403b vs. 457b?

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Francis42
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403b vs. 457b?

Post by Francis42 »

Hey Bogleheads,

My wife is an LAUSD teacher with access to a 403b and 457b retirement options in addition to her pension. I am familiar with 403b accounts, but this 457 thing is a bit new to me. We plan on opening an account and maxing it out (in addition to my 401k and both our IRAs that we convert into Roths).

Questions
  • How is a 457b different from a 403b?
  • Which one would you choose/prefer and why?
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Clever_Username
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Re: 403b vs. 457b?

Post by Clever_Username »

I also have a 403(b) and a 457. I max both out, so I'm not exactly choosing between them. A co-worker of mine tells me that I should prioritize maxing out the 403(b) earlier in the year, but the reasons I remember didn't stick with me. One of the reasons was that I could take a loan against it, which I suppose is a good benefit but I don't foresee doing that.

457 is awesome. You get the tax benefits of a contribution, which is great at my income level, but withdrawing requires only separation from employer, not a particular age. Well, if I'm with this employer until I reach 59, no problem, because I won't be withdrawing from a retirement account while still employed. And if I separate, the money in there is that much earlier I can start withdrawing from tax-advantaged accounts if I choose to retire younger without needing any more magic or rules.

It helps that I have great investment options in both. You should check -- I hear some school districts have a 403(b) that is basically an insurance contract, which sounds awful to me. None of the schools where I've taught had that issue, so I don't have experience with it.
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_ | | I survived my first downturn and all I got was this signature line.
Ron Ronnerson
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Re: 403b vs. 457b?

Post by Ron Ronnerson »

I'm a teacher in the Bay Area. I fund both a 457b as well as a 403b. In case you have the money for it, you are allowed to put up to $19.5k/year in each of these accounts if under age 50 and $26k/year in each account if over age 50 (due to catch-up contributions).

I prioritize the 457b over the 403b because there is no early withdrawal penalty on a 457b upon separating from employer. This can come in handy for situations like early retirement, career change, or changing employer as well as unexpected issues like a disability.

However, if the 403b investment options are better (better diversified funds with lower costs), then the 403b may be the superior option. You should find out what investment options are available in the accounts and the associated fees. If all else is relatively equal and your wife is not yet retirement age, I'd very likely prioritize the 457b over the 403b if you are only able to fund one of the two accounts.
Thesaints
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Re: 403b vs. 457b?

Post by Thesaints »

One can borrow from a 403b, but withdrawing from a 457b is penalty free. The catch is that you can't contribute withdrawals back in, whereas you can return the loan.
tibbitts
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Re: 403b vs. 457b?

Post by tibbitts »

Francis42 wrote: Fri Jul 16, 2021 11:02 am Hey Bogleheads,

My wife is an LAUSD teacher with access to a 403b and 457b retirement options in addition to her pension. I am familiar with 403b accounts, but this 457 thing is a bit new to me. We plan on opening an account and maxing it out (in addition to my 401k and both our IRAs that we convert into Roths).

Questions
  • How is a 457b different from a 403b?
  • Which one would you choose/prefer and why?
The difference in withdrawal terms has been discussed, and it might matter, but nobody can say which of your two plans they'd choose without knowing the options in detail. Many employees can choose between multiple plan providers, not just different options within a plan. I know nothing about LAUSD but beware that if your pension is also tax deferred, it's definitely possible to end up with too much money in deferred accounts if both your 457 and 403b accounts are also tax-deferred and you max your contributions.
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RickBoglehead
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Re: 403b vs. 457b?

Post by RickBoglehead »

Yes, school retirement accounts can be fun...

My wife just retired. She had a 401k, 403b and a 457.

The 403b was where her contributions went.
The 457 was where a pre-tax healthcare amount went, that was then matched.
The 401k was where the employer match went.

This may not be the same for your situation. My wife put all of her pay in the 403b, after paying social security, Medicare, and her health insurance, plus the healthcare amount she had to contribute. Then again, what was left over didn't max out.
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fposte
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Re: 403b vs. 457b?

