prioritizing 457(b)

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Topic Author
Dadachihuahua
Posts: 22
Joined: Sat Feb 04, 2017 6:38 am

prioritizing 457(b)

Post by Dadachihuahua »

My employer just let me know that I am now eligible to contribute to our organization’s non-qualified 457(b) plan. It is managed by Vanguard and has great low cost investment options. I’m confident in the stability of the organization and am willing to accept the risks associated with a non-governmental 457.

We strive to keep our annual expenses low as practicable and save as much as we can. Our goal is to shift gears at some point, move from our HCOL area to a certain specific LCOL area and live in another fashion. To realize this goal, we’re saving aggressively now. Our incomes have increased significantly in the last few years.

Ages: me 40; wife 35. Daughter 7.
Pre-tax savings: 750,000
Roth: 250,000
Taxable: 120,000
529: 65,000

Overall AA: 70/30
Combined annual income: 350,000

Annual savings:

His 401k: 61,000 (includes mega-backdoor Roth)
Her 401k: 28,000
I Bonds: 20,000
Taxable: 27,000
529: 16,000

How should we prioritize contributing to the 457 compared to the other available savings options? In particular, how should we think about it in relation to taxable savings?

Thank you so much for your perspective.
Makefile
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Joined: Fri Apr 22, 2016 11:03 pm

Re: prioritizing 457(b)

Post by Makefile »

Would it make sense to own bonds in the 457 and stocks in the 401(k), to the extent practical, with the expectation that stocks will grow more bonds in the long term and therefore less will be at risk to creditors in the 457 many decades from now?

Looks like you can't roll over such a 457 to an IRA either, so something else to be aware of.
Sprucebark
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Re: prioritizing 457(b)

Post by Sprucebark »

Makefile wrote: Wed Jan 19, 2022 7:45 pm
Looks like you can't roll over such a 457 to an IRA either, so something else to be aware of.
Not sure what OP means by a “non qualified” plan. Maybe the OP can clarify if it is a governmental or non governmental plan.

Governmental- yes you can do many rollovers.

Non governmental- no you cannot roll it over. Your options are limited. Kind of a bad deal if you ask me. If you leave it where it’s at you risk losing assets in a bankruptcy filing. If you take it out early you don’t pay the 10% penalty, but you lose the tax deferred growth. I’m not sure if you can roll into another non governmental 457b plan.

https://www.irs.gov/retirement-plans/co ... 457b-plans

https://www.irs.gov/pub/irs-tege/rollover_chart.pdf
pizzy
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Re: prioritizing 457(b)

Post by pizzy »

Sprucebark wrote: Wed Jan 19, 2022 9:12 pm
Makefile wrote: Wed Jan 19, 2022 7:45 pm
Looks like you can't roll over such a 457 to an IRA either, so something else to be aware of.
Not sure what OP means by a “non qualified” plan. Maybe the OP can clarify if it is a governmental or non governmental plan.

Governmental- yes you can do many rollovers.

Non governmental- no you cannot roll it over. Your options are limited. Kind of a bad deal if you ask me. If you leave it where it’s at you risk losing assets in a bankruptcy filing. If you take it out early you don’t pay the 10% penalty, but you lose the tax deferred growth. I’m not sure if you can roll into another non governmental 457b plan.

https://www.irs.gov/retirement-plans/co ... 457b-plans

https://www.irs.gov/pub/irs-tege/rollover_chart.pdf
He said non-gov in post.
Vanguard/Fidelity | 76% US Stock | 16% Int'l Stock | 8% Cash
rmdashrfsplat
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Joined: Thu Dec 17, 2020 1:22 pm

Re: prioritizing 457(b)

Post by rmdashrfsplat »

I also have access to a non-gov 457b at a stable employer that offers equal payments up to 15 yrs. I plan to retire early and use the 457b distributions over first years of retirement as a Roth ladder marinates. I am currently maxing my 457b and 403b. If I need to taper one due to increased expenses in the future, it will probably be the 403b. I've mainly pushed all my taxable investing into the 457b at this point. I prefer the 457b since it's more flexible than 403b withdrawal-wise, is a de facto unemployment fund and has no tax drag like taxable. I have enough taxable now that I can tap it for emergency savings as well

