Author Topic: Is it dumb to pull back on husband's 403b/457 to max my Roth IRA?  (Read 4567 times)

fallstoclimb

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We are aiming for max work flexibility starting around age 40-45 (in roughly a decade).  That could take the form of part-time work, long sabbaticals, full-time telework while traveling or a giant pay cut to work for a non-profit.  I think it is unlikely we will need to draw on any savings during our 40s but in the spirit of max flexibility I am spreading our investments across various accounts. 

We are saving 45% right now, and are currently contributing to the following accounts:

My TSP: maxing
DH Vanguard Roth IRA: maxing
my Vanguard Roth IRA: opened recently with 1k but only contributing $50/month
DH 457: $200/month
DH 403b:  $350/month

The vast majority of our retirement savings are in my TSP, which has exceptionally low fees.  Biggest fees are in DH's 457 and 403b plans (expense ratios range from .1 for index funds in 403b to .65 for global bonds in 457). Because 80% of our investment money is in my TSP, our overall portfolio weighted fee is very low, so I don't worry much about this.

It looks like we will be in the 25% tax bracket this year, but only by about $8,000.  Despite this, I like the Roth, and by the end of next year I'd like to have my monthly Roth contribution at a max pace (aka, we wouldn't max in 2016, but would be on pace to in 2017).

However, pretty much all of our income already has a "job."  I will get a small COLA in January and will raise my Roth contributions by whatever the after-tax amount ends up being, but it seems unlikely I will be able to find another $400 in our monthly budget after all the optimizing we've already done.  DH will get small annual raises, as long as there is no budget freeze.

To max the Roth my options are either to:
1) Take advantage of every raise in the future until it gets us there --- will likely take several years; or
2) Pull back our 403b/457 contributions to maybe half what they are now, take the tax hit, and be able to max my Roth much faster.

If we take option 2, I do think it is possible that future raises will go towards our travel & charity funds rather than the 403b/457 -- whereas option 1 would be guaranteed to keep me focused on retirement savings -- but we are both due pensions and with our current contributions I'm projecting us to have a portfolio of around 850K if we stop contributing at 45 -- so I am not sure that it matters. 

 

KCM5

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Re: Is it dumb to pull back on husband's 403b/457 to max my Roth IRA?
« Reply #1 on: November 13, 2015, 08:52:09 AM »
Why do you like the Roth better?

The 457 doesn't sound like it has crazy fees. It saves you 25% right off the bat. And if you do draw down in the future when you have no other income, you can pull up to the mfj standard deduction + 2 personal exemptions without paying any taxes at all.

The Roth you're locking in the 25% tax rate. The advantage of the Roth is that once you're receiving your pensions you can pull from them any money above the pensions that you need without paying tax on it (disregarding the fact that you've already paid 25%!). With the 457/403(b) you'd pay an unknown amount of tax depending on your pension size - do you think you'll be in the 25% bracket then? All of this discussion changes if you don't think you'll need more money than your pension provides once you start receiving it.

If I were you I would max the 457 then do the Roth. The 403(b) would be my last bucket to fill. While fees are important, they pale in comparison to the tax rates. And of course, all of the 457 is available once you're no longer working for your employer.

terran

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Re: Is it dumb to pull back on husband's 403b/457 to max my Roth IRA?
« Reply #2 on: November 13, 2015, 09:15:47 AM »
Another vote for holding off on the Roth would be if you think you could save up enough to max it with an extra 3.5 months. The 403b and 457 space is gone forever on Dec 31, 2015, but you can still put money into the roth for 2015 up to April 15, 2016.

fallstoclimb

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Re: Is it dumb to pull back on husband's 403b/457 to max my Roth IRA?
« Reply #3 on: November 13, 2015, 09:20:56 AM »
Why do you like the Roth better?

Well, one thing is with only $8,000 in the 25% bracket:  25% of $8,000 is $2,000; 15% of 8k is $1,200.  So I'm not super worried about driving our income below the 25% threshold with the pre-tax investments.

That said, yes, investing in the 457 "saves" us 25% right off the bat, and then we enjoy the pre-tax growth, which is not something to scoff at.

However, one could also argue that because we are taking full advantage of my TSP, maxing the Roths would be the next best strategy, for diversification.  I really do not know what tax bracket we will be in when we retire (or what tax brackets will even look like, of course).    I've projected that we are looking at about 4K in monthly pension income, assuming the state and federal pensions system do not go broke.  BUT that is not taking into account the fact that my pension will not be adjusted for inflation from the time I retire to the time I being drawing from it, which could easily be 15 years.  I may go down to part time work to ameliorate this.  (But then there is also the 2K in social security, if social security is not broke --- most likely I think we will get a percent of all of these amounts -- probably safely 3K a month).