Post by fposte »

So it looks like the 457b for LAUSD is through VOYA. They seem to have some decent funds, like the Vanguard Institutional Index Fund and other Vanguard funds, but there's no information about expense rates listed anywhere I can find; I suspect they add on some fees, because that's how VOYA tends to operate, but how big the fees are isn't discernible without more actively inquiring. It doesn't look like they offer a Roth 457b (yet, anyway), which can often be a nice benefit when you're in the education system with a pension. I'm not seeing a Roth option in the 403b either, so that option's off the table; with the 403b, they're offering a very large slate of vendors, many of which are likely to be ridiculously costly, so make sure you check expenses and stay selective in the 403b as well.
02nz
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Re: 403b vs. 457b?

Post by 02nz »

Thesaints wrote: Fri Jul 16, 2021 11:31 am One can borrow from a 403b, but withdrawing from a 457b is penalty free. The catch is that you can't contribute withdrawals back in, whereas you can return the loan.
Withdrawals from a 457b are only penalty-free (regardless of age) once separated from that employer.
02nz
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Re: 403b vs. 457b?

Post by 02nz »

Assuming there's not a big difference in cost, prefer the 457b if there's a reasonable possibility of withdrawing after separating from employer but before age 59.5. The 457b also has special catchup provisions that may allow you to "superfund" it just before retiring - the plan can even allow you to use contribution space not used in earlier years (https://www.irs.gov/retirement-plans/pl ... ion-limits). If this is allowed by the plan, it would be a reason to prefer the 403b, as that contribution space is "use or lose."
MathWizard
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Re: 403b vs. 457b?

Post by MathWizard »

Francis42 wrote: Fri Jul 16, 2021 11:02 am Hey Bogleheads,

My wife is an LAUSD teacher with access to a 403b and 457b retirement options in addition to her pension. I am familiar with 403b accounts, but this 457 thing is a bit new to me. We plan on opening an account and maxing it out (in addition to my 401k and both our IRAs that we convert into Roths).

Questions
  • How is a 457b different from a 403b?
  • Which one would you choose/prefer and why?
I had a tax deferred 403b and just got a 457b option , and am using the Roth option on the 457b only so as to stay within the 12% bracket . I am maxing both in addition to our Roths.

The kids are on their own and the mortgage is paid off, so we have the resources to do so.
anonenigma
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Re: 403b vs. 457b?

Post by anonenigma »

fposte wrote: Fri Jul 16, 2021 12:54 pm So it looks like the 457b for LAUSD is through VOYA. They seem to have some decent funds, like the Vanguard Institutional Index Fund and other Vanguard funds, but there's no information about expense rates listed anywhere I can find; I suspect they add on some fees, because that's how VOYA tends to operate, but how big the fees are isn't discernible without more actively inquiring. It doesn't look like they offer a Roth 457b (yet, anyway), which can often be a nice benefit when you're in the education system with a pension. I'm not seeing a Roth option in the 403b either, so that option's off the table; with the 403b, they're offering a very large slate of vendors, many of which are likely to be ridiculously costly, so make sure you check expenses and stay selective in the 403b as well.
Voya is the plan provider but funds are chosen by LAUSD's Retirement Investment Advisory Committee, which has been very active and sophisticated. The plan charge has been 23 bp (0,23%), but I hear that will be going down to 11 bp (0.11%) as the new contact term begins. Excellent choices include Vanguard index funds, Blackrock index target funds (at about 12 bp). Great plan!

Among the 403(b) plans, most are terrible, but state law (insurance code and education code) gives LAUSD very little control. The best choices are the CalSTRS Pension 2 and TIAA (if you want the Traditional Annuity with a 3% minimum).
rmdashrfsplat
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Re: 403b vs. 457b?

Post by rmdashrfsplat »

I prefer 457b to 403b, assuming funds/costs are similar to 403b and you can either spread out distributions for up to 10 years after separation or roll the plan over if needed -- I view my 457b balance basically the same as my 403b with added bonus that it can serve as ad hoc early retirement or lay-off fund.
fposte
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Re: 403b vs. 457b?

