Roth 457 vs Traditional 457

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Topic Author
radeon962
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Roth 457 vs Traditional 457

Post by radeon962 »

Just trying to figure out if I should open up a new Roth 457 at work.

I currently have a 401 and 457 through work and a Roth at Vanguard outside of my retirement savings at work.

Just thinking it may be good to setup a new Roth 457 at work as I can direct deposit from each paycheck to seed it as I am retiring next January 2023 but will continue to work at another job for another 5-8 years depending on when my youngest child is graduated from college.

I currently contribute $1,000/pay (bi-weekly)to my 457 and I could split this to contribute to both the 457 and the Roth 457 over the next year just to create the account.

There are no income restrictions on the regular 457 or Roth 457 other than subject to the annual 457 contribution limit of $27,000 (I’ll be 54 in a week).

Reason I am primarily considering starting the Roth 457 in addition to my outside Roth is then I could do in-plan conversions in the future from my 401 or 457 to the in-plan Roth.

Roth 457 is subject to RMD’s so that takes away one benefit when comparing it to the traditional Roth.

Roth 457 is subject to the 5-year rule from first Roth 457 contribution.

Roth 457 is also subject to the early withdrawal penalty under 59.5, whereas the regular 457 is not and funds are available to use without penalty upon separation of service.

Regular 457 is a before-tax contribution so it helps me now during my high earning years with most of the kids out of the house while the Roth 457 is an after-tax contribution.

Tax rate in retirement will be less than while working based on my expected withdrawal for expenses in retirement but situations can always change in the future so I’m leaning towards setting up the Roth 457 just in case as it would only be a minimal amount over the next year and potentially give me another option/avenue in the future should I need it.

Thanks, Bill
MHA556
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Re: Roth 457 vs Traditional 457

Post by MHA556 »

Well you didn’t give much information, but based on what you did give, I don’t see a reason to do a Roth.

But I also don’t see why you would retire, unless you get a pension, which I suspect you might since you have a 457...

But if you have done the math, and your income from all sources will be lower than current levels, and with RMD’s that will stay the same, then you may not have a lot of reason to add the Roth complexity and pay higher taxes now. It also would add a lot of restrictions to spending any of it compared to leaving it as a traditional 457 which you have access to immediately after retiring.

Saying this as someone with a pension and a 457, and I am converting much of it to Roth....
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retiredjg
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Re: Roth 457 vs Traditional 457

Post by retiredjg »

radeon962 wrote: Wed Jan 26, 2022 8:08 am Just trying to figure out if I should open up a new Roth 457 at work.
It would not be a new 457. It would be making Roth contributions to the same 457 plan.

I currently have a 401 and 457 through work and a Roth at Vanguard outside of my retirement savings at work.
Not what you asked, but it is possible you may be contributing too much to your tax-deferred accounts anyway, especially if you have a pension coming. Switching some of your contributions to Roth may be a good idea for more than one reason.

Reason I am primarily considering starting the Roth 457 in addition to my outside Roth is then I could do in-plan conversions in the future from my 401 or 457 to the in-plan Roth.
Have you checked to be sure you can do in-plan conversions after you leave that employer? Sometimes you can't. I'm also not sure you could make an in-plan conversion from the 401k to the 457 (doesn't sound quite right to me).

Roth 457 is subject to RMD’s so that takes away one benefit when comparing it to the traditional Roth.
This is easily avoided by rolling the 457 to IRA/Roth IRA before RMDs start.

Roth 457 is subject to the 5-year rule from first Roth 457 contribution.
Not really. That' is now how it works.

Roth 457 is also subject to the early withdrawal penalty under 59.5, whereas the regular 457 is not and funds are available to use without penalty upon separation of service.
This is easily avoided by rolling the Roth 457 to Roth IRA. But that only works well if the plan will allow you to roll out the Roth account and leave the traditional account. You should find out now.
Aged Maduro
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Re: Roth 457 vs Traditional 457

Post by Aged Maduro »

I max out my 457 every year with Roth contributions. We also have a Roth IRA and Spousal Roth IRA. I put everything i can into Roth when it comes to tax advantaged savings. To me, the long term compounding effect of tax free growth makes Roth the most attractive. I also will have a state pension so that will already be taxable and i do not want to increase my late life taxable income. This is just one man's perspective. I do not have a very high income. If i did then i would probably put some into traditional to lower my tax burden now.
Topic Author
radeon962
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Re: Roth 457 vs Traditional 457

Post by radeon962 »

See replies below imbedded in your comments/questions:
retiredjg wrote: Wed Jan 26, 2022 11:17 am
radeon962 wrote: Wed Jan 26, 2022 8:08 am Just trying to figure out if I should open up a new Roth 457 at work.
It would not be a new 457. It would be making Roth contributions to the same 457 plan.

