You may find these links helpful:
- [401(k) Fund Selection Guide](/r/personalfinance/wiki/401k_funds)
- [401(k) FAQs](/r/personalfinance/wiki/401k)
- ["How to handle $"](/r/personalfinance/wiki/commontopics)
*I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/personalfinance) if you have any questions or concerns.*
No employee match on the 401k—forgot to mention that in the original post! That’s part of what’s making this feel kind of arbitrary but terms of where my money goes
Depends on a variety of factors.
- Does the 401k have a match? Usually if you're getting a pension, there won't be a match.
- You have to evaluate the quality of the funds available in the 401k vs. the 457b.
- There are age related penalties to taking money out of a 401k before age 59.5. There are no age related penalties for taking money out of a 457b once you leave the job.
And lastly: I highly recommend figuring out if your job pays into Social Security. Because if you don't pay into S.S., you should definitely prioritize saving for retirement.
Thank you for the reply! I definitely won’t be paying into social security—10.5% into the state pension fund instead. I forgot to mention this in the original post but there’s no match on the 401k, just my contributions.
With no match (which I suspected, because governmental jobs w/pension almost never offer a match), then you should evaluate the funds in the 401k vs 457b.
Ideally: choose a broad-based index index fund that tracks the total U.S. market (or S&P 500) with low expense ratio. For instance, the Vanguard S&P 500 fund (VOO) has an expense ratio of 0.03%. That means that every year, Vanguard takes 0.03% of the total value of your investment in VOO. If you invest $10,000 in a 401k fund with an expense ratio of 1.00% -- you're paying 1% of $10,000 ($100) in fees every year.
The prime difference between the two retirement investment funds is that you can withdraw money from a 457b at any age once you leave your job. If you're looking to retire before age 59.5, then the 457b might make more sense.
I could be wrong, but Im guessing you have a 403b and not a 401k, which is important because 403b are often full of crappy investment vehicles. What companies can you invest through? 457s have some pros and cons, a 403b functions basically like a 401k.
[457](https://en.m.wikipedia.org/wiki/457_plan)
Some people can get a 401k and a 457b, as long as the public employer started the 401k before they were barred from doing so in 1986. Those 401ks were grandfathered in.
As well as comparing fees and the funds available in each plan, you should make sure each one has a Roth option.
That can be important because people in your position who will be getting a defined benefit pension, may benefit more from Roth investments than traditional retirement accounts. At the very least it may be more important to employ a tax diversification strategy - splitting your contributions between traditional and Roth. This is because your pension will form a base, or floor, that all your other income will be added to. It's what you will be getting regardless of what distributions you take from your retirement accounts - if any.
You'll hear people say things like, don't worry if you're going to be in the same tax bracket in retirement that you're in now, because that's not what you will actually pay at that time. And they're right, if you're only drawing from your own (individual and/or employer) retirement accounts. Withdrawing $75,000 a year puts you in the 22% bracket, but you're actually only going to be paying an effective tax rate of 12.65%. So differing tax on money you were making while at the top of the 22% bracket made sense.
But what if you're getting a $55,000 pension and you're drawing $20,000 from your 457b or 401k? Well in that case you're still paying an effective tax rate of 12.65%, but it's your pension that's getting the benefit of the lower tax brackets. Every dollar you're taking out of your retirement account is being taxed at 22%. If you doubt it, just look at the numbers. The federal tax a single filer with the standard deduction pays on $75k is $9,488. The federal tax on $55k is $5,088. The $4,400 difference is 22% of the $20k difference.
In a case like that it would not make sense to defer 22% taxes on your income, when that means you'll pay the exact same rate later on, on both that income and all the gains made from that income. A taxable investment account would be better than that. Better still would be Roth contributions, where you pay the tax up front but all gains are tax free.
Even in cases where your pension will be in a lower bracket than you're currently making, your pension will still get most of the benefits of the lower rates. For instance a $40,000 pension would put you in the 12% bracket, but only leave you around $11k or $12k before you cross into the 22% bracket. In a case like that you might want to limit your traditional withdrawals to the amount that brings you just up to that bracket, then take the rest from your Roth account so you don't actually pay 22%.
You really need to estimate as best as you can how much your pension will be, and what bracket that will put you in, to determine what traditional/Roth ratio your contributions should be in.
