Roth 401k vs Roth 457

[Guizmo]

Hi y'all,

I will be filing taxes jointly with my spouse and given that she will stay at home once the baby is born I am thinking of moving to a Roth option since our marginal tax rate will be 12%. However, I am struggling to decide between the Roth 401k and the Roth 457 plan. Currently, I max the Trad. 457 plan as it is clearly superior to the 401k, but the choice between the Roth plans seems harder. Which account is better in your opinion?

[terran]

Why would Roth vs traditional change the decision of 457 vs 401(k)? Is the Roth 457 inferior to the traditional 457 in some way?

Is this a governmental 457? If not, how likely is your employer to go bankrupt and is losing your 457 to your employer's creditors a risk you're willing to take?

How do the investment choices in the 457 and 401(k) compare?

What are the withdrawal options of the 457? Sometimes they must be fully withdrawn or withdrawn over a shorter time span.

[Guizmo]

The 401k and 457 plan have identical investment options. It is a governmental 457. I'm not really sure what the differences are between a Roth 401k and a Roth 457. You can withdraw contributions from both and gains can be withdrawn tax free after a certain age. Other than that, I don't really see a benefit. I think a 401k counts as a retirement account and a 457 is deferred compensation.

[DadJokes]

The 401k and 457 plan have identical investment options. It is a governmental 457. I'm not really sure what the differences are between a Roth 401k and a Roth 457. You can withdraw contributions from both and gains can be withdrawn tax free after a certain age. Other than that, I don't really see a benefit. I think a 401k counts as a retirement account and a 457 is deferred compensation.

The traditional 457b is great for early retirement, since you only have to be separated from your employer to withdraw funds. The Roth 457b is treated the exact same way as a Roth 401k.

Since you are already maxing the traditional 457b, you can't also invest in a Roth 457b. The combined contribution limit for the two is $19k in 2019. However, you can max the traditional 457b and still max a 401k (traditional or Roth).

[dandarc]

#1 - ignore DadJokes' post. It is wrong on both key points.

As DadJoke's notes - You can contribute to the 401K and 457B for $19K each (2019), plus catch-up if you're old enough. $38K. I'm guessing the confusion is that 401K's and 403B's have a combined limit. 457B is a separate limit.

Minor mistake - Roth 457B's don't work exactly like Roth 401K's, but also Roth 457B's don't work exactly how you'd expect with basic knowledge of the good things about 457B's (penalty-free withdrawal at separation rather than 59.5) and the good things about Roth accounts (tax-free qualified withdrawals).

With a Roth 457B, penalty free withdrawals are indeed available upon separation from employment rather than 59.5 which sounds great for an early retiree. However these withdrawals are not tax-free until 59.5 in a Roth 457B - you pay tax on the earnings portion if you withdraw early. Makes it quite a bit less advantageous than you'd initially think for an early retiree, and it isn't quite the same "Traditional vs. Roth" decision as you'd normally make.

Edit: Misread DadJoke's post. One point is correct, other is not quite right.

[DadJokes]

First major mistake - You can contribute to the 401K and 457B for $19K each (2019), plus catch-up if you're old enough. $38K. I'm guessing the confusion is that 401K's and 403B's have a combined limit. 457B is a separate limit.

2nd mistake - Roth 457B's don't work exactly like Roth 401K's, but also Roth 457B's don't work exactly how you'd expect with basic knowledge of the good things about 457B's (penalty-free withdrawal at separation rather than 59.5) and the good things about Roth accounts (tax-free qualified withdrawals).

With a Roth 457B, penalty free withdrawals are indeed available upon separation from employment rather than 59.5 which sounds great for an early retiree. However these withdrawals are not tax-free until 59.5 in a Roth 457B - you pay tax on the earnings portion if you withdraw early. Makes it quite a bit less advantageous than you'd initially think for an early retiree, and it isn't quite the same "Traditional vs. Roth" decision as you'd normally make.

I didn't say you can't contribute the max to both a 457 and a 401k. I said you can't contribute 19k to a traditional 457b and an additional 19k to a Roth 457b.

And yes, the treatment is the same. A Roth 401k is also taxed upon withdrawal if you withdraw it prior to 59.5 just the same as it is under a Roth 457b.

[dandarc]

First major mistake - You can contribute to the 401K and 457B for $19K each (2019), plus catch-up if you're old enough. $38K. I'm guessing the confusion is that 401K's and 403B's have a combined limit. 457B is a separate limit.

2nd mistake - Roth 457B's don't work exactly like Roth 401K's, but also Roth 457B's don't work exactly how you'd expect with basic knowledge of the good things about 457B's (penalty-free withdrawal at separation rather than 59.5) and the good things about Roth accounts (tax-free qualified withdrawals).

With a Roth 457B, penalty free withdrawals are indeed available upon separation from employment rather than 59.5 which sounds great for an early retiree. However these withdrawals are not tax-free until 59.5 in a Roth 457B - you pay tax on the earnings portion if you withdraw early. Makes it quite a bit less advantageous than you'd initially think for an early retiree, and it isn't quite the same "Traditional vs. Roth" decision as you'd normally make.

I didn't say you can't contribute the max to both a 457 and a 401k. I said you can't contribute 19k to a traditional 457b and an additional 19k to a Roth 457b.

And yes, the treatment is the same. A Roth 401k is also taxed upon withdrawal if you withdraw it prior to 59.5 just the same as it is under a Roth 457b.

Mis-read that line - sorry.

With a Roth 401K you pay tax PLUS PENALTY on an unqualified early withdrawal. Treatment is not exactly the same if you've separated from the employer. Roth 457B is better in that case since you pay only tax and not the 10% additional tax penalty.

[Guizmo]

thanks y'all. Looks like the main difference is the 10% penalty on gains on a 401k vs penalty free on 457. Not sure how I value that over the Roth 401k status as a retirement plan vs deferred compensation.

Edit: Ooop. Looks like 457 is also a retirement plan per IRS.