Technically, correct due to poor explanation on my part. The Roth 457 is indeed the same 457 plan, but I would be required to modify the contributions to the plan to change them to Roth after-tax contributions.

I currently have a 401 and 457 through work and a Roth at Vanguard outside of my retirement savings at work.
Not what you asked, but it is possible you may be contributing too much to your tax-deferred accounts anyway, especially if you have a pension coming. Switching some of your contributions to Roth may be a good idea for more than one reason.

No pension. We switched to 401 and 457 back in 1997 with a lump sum to start with based on our defined benefit accruals at that date. We switched to a Defined Contribution plan.

Reason I am primarily considering starting the Roth 457 in addition to my outside Roth is then I could do in-plan conversions in the future from my 401 or 457 to the in-plan Roth.
Have you checked to be sure you can do in-plan conversions after you leave that employer? Sometimes you can't. I'm also not sure you could make an in-plan conversion from the 401k to the 457 (doesn't sound quite right to me).

In-plan conversion is within the 457 only. I have about $300k in the existing 457 which could be rolled over to the Roth IRA.
Roth 457 is subject to RMD’s so that takes away one benefit when comparing it to the traditional Roth.
This is easily avoided by rolling the 457 to IRA/Roth IRA before RMDs start.

Roth 457 is subject to the 5-year rule from first Roth 457 contribution.
Not really. That' is now how it works.

From our plan summary.... "five years have passed since January 1 of the year of your first Roth contribution, and you are at least 59 1/2 years old, or permanently disabled, or the assets are being paid to your beneficiaries following your death".
Roth 457 is also subject to the early withdrawal penalty under 59.5, whereas the regular 457 is not and funds are available to use without penalty upon separation of service.
This is easily avoided by rolling the Roth 457 to Roth IRA. But that only works well if the plan will allow you to roll out the Roth account and leave the traditional account. You should find out now.
Again from the plan summary... "Can Roth assets be rolled over from the 457 plan to another plan? - Generally, yes. However, the receiving plan must be able to accept and provide recordkeeping for Roth assets".

Topic Author
radeon962
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Re: Roth 457 vs Traditional 457

Post by radeon962 »

Aged Maduro wrote: Wed Jan 26, 2022 11:27 am I max out my 457 every year with Roth contributions. We also have a Roth IRA and Spousal Roth IRA. I put everything i can into Roth when it comes to tax advantaged savings. To me, the long term compounding effect of tax free growth makes Roth the most attractive. I also will have a state pension so that will already be taxable and i do not want to increase my late life taxable income. This is just one man's perspective. I do not have a very high income. If i did then i would probably put some into traditional to lower my tax burden now.
Yes, I max out my outside Roth every year.

This is the first year that the Roth 457 option has been made available, hence my interest in it. If it had been available to me from the start, I would have most likely just gone Roth 457 from the start and not done the regular 457.

We have had a 401 mandatory and 457 optional since we switched to DC back in 1997. I max out both now and have done so for the past several years as I was able to.
Aged Maduro
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Re: Roth 457 vs Traditional 457

Post by Aged Maduro »

That sounds good to me. I would take advantage of Roth in any way, shape or form while you can. I am willing to bet that taxes will only go up in the future. Roth accounts are a rare gift from the IRS that is too good to ignore.
Topic Author
radeon962
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Re: Roth 457 vs Traditional 457

Post by radeon962 »

Aged Maduro wrote: Wed Jan 26, 2022 1:32 pm That sounds good to me. I would take advantage of Roth in any way, shape or form while you can. I am willing to bet that taxes will only go up in the future. Roth accounts are a rare gift from the IRS that is too good to ignore.
Valid point. Thanks!
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retiredjg
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Re: Roth 457 vs Traditional 457

Post by retiredjg »

radeon962 wrote: Wed Jan 26, 2022 12:01 pm From our plan summary.... "five years have passed since January 1 of the year of your first Roth contribution, and you are at least 59 1/2 years old, or permanently disabled, or the assets are being paid to your beneficiaries following your death".
Yes, that is how it works - 5 years AND you are 59.5 (or disabled and dead). It is not just a matter of waiting 5 years to withdraw from your Roth 457...which is what your post seems to say.


