457 Fees vs. Taxable Account

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Topic Author
Stillwater1971
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457 Fees vs. Taxable Account

Post by Stillwater1971 »

I am currently 50 years old and will be retiring at age 55 with my current job/career of 30 years. I currently max out my Roth IRS and 403B Roth and I will be encountering additional income next year that will allow me to invest more.

My question is, which will be better to invest in: a Govt 457 or Taxable Acct? This would occur after maxing out my Roth IRA and 403B Roth.

What concerns me is the Fees for the 457 through the 3rd party Vendor( TCG Services).
See below for the 457 Govt:

Administration Fees: $22.00 per participant per year, 0.25% of assets, paid by the participants (capped at $150,000 in assets)
Advisor Fees:0.10% of assets, paid by participant
Consultant Fees: 0.42% of assets, paid by participant
Plan Coordinator Fees: $0.15 per participant per month, paid by participant
Custodian Fees: 0.10%, paid by participant
Other Fees:$30 Distribution Fee, $50 Loan Set Up, All of the above paid by participant


*Pre-Tax

My 403B is pretty good which allows me to Invest in Vanguard and the only fees is from Vanguard which charges a straight annual $60 403b fee and then the expense ratio. Any remaining 3rd party fees is paid by my employer. :sharebeer

I would have 4 years left before retiring when I encounter the extra $, so would the 457 be ok to utilize during the last year or two before I retire, and then upon retirement roll it over into my IRA? Or just avoid it all together and stick with a Taxable Acct?

One more thing to add: Despite early retirement at 55, I will be working overseas for another 5 years. So I don't plan to tap into my retirement until at least 60 years of age.
Last edited by Stillwater1971 on Thu Dec 02, 2021 3:22 pm, edited 1 time in total.
tonyclifton
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Re: 457 Fees vs. Taxable Account

Post by tonyclifton »

I think the 457b is very powerful for an early retiree. Check your plan requirements but you may be able to access your 457b funds immediately upon retirement with no penalty (unlike Roth IRA). Plus you may be eligible for significant catch-up contributions both for being over 50 and your plan may have special catch-up provisions where even more can be "caught up" in the three years prior to retirement. You may wish to prioritize it over your other options as you will be able to access the money in early retirement. The 457b may even have a Roth option.

We plan to use my wife's 457b to fund "early" retirement.

Good luck!
Topic Author
Stillwater1971
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Re: 457 Fees vs. Taxable Account

Post by Stillwater1971 »

Yes! You are correct that it can be used prior to 59 1/2 yrs of age. However, when I retire, I plan to work overseas for 5 more years. I should have mentioned that ( I'll edit it in my original post).

So, if I don't expect to need the funds till after I am 60, would the 457 still be a good plan?
tonyclifton
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Re: 457 Fees vs. Taxable Account

Post by tonyclifton »

Stillwater1971 wrote: Thu Dec 02, 2021 3:21 pm Yes! You are correct that it can be used prior to 59 1/2 yrs of age. However, when I retire, I plan to work overseas for 5 more years. I should have mentioned that ( I'll edit it in my original post).

So, if I don't expect to need the funds till after I am 60, would the 457 still be a good plan?
The conventional wisdom (and what I follow) is the funding priority outlined in the wiki.

In short, most are best served by maxing out tax preferred accounts and I-Bonds before investing in taxable. So unless you absolutely have extremely high fees or extremely poor choices (which you probable don’t), the 457b would actually be fully funded before your Roth and Taxable options.

Be sure to check out the full explanation on the link in the wiki.

Also, I don’t think continuing to work until 60 makes a difference in the decision. 457b is still a great tax preferred option. One of our regrets is not learning about them and using them sooner!
anonenigma
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Re: 457 Fees vs. Taxable Account

Post by anonenigma »

Those fees seem high. The 457(b) governmental plan at my former employer now has total plan fees of 0.12%.
tonyclifton
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Re: 457 Fees vs. Taxable Account

Post by tonyclifton »

anonenigma wrote: Thu Dec 02, 2021 5:01 pm Those fees seem high. The 457(b) governmental plan at my former employer now has total plan fees of 0.12%.
The fees may be higher but also consider the reduced taxes from contributing pre-tax income.
runninginvestor
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Re: 457 Fees vs. Taxable Account

Post by runninginvestor »

"Administration Fees: $22.00 per participant per year,
0.25% of assets, paid by the participants (capped at $150,000 in assets)
Advisor Fees:0.10% of assets, paid by participant
Consultant Fees: 0.42% of assets, paid by participant
Plan Coordinator Fees: $0.15 per participant per month, paid by participant
Custodian Fees: 0.10%, paid by participant
Other Fees:$30 Distribution Fee, $50 Loan Set Up, All of the above paid by participant"

Seems excessive.
Really depends on investment options.

It looks like with just AUM fees alone you have
.25+.10+.42+.10= 0.87%

Plus $22+$1.30=$23.30/year, which at different asset levels would be akin to
$10k ~> 0.230%
$25k ~> 0.093%
$50k ~> 0.047%
$100k~> 0.023%

So you could be adding 0.87%+ ~0.01% to ~0.23% based on assets. Then tack on underlying expense ratios.

The wiki has a formula to help see if plan expenses are worth it. It may be worth it to you, especially if you're in a high tax bracket. Which of you are maxing out the other accounts and adding money to this you might be. But maybe not.
ThankYouJack
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Re: 457 Fees vs. Taxable Account

Post by ThankYouJack »

If you put the money in taxable, do you have an estimate on what your LTCG rate would be (including state taxes)?

Roughly how much would this amount invested be and also, how long will the money be invested before you start withdrawing it?

If it's a very small amount relative to your portfolio and you'll start withdrawing it at age 60, I'd probably just go taxable and not worry about the little bit extra you'll pay in taxes.
Topic Author
Stillwater1971
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Re: 457 Fees vs. Taxable Account

Post by Stillwater1971 »

ThankYouJack wrote: Fri Dec 03, 2021 7:43 am If you put the money in taxable, do you have an estimate on what your LTCG rate would be (including state taxes)?

Roughly how much would this amount invested be and also, how long will the money be invested before you start withdrawing it?

If it's a very small amount relative to your portfolio and you'll start withdrawing it at age 60, I'd probably just go taxable and not worry about the little bit extra you'll pay in taxes.
I am a Public school educator in Texas. So, no State Taxes. As for my Income Bracket, I'm at the upper end of the 22% Bracket ( 78k).

