View Full Version : Max out 457 or Roth IRA?
My DH and I each own a Roth IRA and a 457 plan.
Roth is after-tax and we cannot take money out until 59.5. Can contribute up to 5,000/yr.
457 is pre-tax and can take money out at any age. Can contribute up to 16,500/yr.
We can't afford to max out both. We are debating which to put most of our increased contributions to? My first idea was to max out our Roths first and up our 457 contributions. However, the thought of putting our money away into a vehicle that we can't access until 59.5 is disheartening.
We are roughly aiming to contribute 15% of our income (a lá Dave Ramsey).
Thoughts?
I have been maxing out my 457 for the past 10 years.
Why did you decide to go that route?
I got married. My husband's paycheck is for our present and mine is for our future. It was the biggest bang for our buck. I have a great retirement plan in addition to this one. He makes more money but his job is in the technical/engineering field and is very volatile. He has changed companies every five years and each time his benefits change or disapear. I am rock solid unless a meteor hits the planet. If something should happen to him then I could go back to a full paycheck and we would be fine. If something should happen to me, I will be eligible for early retirement in a couple of months and take home from that (not counting the 457 stash) would be more than what I am allowing myself after 457 contributions now.
Can't help myself........ I have a hardcore ant mentality :0) We became debt free last year at this time. I still can't stop saving as if the next great depression is right around the corner. My NY resolution is to learn how to slow down and enjoy the fruits of my labor.
ApatheticNoMore
1-1-11, 1:55pm
However, the thought of putting our money away into a vehicle that we can't access until 59.5 is disheartening.
Sometimes that's the point. To at least have some money I can't get my greedy little mits on until 59.5, so no matter what wonderful spending opportunities may present themselves in the meantime (ooh houses, ooh educational opportunities, etc.), I at least have *something* when I am too old to work. If the opportunities were really that beneficial I could always take the rather severe penalties and withdraw the money. Your psychology may vary.
@Fidgiegirl: Well, technically, you can get to your ROTH IRA before 59 1/2. It will just be very painful to liquidate 100% since you would likely lose half of what you take out to taxes and penalties after deducting all contributions you've made, provided you took no previous contributions out. You can always take out your contributions tax and penalty free (does not include contributions coming from converting a traditional IRA). Never had a 457 though I suspect you can't exactly get to the funds without penalties before age 59 1/2 unless you are talking about a loan.
@Simplemind: Yep, ant mentality here too. Also trying to transition into slowing down and enjoying the fruits of my labor. It's hard not to think about the next great depression given what's happening to regular everyday folks in this jobless recovery.
However, the thought of putting our money away into a vehicle that we can't access until 59.5 is disheartening. Why? What motivates this comment from you? I'm not trying to challenge you, trying to understand the long-term goal(s) that would require access to those funds...
We are roughly aiming to contribute 15% of our income (a lá Dave Ramsey). Dave is good for getting people off their butts and starting saving, but I think his focus is too low. I'm with Joe Dominguez: you ought to be able to save much more than that if you wanted to. Why not aim for 20% or whatever % it takes to max out everything?
Granted, you may not make it now because of income restrictions, but income can grow and there may be other ways to earn...
You may want to also consider the investment options within each vehicle. I have a Roth and also have access to a 457. My 457 has very limited options for investment, but it has a fixed return option that is killer - beats anything out there. Also, I believe you cannot access the 457 while you are still working at the current employer...not sure about that. But say you wanted to keep working and your DH retire and access the 457, but the 457 is all in your name, just a kink that might exist.
I have not contributed to the 457, but my Mom maxes hers each year. I contributed to the Roth for a couple years before I moved to my current job...right now between matches and contribution we have 20% going in between 403b and pension, so we are concentrating on other goals with the leftover money. I get what Jonathan is saying about maxing out everything, but we also wanted to get our expenses lower in the long run by paying off our mortgage and not have so much tied to traditional investments.
I maxed out my 457 before my IRA (traditional not roth). I knew that I would retire early and it was nice to know that I could start taking a monthly income from that at any age. I began doing that when I was 42 (now 53) and it has helped me realize my early retirement dream rather than having to wait until age 60. Also, you cannot access your 457 until you leave your employment with that company.
(formerly She-Rah)
@Fidgiegirl: Never had a 457 though I suspect you can't exactly get to the funds without penalties before age 59 1/2 unless you are talking about a loan.
.
There is no penalty to withdraw from a 457 at any age once you leave employment. Either as a lump sum or in monthly installments. There is a tax code the IRS assigns to the 457 that basicly says it's an early withdrawl but not subject to penalty. You do have to pay income tax on the amount you withdraw of course - both interest and principal unlike with a Roth IRA. I've been getting monthly installments from my 457 for over 10 years now and have never had to pay an early withdrawl penalty.
Why? What motivates this comment from you? I'm not trying to challenge you, trying to understand the long-term goal(s) that would require access to those funds...
Dave is good for getting people off their butts and starting saving, but I think his focus is too low. I'm with Joe Dominguez: you ought to be able to save much more than that if you wanted to. Why not aim for 20% or whatever % it takes to max out everything?
Granted, you may not make it now because of income restrictions, but income can grow and there may be other ways to earn...
Well, I don't want to work that long :D I don't want to sock a bunch of money in a retirement fund that I can't access when I want to retire.
And I was thinking about the percentage. I mean, how did Dave pick 15%? I've also read 10% in a lot of places. It all seems so random.