I like that I understand & trust Vanguard (I've asked lots of questions about 457/403b fees but I just don't trust these guys at the end of the day to not pull something secretive & crummy; teachers have notoriously bad investment options). I also sleep better at night knowing that I can pull money out of the Roths today if I had to.  That would of course be only in the case of absolute financial emergency, but it's a psychological comfort. 

fallstoclimb

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Re: Is it dumb to pull back on husband's 403b/457 to max my Roth IRA?
« Reply #4 on: November 13, 2015, 09:22:49 AM »
Another vote for holding off on the Roth would be if you think you could save up enough to max it with an extra 3.5 months. The 403b and 457 space is gone forever on Dec 31, 2015, but you can still put money into the roth for 2015 up to April 15, 2016.

This is true, but I don't really think about our finances this way --- I have a bunch of different savings funds (travel, car insurance, etc) to try to smooth out each month, and also contribute to all the accounts biweekly.  If we find extra lump sums, it is more likely to go to bulking up our emergency fund a bit more.  I take a "set it and forget it" approach to investing.  (....except for when I am constantly posting on the boards trying to optimize things, so maybe this is not true!!)

matchewed

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Re: Is it dumb to pull back on husband's 403b/457 to max my Roth IRA?
« Reply #5 on: November 13, 2015, 09:23:46 AM »
Sounds like someone needs to revisit/craft an IPS.

fallstoclimb

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Re: Is it dumb to pull back on husband's 403b/457 to max my Roth IRA?
« Reply #6 on: November 13, 2015, 09:34:37 AM »
If I were you I would max the 457 then do the Roth. The 403(b) would be my last bucket to fill. While fees are important, they pale in comparison to the tax rates. And of course, all of the 457 is available once you're no longer working for your employer.

Also:  this had been my original plan when DH switched counties this year, but I was persuaded to open the 403b to offset some of the 457 fund expense fees.  The cheapest index fund in the 457 was the S&P 500 index at .3, which I was told "sucked."  Remaining index fund fees were higher.  So we used the 403b to basically balance the 457 -- that one has index funds at around .1.  Bonds for both are at .65.

bacchi

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Re: Is it dumb to pull back on husband's 403b/457 to max my Roth IRA?
« Reply #7 on: November 13, 2015, 09:47:27 AM »
A 457 is like gold for an early retiree. It would take a LONG time for that MER difference to equal the tax gains from the 457.

How can an S&P index fund "suck"? Is there substantial tracking error?

fallstoclimb

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Re: Is it dumb to pull back on husband's 403b/457 to max my Roth IRA?
« Reply #8 on: November 13, 2015, 10:44:39 AM »
A 457 is like gold for an early retiree. It would take a LONG time for that MER difference to equal the tax gains from the 457.

How can an S&P index fund "suck"? Is there substantial tracking error?

What is MER?

And no, I meant I was told that the .3 fee sucked, for an index fund.  I'm sure it tracks the S&P just fine.

This is getting away from the Roth v 457 question, but now I'm thinking about dropping the 403b contribution to a very nominal amount. It's tricky because I used that to balance the 457 -- so our asset allocations (fees in parens) in each are:

457:  90% S&P 500 (.3), 10% domestic bonds (.66)
403b: 45% fidelity spartan international (.2) 15% small cap index (.09) 25% mid cap index (.09), 5% S&P 500 (.1), 10% global bonds (.65)

So when you take into account the $100/pp into the 457 and the $175/pp into the 403b, across the two accounts we are balanced as 10% bonds, 10% small cap, 15% mid cap, 35% large cap, 30% international.

All those other index funds were .5+ in the 457 so I opted to get that coverage in the 403b instead.

So if I pull back on the 403b and increase the 457, we'll get off balanced.  Except not by much, at least not for a while, because the TSP (as well as our 3 Vanguard accounts) are all in lifecycle funds so those are always balanced.  The 403b/457 combo is only about 10% of our portfolio.  Maybe I am a little too concerned about balancing?

New thought:  maybe I should pull the 403b back to a nominal amount and bump up BOTH the 457 and the Roth.   

Pooplips

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Re: Is it dumb to pull back on husband's 403b/457 to max my Roth IRA?
« Reply #9 on: November 13, 2015, 10:58:38 AM »
If there is a way to stay balanced by using funds in your 457, do it. (Even if the fees are slightly higher) Tax wise it is a win.