Post by fposte »

anonenigma wrote: Fri Jul 16, 2021 1:35 pm

Voya is the plan provider but funds are chosen by LAUSD's Retirement Investment Advisory Committee, which has been very active and sophisticated. The plan charge has been 23 bp (0,23%), but I hear that will be going down to 11 bp (0.11%) as the new contact term begins. Excellent choices include Vanguard index funds, Blackrock index target funds (at about 12 bp). Great plan!

Among the 403(b) plans, most are terrible, but state law (insurance code and education code) gives LAUSD very little control. The best choices are the CalSTRS Pension 2 and TIAA (if you want the Traditional Annuity with a 3% minimum).
Oh, that's good information. Do they hike the ERs on the Vanguard funds in addition to the plan cost or are they the usual VINIX-type low cost (I think for us it's .05%)?
Chuckles960
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Re: 403b vs. 457b?

Post by Chuckles960 »

The rules vary by employer, so what you see here may not be what you get.

My school has a 457(b) for highly compensated employees. Unlike the 403(b), which is retirement money, the 457(b) is "deferred compensation". Upon retirement, it must be withdrawn either all at once or in equal installments over a period of up to 10 years. So the impact on your post-retirement taxes is different from that of RMD from a 403(b).

Also, because it is deferred compensation, state taxes are due in my state for 457(b) withdrawals, but my state does not tax 403(b) withdrawals. That's roughly a 5% difference in my case.
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calmaniac
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Re: 403b vs. 457b?

Post by calmaniac »

Check out 403bwise, a website started by a teacher (I believe now former teacher) who was incensed by the many abusive annuity-heavy 403b programs in his district. They even have an upcoming video conference on July 29 on 403(b) & 457(b) Side-by-Side.
"Pretired", working 20 h/wk. AA 75/25: 30% TSM, 19% value (VFVA/AVUV), 18% Int'l LC, 8% emerging, 25% GFund/VBTLX. Military pension ≈60% of expenses. Pension+SS@age 70 ≈100% of expenses.
Topic Author
Francis42
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Re: 403b vs. 457b?

Post by Francis42 »

tibbitts wrote: Fri Jul 16, 2021 12:21 pm
Francis42 wrote: Fri Jul 16, 2021 11:02 am Hey Bogleheads,

My wife is an LAUSD teacher with access to a 403b and 457b retirement options in addition to her pension. I am familiar with 403b accounts, but this 457 thing is a bit new to me. We plan on opening an account and maxing it out (in addition to my 401k and both our IRAs that we convert into Roths).

Questions
  • How is a 457b different from a 403b?
  • Which one would you choose/prefer and why?
The difference in withdrawal terms has been discussed, and it might matter, but nobody can say which of your two plans they'd choose without knowing the options in detail. Many employees can choose between multiple plan providers, not just different options within a plan. I know nothing about LAUSD but beware that if your pension is also tax deferred, it's definitely possible to end up with too much money in deferred accounts if both your 457 and 403b accounts are also tax-deferred and you max your contributions.
It's a good point. My plan is to max out my 401k, her 403b and 457b on a pre-tax basis. My income pushes us to a very high bracket and this will help us reduce a tax liability by an est ~$23k. I think we'd only max this out for a few years and then coast to avoid the issue of having too much in deferred accounts to your point. This is mostly to cut our tax bill and shift our after tax investing to tax advantaged basis.
Topic Author
Francis42
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Re: 403b vs. 457b?

Post by Francis42 »

fposte wrote: Fri Jul 16, 2021 12:54 pm So it looks like the 457b for LAUSD is through VOYA. They seem to have some decent funds, like the Vanguard Institutional Index Fund and other Vanguard funds, but there's no information about expense rates listed anywhere I can find; I suspect they add on some fees, because that's how VOYA tends to operate, but how big the fees are isn't discernible without more actively inquiring. It doesn't look like they offer a Roth 457b (yet, anyway), which can often be a nice benefit when you're in the education system with a pension. I'm not seeing a Roth option in the 403b either, so that option's off the table; with the 403b, they're offering a very large slate of vendors, many of which are likely to be ridiculously costly, so make sure you check expenses and stay selective in the 403b as well.
There is a Roth 457b, not a 403b to my knowledge. The CalSTRS Pension 2 fund was created to guarantee low cost investment options for teachers. You can gain access to the institutional mutual fund equivalent of VTI, VOO, VEA, VWO, and BND for reasonable prices. I think we'd avoid Roth's because of my income. We are unlikely to have our current income level in retirement.
Topic Author
Francis42
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Re: 403b vs. 457b?