Risks I'm comfortable with are assuming this will be my final employer and that the 457b will remain solvent and steady as-is. I started investing in the 457b late enough that it will be a relatively small amount of retirement savings (less than 20%).
Topic Author
Dadachihuahua
Posts: 22
Joined: Sat Feb 04, 2017 6:38 am

Re: prioritizing 457(b)

Post by Dadachihuahua »

rmdashrfsplat wrote: Wed Jan 19, 2022 10:09 pm I also have access to a non-gov 457b at a stable employer that offers equal payments up to 15 yrs. I plan to retire early and use the 457b distributions over first years of retirement as a Roth ladder marinates. I am currently maxing my 457b and 403b. If I need to taper one due to increased expenses in the future, it will probably be the 403b. I've mainly pushed all my taxable investing into the 457b at this point. I prefer the 457b since it's more flexible than 403b withdrawal-wise, is a de facto unemployment fund and has no tax drag like taxable. I have enough taxable now that I can tap it for emergency savings as well

Risks I'm comfortable with are assuming this will be my final employer and that the 457b will remain solvent and steady as-is. I started investing in the 457b late enough that it will be a relatively small amount of retirement savings (less than 20%).
Thank you for this perspective. The expectation about this this being my final employer prior to the major career shift is one I hadn't considered explicitly, but it's certainly important. I can elect to take equal payments over 5, 10 or 15 years, so my approach will be similar to what you outlined above. The 457 reduces my tax burden now and shifts it to a time when our AGI should be significantly lower.

Cheers!
dred pirate
Posts: 667
Joined: Tue Nov 27, 2018 10:46 am

Re: prioritizing 457(b)

Post by dred pirate »

I personally would have a hard time putting money in the 457 before other avenues as it is a non-governmental plan. I am sure you think it is a stable company, but so did the employees at Enron and Arthur Anderson. The thing is, crazy things happen. It is a risk, and everybody has a different risk tolerance.
For me I would put the 457 AFTER the 401k/HSA/IRA (all depending on elgibility). If you have maxed them out - then it is up to you. I would prioritize it over a taxable account easily if a governmental (like mine) - but over taxable - well, that is a hard one personally. I just don't have the risk tolerance to do that, regardless of how stable I think the company is.

cheers
DP
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retiredjg
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Re: prioritizing 457(b)

Post by retiredjg »

One of the serious downsides of a non-gov 457 is a bad distribution schedule. Taking a lump sum or even taking the balance over 5 years may not work out well for your taxes. But some have distribution options that are not a catastrophe. You should find out what your options are and see if they fit with when you think you can use the money.

Looks like you are in the 24% tax bracket (not one of the high brackets) and you already have a nice sum saved in tax-deferral. I'm not sure you "need" to add a third tax-deferred account myself. If you continue to just use the tax-deferred accounts you are already using, you may have plenty. Particularly if either of you has a pension coming.

If you plan an early retirement, the non-gov 457 becomes more attractive. If not, I'd use taxable instead.
Topic Author
Dadachihuahua
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Re: prioritizing 457(b)

Post by Dadachihuahua »

dred pirate wrote: Thu Jan 20, 2022 2:42 pm I personally would have a hard time putting money in the 457 before other avenues as it is a non-governmental plan. I am sure you think it is a stable company, but so did the employees at Enron and Arthur Anderson. The thing is, crazy things happen. It is a risk, and everybody has a different risk tolerance.
For me I would put the 457 AFTER the 401k/HSA/IRA (all depending on elgibility). If you have maxed them out - then it is up to you. I would prioritize it over a taxable account easily if a governmental (like mine) - but over taxable - well, that is a hard one personally. I just don't have the risk tolerance to do that, regardless of how stable I think the company is.

cheers
DP
Makes sense and I agree. I would fund the 457 only after maxing all other available tax advantaged options, including after-tax 401k to Roth. I could have made it clearer that the central decision is between 457 and taxable.