As for the amount invested annually, I'm estimating 25k a year to invest in the 457 or Taxable.

I am cautiously optimistic that my pension will be able to cover my expenses for quite some time as I will be living overseas with a lower cost of living, so while I mentioned that I may start accessing it at age 60, I should change that age #. In all likelihood I would not need to touch it until I am 65 or 70. So I am looking at 15-20 years from now.
retire2022
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Re: 457 Fees vs. Taxable Account

Post by retire2022 »

Op

How big is your portfolio?

I was in my state government NYSDCP plan for 31 years.

Fees were capped above balances 200K, approx $100 annually and taken from existing shares, which mean they sold shares to pay for the fee. It is cheaper as the share prices grew.

I rolled over my pretax and Roth 457 when I retired in August 2021 this year with 1.7 million.

I don't regret paying the fees, because there were no alternatives.

You are lucky you have 403b, non teachers like myself did not have that option.
MHA556
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Re: 457 Fees vs. Taxable Account

Post by MHA556 »

Some of those fees appear optional- like their advisor and consultant fees. Find out if you would be paying them if you are not asking for advice.

The 457 is a great plan, if you can use it I would. (assuming you are not paying advisor/consultant fees). Your future plans can easily change, you could get disabled or sick, who knows. Having early access to funds may not seem needed, but a lot can be said for having flexibility.

My 457 runs at .13%, I don’t really ask for investment advice, just a bit of info to help on moving money into the account and doing some Roth conversions. I sure would not want to pay a huge bunch of fees either. Figure out what you are really looking at for minimum fees before deciding.
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alcon50
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Re: 457 Fees vs. Taxable Account

Post by alcon50 »

A 457b is a great way to put a way a fair amount of money each year before federal and payroll taxes. Depending on your salary this can be a great benefit. Also the maximum is currently $26,000 per year if you are 50 or older and it can be increased to $39,000 in the three years before you retire. These amounts are all going to increase in 2022, check with your plan for details.

You should be able to defer a lot of taxes over the next five years depending on how much you can afford to contribute.

The fees you pay are very high. I agree with other posts that you should see which of these fees might be avoided.

I was in a similar situation before I retired. What I did was to max out my contributions until retirement while doing everything I could to reduce fees. I was not allowed to transfer funds from the account until I retired. As soon as I retired, I rolled the entire account to a state 457b account which has very low fees and a good selection of low cost index funds. I have been very happy since.

I would suggest that you take advantage of the high maximin contribution limits to the extent that you can and, thus, maximize the ability to defer federal and payroll taxes each year. This will save you a lot.

I would do my best to reduce any avoidable fees for the next five years until you retire. While the fees are clearly too high, the harm from the high fees is more than offset by the ability to avoid federal tax and payroll tax on the increased contributions prior to retirement.

Then, once you retire in five years, roll over the entire account to a low cost provider.

Hope this is helpful.
There are three kinds of men. The one that learns by reading. The few who learn by observation. | The rest of them have to pee on the electric fence for themselves. -- Will Rogers
retire2022
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Re: 457 Fees vs. Taxable Account

Post by retire2022 »

tonyclifton wrote: Fri Dec 03, 2021 5:22 am
anonenigma wrote: Thu Dec 02, 2021 5:01 pm Those fees seem high. The 457(b) governmental plan at my former employer now has total plan fees of 0.12%.
The fees may be higher but also consider the reduced taxes from contributing pre-tax income.
+1

Tax free growth is advantage public sector have against higher wage private sector employees.

Plus possibly pension and post employment healthcare, I have are incentives which makes a career in public sector on parity with private sector which they have abandoned in recent years.
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Stillwater1971
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Re: 457 Fees vs. Taxable Account

Post by Stillwater1971 »

Thank you for the advice so far. One thing I should have mentioned from the start is that if I do begin investing in a 457 and retire at 55, I would have to move that 457 into something else, like a Vanguard IRA after I have retired, correct? That would eliminate all of those high 457 fees.

If I rollover the 457 into an IRA or Roth, would that suddenly keep me from withdrawing prior to 59.5yrs of age without penalty?
retire2022
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Re: 457 Fees vs. Taxable Account

Post by retire2022 »

Stillwater1971 wrote: Sun Dec 05, 2021 2:18 pm Thank you for the advice so far. One thing I should have mentioned from the start is that if I do begin investing in a 457 and retire at 55, I would have to move that 457 into something else, like a Vanguard IRA after I have retired, correct? That would eliminate all of those high 457 fees.

If I rollover the 457 into an IRA or Roth, would that suddenly keep me from withdrawing prior to 59.5yrs of age without penalty?
  • You can roll over pretax 457 and Roth 457 if you have one to Vanguard or any other custodian of your choosing.
  • I recently retired August 2021 and initiated a rollover from NYSDCP (NYS via Nationwide as back office custodian) to Vanguard
Here is my story should you desire to read it.

viewtopic.php?f=1&t=324944&hilit=NYSDCP
  • And depending on whether or not you have qualified Roth IRA, you may or may not pay taxes on the Designated Roth 457 account.
see chart for transferring https://www.irs.gov/pub/irs-pdf/p590a.pdf page 22
  • Here is chart which explains differences between Roth IRA and Designated Roth 457, 403, & 401k
https://www.irs.gov/retirement-plans/te ... th-account
  • FAQ on rollover and distributions Designated Roth accounts ie 401, 403, 457:
https://www.irs.gov/retirement-plans/re ... 1rollovers
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retiredjg
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Re: 457 Fees vs. Taxable Account

Post by retiredjg »

Stillwater1971 wrote: Sun Dec 05, 2021 2:18 pm Thank you for the advice so far. One thing I should have mentioned from the start is that if I do begin investing in a 457 and retire at 55, I would have to move that 457 into something else, like a Vanguard IRA after I have retired, correct? That would eliminate all of those high 457 fees.
There is no requirement to do such a rollover. If you do the rollover to IRA, the money is no longer penalty free.
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retiredjg
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Re: 457 Fees vs. Taxable Account

Post by retiredjg »

If you want some tax-deferral, I'd suggest using traditional 403b and taxable.