Post by Francis42 »

anonenigma wrote: Fri Jul 16, 2021 1:35 pm
fposte wrote: Fri Jul 16, 2021 12:54 pm So it looks like the 457b for LAUSD is through VOYA. They seem to have some decent funds, like the Vanguard Institutional Index Fund and other Vanguard funds, but there's no information about expense rates listed anywhere I can find; I suspect they add on some fees, because that's how VOYA tends to operate, but how big the fees are isn't discernible without more actively inquiring. It doesn't look like they offer a Roth 457b (yet, anyway), which can often be a nice benefit when you're in the education system with a pension. I'm not seeing a Roth option in the 403b either, so that option's off the table; with the 403b, they're offering a very large slate of vendors, many of which are likely to be ridiculously costly, so make sure you check expenses and stay selective in the 403b as well.
Voya is the plan provider but funds are chosen by LAUSD's Retirement Investment Advisory Committee, which has been very active and sophisticated. The plan charge has been 23 bp (0,23%), but I hear that will be going down to 11 bp (0.11%) as the new contact term begins. Excellent choices include Vanguard index funds, Blackrock index target funds (at about 12 bp). Great plan!

Among the 403(b) plans, most are terrible, but state law (insurance code and education code) gives LAUSD very little control. The best choices are the CalSTRS Pension 2 and TIAA (if you want the Traditional Annuity with a 3% minimum).
Agree with you on the CalSTRS Pension 2 fund... you sound quite knowledgeable about LAUSD options. Would you prefer the 457b over the 403b? If so, why?
lakpr
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Re: 403b vs. 457b?

Post by lakpr »

Francis42 wrote: Fri Jul 16, 2021 6:28 pm Agree with you on the CalSTRS Pension 2 fund... you sound quite knowledgeable about LAUSD options. Would you prefer the 457b over the 403b? If so, why?
I am not @anonenigma, but my wife is also a public school teacher in NJ, so I think I am qualified to answer this question.

If you are making only Traditional contributions, then prefer 457b plan over 403b plan.
If you are going to make Roth contributions, then prefer 403b plan over 457b.

I wrote this reply for another poster who has access to both 403b and 457b plans, and can make Traditional or Roth contributions to either. I would urge you to take a look, and see if what I wrote resonates with you.
Topic Author
Francis42
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Re: 403b vs. 457b?

Post by Francis42 »

lakpr wrote: Fri Jul 16, 2021 6:51 pm
Francis42 wrote: Fri Jul 16, 2021 6:28 pm Agree with you on the CalSTRS Pension 2 fund... you sound quite knowledgeable about LAUSD options. Would you prefer the 457b over the 403b? If so, why?
I am not @anonenigma, but my wife is also a public school teacher in NJ, so I think I am qualified to answer this question.

If you are making only Traditional contributions, then prefer 457b plan over 403b plan.
If you are going to make Roth contributions, then prefer 403b plan over 457b.

I wrote this reply for another poster who has access to both 403b and 457b plans, and can make Traditional or Roth contributions to either. I would urge you to take a look, and see if what I wrote resonates with you.
Thanks!
BrendanP
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Re: 403b vs. 457b?

Post by BrendanP »

lakpr wrote: Fri Jul 16, 2021 6:51 pm

If you are making only Traditional contributions, then prefer 457b plan over 403b plan.
If you are going to make Roth contributions, then prefer 403b plan over 457b.
I don't know if I missed this, but what do you recommend for those with access to pretax only 403b and pre or posttax 457?

We hope to stop teaching at 50 and 55 with pensions at 55.
lakpr
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Re: 403b vs. 457b?

