Switching From A 457 To A Roth

[Angio333]

I am considering stopping all future contributions to my deferred comp account (457). Off course, I will have to leave the money I already have in there.

The money I was investing in my 457, I would like to start investing in a Roth (i am eligible).

What do you think?

[krantcents]

I am considering stopping all future contributions to my deferred comp account (457). Off course, I will have to leave the money I already have in there.

The money I was investing in my 457, I would like to start investing in a Roth (i am eligible).

What do you think?

Personally, I like both if you can. That is what I do.

[Angio333]

I was thinking about doing both, but I think that I would make out better puting a larger sum of money into one of them instead of smaller sums in each.

By the way, my employer does not contribute to my 457.

[jIM_Ohio]

I was thinking about doing both, but I think that I would make out better puting a larger sum of money into one of them instead of smaller sums in each.

By the way, my employer does not contribute to my 457.

There are three issues when making the decision.

The match generally trumps the other 2.

1) is the match

2) is current taxes

3) is withdraw issues when retired


IMO taxes now trump withdraw issues UNLESS there is a pension or some other defined benefit which kicks in around age 65. 457+pension might push you to a higher tax bracket, where as Roth+Pension might keep you in same tax bracket.

So if you have that "exception" where there is a pension involved when you retire, look at all 3 issues and balance them. If there is no pension, and there is no match, you need to balance one issue (taxes).

Refer here for some tables which may help
Reference Room


If your current tax bracket is 15% (single AGI under 34k; Married AGI under 68k) then the Roth is a big winner **ding** **ding** **ding** **ding**

If your current tax bracket is 25% (single AGI under 82,400, married AGI under 137,300), then I suggest taking a 25% savings now to get a higher "return" now.

Example- if you have $10,000 to invest, if in 25% bracket going into a 457 plan that is $12,500 which actually goes in (the money is pre-tax, so 25% more goes in). If that same $10,000 is going into a Roth, you are paying $2500 in taxes now and putting $10,000 into the Roth (same $12,500 on the table).

The reason to take the 25% tax deduction is this... if you know how taxes are done... the lowest bracket is filled first with income from any source... and that bracket is 10%, the next income fills up the 15% bracket, then if more income exists, it fills up the 25% bracket... and so on for 28%, 33% and 35% brackets. The point is the income is taxed "bottom up", but deductions are ALWAYS taken off the top. So the 25% deduction of 457 contributions is taken at the top bracket you are taxed at. Refer to reference room link for which income is in which bracket.

However when money is WITHDRAWN from the 457, it is taken as income. Meaning the first little bit you take out is taxed at 10%, then the next bit is taxed at 15%, then 25%, 28%...

So if you put money in at 25% (meaning 25% more is contributed), and then take it out at 10% and 15% (lower brackets) we have a big winner **ding** **ding** **ding** **ding**

If you put money in at 15% and take it out at 15% it does not matter which you choose (457 vs Roth)
If you put money in at 25% and take it out at 25% it does not matter which you choose.

We do know the first 400k (for married couples) in the 457 will come out tax free. This is not given much attention, but make sure you are on track to have "at least" 400k in tax DEFERRED accounts when you retire, then take out enough each year to fill up std deduction and personal exemptions.

Use the fairmark link above (the reference room) and here is that 400k math... Each person gets a standard deduction ($11,400 married, $5700 single) and an exemption for themselves and spouse ($3650). Add those together, and that income is TAX FREE for all tax payers, regardless of income level.

example- for a married couple, add $11,400+$3650+3650=$18,700 tax free ($11,400 is std deduction for married couples, two people are married, so $3650 times 2 for 2 exemptions). Meaning you could earn $18,000 from an employer, it is tax free, you could earn $9000 and take $9000 out of a 457 plan, and all that $18k is tax free. Regardless of source, the first $18,700 of income for a married couple is tax free. That number goes up a little each year.

$18700 times 25 is $467,500. 25 represents a 4% withdraw from retirement plans (100/4%=25). If you plan to withdraw more or less than 4%, change that math.

example- for a single person add $5700+$3650=$9350 tax free. Times 25 is $233,000- for a single person about half what a married couple could take out tax free.



So the summary

1) put a little into 457 so you can take it out tax free in retirement and still get a tax deduction now. If you are single, but plan on being married, focus on the $450k number for 457... if you expect to be single all your life, then focus on the $233k number.

2) Once you have the minimum amount going into the 457, look at taxes. If the spread (difference in tax rates) warrants using the Roth, do it. The Roth is best if taxes are low now (15%). The 457 will "win out" if taxes are higher now (25% probably and 28% or 33% probably more). The higher the bracket, the less likely the Roth wins. When people talk about taxes going up, those taxes go up on people in 28,33 and 35% brackets, very few times will taxes go up on people in 15% or 25% brackets (based on past behaviors by politicians).

3) If you have a pension (rare these days), bias decisions towards Roth, but still mind current taxes paid.

[jpg7n16]

I was thinking about doing both, but I think that I would make out better puting a larger sum of money into one of them instead of smaller sums in each.

Why do you feel that way?


I would advise the simple answer, do half and half. If you want to save 10% of your income, contribute 5% to the 457 and the other 5% to the Roth. It may be slightly off the ideal balance, but it's good enough for probably 80+% of situations.

Though I can tell by the words you use, that you really want to do 100% to the Roth.

Why do you feel it'd be better to put a large sum in one, instead of splitting the same amount between the 2?

