  By this I mean if the earnings are very large, then the Roth option would make sense vs a Traditional since the earnings are very large and would then all be tax free?

See http://forum.mrmoneymustache.com/investor-alley/rolling-over-a-401k/ for some discussions about this. 
In short, all that matters is your marginal bracket at contribution time vs. your marginal bracket for the money you withdraw.  But, as you note, it is theoretically possible for the investments themselves to cause a change in your marginal bracket.

I have recently been reading how people with very large incomes can pay little to no taxes at all, which is very interesting.  But, I guess this goes back to the Roth vs Traditional discussion.

And the 457 account adds the "tax-deferred with high fees vs. taxable with low fees" question.  See discussion in http://forum.mrmoneymustache.com/investor-alley/help-with-401k-options-please!/