Post by lakpr »

BrendanP wrote: Sat Jul 17, 2021 9:56 am
lakpr wrote: Fri Jul 16, 2021 6:51 pm

If you are making only Traditional contributions, then prefer 457b plan over 403b plan.
If you are going to make Roth contributions, then prefer 403b plan over 457b.
I don't know if I missed this, but what do you recommend for those with access to pretax only 403b and pre or posttax 457?

We hope to stop teaching at 50 and 55 with pensions at 55.
That depends on the amount of assets you have right now, how far away is that age 55 in terms of years, what is the expected pension, etc. It is basically a restatement of the question Traditional versus Roth. Perhaps start a separate thread for portfolio review?

If you can make the Roth contribution only to 457 plan, then you need to keep super tight records of every contribution you make to that plan, and also have the discipline not to touch even a penny of that money until age 59.5.
anonenigma
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Re: 403b vs. 457b?

Post by anonenigma »

lakpr wrote: Fri Jul 16, 2021 6:51 pm
Francis42 wrote: Fri Jul 16, 2021 6:28 pm Agree with you on the CalSTRS Pension 2 fund... you sound quite knowledgeable about LAUSD options. Would you prefer the 457b over the 403b? If so, why?
I am not @anonenigma, but my wife is also a public school teacher in NJ, so I think I am qualified to answer this question.

If you are making only Traditional contributions, then prefer 457b plan over 403b plan.
If you are going to make Roth contributions, then prefer 403b plan over 457b.

I wrote this reply for another poster who has access to both 403b and 457b plans, and can make Traditional or Roth contributions to either. I would urge you to take a look, and see if what I wrote resonates with you.
I am anonenigma, and I am knowledgeable about the LAUSD 457(b) plan and 403(b) options. I'd like to know the reasons for the above-stated preferences.

Leaving aside the Roth/Traditional decision, I advocate using both the 457(b) and 403(b), depending on your age. No one knows the hand life will deal you and when access to retirement funds will be needed. The advantage to the 457(b) is that funds can be accessed without penalty prior to age 59.5 as long as one has left the employer. If you're already 59.5, this becomes a disadvantage because you can't access the funds without leaving the employer. Advantage to the 403(b), which can be accessed without penalty at 59.5 regardless of whether you remain with the employer.

Public school teaching is very stable employment after one has been doing it for a number of years and, due to seniority, is likely safe from layoffs during bad times. A full career educator (30 years) is, in most states, in line for excellent retirement benefits, with pensions providing more than 70% of salary (and maybe 87% of take home after pension and Medicare contributions, union dues, and tax differential on the additional pay are considered). This means that teachers may not be in a significantly lower tax bracket in retirement, which erodes the advantage of traditional contributions and tilts a bit towards Roth. Maybe Roth contributions early in career when income and marginal tax rates are lower, traditional contributions mid-career and, depending on how one's financial future is shaping up in the ten years prior to projected retirement, Roth again? Now that I'm on Medicare, a significant consideration is IRMAA cliff planning. I didn't know about this when it would have mattered, but there wasn't a Roth option for LAUSD's 403(b)/457(b) back then anyway. There is now a Roth option for the 457(b) plan, so edge to 457(b) if you want to do Roth.
anonenigma
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Re: 403b vs. 457b?

Post by anonenigma »

fposte wrote: Fri Jul 16, 2021 1:41 pm
anonenigma wrote: Fri Jul 16, 2021 1:35 pm

Voya is the plan provider but funds are chosen by LAUSD's Retirement Investment Advisory Committee, which has been very active and sophisticated. The plan charge has been 23 bp (0,23%), but I hear that will be going down to 11 bp (0.11%) as the new contact term begins. Excellent choices include Vanguard index funds, Blackrock index target funds (at about 12 bp). Great plan!