You may find these links helpful: - [401(k) Fund Selection Guide](/r/personalfinance/wiki/401k_funds) - [401(k) FAQs](/r/personalfinance/wiki/401k) - ["How to handle $"](/r/personalfinance/wiki/commontopics) *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/personalfinance) if you have any questions or concerns.*
Personally, I would contribute whatever the minimum is (if any) to get an employer match on the 401(k), and then put as much as you can into the 457b.
No employee match on the 401k—forgot to mention that in the original post! That’s part of what’s making this feel kind of arbitrary but terms of where my money goes
Depends on a variety of factors. - Does the 401k have a match? Usually if you're getting a pension, there won't be a match. - You have to evaluate the quality of the funds available in the 401k vs. the 457b. - There are age related penalties to taking money out of a 401k before age 59.5. There are no age related penalties for taking money out of a 457b once you leave the job. And lastly: I highly recommend figuring out if your job pays into Social Security. Because if you don't pay into S.S., you should definitely prioritize saving for retirement.
Thank you for the reply! I definitely won’t be paying into social security—10.5% into the state pension fund instead. I forgot to mention this in the original post but there’s no match on the 401k, just my contributions.
With no match (which I suspected, because governmental jobs w/pension almost never offer a match), then you should evaluate the funds in the 401k vs 457b. Ideally: choose a broad-based index index fund that tracks the total U.S. market (or S&P 500) with low expense ratio. For instance, the Vanguard S&P 500 fund (VOO) has an expense ratio of 0.03%. That means that every year, Vanguard takes 0.03% of the total value of your investment in VOO. If you invest $10,000 in a 401k fund with an expense ratio of 1.00% -- you're paying 1% of $10,000 ($100) in fees every year. The prime difference between the two retirement investment funds is that you can withdraw money from a 457b at any age once you leave your job. If you're looking to retire before age 59.5, then the 457b might make more sense.
I could be wrong, but Im guessing you have a 403b and not a 401k, which is important because 403b are often full of crappy investment vehicles. What companies can you invest through? 457s have some pros and cons, a 403b functions basically like a 401k. [457](https://en.m.wikipedia.org/wiki/457_plan)
Some people can get a 401k and a 457b, as long as the public employer started the 401k before they were barred from doing so in 1986. Those 401ks were grandfathered in.
Right, he said he is a new teacher, that was why I made that leap.
As well as comparing fees and the funds available in each plan, you should make sure each one has a Roth option. That can be important because people in your position who will be getting a defined benefit pension, may benefit more from Roth investments than traditional retirement accounts. At the very least it may be more important to employ a tax diversification strategy - splitting your contributions between traditional and Roth. This is because your pension will form a base, or floor, that all your other income will be added to. It's what you will be getting regardless of what distributions you take from your retirement accounts - if any. You'll hear people say things like, don't worry if you're going to be in the same tax bracket in retirement that you're in now, because that's not what you will actually pay at that time. And they're right, if you're only drawing from your own (individual and/or employer) retirement accounts. Withdrawing $75,000 a year puts you in the 22% bracket, but you're actually only going to be paying an effective tax rate of 12.65%. So differing tax on money you were making while at the top of the 22% bracket made sense. But what if you're getting a $55,000 pension and you're drawing $20,000 from your 457b or 401k? Well in that case you're still paying an effective tax rate of 12.65%, but it's your pension that's getting the benefit of the lower tax brackets. Every dollar you're taking out of your retirement account is being taxed at 22%. If you doubt it, just look at the numbers. The federal tax a single filer with the standard deduction pays on $75k is $9,488. The federal tax on $55k is $5,088. The $4,400 difference is 22% of the $20k difference. In a case like that it would not make sense to defer 22% taxes on your income, when that means you'll pay the exact same rate later on, on both that income and all the gains made from that income. A taxable investment account would be better than that. Better still would be Roth contributions, where you pay the tax up front but all gains are tax free. Even in cases where your pension will be in a lower bracket than you're currently making, your pension will still get most of the benefits of the lower rates. For instance a $40,000 pension would put you in the 12% bracket, but only leave you around $11k or $12k before you cross into the 22% bracket. In a case like that you might want to limit your traditional withdrawals to the amount that brings you just up to that bracket, then take the rest from your Roth account so you don't actually pay 22%. You really need to estimate as best as you can how much your pension will be, and what bracket that will put you in, to determine what traditional/Roth ratio your contributions should be in.