The costs of that 457 are high. If you didn't have the 403b, it might be worth using though. It depends on whether all those fees are mandatary and separate.
aristotelian
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Re: 457 Fees vs. Taxable Account

Post by aristotelian »

runninginvestor wrote: Fri Dec 03, 2021 7:22 am
$100k~> 0.023%

So you could be adding 0.87%+ ~0.01% to ~0.23% based on assets. Then tack on underlying expense ratios.

The wiki has a formula to help see if plan expenses are worth it. It may be worth it to you, especially if you're in a high tax bracket. Which of you are maxing out the other accounts and adding money to this you might be. But maybe not.
I agree this is how to think about it and the fees are excessive. That said, with only 5 years to compound before retirement, the tax advantage is likely to be much higher than the cumulative annual fees during that timeframe. After 5 years, they could roll the funds into a low cost traditional IRA. Again, we need more info about OP's current tax bracket and tax situation in retirement before making a final call.
Topic Author
Stillwater1971
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Re: 457 Fees vs. Taxable Account

Post by Stillwater1971 »

[/quote]

I agree this is how to think about it and the fees are excessive. That said, with only 5 years to compound before retirement, the tax advantage is likely to be much higher than the cumulative annual fees during that timeframe. After 5 years, they could roll the funds into a low cost traditional IRA. Again, we need more info about OP's current tax bracket and tax situation in retirement before making a final call.
[/quote]

My current Tax bracket is 22% (75K gross), but with a Pension on the horizon, I have a good chunk being taken out as Pre-Tax every pay period. I recently added a Roth IRA and Roth 403B to try and balance things since my Pension income (Pre-Tax) places me in the same Tax Bracket, albeit on the low end of 22%.

Would it be advantageous to keep the investments protected from Capital Gains in the 457 and ultimately IRA ( rollover) if it possibly remains untouched for 15+years? The 457 Fees would be costly for 4-5 years until I roll it over, but may cost less in the long run if the money stays untouched for a long time. I am planning to Invest in VTI if the 457 allows it.

I hope I'm making sense?
aristotelian
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Re: 457 Fees vs. Taxable Account

Post by aristotelian »

Stillwater1971 wrote: Mon Dec 06, 2021 1:46 pm
My current Tax bracket is 22% (75K gross), but with a Pension on the horizon, I have a good chunk being taken out as Pre-Tax every pay period. I recently added a Roth IRA and Roth 403B to try and balance things since my Pension income (Pre-Tax) places me in the same Tax Bracket, albeit on the low end of 22%.

Would it be advantageous to keep the investments protected from Capital Gains in the 457 and ultimately IRA ( rollover) if it possibly remains untouched for 15+years? The 457 Fees would be costly for 4-5 years until I roll it over, but may cost less in the long run if the money stays untouched for a long time. I am planning to Invest in VTI if the 457 allows it.

I hope I'm making sense?
How much is the pension? Would it be claimed immediately at retirement or would you have time to do some 457 withdrawals before it takes effect?
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Stillwater1971
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Re: 457 Fees vs. Taxable Account

Post by Stillwater1971 »

aristotelian wrote: Mon Dec 06, 2021 2:04 pm
Stillwater1971 wrote: Mon Dec 06, 2021 1:46 pm
My current Tax bracket is 22% (75K gross), but with a Pension on the horizon, I have a good chunk being taken out as Pre-Tax every pay period. I recently added a Roth IRA and Roth 403B to try and balance things since my Pension income (Pre-Tax) places me in the same Tax Bracket, albeit on the low end of 22%.

Would it be advantageous to keep the investments protected from Capital Gains in the 457 and ultimately IRA ( rollover) if it possibly remains untouched for 15+years? The 457 Fees would be costly for 4-5 years until I roll it over, but may cost less in the long run if the money stays untouched for a long time. I am planning to Invest in VTI if the 457 allows it.

I hope I'm making sense?
How much is the pension? Would it be claimed immediately at retirement or would you have time to do some 457 withdrawals before it takes effect?
The Pension begins immediately once I retire, I don't have a choice. The pension (54k) alone will cover all of my expenses since I will be living and working overseas. The plan is to live my remaining days overseas, but I would never rule out having to return to the States. I am hopeful I will never have to touch my retirement investments for a very long time, but you never know with what life throws at ya.
aristotelian
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Re: 457 Fees vs. Taxable Account

Post by aristotelian »

Stillwater1971 wrote: Mon Dec 06, 2021 3:21 pm
The Pension begins immediately once I retire, I don't have a choice. The pension (54k) alone will cover all of my expenses since I will be living and working overseas. The plan is to live my remaining days overseas, but I would never rule out having to return to the States. I am hopeful I will never have to touch my retirement investments for a very long time, but you never know with what life throws at ya.
Am I correct that you are single? Unfortunately it appears the pension will just barely put you in the 22% bracket in retirement, meaning that there will be no advantage to doing traditional. In this case, I would save in Roth 403b and taxable.
ThankYouJack
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Re: 457 Fees vs. Taxable Account

Post by ThankYouJack »

aristotelian wrote: Mon Dec 06, 2021 3:41 pm
Stillwater1971 wrote: Mon Dec 06, 2021 3:21 pm
The Pension begins immediately once I retire, I don't have a choice. The pension (54k) alone will cover all of my expenses since I will be living and working overseas. The plan is to live my remaining days overseas, but I would never rule out having to return to the States. I am hopeful I will never have to touch my retirement investments for a very long time, but you never know with what life throws at ya.
Am I correct that you are single? Unfortunately it appears the pension will just barely put you in the 22% bracket in retirement, meaning that there will be no advantage to doing traditional. In this case, I would save in Roth 403b and taxable.
Can you clarify the bolded part? The advantage of say traditional vs taxable would be no tax drag and long term capital gains taxes.

Since the OP has a long time frame for withdrawing the money, I'd probably go 457 over taxable. Granted the initial fees will be more (until the money gets transferred to an IRA), but in the long run I think the OP will come out ahead by saving on taxes.
aristotelian
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Re: 457 Fees vs. Taxable Account

Post by aristotelian »

ThankYouJack wrote: Mon Dec 06, 2021 3:56 pm
aristotelian wrote: Mon Dec 06, 2021 3:41 pm
Stillwater1971 wrote: Mon Dec 06, 2021 3:21 pm
The Pension begins immediately once I retire, I don't have a choice. The pension (54k) alone will cover all of my expenses since I will be living and working overseas. The plan is to live my remaining days overseas, but I would never rule out having to return to the States. I am hopeful I will never have to touch my retirement investments for a very long time, but you never know with what life throws at ya.
Am I correct that you are single? Unfortunately it appears the pension will just barely put you in the 22% bracket in retirement, meaning that there will be no advantage to doing traditional. In this case, I would save in Roth 403b and taxable.
Can you clarify the bolded part? The advantage of say traditional vs taxable would be no tax drag and long term capital gains taxes.