Among the 403(b) plans, most are terrible, but state law (insurance code and education code) gives LAUSD very little control. The best choices are the CalSTRS Pension 2 and TIAA (if you want the Traditional Annuity with a 3% minimum).
Oh, that's good information. Do they hike the ERs on the Vanguard funds in addition to the plan cost or are they the usual VINIX-type low cost (I think for us it's .05%)?
They don't hike rates. When LAUSD transitioned from TIAA to Voya (TIAA decided not to bid), all bidders had to accept the slate of funds LAUSD had chosen. The only change was the stable value fund, as Voya couldn't accept new contributions to the TIAA Traditional Annuity. The Retirement Investment Advisory Committee had an excellent consultant and over the years purged all funds that engaged in revenue sharing. As the plan's size increased, the offerings changed to the lowest cost class of each fund. A few years ago, the weighted ER of how funds were invested (not including stable value) was 14 bp. I expect that it's even lower now. A great plan!
fposte
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Re: 403b vs. 457b?

Post by fposte »

anonenigma wrote: Sat Jul 17, 2021 1:58 pm
fposte wrote: Fri Jul 16, 2021 1:41 pm
anonenigma wrote: Fri Jul 16, 2021 1:35 pm

Voya is the plan provider but funds are chosen by LAUSD's Retirement Investment Advisory Committee, which has been very active and sophisticated. The plan charge has been 23 bp (0,23%), but I hear that will be going down to 11 bp (0.11%) as the new contact term begins. Excellent choices include Vanguard index funds, Blackrock index target funds (at about 12 bp). Great plan!

Among the 403(b) plans, most are terrible, but state law (insurance code and education code) gives LAUSD very little control. The best choices are the CalSTRS Pension 2 and TIAA (if you want the Traditional Annuity with a 3% minimum).
Oh, that's good information. Do they hike the ERs on the Vanguard funds in addition to the plan cost or are they the usual VINIX-type low cost (I think for us it's .05%)?
They don't hike rates. When LAUSD transitioned from TIAA to Voya (TIAA decided not to bid), all bidders had to accept the slate of funds LAUSD had chosen. The only change was the stable value fund, as Voya couldn't accept new contributions to the TIAA Traditional Annuity. The Retirement Investment Advisory Committee had an excellent consultant and over the years purged all funds that engaged in revenue sharing. As the plan's size increased, the offerings changed to the lowest cost class of each fund. A few years ago, the weighted ER of how funds were invested (not including stable value) was 14 bp. I expect that it's even lower now. A great plan!
That is really good to hear. A lot of elementary/secondary schools get really bilked on the ERs. Glad LAUSD had the sense to throw its weight around for the good of its employees.
02nz
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Re: 403b vs. 457b?

Post by 02nz »

anonenigma wrote: Sat Jul 17, 2021 1:51 pm ... This means that teachers may not be in a significantly lower tax bracket in retirement, which erodes the advantage of traditional contributions and tilts a bit towards Roth. Maybe Roth contributions early in career when income and marginal tax rates are lower, traditional contributions mid-career and, depending on how one's financial future is shaping up in the ten years prior to projected retirement, Roth again? Now that I'm on Medicare, a significant consideration is IRMAA cliff planning. I didn't know about this when it would have mattered, but there wasn't a Roth option for LAUSD's 403(b)/457(b) back then anyway. There is now a Roth option for the 457(b) plan, so edge to 457(b) if you want to do Roth.
Generally good advice, but here the teacher is married to a higher earner (OP), and so they benefit from deferring taxes via traditional contributions.
anonenigma
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Re: 403b vs. 457b?

Post by anonenigma »

02nz wrote: Sat Jul 17, 2021 3:21 pm
anonenigma wrote: Sat Jul 17, 2021 1:51 pm ... This means that teachers may not be in a significantly lower tax bracket in retirement, which erodes the advantage of traditional contributions and tilts a bit towards Roth. Maybe Roth contributions early in career when income and marginal tax rates are lower, traditional contributions mid-career and, depending on how one's financial future is shaping up in the ten years prior to projected retirement, Roth again? Now that I'm on Medicare, a significant consideration is IRMAA cliff planning. I didn't know about this when it would have mattered, but there wasn't a Roth option for LAUSD's 403(b)/457(b) back then anyway. There is now a Roth option for the 457(b) plan, so edge to 457(b) if you want to do Roth.
Generally good advice, but here the teacher is married to a higher earner (OP), and so they benefit from deferring taxes via traditional contributions.
Missed that - it was later in the thread. In that case, they should probably max both the 403(b), which can only be traditional (again, either CalSTRS Pension 2 or TIAA), and think about whether the 457(b) should be traditional or Roth. The danger, for the long-lived, is RMDs at 72 pushing them off an IRMAA cliff. The LAUSD teacher spouse will hopefully qualify for lifetime health benefits for both of them, but one still has to pay Medicare.