When I start to think about the whole thing more deeply, then I get into the, "Well, how much money do we even need to retire?" thing . . . and then I think I should be doing YMOYL more to-the-letter. I keep a wall chart of income/expenses but don't track investment earnings. And if those earnings are in a vehicle we can't even access, well, then what's the point of putting it there?
I can see why we'd want to put some pre-tax and some after tax, but if we max out both (we EACH have each so that's $10K after tax to Roths and $33K pre tax to 457s). That's a third of our total income! I don't think we can max both types of accounts at this point.
ApatheticNoMore
1-3-11, 8:07pm
I don't want to sock a bunch of money in a retirement fund that I can't access when I want to retire.
Well even if you retire early you are still going to spend part of your retirement being over 59 1/2 right?
You may want to also consider the investment options within each vehicle. I have a Roth and also have access to a 457. My 457 has very limited options for investment...
... I get what Jonathan is saying about maxing out everything, but we also wanted to get our expenses lower in the long run by paying off our mortgage and not have so much tied to traditional investments. And if you're deliberately not maxing out with clear thinking and an agreeable plan with your spouse, I totally support your (anyone's) right to do it! Just the way fidgiegirl put that set off my "stuck on a figure" alarm, and hence my question. rrrrr
The point about the investment options available is also crucial to consider. I'm fortunate to have a wide array of options to pick from for my tax-deferred savings, but I'm aware not everyone has that luxury. There is no exemption from becoming a knowledgeable investor. If you don't have a goodly selection in the tax deferred arena, you have to be a lot pickier about what investments go where.
Well, I don't want to work that long :D I don't want to sock a bunch of money in a retirement fund that I can't access when I want to retire.Take a look at the early distribution rules for your accounts. You may be pleasantly surprised. Keep in mind that Congress can rewrite those rules any time however.
And I was thinking about the percentage. I mean, how did Dave pick 15%? I've also read 10% in a lot of places. It all seems so random.Because it is random. I'm sure he picked that figure because it's challenging enough to cause people to think, but not so large as to cause people to give up immediately.
...
I can see why we'd want to put some pre-tax and some after tax, but if we max out both (we EACH have each so that's $10K after tax to Roths and $33K pre tax to 457s). That's a third of our total income! I don't think we can max both types of accounts at this point.Since people around here have, rather reliably I think, claimed to save in excess of 50% of income, 33% isn't as odd as it might sound. That said, you're the team which has to decide how much is Enough and make any savings happen after you've reached Enough.
So, I will challenge you to think with your DH about saving more. But I'm realistic enough to know you two have to make it so. And since you're yet young in your careers, you still have time to get better at YMOYL and up that savings% when it feels right to you. ;)
Actually, your understanding of the limits on Roth withdrawals is inaccurate. A few things to consider:
1) Contributions to a Roth account can be taken back out at any time. So if you and DH invest the max each over a 10 year period, you have a $100k nest egg that you can access without taxes or penalties.
2) Earnings on your contributions can be taken out earlier than 59.5 without penalty under a number of different mitigating circumstances, including if they are part of a Substantially Equal Periodic Payment (SEPP) plan under rule 72T of the tax code. This process is complicated, but worth looking into if you are interested in pursuing early retirement at any point. I believe it is discussed at some length in YMOYL.
lhamo
fidgiegirl
1-5-11, 10:33pm
Take a look at the early distribution rules for your accounts. You may be pleasantly surprised. Keep in mind that Congress can rewrite those rules any time however.
Stoopid Congress :~)
So, I will challenge you to think with your DH about saving more. But I'm realistic enough to know you two have to make it so. And since you're yet young in your careers, you still have time to get better at YMOYL and up that savings% when it feels right to you. ;)
Challenge accepted. ;)
Now we have a new problem - back to work and seemingly no time to think about anything but eating, sleeping, and going there . . .
@lhamo, thanks for your points . . . I had read something like that, but wasn't really clear on what it meant. I will have to pull out my newest version of YMOYL to see. Or did I get that one from the library? ;)
I am inclined to try to max, but scared, too. But I think a budget contracts to the available funds, so . . .
I am inclined to try to max, but scared, too. Listening to your fear is important. All this fear says is you still don't have enough information to make what you consider a good decision. So dig in - you may have to spend some time on the IRS site to get at their interpretation too. Let us know what you find; there are others with 457 plans here.
fidgiegirl
2-13-11, 9:02pm
I thought I should come back and let you all know what we decided. Finally we decided to go for $10,000 each to our 457. It won't be such a sting on the take home end as maxing out the Roths. We are going to do that first, let the dust settle with the take home amounts, see how it goes for a few months, and decide if we should then increase the amounts in the Roths. Going from $2400 a year to the max of 16,500 a year just felt too big. $10,000 feels too big, to be honest, but we ain't gettin' any younger and the sooner we do it, the sooner we'll adjust!!!
We had no real rationale for choosing the pre-tax over the after tax (Roths) other than that we can put more in and not really have to feel that much less in our paycheck. We can't forecast which will be better for us when we retire, anyway. Who knows what they'll do with the tax code between now and then. We'll be taking our chances with the 457 at this point.
You may be surprised at how fast 59 1/2 comes! You can take money out of a traditional IRA before 59 1/2 without penalty if you set up a program of equal withdrawals over a certain time period. I forget the time period and I am not sure if you can do this with a Roth IRA. You do have to include IRA withdrawal in your ordinary income.
Powered by vBulletin® Version 4.2.5 Copyright © 2024 vBulletin Solutions Inc. All rights reserved.