taxable account vs 457?

[daltonthecooler]

Hey guys, quick question here.  I’m trying to decide between opening up a taxable account with a $25,000 deposit or spending down my savings and depositing $25,000 in a 457 deferred comp account through the state of Ohio.  I’m leaning towards the taxable account but I didn’t know if there was something that I was missing which makes this a dumb decision.  Currently, I have no debt, own my house and we have a 6 month emergency fund in addition to the extra 25k.  I pay 14% pretax into my school based pension and I also max out 2 roths for my wife and myself and additionally I max out our HSA.  My wife also pays 14% towards her school based pension.  Currently she works 2 days a week so that she can be home with our 2 young kids the majority of the time.  We also are paying into 529’s and the kids should be covered for college.  We would like to one day upgrade our house with a pool but that’s roughly 5-8 years away. Which brings me to this $25k.  Would it be smart to place this money in a taxable account or stash it away for retirement?  We are currently in a low tax bracket and our pension as it sits currently will be 77% of our final average salary if we remain in teaching/therapy for the duration of our careers.  Thus with 2 pensions, 2 roths, and the HSA as an investment tool, are we doing well enough to skip on the tax deduction and tax deferred growth of a 457 right now?  I figured this taxable account could grow and help us with a pool down the road if we go that route.  Am I missing something here?  Is this a dumb decision to pass on tax deduction and tax deferred growth?  Also, once my kids are in school, my wife will go back to work full time and we will place funds in the 457 to assist with taxes since we will probably be in a higher tax bracket then.

[VoteCthulu]

As long as you're already in the 15% federal bracket, I would keep it in a taxable account for the sake of flexibility, who knows if you'll need it for some emergency in 5 years.

On the other hand, if you're in the 25% bracket or you have trouble spending your extra cash, then I would absolutely stash it in the 457 plan.

I would never, ever build a swimming pool, though, so to each their own.

[Paul der Krake]

You should post a much more detailed breakdown of your income, assets, and goals.

It sounds like your income is already pretty low, and getting it 18k lower could qualify you for even more tax goodies, potentially going from a low tax bracket to a negative tax bracket. That's right, the government pays you instead.

[daltonthecooler]

You should post a much more detailed breakdown of your income, assets, and goals.

It sounds like your income is already pretty low, and getting it 18k lower could qualify you for even more tax goodies, potentially going from a low tax bracket to a negative tax bracket. That's right, the government pays you instead.

Thanks for the reply, a quick rundown of my finances include:

Pension  - me - 95k cash out option right now, if I stay in teaching as long as anticipated it will be worth 77% of FAS
Pension - wife - 90K cash out option right now, if stays in the schools as a therapist as long as anticipated it will be worth 77* of FAS
Pension approximate when we retire - 144k annually in 25 years at retirment
Roth - me - 36k  (max out each year)
Roth - wife - 31k (max out each year)
457 - wife - 32k  (no contributions currently)
HSA - 9K  (5750 contribution + 1k employer contribution)

Cash - $71k need to spend this down
House - 300K, own, no mortgage
Debt - none
529's - 20k

Income
95 K
tax deductions
13,300 - pension (14% of income)
5750- hsa
12,600 - standard deduction
16,000 - exemptions
= $47350 in taxable income
and I know we get some other random deductions/credits involving educator credits, child tax credits, and health expenses for a health issue

As for goals, we probably wont retire early, because we enjoy working and we have a pretty decent work schedule to enjoy some down time.  I think our retirement finances look pretty good, especially with the pensions.  The only thing on the horizon is possibly a different house down the road with possibly a pool.  I don't like our lot, it is not private.  But outside of that we should get a boost when my wife goes back to work full time in 4 years.  Thanks for looking at this

[Another Reader]

What are your investment options in the 457 plan?  If it's annuities only, especially with high fees, I might pass.  However, 457 plans are probably the most flexible tax deferred plans available.  They are deferred compensation, not qualified retirement plans.  Therefore, when you separate from your employment, they are available to you without penalty no matter how old you are.  With two of them available to you, that's a lot of money that can grow tax deferred.

For an example of early retirement using these plans, check out http://www.millionaireeducator.com/.    Ed Mills' blog is very helpful even if you don't plan today to retire early.  He might change your mind!

[daltonthecooler]

As long as you're already in the 15% federal bracket, I would keep it in a taxable account for the sake of flexibility, who knows if you'll need it for some emergency in 5 years.

On the other hand, if you're in the 25% bracket or you have trouble spending your extra cash, then I would absolutely stash it in the 457 plan.

I would never, ever build a swimming pool, though, so to each their own.