OP, I'm curious, when did your spouse sign on with LAUSD? The answer will determine what's needed to qualify for the lifetime benefits, which are extremely valuable.
jharkin
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Re: 403b vs. 457b?

Post by jharkin »

My wife works in a Massachusetts school district and like you has both 403b and 457 ( and a pension funded in lieu of SS).


We chose to contribute her income to the 457. It’s a state plan (govt 457) and has low fee fund options as good as the Vanguard institutional funds in my corporate 401k. Also has all the flexibility mentioned above to withdraw without penalty if we pursue early retirement.

For now we are skipping the 403. It’s a complex arrangement with a dozen different vendors to pick from, must of whom are insurance companies and force you to speak with an “advisor” to set it up. Also maxing both would consume about 65% of pay and we need some of that to live on today..l kids are expensive ;)
Topic Author
Francis42
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Re: 403b vs. 457b?

Post by Francis42 »

anonenigma wrote: Sat Jul 17, 2021 6:05 pm
02nz wrote: Sat Jul 17, 2021 3:21 pm
anonenigma wrote: Sat Jul 17, 2021 1:51 pm ... This means that teachers may not be in a significantly lower tax bracket in retirement, which erodes the advantage of traditional contributions and tilts a bit towards Roth. Maybe Roth contributions early in career when income and marginal tax rates are lower, traditional contributions mid-career and, depending on how one's financial future is shaping up in the ten years prior to projected retirement, Roth again? Now that I'm on Medicare, a significant consideration is IRMAA cliff planning. I didn't know about this when it would have mattered, but there wasn't a Roth option for LAUSD's 403(b)/457(b) back then anyway. There is now a Roth option for the 457(b) plan, so edge to 457(b) if you want to do Roth.
Generally good advice, but here the teacher is married to a higher earner (OP), and so they benefit from deferring taxes via traditional contributions.
Missed that - it was later in the thread. In that case, they should probably max both the 403(b), which can only be traditional (again, either CalSTRS Pension 2 or TIAA), and think about whether the 457(b) should be traditional or Roth. The danger, for the long-lived, is RMDs at 72 pushing them off an IRMAA cliff. The LAUSD teacher spouse will hopefully qualify for lifetime health benefits for both of them, but one still has to pay Medicare.

OP, I'm curious, when did your spouse sign on with LAUSD? The answer will determine what's needed to qualify for the lifetime benefits, which are extremely valuable.
@anonenigma - thanks much. Your expertise here is much appreciated. I'd love to get your feedback on the below thought process - what do you think?

Some additional details/updates since my original post.
+ Spouse's first year as a full time teacher at LAUSD teacher was 2015.
+ Since original post, we have opened a 457b and are waiting for LAUSD to process.
+ We should be able to come within a few k of maxing out 457 in 2021. We prioritized 457b because we can access the money early. We have prioritized pre-tax rather than post tax to lower our taxable income while it is high. It's too late in the year to open both a 457b and 403b so plan to open 403b in 2022.
+ Plan for 2022 is to max out 401k, her 403b, 457b, and Roth IRAs through backdoor conversions. We only plan on maxing out pre-tax accounts for a few years to hit a reasonable coast FI balance - just want to max out accounts before kids arrive on scene.. We might perhaps shift to Roth contributions at that point.

About our financial picture:
+ Age: DW is 35, I am 33

+ Net/joint income ~$310k annually

+ Net worth: $577k

+ Retirement balance is $211k.
+ My pension cash balance: $31.3k
+ Her pension cash balance: $35.4k
+ My 401k: $109.1k
+ My inherited IRA: $10.3k
+ Her Roth: $10.8k
+ My Roth: $14k

+ Taxable Investments: $308k

+ Cash (emergency fund): $58k

+ Debt free
anonenigma
Posts: 1137
Joined: Thu Apr 21, 2011 11:58 pm

Re: 403b vs. 457b?