In the OP you mentioned max flexability. 457>Roth>403(b) for max flexability.

seattlecyclone

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Re: Is it dumb to pull back on husband's 403b/457 to max my Roth IRA?
« Reply #10 on: November 13, 2015, 11:42:45 AM »
Most of us aren't planning on getting pension income, and that does affect the math a bit. At least during your "normal" retirement period when you'll be receiving this pension income, your taxable income has a floor at the level of that pension, which may push you up into the 15% tax bracket all on its own. Having some funds in Roth gives you some tax diversification and some flexible withdrawal options during early retirement. Go ahead and put income into Roth accounts if you would have paid 15% on it, but I think the 457 probably still wins out over the Roth IRA at the 25% level

My advice:
1) Keep maxing your TSP.
2) Contribute enough to the 457 to get yourself down into the 15% bracket,
3) Max out Roth IRAs.
4) Put any additional savings into the 457 first, then 403(b) when the 457 is maxed out.

During early retirement you can withdraw from the 457 with no early withdrawal penalty. Plan to use up this account first since the fees are a bit higher. The less time your money is in there, the better. Depending on how long you expect your 457 to last, you may also want to do some Roth conversions from your pre-tax retirement accounts to build up some Roth principal for the years between using up your 457 and starting your pension. Your goal should be to have your taxable income be as close to identical from year to year as possible. This should generally lead to the lowest level of taxation during retirement.

fallstoclimb

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Re: Is it dumb to pull back on husband's 403b/457 to max my Roth IRA?
« Reply #11 on: November 13, 2015, 11:45:57 AM »
If there is a way to stay balanced by using funds in your 457, do it. (Even if the fees are slightly higher) Tax wise it is a win.

In the OP you mentioned max flexability. 457>Roth>403(b) for max flexability.

Well, I won't be quite balanced, but worst case scenario I'll be just a tad overweighted in favor of the S&P, which is probably not the end of the world.

Why are fees so goddamn hard to understand though?!  I do know the gross expense ratios of all of the funds we invest in, but as I understand it, these are not the only fees (correct??).  I logged into the 457 and checked our statement; it under fees it says $0.  OK.  But then the "investment performance information" below the statement has this footnote:

Quote
FEE DISCLOSURES
The Standardized illustration represents performance based on a $1,000 hypothetical investment, and reflects the deduction of the
* denotes a Fee of 0.42% # denotes a Fee of 0.00%
The participant account maintenance charge, up to a maximum of $50, will not be assessed unless agreed to by the entity. Options in bold are options in a group variable annuity contract. Fees indicated for those options are Variable Account Expense Fees and are in addition to the fees disclosed in the underlying fund prospectus.
Gross expense ratios represent the fund's total operating expenses expressed as a percentage of the assets held in the fund. For more information about gross expense ratios, read the fund's prospectus.

The bond account has that * indicating a fee of 0.42%, the S&P has the # indicting 0.0%.  So is that .42% on TOP of the gross expense ratio that is listed, or is it already included?  And all of the accounts are listed in bold, so what are these Variable Account Expense Fees?

This stuff should not be so complicated. 

CorpRaider

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Re: Is it dumb to pull back on husband's 403b/457 to max my Roth IRA?
« Reply #12 on: November 13, 2015, 01:23:59 PM »
Most of us aren't planning on getting pension income, and that does affect the math a bit. At least during your "normal" retirement period when you'll be receiving this pension income, your taxable income has a floor at the level of that pension, which may push you up into the 15% tax bracket all on its own. Having some funds in Roth gives you some tax diversification and some flexible withdrawal options during early retirement. Go ahead and put income into Roth accounts if you would have paid 15% on it, but I think the 457 probably still wins out over the Roth IRA at the 25% level

My advice:
1) Keep maxing your TSP.
2) Contribute enough to the 457 to get yourself down into the 15% bracket,
3) Max out Roth IRAs.
4) Put any additional savings into the 457 first, then 403(b) when the 457 is maxed out.

During early retirement you can withdraw from the 457 with no early withdrawal penalty. Plan to use up this account first since the fees are a bit higher. The less time your money is in there, the better. Depending on how long you expect your 457 to last, you may also want to do some Roth conversions from your pre-tax retirement accounts to build up some Roth principal for the years between using up your 457 and starting your pension. Your goal should be to have your taxable income be as close to identical from year to year as possible. This should generally lead to the lowest level of taxation during retirement.

/end thread.  I would guess that fee is included in your bond fund, since the .62% seems a lot higher than the other options in the 457.  One could make a good case for having all bond exposures in the TSP g fund given the current state of the world.

fallstoclimb

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Re: Is it dumb to pull back on husband's 403b/457 to max my Roth IRA?
« Reply #13 on: November 13, 2015, 02:47:05 PM »
OK, thanks all!  This has been really helpful.  Also, I called the 457 vendor and found out that the bonds fund actually has a .4% fee on TOP of the .66% expense ratio, which GTFO. 