Again from the plan summary... "Can Roth assets be rolled over from the 457 plan to another plan? - Generally, yes. However, the receiving plan must be able to accept and provide recordkeeping for Roth assets".
I think you missed the point of what I said. You stated that the roth 457 is subject to early withdrawal penalty. I said that can be avoided by rolling to Roth IRA. I was not talking about rolling to another Roth 457 plan - that solves none of the problems you are bringing up.
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retiredjg
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Re: Roth 457 vs Traditional 457

Post by retiredjg »

radeon962 wrote: Wed Jan 26, 2022 12:04 pm We have had a 401 mandatory and 457 optional since we switched to DC back in 1997. I max out both now and have done so for the past several years as I was able to.
This is what I was trying to address earlier. Filling both of these with tax-deferred dollars may be too much. It is worse with a pension, but can still be a problem without a pension.

I'm not saying you are saving too much in tax-deferred - there is not enough information to have an opinion on that. But it is possible to save too much in tax-deferred and using more Roth now can help avoid that.
Topic Author
radeon962
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Re: Roth 457 vs Traditional 457

Post by radeon962 »

retiredjg wrote: Thu Jan 27, 2022 4:06 pm
radeon962 wrote: Wed Jan 26, 2022 12:01 pm From our plan summary.... "five years have passed since January 1 of the year of your first Roth contribution, and you are at least 59 1/2 years old, or permanently disabled, or the assets are being paid to your beneficiaries following your death".
Yes, that is how it works - 5 years AND you are 59.5 (or disabled and dead). It is not just a matter of waiting 5 years to withdraw from your Roth 457...which is what your post seems to say.

What I was comparing is a regular Roth like I have at Vanguard to the Roth 457 option which is more akin to a blend of a regular 457 and a true Roth.

Again from the plan summary... "Can Roth assets be rolled over from the 457 plan to another plan? - Generally, yes. However, the receiving plan must be able to accept and provide recordkeeping for Roth assets".
I think you missed the point of what I said. You stated that the roth 457 is subject to early withdrawal penalty. I said that can be avoided by rolling to Roth IRA. I was not talking about rolling to another Roth 457 plan - that solves none of the problems you are bringing up.
Still trying to figure out what you are trying to lead me to here.
Topic Author
radeon962
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Re: Roth 457 vs Traditional 457

Post by radeon962 »

retiredjg wrote: Thu Jan 27, 2022 4:08 pm
radeon962 wrote: Wed Jan 26, 2022 12:04 pm We have had a 401 mandatory and 457 optional since we switched to DC back in 1997. I max out both now and have done so for the past several years as I was able to.
This is what I was trying to address earlier. Filling both of these with tax-deferred dollars may be too much. It is worse with a pension, but can still be a problem without a pension.

I'm not saying you are saving too much in tax-deferred - there is not enough information to have an opinion on that. But it is possible to save too much in tax-deferred and using more Roth now can help avoid that.
You are the member who got me on my way back in 2009 when I made my first post.

I have about 1.3M in my 401k, 300k in my 457 and 115k in a Vanguard Roth.

I plan to leave my current job on November 18, 2022 and my actual retirement date would be January 14, 2023.

Work at another job for 5-8 years until my youngest is done with school in a position with less stress as my current position pays me very well but the stress level is not sustainable for much longer. Waiting to qualify for retiree medical coverage on August 15, 2022.

January 2023 gets me to the year in which I turn 55 so I could use my 401 if necessary without penalty.

457 is available for use upon separation of service.

Roth 457 is a new option made available to us as of January 1, 2022 so something I have just starting considering.
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retiredjg
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Re: Roth 457 vs Traditional 457

Post by retiredjg »

radeon962 wrote: Thu Jan 27, 2022 9:56 pm
retiredjg wrote: Thu Jan 27, 2022 4:06 pm
radeon962 wrote: Wed Jan 26, 2022 12:01 pm From our plan summary.... "five years have passed since January 1 of the year of your first Roth contribution, and you are at least 59 1/2 years old, or permanently disabled, or the assets are being paid to your beneficiaries following your death".
Yes, that is how it works - 5 years AND you are 59.5 (or disabled and dead). It is not just a matter of waiting 5 years to withdraw from your Roth 457...which is what your post seems to say.

What I was comparing is a regular Roth like I have at Vanguard to the Roth 457 option which is more akin to a blend of a regular 457 and a true Roth.

Again from the plan summary... "Can Roth assets be rolled over from the 457 plan to another plan? - Generally, yes. However, the receiving plan must be able to accept and provide recordkeeping for Roth assets".
I think you missed the point of what I said. You stated that the roth 457 is subject to early withdrawal penalty. I said that can be avoided by rolling to Roth IRA. I was not talking about rolling to another Roth 457 plan - that solves none of the problems you are bringing up.
Still trying to figure out what you are trying to lead me to here.
Roth 457 has a bit of a stumbling block if you want to use it before age 59.5 because the the earnings in Roth 457 are not yet tax free.

When withdrawing from Roth 457 before 59.5 they must distribute contributions and earnings together. This causes the earnings to be taxed (because you are too young for them to be tax free) and there is also a small penalty for the early withdrawal of the earnings part.