Without getting too specific, I work in a stable, highly regulated industry for a well regarded organization. The likelihood of Enron-style shenanigans is low. Personally, that's a risk I'm willing to accept.

Thanks for helping clarify my thinking!
LiveItUpBySaving
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Joined: Mon Oct 31, 2016 11:06 am

Re: prioritizing 457(b)

Post by LiveItUpBySaving »

With the information you have provided. I would skip the 457 and focus on loading up the Taxable for the next few years until you have at least 5 years worth of expenses there. Of course, I'd keep on contributing to the 401K's and 529's and do Taxable with the remainder.

Why? Because this will allow you tons of extra flexibility in the future:
-5 year Roth Conversion Ladders
-early retirement while allowing ACA subsidies for health insurance
-spending money as needed for large purchases
-Tax Loss harvesting
-etc...

After you have that sum, take another look at the 457.

Hope this is helpful.
dred pirate
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Joined: Tue Nov 27, 2018 10:46 am

Re: prioritizing 457(b)

Post by dred pirate »

minus the bankruptcy risk - you can use the 457 for early retirement before the age of 59 1/2 without the 10% penalty (somebody correct me if I am wrong with this)
tonyclifton
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Re: prioritizing 457(b)

Post by tonyclifton »

Another perk…Please check your plan, you may be allowed to do significant “catch up” contributions at age 50 that are greater than what you can do in a 401k.

Feature by feature 457b are the same or better than 401k. Especially if your plan has a few investment options that you like or can move with.

I wish we learned about it and started contributing to it sooner.
Admiral
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Re: prioritizing 457(b)

Post by Admiral »

tonyclifton wrote: Fri Jan 21, 2022 6:49 pm Another perk…Please check your plan, you may be allowed to do significant “catch up” contributions at age 50 that are greater than what you can do in a 401k.

Feature by feature 457b are the same or better than 401k. Especially if your plan has a few investment options that you like or can move with.

I wish we learned about it and started contributing to it sooner.
Some 457s allow larger, pre-retirement "catch up" contributions ($41k total in 2022) the three years preceding the plan's normal retirement age. Not all plans allow it, and they don't allow it if you've maxed your contributions in the past. It may be only governmental 457s, I'm not sure.

The OP would have to look into this.
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retiredjg
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Re: prioritizing 457(b)

Post by retiredjg »

Admiral wrote: Fri Jan 21, 2022 7:14 pm
tonyclifton wrote: Fri Jan 21, 2022 6:49 pm Another perk…Please check your plan, you may be allowed to do significant “catch up” contributions at age 50 that are greater than what you can do in a 401k.

Feature by feature 457b are the same or better than 401k. Especially if your plan has a few investment options that you like or can move with.

I wish we learned about it and started contributing to it sooner.
Some 457s allow larger, pre-retirement "catch up" contributions ($41k total in 2022) the three years preceding the plan's normal retirement age. Not all plans allow it, and they don't allow it if you've maxed your contributions in the past. It may be only governmental 457s, I'm not sure.

The OP would have to look into this.
I have heard of something like this, but I think it was only for teachers or some similar class of employees. Of course, that would only apply to a governmental 457.

I'd be surprised if $41k in catch up is allowed for the original poster in a non-governmental 457. However, I've been wrong before and I'm sure I'll be wrong again. :happy
Topic Author
Dadachihuahua
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Joined: Sat Feb 04, 2017 6:38 am

Re: prioritizing 457(b)

Post by Dadachihuahua »

retiredjg wrote: Thu Jan 20, 2022 3:13 pm Looks like you are in the 24% tax bracket (not one of the high brackets) and you already have a nice sum saved in tax-deferral. I'm not sure you "need" to add a third tax-deferred account myself. If you continue to just use the tax-deferred accounts you are already using, you may have plenty. Particularly if either of you has a pension coming.