Since the OP has a long time frame for withdrawing the money, I'd probably go 457 over taxable. Granted the initial fees will be more (until the money gets transferred to an IRA), but in the long run I think the OP will come out ahead by saving on taxes.
No, the main advantage of traditional is from tax deferral, ie the difference between your current marginal rate and your marginal rate in retirement. In this case there is no difference due to the pension so any money gained from deferral will be lost on withdrawal. Capital gains will be taxed at 22% on withdrawal so he may end up paying *more* in tax by saving in traditional. Yes, there is a slight tax drag on dividends but that is more than offset by the onerous fees charged by the 457.
ThankYouJack
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Re: 457 Fees vs. Taxable Account

Post by ThankYouJack »

aristotelian wrote: Mon Dec 06, 2021 4:44 pm
ThankYouJack wrote: Mon Dec 06, 2021 3:56 pm
aristotelian wrote: Mon Dec 06, 2021 3:41 pm
Stillwater1971 wrote: Mon Dec 06, 2021 3:21 pm
The Pension begins immediately once I retire, I don't have a choice. The pension (54k) alone will cover all of my expenses since I will be living and working overseas. The plan is to live my remaining days overseas, but I would never rule out having to return to the States. I am hopeful I will never have to touch my retirement investments for a very long time, but you never know with what life throws at ya.
Am I correct that you are single? Unfortunately it appears the pension will just barely put you in the 22% bracket in retirement, meaning that there will be no advantage to doing traditional. In this case, I would save in Roth 403b and taxable.
Can you clarify the bolded part? The advantage of say traditional vs taxable would be no tax drag and long term capital gains taxes.

Since the OP has a long time frame for withdrawing the money, I'd probably go 457 over taxable. Granted the initial fees will be more (until the money gets transferred to an IRA), but in the long run I think the OP will come out ahead by saving on taxes.
No, the main advantage of traditional is from tax deferral, ie the difference between your current marginal rate and your marginal rate in retirement. In this case there is no difference due to the pension so any money gained from deferral will be lost on withdrawal. Capital gains will be taxed at 22% on withdrawal so he may end up paying *more* in tax by saving in traditional. Yes, there is a slight tax drag on dividends but that is more than offset by the onerous fees charged by the 457.
Say the OP puts $100 into tax deferral. OP will save 22% on taxes and can invest that tax savings. So the OP would have either $122 in traditionally compared to just $100 in a taxable account. Not factoring in tax drag and fees, let's say the investments double. That's $244 in traditional vs $200 in taxable.

After taxes that would leave:
Traditional $244 * (1-.22) = $190
Taxable $200 - $100 * (1-.15) = $185


aristotelian wrote: Mon Dec 06, 2021 4:44 pm Yes, there is a slight tax drag on dividends but that is more than offset by the onerous fees charged by the 457.
But one should factor in timeframe for the fees / tax drag. The 457 fees will only last maybe 5 years where the tax drag (may be .3% or so depending on state taxes) could last 30+ years depending on longevity.
aristotelian
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Re: 457 Fees vs. Taxable Account

Post by aristotelian »

ThankYouJack wrote: Mon Dec 06, 2021 6:26 pm
aristotelian wrote: Mon Dec 06, 2021 4:44 pm
ThankYouJack wrote: Mon Dec 06, 2021 3:56 pm
aristotelian wrote: Mon Dec 06, 2021 3:41 pm
Stillwater1971 wrote: Mon Dec 06, 2021 3:21 pm
The Pension begins immediately once I retire, I don't have a choice. The pension (54k) alone will cover all of my expenses since I will be living and working overseas. The plan is to live my remaining days overseas, but I would never rule out having to return to the States. I am hopeful I will never have to touch my retirement investments for a very long time, but you never know with what life throws at ya.
Am I correct that you are single? Unfortunately it appears the pension will just barely put you in the 22% bracket in retirement, meaning that there will be no advantage to doing traditional. In this case, I would save in Roth 403b and taxable.
Can you clarify the bolded part? The advantage of say traditional vs taxable would be no tax drag and long term capital gains taxes.

Since the OP has a long time frame for withdrawing the money, I'd probably go 457 over taxable. Granted the initial fees will be more (until the money gets transferred to an IRA), but in the long run I think the OP will come out ahead by saving on taxes.
No, the main advantage of traditional is from tax deferral, ie the difference between your current marginal rate and your marginal rate in retirement. In this case there is no difference due to the pension so any money gained from deferral will be lost on withdrawal. Capital gains will be taxed at 22% on withdrawal so he may end up paying *more* in tax by saving in traditional. Yes, there is a slight tax drag on dividends but that is more than offset by the onerous fees charged by the 457.
Say the OP puts $100 into tax deferral. OP will save 22% on taxes and can invest that tax savings. So the OP would have either $122 in traditionally compared to just $100 in a taxable account. Not factoring in tax drag and fees, let's say the investments double. That's $244 in traditional vs $200 in taxable.

After taxes that would leave:
Traditional $244 * (1-.22) = $190
Taxable $200 - $100 * (1-.15) = $185


aristotelian wrote: Mon Dec 06, 2021 4:44 pm Yes, there is a slight tax drag on dividends but that is more than offset by the onerous fees charged by the 457.
But one should factor in timeframe for the fees / tax drag. The 457 fees will only last maybe 5 years where the tax drag (may be .3% or so depending on state taxes) could last 30+ years depending on longevity.
You are forgetting taxes on the withdrawal.
ThankYouJack
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Re: 457 Fees vs. Taxable Account

Post by ThankYouJack »

aristotelian wrote: Mon Dec 06, 2021 7:26 pm
ThankYouJack wrote: Mon Dec 06, 2021 6:26 pm
aristotelian wrote: Mon Dec 06, 2021 4:44 pm
ThankYouJack wrote: Mon Dec 06, 2021 3:56 pm
aristotelian wrote: Mon Dec 06, 2021 3:41 pm

Am I correct that you are single? Unfortunately it appears the pension will just barely put you in the 22% bracket in retirement, meaning that there will be no advantage to doing traditional. In this case, I would save in Roth 403b and taxable.
Can you clarify the bolded part? The advantage of say traditional vs taxable would be no tax drag and long term capital gains taxes.

