457(B) Deferred compensation strategies

[MountainTown]

Hi,

I recently have learned about the benefits of 457(b) plans from the millionaire educator. Right now I contribute to a Thrift Savings Plan and my wife contributed to a University/State Defined Contribution plan. We both have matching benefits so obviously we are doing that portion. We have the space to contribute another $1500 to $2000 a month for FI purposes.

The fees of the plan are as follows:
Administrative Charges:
Participants are charged a graduated asset based fee for administrative services as follows:

$0 – 20,000       =   0.33%
$20,001 – 50,000   =    0.23%
$50,001 – 100,000   =   0.13%
Over $100,000   =   0
The graduated asset fee will never be more than $50 per quarter.

The fund choices are good. For example there is a Vanguard Institutional Index(S&P500) with very low expense ratio.

What do people think of the administrative fees? I didn't think they were too bad. Obviously once we get to $100k it's 0!'

Other than that, my question is what suggestions people have for a deferred comp strategy? Obviously I understand the great benefit of not having to wait for the 59 age.....but on the other hand we have to pay taxes eventually.

Would everyone suggest loading up these deferred comp funds or might a Roth be more appropriate? If I do load up the deferred compensation, are there any strategies to convert those funds in something like a Roth conversion ladder? The problem I see with that is of course then they are subject to the later withdrawal age(other than contributions).

I guess I am just trying to figure out how people use these in FI strategies. Let's say I retire in 10-15 years...would these be the funds I want to draw on first? Would I just try to keep it below our personal exemptions so it wasn't taxed???? What if my wife is still working???

Or...are these good funds to have set aside for let's say a new baby? Maybe the wife can take a year off and then we can draw that money? Intermittent employment is difficult for me. In my location, for me to ever get this federal job again would be next to a miracle(they haven't hired anyone new in 7 years)

Any thoughts are appreciated. I hope my question isn't too vague. I haven't seen a whole lot written on these strategies. A few more details about my situation:

My income: $74,000
Wife income: $30,000
TSP: $45k
Wife DC plan: $10k
Trad Ira: $10k
Investment strategy: All index funds with a mix of C, S, I(TSP) and Total market stock index funds. No bonds.

Cash Savings: $65,000

MONTHLY RENT: 825 a month for 2 bedroom house
Age: 32 and 28(wife)
Dependents: No(maybe in the future)
Future plans: I would love to retire in 10-15 years. Wife is not so concerned with that and plans on going back to school soon as a speech pathologist(she gets free tuition from her employer)

I know the cash savings is large. We were planning on buying a house and so that is why we had that there for a down payment. The market has shot up here and we are rethinking that. We are considering the whole "Rent for life" scenario. Regardless, that money will either go into a house in the near future or....we would like to use it to max out deferred comp, TSP, DC, and any IRA space we have. We want to make this decision asap but we have been on the fence about buying a house.

Any thoughts are appreciated!! In summary my questions are 1.) Are the fees okay for our deferred comp plan, and 2.) Given our current finances and future plans, what are some suggested scenarios for contributing to deferred comp and withdrawing. What advantages might deferred comp have over say the TSP?

[MDM]

Based on "Thrift Savings Plan" I'll assume this is a governmental 457 plan.  Based on 26 U.S. Code § 457 - Deferred compensation plans of State and local governments and tax-exempt organizations, that means your 457 is safer than a non-governmental one.

The fees are not too high - go for it!

For general FI strategies, see Traditional versus Roth - Bogleheads and How to withdraw funds from your IRA and 401k without penalty before age 59.5

See also How To: Write a "Case Study" Topic and Best and/or Recommended Retirement Calculator - Bogleheads.org.

[MountainTown]

Thanks for the tips MDM. Actually Thrift Savings Plan is not a governmental 457 plan. The 457 I was referring to is my wife's plan. It is indeed a governmental plan!!! I disagree that a non-governmental 457 is safer...but each has it's risks.

Sounds like the fees are good in your opinion. That's what I thought too--just wanted a sanity check...I will check out the links. Sorry if my case study was written poorly--new here.

[MDM]

Thanks for the tips MDM. Actually Thrift Savings Plan is not a governmental 457 plan.

Understood - but having TSP access implies one works for the government, therefore the 457....

I disagree that a non-governmental 457 is safer

I'd disagree with that also. ;)

Sounds like the fees are good in your opinion. That's what I thought too--just wanted a sanity check...I will check out the links. Sorry if my case study was written poorly--new here.

It was written just fine.  The point of that link is to get you thinking about your current and retirement expenses.  There is a spreadsheet that can be helpful if you don't already have a similar one.  The case study spreadsheet is something of a "gateway drug" to the more advance programs. ;)

Good luck!

[MountainTown]

 hmmm Yea I'm not sure why you think that TSP access implies 457 access...As Fed employee we/I have no access to 457's. My wife does and that's the account I am referring to. She is a State employee. Mostly the 457's are for University/State/County/Nonprofit employees. I actually haven't heard of it ever being offered to Fed's. Most 457's(my understanding) are governmental but not federal. And then there are nonprofits as well. 

[MDM]

hmmm Yea I'm not sure why you think that TSP access implies 457 access...As Fed employee we/I have no access to 457's. My wife does and that's the account I am referring to.

Got it - that wasn't in the OP.

[Cassie]

We each had a 457 plan and saved a lot of $ in it. we were not allowed to draw any of it out until we either retired or quit. When my DH retired at 53 he could take it. There was no age limit. I am sure each plan has different options that you need to check out to make a good decision.

[DavidAnnArbor]

Putting money in a 457 doesn't count as the total amount you're allowed as an employee to put into a 401(k), so if you have a job that offers a 401(k) you can put the maximum into that as well.

[MountainTown]

Thanks David.
Yes she has a 403b and I have a TSP. My understanding is we could fill up those as well as traditional IRA's or Roth's....and max out the 457

[JZinCO]

Hey OP, I just wanted to chime in for some added perspective.
I max out my 403b and then put about 1/2 the max into my 457.
My 403 fees are negligible (close to, but not as low as your TSP) and the 457 fees range from 0.37% for a lifecycle fund to 0.72% for the small cap fund, after accounting for admin fees. I'm not happy about the investment options or the fees but I think that is typical of a 457. In either case, the fees are still less than taxes would remove so I appreciate having greater tax deferred space with the 457.