[disneysteve]

How much do you earn? Remember, if you are under 50, the max you can put in a Roth is $5,000. If you want to put 15% toward retirement, as we all recommend, that means the Roth alone would only be sufficient if you earn no more than $33,333/year. If you make more than that, the Roth isn't enough to be saving for retirement.

[Angio333]

There are three issues when making the decision.

The match generally trumps the other 2.

1) is the match

2) is current taxes

3) is withdraw issues when retired


IMO taxes now trump withdraw issues UNLESS there is a pension or some other defined benefit which kicks in around age 65. 457+pension might push you to a higher tax bracket, where as Roth+Pension might keep you in same tax bracket.

So if you have that "exception" where there is a pension involved when you retire, look at all 3 issues and balance them. If there is no pension, and there is no match, you need to balance one issue (taxes).

Refer here for some tables which may help
Reference Room


If your current tax bracket is 15% (single AGI under 34k; Married AGI under 68k) then the Roth is a big winner **ding** **ding** **ding** **ding**

If your current tax bracket is 25% (single AGI under 82,400, married AGI under 137,300), then I suggest taking a 25% savings now to get a higher "return" now.

Example- if you have $10,000 to invest, if in 25% bracket going into a 457 plan that is $12,500 which actually goes in (the money is pre-tax, so 25% more goes in). If that same $10,000 is going into a Roth, you are paying $2500 in taxes now and putting $10,000 into the Roth (same $12,500 on the table).

The reason to take the 25% tax deduction is this... if you know how taxes are done... the lowest bracket is filled first with income from any source... and that bracket is 10%, the next income fills up the 15% bracket, then if more income exists, it fills up the 25% bracket... and so on for 28%, 33% and 35% brackets. The point is the income is taxed "bottom up", but deductions are ALWAYS taken off the top. So the 25% deduction of 457 contributions is taken at the top bracket you are taxed at. Refer to reference room link for which income is in which bracket.

However when money is WITHDRAWN from the 457, it is taken as income. Meaning the first little bit you take out is taxed at 10%, then the next bit is taxed at 15%, then 25%, 28%...

So if you put money in at 25% (meaning 25% more is contributed), and then take it out at 10% and 15% (lower brackets) we have a big winner **ding** **ding** **ding** **ding**

If you put money in at 15% and take it out at 15% it does not matter which you choose (457 vs Roth)
If you put money in at 25% and take it out at 25% it does not matter which you choose.

We do know the first 400k (for married couples) in the 457 will come out tax free. This is not given much attention, but make sure you are on track to have "at least" 400k in tax DEFERRED accounts when you retire, then take out enough each year to fill up std deduction and personal exemptions.

Use the fairmark link above (the reference room) and here is that 400k math... Each person gets a standard deduction ($11,400 married, $5700 single) and an exemption for themselves and spouse ($3650). Add those together, and that income is TAX FREE for all tax payers, regardless of income level.

example- for a married couple, add $11,400+$3650+3650=$18,700 tax free ($11,400 is std deduction for married couples, two people are married, so $3650 times 2 for 2 exemptions). Meaning you could earn $18,000 from an employer, it is tax free, you could earn $9000 and take $9000 out of a 457 plan, and all that $18k is tax free. Regardless of source, the first $18,700 of income for a married couple is tax free. That number goes up a little each year.

$18700 times 25 is $467,500. 25 represents a 4% withdraw from retirement plans (100/4%=25). If you plan to withdraw more or less than 4%, change that math.

example- for a single person add $5700+$3650=$9350 tax free. Times 25 is $233,000- for a single person about half what a married couple could take out tax free.



So the summary

1) put a little into 457 so you can take it out tax free in retirement and still get a tax deduction now. If you are single, but plan on being married, focus on the $450k number for 457... if you expect to be single all your life, then focus on the $233k number.

2) Once you have the minimum amount going into the 457, look at taxes. If the spread (difference in tax rates) warrants using the Roth, do it. The Roth is best if taxes are low now (15%). The 457 will "win out" if taxes are higher now (25% probably and 28% or 33% probably more). The higher the bracket, the less likely the Roth wins. When people talk about taxes going up, those taxes go up on people in 28,33 and 35% brackets, very few times will taxes go up on people in 15% or 25% brackets (based on past behaviors by politicians).

3) If you have a pension (rare these days), bias decisions towards Roth, but still mind current taxes paid.

Wow....thanks Jim. We are going to miss you.

[Angio333]

Why do you feel that way?


I would advise the simple answer, do half and half. If you want to save 10% of your income, contribute 5% to the 457 and the other 5% to the Roth. It may be slightly off the ideal balance, but it's good enough for probably 80+% of situations.

Though I can tell by the words you use, that you really want to do 100% to the Roth.

Why do you feel it'd be better to put a large sum in one, instead of splitting the same amount between the 2?

Once I kick my investing up to 15%, I will have to do both. That should be July or August.

Until then I think that I would do better if I hit one of them with all of my investment money.

[Angio333]

How much do you earn? Remember, if you are under 50, the max you can put in a Roth is $5,000. If you want to put 15% toward retirement, as we all recommend, that means the Roth alone would only be sufficient if you earn no more than $33,333/year. If you make more than that, the Roth isn't enough to be saving for retirement.

I make just over $50,000. I should hit about $52,000 this year. I am not investing 15% yet. I should be able to kick it up in July or August of 2011.