Since the OP has a long time frame for withdrawing the money, I'd probably go 457 over taxable. Granted the initial fees will be more (until the money gets transferred to an IRA), but in the long run I think the OP will come out ahead by saving on taxes.
No, the main advantage of traditional is from tax deferral, ie the difference between your current marginal rate and your marginal rate in retirement. In this case there is no difference due to the pension so any money gained from deferral will be lost on withdrawal. Capital gains will be taxed at 22% on withdrawal so he may end up paying *more* in tax by saving in traditional. Yes, there is a slight tax drag on dividends but that is more than offset by the onerous fees charged by the 457.
Say the OP puts $100 into tax deferral. OP will save 22% on taxes and can invest that tax savings. So the OP would have either $122 in traditionally compared to just $100 in a taxable account. Not factoring in tax drag and fees, let's say the investments double. That's $244 in traditional vs $200 in taxable.

After taxes that would leave:
Traditional $244 * (1-.22) = $190
Taxable $200 - $100 * (1-.15) = $185


aristotelian wrote: Mon Dec 06, 2021 4:44 pm Yes, there is a slight tax drag on dividends but that is more than offset by the onerous fees charged by the 457.
But one should factor in timeframe for the fees / tax drag. The 457 fees will only last maybe 5 years where the tax drag (may be .3% or so depending on state taxes) could last 30+ years depending on longevity.
You are forgetting taxes on the withdrawal.
Nope, I subtracted 22% for the traditional withdrawal which brought $244 down to $190.
aristotelian
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Re: 457 Fees vs. Taxable Account

Post by aristotelian »

ThankYouJack wrote: Mon Dec 06, 2021 10:55 pm
Nope, I subtracted 22% for the traditional withdrawal which brought $244 down to $190.
Would you agree that Roth 403b would be preferable?
ThankYouJack
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Re: 457 Fees vs. Taxable Account

Post by ThankYouJack »

aristotelian wrote: Tue Dec 07, 2021 12:03 am
ThankYouJack wrote: Mon Dec 06, 2021 10:55 pm
Nope, I subtracted 22% for the traditional withdrawal which brought $244 down to $190.
Would you agree that Roth 403b would be preferable?
Preferable to what? Here's the Boglehead wiki article on Traditional vs Roth - https://www.bogleheads.org/wiki/Traditional_versus_Roth

But I think we should stick with comparing taxable vs 457 with the high fees which is what the OP wanted to know so things don't get off topic.
runninginvestor
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Re: 457 Fees vs. Taxable Account

Post by runninginvestor »

Also, I Hope that now you're 50 you are also taking advantage of any catch up contributions in all of your accounts as well.
aristotelian
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Re: 457 Fees vs. Taxable Account

Post by aristotelian »

ThankYouJack wrote: Tue Dec 07, 2021 7:46 am
aristotelian wrote: Tue Dec 07, 2021 12:03 am
ThankYouJack wrote: Mon Dec 06, 2021 10:55 pm
Nope, I subtracted 22% for the traditional withdrawal which brought $244 down to $190.
Would you agree that Roth 403b would be preferable?
Preferable to what? Here's the Boglehead wiki article on Traditional vs Roth - https://www.bogleheads.org/wiki/Traditional_versus_Roth

But I think we should stick with comparing taxable vs 457 with the high fees which is what the OP wanted to know so things don't get off topic.
That they should max Roth 403b ahead of traditional 457, since they are getting no tax benefit from traditional 457 but fees are much lower.

I am coming around to your side on taxable being the lowest priority despite the 457 fees. (I had forgotten that the pension also puts them in the 15% bracket for LTCG). My only question would be whether they might spend down the taxable account first. If that is true then the tax drag might not exceed the compounded fees from five years in the 457.
tonyclifton
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Re: 457 Fees vs. Taxable Account

Post by tonyclifton »

aristotelian wrote: Tue Dec 07, 2021 8:56 am That they should max Roth 403b ahead of traditional 457, since they are getting no tax benefit from traditional 457 but fees are much lower.
The minimum fee is 0.25% for the administration plus the few dimes here and there isn't so bad. The other fees appear to be optional. Even if they were not, the full .83% that was calculated seems far "less" than the tax advantages from using pre-tax money.

I know on bogleheads we try to minimize fees (and I do the same) but the tax savings are significant for a 457b and 401k even with somewhat crummy fees. The .83% is what my 401k plan recently charged as an admin fee and Vanguard itself charges a .5% to .53% fee for 401k plans (unless you are at a mega-corps where the employer pays this on behalf of the employee).
Last edited by tonyclifton on Tue Dec 07, 2021 12:30 pm, edited 1 time in total.
ThankYouJack
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Re: 457 Fees vs. Taxable Account

Post by ThankYouJack »

aristotelian wrote: Tue Dec 07, 2021 8:56 am
I am coming around to your side on taxable being the lowest priority despite the 457 fees. (I had forgotten that the pension also puts them in the 15% bracket for LTCG). My only question would be whether they might spend down the taxable account first. If that is true then the tax drag might not exceed the compounded fees from five years in the 457.
I asked that in my first response and upthread the OP replied :
Stillwater1971 wrote: Fri Dec 03, 2021 11:13 am
I am cautiously optimistic that my pension will be able to cover my expenses for quite some time as I will be living overseas with a lower cost of living, so while I mentioned that I may start accessing it at age 60, I should change that age #. In all likelihood I would not need to touch it until I am 65 or 70. So I am looking at 15-20 years from now.
So with taxable it's 15-20+ years of tax drag, plus long term capital gains taxes

With 457 it's 5 years of high fees.

It's impossible to predict the future but the more I think about the better the tax-advantage account seems.
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Stillwater1971
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Re: 457 Fees vs. Taxable Account

Post by Stillwater1971 »

I spoke with the company that runs the 457 traditional plan (TCG Services) and spoke to an Advisor.

