Roth 457b Contributions
I am 47yr old State employee with a pension plan. I’ve been contributing to a pre-tax 457 plan and have about $105,000 saved. The State plan now offers a Roth 457 plan that I want to start contributing to since I will likely not retire for 20yrs (age 67). My question is…since I can only afford to contribute 10% of my income, should I stop contributing to the pre-tax 457 plan and put the whole 10% into the Roth 457 to build it up? I really want to build a retirement nest egg that I can withdraw tax free some day. But I’m afraid of losing the compounding power of the $105,000 in the regular 457 plan since I will not contributing to it? I also feel like I will be starting from scratch with the Roth plan and feel (right or wrong) that I’ll need to put the full 10% in to build up the account balance over the next 10 or 20 years…help!
Permalink Submitted by Alan - IRA critic on Tue, 2013-06-11 22:52
This is the same decision process as whether to make Roth or TIRA contributions or whether to convert to a Roth IRA or not. While complex, the main factor is that you should elect Roth contributions if your current marginal tax rate is lower then you expect it to be in retirement and NOT to make Roth contributions if your current rate is higher. If you think your current rate is about the same, you might still make some smaller Roth contributions. You might split your contributions @ 5% each to pre tax and Roth in that situation. Note that your existing pre tax contributions will continue to compound with tax deferred earnings, so it will still grow. You should also consider your total pre tax retirement balance vrs your Roth balance since the first Roth dollars are potentially the most valuable, so if you have -0- Roth IRA or 457 balance now, that would encourage a higher Roth contribution. If you will receive a nice state defined benefit pension, then you will tend to be in a higher bracket in retirement, and that favors the Roth. There is no easy answer to your question, but the more you will accumulate, the more valuable Roth contributions will be. On the other hand, if you planned on taking an early retirement or had health issues, you would continue to choose the pre tax option.
Permalink Submitted by Jeff Moore on Wed, 2013-06-12 15:27
Thanks for the feedback…I think at this point I will probably contriibute 5% to each 457 plan to be safe. I guess with about 20 years to retirement I can still build up a decent acccount balance in the Roth 457 plan with consistent investing.