Roth IRA is different. When withdrawing from Roth IRA, contributions come out WITHOUT the earnings...so you avoid the tax on the earnings and the small penalty on the earnings.

My point is that the problems with Roth 457 (as well as Roth 401k and Roth 403b) can be avoided by rolling the designated Roth account into a Roth IRA.

Does that help?
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retiredjg
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Re: Roth 457 vs Traditional 457

Post by retiredjg »

radeon962 wrote: Thu Jan 27, 2022 10:06 pm
retiredjg wrote: Thu Jan 27, 2022 4:08 pm
radeon962 wrote: Wed Jan 26, 2022 12:04 pm We have had a 401 mandatory and 457 optional since we switched to DC back in 1997. I max out both now and have done so for the past several years as I was able to.
This is what I was trying to address earlier. Filling both of these with tax-deferred dollars may be too much. It is worse with a pension, but can still be a problem without a pension.

I'm not saying you are saving too much in tax-deferred - there is not enough information to have an opinion on that. But it is possible to save too much in tax-deferred and using more Roth now can help avoid that.
You are the member who got me on my way back in 2009 when I made my first post.

I have about 1.3M in my 401k, 300k in my 457 and 115k in a Vanguard Roth.

I plan to leave my current job on November 18, 2022 and my actual retirement date would be January 14, 2023.

Work at another job for 5-8 years until my youngest is done with school in a position with less stress as my current position pays me very well but the stress level is not sustainable for much longer. Waiting to qualify for retiree medical coverage on August 15, 2022.

January 2023 gets me to the year in which I turn 55 so I could use my 401 if necessary without penalty.

457 is available for use upon separation of service.

Roth 457 is a new option made available to us as of January 1, 2022 so something I have just starting considering.
This sounds like a very good and well thought out plan.. :happy

So you have $1.6 million in tax-deferred accounts now. That's a lot. You may not need more.

The decision of whether to use Roth 457 or traditional primarily boils down to tax rate now vs tax rate later. Are you in one of the higher tax bracket now? What about those years in the next lower stress job? What rate (based on today's tables) would you expect in retirement?

The decision of whether to use Roth 457 now secondarily boils down to whether you have way more tax-deferred money than you will need. (This is where I differ from many other forum members on this topic.) If your $1.6 million continues to grow and you are not spending it or converting it to Roth IRA during your lower tax years and early retirement, it will become a problem when RMDs start at age 72.

I'm not sure it is going to matter which you use since we are only talking about $20kish in a $2 million portfolio. Your plan seems solid to me either way.
Topic Author
radeon962
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Re: Roth 457 vs Traditional 457

Post by radeon962 »

retiredjg wrote: Fri Jan 28, 2022 7:53 am
radeon962 wrote: Thu Jan 27, 2022 9:56 pm
retiredjg wrote: Thu Jan 27, 2022 4:06 pm
radeon962 wrote: Wed Jan 26, 2022 12:01 pm From our plan summary.... "five years have passed since January 1 of the year of your first Roth contribution, and you are at least 59 1/2 years old, or permanently disabled, or the assets are being paid to your beneficiaries following your death".
Yes, that is how it works - 5 years AND you are 59.5 (or disabled and dead). It is not just a matter of waiting 5 years to withdraw from your Roth 457...which is what your post seems to say.

What I was comparing is a regular Roth like I have at Vanguard to the Roth 457 option which is more akin to a blend of a regular 457 and a true Roth.

Again from the plan summary... "Can Roth assets be rolled over from the 457 plan to another plan? - Generally, yes. However, the receiving plan must be able to accept and provide recordkeeping for Roth assets".
I think you missed the point of what I said. You stated that the roth 457 is subject to early withdrawal penalty. I said that can be avoided by rolling to Roth IRA. I was not talking about rolling to another Roth 457 plan - that solves none of the problems you are bringing up.
Still trying to figure out what you are trying to lead me to here.
Roth 457 has a bit of a stumbling block if you want to use it before age 59.5 because the the earnings in Roth 457 are not yet tax free.

When withdrawing from Roth 457 before 59.5 they must distribute contributions and earnings together. This causes the earnings to be taxed (because you are too young for them to be tax free) and there is also a small penalty for the early withdrawal of the earnings part.

Roth IRA is different. When withdrawing from Roth IRA, contributions come out WITHOUT the earnings...so you avoid the tax on the earnings and the small penalty on the earnings.

My point is that the problems with Roth 457 (as well as Roth 401k and Roth 403b) can be avoided by rolling the designated Roth account into a Roth IRA.

Does that help?
Yes, that does. Thanks
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