There are 3 separate fees that comes standard which totals 0.87% a year. They spread it over 12 months so it comes to .0725% a month. There is also a $1.98 per month fee.

The fees seem quite high.

Would it be worth it if I invested in the 457 for only 5 years or even less? Maybe 1-3 years? I am concerned that if I am able to invest the max each year and with a positive stock market, I'll be paying over $870 in fees once I hit 100k. :shock:

Of course, once I am able to retire, I can roll over the 457 into a Roth and avoid future fees!

So, thoughts if I should do a Taxable or 457?
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retiredjg
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Re: 457 Fees vs. Taxable Account

Post by retiredjg »

Stillwater1971 wrote: Wed Dec 08, 2021 2:44 pm I spoke with the company that runs the 457 traditional plan (TCG Services) and spoke to an Advisor.

There are 3 separate fees that comes standard which totals 0.87% a year. They spread it over 12 months so it comes to .0725% a month. There is also a $1.98 per month fee.

The fees seem quite high.

Would it be worth it if I invested in the 457 for only 5 years or even less? Maybe 1-3 years? I am concerned that if I am able to invest the max each year and with a positive stock market, I'll be paying over $870 in fees once I hit 100k. :shock:

Of course, once I am able to retire, I can roll over the 457 into a Roth and avoid future fees!

So, thoughts if I should do a Taxable or 457?
Are you considering Roth 457 or traditional 457?

Roth 457 does not offer you anything that a taxable account does not offer.

Putting money into traditional 457 and rolling it to Roth sort of defeats the purpose of putting the money into traditional.
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Stillwater1971
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Re: 457 Fees vs. Taxable Account

Post by Stillwater1971 »

retiredjg wrote: Wed Dec 08, 2021 4:36 pm
Stillwater1971 wrote: Wed Dec 08, 2021 2:44 pm I spoke with the company that runs the 457 traditional plan (TCG Services) and spoke to an Advisor.

There are 3 separate fees that comes standard which totals 0.87% a year. They spread it over 12 months so it comes to .0725% a month. There is also a $1.98 per month fee.

The fees seem quite high.

Would it be worth it if I invested in the 457 for only 5 years or even less? Maybe 1-3 years? I am concerned that if I am able to invest the max each year and with a positive stock market, I'll be paying over $870 in fees once I hit 100k. :shock:

Of course, once I am able to retire, I can roll over the 457 into a Roth and avoid future fees!

So, thoughts if I should do a Taxable or 457?
Are you considering Roth 457 or traditional 457?

Roth 457 does not offer you anything that a taxable account does not offer.

Putting money into traditional 457 and rolling it to Roth sort of defeats the purpose of putting the money into traditional.
I'm sorry, I meant roll it over to a Traditional IRA. It appears they only offer a Traditional 457.

The 457 is more expensive for the first 5 years. But once I roll it over, those high fees stop. Then it's protected from taxes like capital gains, etc. right? If I keep it in the IRA for 10 years or more before I start withdrawing, which makes more sense in the savings?
tonyclifton
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Re: 457 Fees vs. Taxable Account

Post by tonyclifton »

Stillwater1971 wrote: Wed Dec 08, 2021 2:44 pm I spoke with the company that runs the 457 traditional plan (TCG Services) and spoke to an Advisor.

There are 3 separate fees that comes standard which totals 0.87% a year. They spread it over 12 months so it comes to .0725% a month. There is also a $1.98 per month fee.

The fees seem quite high.

Would it be worth it if I invested in the 457 for only 5 years or even less? Maybe 1-3 years? I am concerned that if I am able to invest the max each year and with a positive stock market, I'll be paying over $870 in fees once I hit 100k. :shock:

Of course, once I am able to retire, I can roll over the 457 into a Roth and avoid future fees!

So, thoughts if I should do a Taxable or 457?
To put the fees in perspective, I went back to a thread where I found some fees to compare:

Empower Retirement (0.82%)
Voya (0.47%)
Vanguard (0.55%).

All plans have admin fees whether paid by the employee or the employer.

We decided to invest in a 457b for just 5 years (we are just about end year 1 of the 5 years).

The 457b is equivalent to a 401k from a tax perspective.

Have you reviewed this page on investment order priority when you have a "high cost fund"?

https://www.bogleheads.org/wiki/Priorit ... cost_funds

PS - You cannot "roll" a 457b into a Roth IRA. You may be able to "roll" it into a Rollover IRA or "convert" it into a Roth IRA (by paying the taxes). You should check and confirm with the 457b plan on their options to rollover or convert.
ThankYouJack
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Re: 457 Fees vs. Taxable Account

Post by ThankYouJack »

Stillwater1971 wrote: Wed Dec 08, 2021 2:44 pm I spoke with the company that runs the 457 traditional plan (TCG Services) and spoke to an Advisor.

There are 3 separate fees that comes standard which totals 0.87% a year. They spread it over 12 months so it comes to .0725% a month. There is also a $1.98 per month fee.

The fees seem quite high.

Would it be worth it if I invested in the 457 for only 5 years or even less? Maybe 1-3 years? I am concerned that if I am able to invest the max each year and with a positive stock market, I'll be paying over $870 in fees once I hit 100k. :shock:

Of course, once I am able to retire, I can roll over the 457 into a Roth and avoid future fees!

So, thoughts if I should do a Taxable or 457?
Why don't you estimate how much you'll pay in taxes if you go taxable?
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retiredjg
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Re: 457 Fees vs. Taxable Account

Post by retiredjg »

Stillwater1971 wrote: Wed Dec 08, 2021 6:00 pm
retiredjg wrote: Wed Dec 08, 2021 4:36 pm
Stillwater1971 wrote: Wed Dec 08, 2021 2:44 pm I spoke with the company that runs the 457 traditional plan (TCG Services) and spoke to an Advisor.

There are 3 separate fees that comes standard which totals 0.87% a year. They spread it over 12 months so it comes to .0725% a month. There is also a $1.98 per month fee.

The fees seem quite high.

Would it be worth it if I invested in the 457 for only 5 years or even less? Maybe 1-3 years? I am concerned that if I am able to invest the max each year and with a positive stock market, I'll be paying over $870 in fees once I hit 100k. :shock:

Of course, once I am able to retire, I can roll over the 457 into a Roth and avoid future fees!

So, thoughts if I should do a Taxable or 457?
Are you considering Roth 457 or traditional 457?