New plan: 

1. Via the 457 plan, invest only in the S&P index fund, because everything else is crazy expensive.  (I don't LOVE this because what if the market tanks when we want to take money out, but we'll also have the better-balanced Roths to fall back on.  Plus if the market is tanking we'll be trying not to withdraw regardless)

2. Increase biweekly contributions to 457 plan from $100 to maybe $200/biweekly.

3. Stop 403b contributions entirely?  (Or is there some benefit to putting in a nominal amount to keep account 'active' or whatever?)

4. Use the remaining ~$115/month (post tax estimate) to bump my Roth contributions up now; time the rest of bumps with future raises and COLAs as possible


Does this all make sense??  The 457 being all in S&P 500 stocks makes me nervous, especially with us increasing our contributions to it.  But nearly all the other funds have expense ratios ranging from .7-1.3.  So I feel that is our best plan of action, yes? 

...I may still use the 403b to offset the 457 a bit.  I don't know why I feel I need that as a mental crutch when our TSP & Vanguard funds are all well balanced.  And it's not like the S&P500 is a crazy thing to go all-in on. 

Thoughts??? 

terran

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Re: Is it dumb to pull back on husband's 403b/457 to max my Roth IRA?
« Reply #14 on: November 13, 2015, 04:00:03 PM »
This is true, but I don't really think about our finances this way --- I have a bunch of different savings funds (travel, car insurance, etc) to try to smooth out each month, and also contribute to all the accounts biweekly.  If we find extra lump sums, it is more likely to go to bulking up our emergency fund a bit more.  I take a "set it and forget it" approach to investing.  (....except for when I am constantly posting on the boards trying to optimize things, so maybe this is not true!!)

There's another thought: have you considered putting some of your emergency fund in a Roth?

Put it in something low risk (or even open a Roth CD at Ally bank), if you need it you can always withdraw contributions (not gains) penalty free, and if don't need it you've "rescued" tax advantaged space that would have otherwise been lost.

https://www.bogleheads.org/wiki/Roth_IRA_as_an_emergency_fund

MoonShadow

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Re: Is it dumb to pull back on husband's 403b/457 to max my Roth IRA?
« Reply #15 on: November 13, 2015, 04:09:08 PM »
Have you considered taking a "loan" from the 403b in order to max out the Roth?  This would allow you to shift the actual costs of the Roth for this year to next year, while also getting the benefit of your tax deductions from 403b contributions this tax year.  It may or may not actually be a good idea, it depends upon your details.

Vilgan

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Re: Is it dumb to pull back on husband's 403b/457 to max my Roth IRA?
« Reply #16 on: November 14, 2015, 09:56:20 AM »
OK, thanks all!  This has been really helpful.  Also, I called the 457 vendor and found out that the bonds fund actually has a .4% fee on TOP of the .66% expense ratio, which GTFO. 

New plan: 

1. Via the 457 plan, invest only in the S&P index fund, because everything else is crazy expensive.  (I don't LOVE this because what if the market tanks when we want to take money out, but we'll also have the better-balanced Roths to fall back on.  Plus if the market is tanking we'll be trying not to withdraw regardless)

2. Increase biweekly contributions to 457 plan from $100 to maybe $200/biweekly.

3. Stop 403b contributions entirely?  (Or is there some benefit to putting in a nominal amount to keep account 'active' or whatever?)

4. Use the remaining ~$115/month (post tax estimate) to bump my Roth contributions up now; time the rest of bumps with future raises and COLAs as possible


Does this all make sense??  The 457 being all in S&P 500 stocks makes me nervous, especially with us increasing our contributions to it.  But nearly all the other funds have expense ratios ranging from .7-1.3.  So I feel that is our best plan of action, yes? 

...I may still use the 403b to offset the 457 a bit.  I don't know why I feel I need that as a mental crutch when our TSP & Vanguard funds are all well balanced.  And it's not like the S&P500 is a crazy thing to go all-in on. 

Thoughts???

This is a good plan. For what its worth, Warren Buffett has said many times that all anyone needs is the S&P 500. Yes you are a bit less diverse, but bonds are kinda blech for the next 2-3 years anyway. Maybe in that time you can pressure whoever is running your 457 to provide better options.