Yea I like the flexibility of the taxable account in case a need arises over the next 10 years or so. Or potentially it can help with college education for two kids.  If there is no need than it can just sit and grow.  It does stink not getting the tax deduction up front but the capital gains would be tax free if I stay in the 15% tax bracket. 
As for the pool, it is something we've discussed.  It is a little out of character because  I'm a saver and not a spender but as I age I am putting more value in experiences for  my family and myself and not just seeing how much I can save.  We'll see what the future holds with that.  Thanks for the input.

[KCM5]

When do you plan on retiring?

You haven't yet mentioned the fees and funds available in the 457.

457s are so flexible, I'm having a hard time seeing why you shouldn't fund it. You could continue adding a few thousand a year to a taxable account for the plan for the pool - how much does a pool cost, anyway? And I'm assuming one of you will retire before your kids are in college? Or are you planning on working until full retirement age with the pension?

I have a 457 and a pension. The difference is that I in no way plan on working until retirement age to get my pension, so of course I fully fund the 457 and an IRA.

Do the math on your taxes assuming fully funding at least one 457. I bet it would save you at least $3100 in taxes (15% bracket, savers credit eligibility)

[Paul der Krake]

Even with knocking off 18k of taxable income, OP's family would still make too much to qualify for the savers credit (back of the napkin math, correct me if I'm wrong).

I would still use the 457 for an immediate 15% tax savings, especially since there are no immediate plans to end either career. There are no early withdrawal penalties on 457s- which makes them an incredibly easy sell.

[KCM5]

Even with knocking off 18k of taxable income, OP's family would still make too much to qualify for the savers credit (back of the napkin math, correct me if I'm wrong).

I would still use the 457 for an immediate 15% tax savings, especially since there are no immediate plans to end either career. There are no early withdrawal penalties on 457s- which makes them an incredibly easy sell.

No, you're right. I was thinking the IRAs were Traditional. But it wouldn't be hard to get down below $62k AGI with the $13,300 pension contribution. $18k to one of the 457s, $1800 to the other. Not that it's that big of a deal to get an additional $400. We make a bit more than they do and easily get below $62k AGI just by meeting our savings goals - the savers credit is just a bonus.

[daltonthecooler]

Thanks for all the replies.  We both actually do plan on working until 60.  My pension would drop 35k per year in retirement if I retire at 55 instead of 60.  That's a lot of passive income we would miss out on for not working 5 extra years (70k total annually if we both retired at 55 instead of 60).

The 457 fees are not too bad. There is a .14% annual administrative fee plus expense ratios.  The funds are good funds as well.  In my current 457, I have vanguard institutional index (viiix) which has an er of .02% and vanguard small cap index (vscpx) which has an er of .05%.   The 457 is nice since I can withdrawal it if I ever leave my district.  However, outside of moving to a nicer climate I don't think I'll leave my position because I have a masters degree and years of experience that outprice me for other districts.   If I would get hired, I'd start over on the salary schedule and take a 30-40% pay cut.  My wife on the other hand is more apt to leave for a different district because her therapy licensure gives her more options and control, plus there are administrative issues at her current place of employment. So if we go the 457 route we could start maxing out hers because she will probably be switching districts in the future which gives us the option to use the 457 funds if need be.  Thanks again for the input and knowledge. I'll have to run this by my wife.  Her biggest concern is paying for our kids college and we already have money tied up in 2 pensions, 2 roths, an HSA, and a 457 so she thinks this might be overkill instead of throwing it in VTSAX in a taxable.

[daltonthecooler]

What are your investment options in the 457 plan?  If it's annuities only, especially with high fees, I might pass.  However, 457 plans are probably the most flexible tax deferred plans available.  They are deferred compensation, not qualified retirement plans.  Therefore, when you separate from your employment, they are available to you without penalty no matter how old you are.  With two of them available to you, that's a lot of money that can grow tax deferred.

For an example of early retirement using these plans, check out http://www.millionaireeducator.com/.    Ed Mills' blog is very helpful even if you don't plan today to retire early.  He might change your mind!

The moment you think you have it all figured out then someone has to go post a link to a website, millionaire educator. Thanks for the link, definitely some new concepts to play around with. 

Going forward, I think I might max out my wife's 457 annually because she is likely to switch jobs soon and also possibly place some money in VTSAX in a taxable account.  Are there other expenses involved with a taxable account besides capital gains and qualified dividends that I am missing?  Also, if I am in the 10-15% tax bracket won't the long term capital gains and qualified dividend be tax free?  Thus if I can stay in this 10-15% bracket, the taxable account somewhat operates like a roth?  You pay the taxes up front then the the gains and dividends grow tax free.  Would this provide me a little diversification?   I have a feeling my retirement income will be more than my income now.  Thanks for all the input and aiding in my understanding.