If you plan an early retirement, the non-gov 457 becomes more attractive. If not, I'd use taxable instead.
We are in the 24% bracket. Is the implication that the savings from deferring taxes aren't significant enough to favor 457 over taxable? We do have ambitions for early retirement, ideally within the next decade or so.
LiveItUpBySaving wrote: Thu Jan 20, 2022 3:28 pm With the information you have provided. I would skip the 457 and focus on loading up the Taxable for the next few years until you have at least 5 years worth of expenses there. Of course, I'd keep on contributing to the 401K's and 529's and do Taxable with the remainder.

Why? Because this will allow you tons of extra flexibility in the future:
-5 year Roth Conversion Ladders
-early retirement while allowing ACA subsidies for health insurance
-spending money as needed for large purchases
-Tax Loss harvesting
-etc...
I haven't looked closely into things like keeping earned income below a certain threshold for ACA subsidies, yet. We still have a long way to go before we start thinking seriously about downshifting our careers. At first blush, taking equal distributions over a 15 year period, like my plan allows, seems to provide a nice little cushion before 65. That said, I wouldn't want it to cause headaches down the road.

We will have some large expenses when we enter the next phase of our lives like finding our forever home. That does seems to make a heavier taxable account really attractive.
Admiral wrote: Fri Jan 21, 2022 7:14 pm Some 457s allow larger, pre-retirement "catch up" contributions ($41k total in 2022) the three years preceding the plan's normal retirement age. Not all plans allow it, and they don't allow it if you've maxed your contributions in the past. It may be only governmental 457s, I'm not sure.
The plan does allow for catch up contributions of up to $41k. However, eligibility is limited to the three years prior to "normal retirement age" - defined in the plan as 65. So for my situation the catch up feature is probably moot.

Thanks to all for giving me so much to consider. The feedback and thoughts really are a gift.
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retiredjg
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Re: prioritizing 457(b)

Post by retiredjg »

Dadachihuahua wrote: Sat Jan 22, 2022 1:04 pm
retiredjg wrote: Thu Jan 20, 2022 3:13 pm Looks like you are in the 24% tax bracket (not one of the high brackets) and you already have a nice sum saved in tax-deferral. I'm not sure you "need" to add a third tax-deferred account myself. If you continue to just use the tax-deferred accounts you are already using, you may have plenty. Particularly if either of you has a pension coming.

If you plan an early retirement, the non-gov 457 becomes more attractive. If not, I'd use taxable instead.
We are in the 24% bracket. Is the implication that the savings from deferring taxes aren't significant enough to favor 457 over taxable?
Kind of. If you were in the 35% tax bracket now and expected to be about 22% in retirement, that is a big difference. If you are in the 24% bracket now and expect to be about 22% in retirement, that's not such a big difference. Deferring in a high tax bracket is "better" and "more productive" than deferring in a lower bracket if, in either case, you end up in about the same place.

We do have ambitions for early retirement, ideally within the next decade or so.
If this is a reasonable goal instead of a pipe dream, you can go ahead and save a lot in tax-deferred accounts without them becoming a problem later on. This is because you have more years to spend down the tax-deferred accounts and/or convert them to Roth at a reasonable tax rate.

At first blush, taking equal distributions over a 15 year period, like my plan allows, seems to provide a nice little cushion before 65.
From what I've read, this is a very good distribution option and will give you money in those years before 59.5 when you don't have such easy access to your 401k/IRA savings.
bogledogle
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Re: prioritizing 457(b)

Post by bogledogle »

I would think of a non-govt 457b as a taxable account that does not have loss harvesting capability, but allows you gain harvest cost free when needed. Is this account limited to specific funds? Some accounts have the capability to link to a brokerage and buy anything on the open market in that case you can use this account to trade funds/stocks that you may want to hold for short term.

457b can also be great early retirement tools, but look very closely at the fees, terms and conditions on withdrawals. Some of the non-govt plans can be very weird.
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