Pooplips

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Re: Is it dumb to pull back on husband's 403b/457 to max my Roth IRA?
« Reply #17 on: November 16, 2015, 06:48:05 AM »
If there is a way to stay balanced by using funds in your 457, do it. (Even if the fees are slightly higher) Tax wise it is a win.

In the OP you mentioned max flexability. 457>Roth>403(b) for max flexability.

Well, I won't be quite balanced, but worst case scenario I'll be just a tad overweighted in favor of the S&P, which is probably not the end of the world.

Why are fees so goddamn hard to understand though?!  I do know the gross expense ratios of all of the funds we invest in, but as I understand it, these are not the only fees (correct??).  I logged into the 457 and checked our statement; it under fees it says $0.  OK.  But then the "investment performance information" below the statement has this footnote:

Quote
FEE DISCLOSURES
The Standardized illustration represents performance based on a $1,000 hypothetical investment, and reflects the deduction of the
* denotes a Fee of 0.42% # denotes a Fee of 0.00%
The participant account maintenance charge, up to a maximum of $50, will not be assessed unless agreed to by the entity. Options in bold are options in a group variable annuity contract. Fees indicated for those options are Variable Account Expense Fees and are in addition to the fees disclosed in the underlying fund prospectus.
Gross expense ratios represent the fund's total operating expenses expressed as a percentage of the assets held in the fund. For more information about gross expense ratios, read the fund's prospectus.


Yes that fee disclosure is ridiculous. I agree with the plan you laid out above. A little over exposure to the S&P will not hurt you to bad long term. If things get too out of line you could always rebalance to a small cash position in your 457 depending on what the money market expense ratio is.

KCM5

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Re: Is it dumb to pull back on husband's 403b/457 to max my Roth IRA?
« Reply #18 on: November 16, 2015, 07:54:18 AM »
This is true, but I don't really think about our finances this way --- I have a bunch of different savings funds (travel, car insurance, etc) to try to smooth out each month, and also contribute to all the accounts biweekly.  If we find extra lump sums, it is more likely to go to bulking up our emergency fund a bit more.  I take a "set it and forget it" approach to investing.  (....except for when I am constantly posting on the boards trying to optimize things, so maybe this is not true!!)

There's another thought: have you considered putting some of your emergency fund in a Roth?

Put it in something low risk (or even open a Roth CD at Ally bank), if you need it you can always withdraw contributions (not gains) penalty free, and if don't need it you've "rescued" tax advantaged space that would have otherwise been lost.

https://www.bogleheads.org/wiki/Roth_IRA_as_an_emergency_fund

I like your new plan.

Also, I like the idea outlined above. If you're not currently filling all of your Roth space, it makes sense to fill it with your emergency fund. All contributions can be accessed without penalty, so if you weren't going to fill it anyway, even if you use the emergency fund, you haven't lost anything. And if you put it in something conservative at first like a money market, you can always move it to an index fund in the future.

fallstoclimb

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Re: Is it dumb to pull back on husband's 403b/457 to max my Roth IRA?
« Reply #19 on: November 16, 2015, 08:22:25 AM »
Thanks everyone.  I crystallized my thoughts on this a bit more and have decided to just completely stop contributing to the 403b - it just doesn't make sense, given our plan/goals.  I'm also going to bump up the 457 contributions a bit more than I originally said, up to $250/pp, and then I can focus on putting future raises to the Roth.  If we get unbalanced due to the S&P exposure I'll use the G fund in my TSP to balance; for right now we are actually a little conservative for my tastes so I'll leave as is.

I guess my last decision point is in regards to the emergency fund vs. the Roth.  We have 10K in cash right now, and I was inching my way to 20K (with $600/month contributions, plus occasional tuition reimbursements).  In addition to being an 'emergency fund' (though we are not at high risk of emergencies, other than house issues), this is our house maintenance fund and our eventual car replacement fund.  I hope the car will last at least another 3 years, but at 140K you never know.  So I don't really want to pull cash out of here, even just for a money market account. 

But, perhaps $600/month is more than I really need to be putting away. By dropping my husband's total pretax investments from $275 to $250 I have freed up (roughly, but let's just call it) $25/biweekly. I also just made a tax withholding change that I expect will free up another $25/biweekly.  My COLA adjustment in January should give us about ANOTHER $25/biweekly, and then if I also drop my e-fund contributions from $300 to $250 biweekly.....all of that totals up to $125, so I could bump my Roth contribution from $25 to $150 every 2 weeks.  And that gets us within $60/biweekly of maxing, which let's be honest, my budget is not SO tight that I can't pull that off.  (If not now, then very soon)

I think we just very quickly got me to maxing pace while hardly pulling back on our pretax contributions at all.  Thanks, everyone!