Roth 457 does not offer you anything that a taxable account does not offer.

Putting money into traditional 457 and rolling it to Roth sort of defeats the purpose of putting the money into traditional.
I'm sorry, I meant roll it over to a Traditional IRA. It appears they only offer a Traditional 457.

The 457 is more expensive for the first 5 years. But once I roll it over, those high fees stop. Then it's protected from taxes like capital gains, etc. right? If I keep it in the IRA for 10 years or more before I start withdrawing, which makes more sense in the savings?
Rolling the 457 into tIRA means you will no longer have the ability to use that money penalty free before 59.5. If you don't need the money during that time, the plan works.

Yes, money in an IRA does not have capital gains tax. But I wonder if you are mis-construing the importance of capital gains tax in a taxable account. If the money is invested in a tax-efficient way, there should be little tax generated by your taxable account unless you actually sell shares. If you sell shares, there will be capital gains tax (but the tax rate on long term gains is lower than the tax rate on the IRA).
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Stillwater1971
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Re: 457 Fees vs. Taxable Account

Post by Stillwater1971 »

retiredjg wrote: Thu Dec 09, 2021 8:22 am
Stillwater1971 wrote: Wed Dec 08, 2021 6:00 pm
retiredjg wrote: Wed Dec 08, 2021 4:36 pm
Stillwater1971 wrote: Wed Dec 08, 2021 2:44 pm I spoke with the company that runs the 457 traditional plan (TCG Services) and spoke to an Advisor.

There are 3 separate fees that comes standard which totals 0.87% a year. They spread it over 12 months so it comes to .0725% a month. There is also a $1.98 per month fee.

The fees seem quite high.

Would it be worth it if I invested in the 457 for only 5 years or even less? Maybe 1-3 years? I am concerned that if I am able to invest the max each year and with a positive stock market, I'll be paying over $870 in fees once I hit 100k. :shock:

Of course, once I am able to retire, I can roll over the 457 into a Roth and avoid future fees!

So, thoughts if I should do a Taxable or 457?
Are you considering Roth 457 or traditional 457?

Roth 457 does not offer you anything that a taxable account does not offer.

Putting money into traditional 457 and rolling it to Roth sort of defeats the purpose of putting the money into traditional.
I'm sorry, I meant roll it over to a Traditional IRA. It appears they only offer a Traditional 457.

The 457 is more expensive for the first 5 years. But once I roll it over, those high fees stop. Then it's protected from taxes like capital gains, etc. right? If I keep it in the IRA for 10 years or more before I start withdrawing, which makes more sense in the savings?
Rolling the 457 into tIRA means you will no longer have the ability to use that money penalty free before 59.5. If you don't need the money during that time, the plan works.

Yes, money in an IRA does not have capital gains tax. But I wonder if you are mis-construing the importance of capital gains tax in a taxable account. If the money is invested in a tax-efficient way, there should be little tax generated by your taxable account unless you actually sell shares. If you sell shares, there will be capital gains tax (but the tax rate on long term gains is lower than the tax rate on the IRA).
I have no plans of withdrawing any money from the 457 before 59.5, so that perk wouldn't apply. The main perk I am looking for is it being Tax-Sheltered, even though I would have to pay taxes on it eventually since it's a pre-tax 457.

I honestly need to do more homework on the aspects of a Taxable Brokerage Account and what taxes I would pay. Here are a few things that might help determine my taxes in a Taxable Brokerage Account:

1. I live in Texas (no state tax).
2. My taxable income is around 66k due to a nice size portion towards my pension pre-tax. So I'm in the 22% tax bracket. I'll be in the same tax bracket when I receive my pension so I'm in that "gray area" so I have some Traditional and Roth IRA Investments.
3. I am single but file under Head of Household due to my son living with me.
4. Planning to invest in VTI ( keep it as an ETF).
5. No plan to withdraw for the next 15 years due to stable job and Emergency Fund.

What would taxes look like in the Taxable Brokerage annually?
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Re: 457 Fees vs. Taxable Account

Post by tonyclifton »

Stillwater1971 wrote: Thu Dec 09, 2021 12:48 pm What would taxes look like in the Taxable Brokerage?
I own VTI in a taxable account.

1. I bought the shares using after-tax dollars from my paycheck from work. So I paid taxes on the money used to buy the shares. If I bought the same or similar shares in my 401k or 457b I would be using before-tax dollars to purchase the shares.

2. Usually a few times per year, VTI pays out a dividend. These dividends will be taxed on your tax returns. You can check the Vanguard website or other online sites for the dividend history. In my taxable account, I reinvest the dividends into more VTI. I will eventually have to pay some tax on these reinvested dividends. How much, I don’t know because I haven’t done my taxes. Could be anywhere from zero to a little bit of money.

3. One day in the future, when I sell the shares of VTI In my taxable account I will have to pay taxes on the hopeful increase of what I paid for the shares (cost basis) and the sale price of the shares. I will not worry about this until I need to sell the shares.

Does this help illustrate taxes and VTI?
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retiredjg
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Re: 457 Fees vs. Taxable Account

Post by retiredjg »

If you plan to stay single (yes, I know these things are not set in stone), you will have to have a very low income in retirement (after the child has flown the coop) to be at a tax rate less than 22%. For that reason, if you expect to stay single, you might want to go ahead and pay tax at 22% to get money into taxable rather than pay 25% (or whatever) when you take money out of IRA.

Once in taxable, you pay little tax if you invest in things that don't cause a lot of taxable income...unless you sell shares. Broad index funds like total stock and total international are very tax-efficient and don't cause a lot of taxable income (without selling shares) and their dividends are mostly qualified so they are taxed at the lower long term capital gains/qualified dividend rate of 15%.

Maybe people who have money in taxable could tell you how much they are getting in taxable dividends.

The same funds, might cost you 25% (or whatever after rates go back up) if put into the 457 and sent to IRA.

Your situation is complex with many moving parts. It is hard to know what will be "best" and it may not even be possible to know what is "best".