Post by anonenigma »

Francis42 wrote: Sun Jul 25, 2021 1:14 pm
anonenigma wrote: Sat Jul 17, 2021 6:05 pm
02nz wrote: Sat Jul 17, 2021 3:21 pm
anonenigma wrote: Sat Jul 17, 2021 1:51 pm ... This means that teachers may not be in a significantly lower tax bracket in retirement, which erodes the advantage of traditional contributions and tilts a bit towards Roth. Maybe Roth contributions early in career when income and marginal tax rates are lower, traditional contributions mid-career and, depending on how one's financial future is shaping up in the ten years prior to projected retirement, Roth again? Now that I'm on Medicare, a significant consideration is IRMAA cliff planning. I didn't know about this when it would have mattered, but there wasn't a Roth option for LAUSD's 403(b)/457(b) back then anyway. There is now a Roth option for the 457(b) plan, so edge to 457(b) if you want to do Roth.
Generally good advice, but here the teacher is married to a higher earner (OP), and so they benefit from deferring taxes via traditional contributions.
Missed that - it was later in the thread. In that case, they should probably max both the 403(b), which can only be traditional (again, either CalSTRS Pension 2 or TIAA), and think about whether the 457(b) should be traditional or Roth. The danger, for the long-lived, is RMDs at 72 pushing them off an IRMAA cliff. The LAUSD teacher spouse will hopefully qualify for lifetime health benefits for both of them, but one still has to pay Medicare.

OP, I'm curious, when did your spouse sign on with LAUSD? The answer will determine what's needed to qualify for the lifetime benefits, which are extremely valuable.
@anonenigma - thanks much. Your expertise here is much appreciated. I'd love to get your feedback on the below thought process - what do you think?

Some additional details/updates since my original post.
+ Spouse's first year as a full time teacher at LAUSD teacher was 2015.
+ Since original post, we have opened a 457b and are waiting for LAUSD to process.
+ We should be able to come within a few k of maxing out 457 in 2021. We prioritized 457b because we can access the money early. We have prioritized pre-tax rather than post tax to lower our taxable income while it is high. It's too late in the year to open both a 457b and 403b so plan to open 403b in 2022.
+ Plan for 2022 is to max out 401k, her 403b, 457b, and Roth IRAs through backdoor conversions. We only plan on maxing out pre-tax accounts for a few years to hit a reasonable coast FI balance - just want to max out accounts before kids arrive on scene.. We might perhaps shift to Roth contributions at that point.

About our financial picture:
+ Age: DW is 35, I am 33

+ Net/joint income ~$310k annually

+ Net worth: $577k

+ Retirement balance is $211k.
+ My pension cash balance: $31.3k
+ Her pension cash balance: $35.4k
+ My 401k: $109.1k
+ My inherited IRA: $10.3k
+ Her Roth: $10.8k
+ My Roth: $14k

+ Taxable Investments: $308k

+ Cash (emergency fund): $58k

+ Debt free
Others may be in a better position to comment on your overall strategy, but the LAUSD 457(b) plan is terrific. The Blackrock index target date funds are an interesting choice - ER about 12 bp plus the 11 bp plan charge when the new Voya contact kicks in. Really low cost/high quality.

Your wife hired on after PEPRA (Public Employee Pension Reform Act) was implemented, so she's in the 2% at 62 pension formula, which means that she can retire as early as age 57 (but with only a 1.4% age factor - there's a strong financial incentive to hang on because the age factor increases over time until it maxes out at 2.4%).

To receive lifetime health benefits, your wife will need to qualify for a CalSTRS pension (so at least age 57) and meet the following requirement:
"For New Employees hired on or after April 1, 2009, years of qualifying service and age must total at least eighty-five (85) in order to
qualify for retiree health benefits. This must include a minimum of twenty-five (25) consecutive years of service with the District immediately prior to
retirement."

If my math is correct, your wife will become eligible for lifetime benefits at age 57 or 58. You will be included during her lifetime. Those benefits (which include dental and vision) are worth a lot.
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