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RuthD

NYC Teacher: 457 pretax vs. Roth

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question:
Won't I save in the long run if I continue to fund 457 pretax? Started out late in 457, so will have about 12 years total of contributions. Been maximizing in TDA 403b since started at the DOE and will have a nice amount given contributions and 7% fixed earnings. Will likely retire in 7-10 years.

Seems that given below, I should just continue to contribute to 457 pretax. Am I missing something?

a. 457 pretax contributions, so currently saving on federal, state, and city tax now due to lower taxable income. 
b. 457 withdrawals subject to all taxes, but allowed $20,000 annual state deduction.
c. If I fund Roth, then current contributions subject to all taxes.  Will I earn much in 12 years to make difference?

d.  Given expected pension, unless brackets change, I will probably remain in the same tax bracket.

 

Thank you,

 

R

 

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RuthD, welcome to the forum! I agree with your points a, b and c. We don't know enough about you to know for sure about d, but I suspect you are correct.

How big will your tax-deferred accounts be when you retire? Will you need to make withdrawals in retirement, or will you pension be adequate? If you do not make withdrawals until age 70.5 when Required Minimum Distributions (RMDs) are required, have you estimated the size of the accounts? That would give you an estimate of the size of the RMDs which will add to your taxable income. 

When do you plan to take Social Security? That will add to your income.

Rather than make Roth 457 contributions during your working years of peak taxable income, it makes sense to make traditional contributions during those years, as you are doing. Then in early retirement when income is usually lower, do some conversions of the traditional 457 (or 403b) to a Roth IRA. This plan fits in with delaying SS which results in an 8% increase for every year of delay. 

So I'm guessing you are probably correct in continuing to contribute to the traditional 457 and 403b. Do you contribute to a Roth IRA? It's not a bad idea to have some tax diversification. 

I hope you are maxing the NYC 403b that pays 7% on a fixed value fund!

 

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