I'm just saying you may have more fear of taxes in the taxable account than is warranted. Maybe you should learn something about that before making this decision.
ThankYouJack
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Re: 457 Fees vs. Taxable Account

Post by ThankYouJack »

tonyclifton wrote: Thu Dec 09, 2021 1:57 pm

2. Usually a few times per year, VTI pays out a dividend. These dividends will be taxed on your tax returns. You can check the Vanguard website or other online sites for the dividend history. In my taxable account, I reinvest the dividends into more VTI. I will eventually have to pay some tax on these reinvested dividends. How much, I don’t know because I haven’t done my taxes. Could be anywhere from zero to a little bit of money.
Not sure what you mean by the bolded part. If the money is in your taxable account, aren't you paying taxes on the dividends annually?
tonyclifton
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Re: 457 Fees vs. Taxable Account

Post by tonyclifton »

ThankYouJack wrote: Thu Dec 09, 2021 2:31 pm
tonyclifton wrote: Thu Dec 09, 2021 1:57 pm

2. Usually a few times per year, VTI pays out a dividend. These dividends will be taxed on your tax returns. You can check the Vanguard website or other online sites for the dividend history. In my taxable account, I reinvest the dividends into more VTI. I will eventually have to pay some tax on these reinvested dividends. How much, I don’t know because I haven’t done my taxes. Could be anywhere from zero to a little bit of money.
Not sure what you mean by the bolded part. If the money is in your taxable account, aren't you paying taxes on the dividends annually?
Yes, for me, eventually equals annually (after I receive my 1099 when I pay my personal income taxes).

I do not pay the taxes at the time the dividend is paid out and do not pay quarterly estimated taxes.

Also, I checked...The last dividend was on 9/24/2021 and distributed $.7242 per share of income (not short-term and not long-term gains). If someone had 100 shares they would have an additional $72.42 of income added to their tax return on shares valued at $22,950. This amount of tax seems relatively insignificant in the grand scheme of things.
Last edited by tonyclifton on Thu Dec 09, 2021 3:18 pm, edited 1 time in total.
ThankYouJack
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Re: 457 Fees vs. Taxable Account

Post by ThankYouJack »

Stillwater1971 wrote: Thu Dec 09, 2021 12:48 pm I have no plans of withdrawing any money from the 457 before 59.5, so that perk wouldn't apply. The main perk I am looking for is it being Tax-Sheltered, even though I would have to pay taxes on it eventually since it's a pre-tax 457.

I honestly need to do more homework on the aspects of a Taxable Brokerage Account and what taxes I would pay. Here are a few things that might help determine my taxes in a Taxable Brokerage Account:

1. I live in Texas (no state tax).
2. My taxable income is around 66k due to a nice size portion towards my pension pre-tax. So I'm in the 22% tax bracket. I'll be in the same tax bracket when I receive my pension so I'm in that "gray area" so I have some Traditional and Roth IRA Investments.
3. I am single but file under Head of Household due to my son living with me.
4. Planning to invest in VTI ( keep it as an ETF).
5. No plan to withdraw for the next 15 years due to stable job and Emergency Fund.

What would taxes look like in the Taxable Brokerage annually?
Here's an estimate to show my reasoning for a 457:

VTI typically has a dividend yield around 2%. Most of the dividends are qualified (let's call it 100%) so you'd be paying about 15% tax on the dividend. This comes out to a tax drag of 0.3%.

So the different between 457 fees (.87%) vs taxable (.3%) is .57%

Let's say the 457 balance goes up $20k for the 5 years you have it there.

After each year you'd be paying this much more for the 457:
$20k * .57% = $114
$40k * .57% = $228
$60k * .57% = $342
$80k * .57% = $456
$100k * .57% = $570

So $1,710 more for the 457 after 5 years.

But after that, the .87% fee goes away while the tax drag remains. Assuming 0 growth because I'm lazy ;), the tax drag would be $100k*.3% = $300 per year.

$300 * 15 = $4,500

(and the tax drag will continue to cost you past this point assuming some money remains in the taxable account)

So this shows how the impact of the tax drag over time can outweigh the short term high fees. The different would be even greater if we assume a return of say 5% and also factor in long term capital gain taxes.

I don't think I missed anything major but I'm sure others on here will correct me if I'm off.
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Stillwater1971
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Re: 457 Fees vs. Taxable Account

Post by Stillwater1971 »

Thank you Jack!

It seems the 457 is the way to go in the long run. As long as I don't touch the money for a minimum of 6 years, the 457 seems to be the better way to go. I guess the other option I have too, is that I can be more flexible with Bonds added with a 457 that I probably don't wanna do in a Taxable Account?

I don't know what will happen with taxes in the future, but I don't plan to need to pull a lot from my retirement savings when the cost of living begins to catch up with me. If it does, it seem traditional IRAs would be the better place to withdraw from before Roth, right?

Another option? Maybe split investments between a 457 and Taxable. I hate overthinking things when it comes to $$!
MrCheapo
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Re: 457 Fees vs. Taxable Account

Post by MrCheapo »

Stillwater1971 wrote: Thu Dec 02, 2021 1:22 pm I am currently 50 years old and will be retiring at age 55 with my current job/career of 30 years. I currently max out my Roth IRS and 403B Roth and I will be encountering additional income next year that will allow me to invest more.

My question is, which will be better to invest in: a Govt 457 or Taxable Acct? This would occur after maxing out my Roth IRA and 403B Roth.

What concerns me is the Fees for the 457 through the 3rd party Vendor( TCG Services).
See below for the 457 Govt:

Administration Fees: $22.00 per participant per year, 0.25% of assets, paid by the participants (capped at $150,000 in assets)
Advisor Fees:0.10% of assets, paid by participant
Consultant Fees: 0.42% of assets, paid by participant
Plan Coordinator Fees: $0.15 per participant per month, paid by participant
Custodian Fees: 0.10%, paid by participant
Other Fees:$30 Distribution Fee, $50 Loan Set Up, All of the above paid by participant


*Pre-Tax

My 403B is pretty good which allows me to Invest in Vanguard and the only fees is from Vanguard which charges a straight annual $60 403b fee and then the expense ratio. Any remaining 3rd party fees is paid by my employer. :sharebeer

I would have 4 years left before retiring when I encounter the extra $, so would the 457 be ok to utilize during the last year or two before I retire, and then upon retirement roll it over into my IRA? Or just avoid it all together and stick with a Taxable Acct?

One more thing to add: Despite early retirement at 55, I will be working overseas for another 5 years. So I don't plan to tap into my retirement until at least 60 years of age.
If your tax bracket after retirement will be less than before retirement it's a no brainer. Go with the 457b as it funded with pre-tax dollars.
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