Deferred compensation
- Thread starter Harfle
- Start date
Makes a little more sense now.
This is a 457(b) plan, which is essentially a municipal government's version of a 401(k) retirement plan. You make contributions to it (this is what it means to defer compensation - you don't get taxed on your contributions), pick among the available investment plans, and don't start withdrawing until retirement.
The county does not match your contributions (as some employers do) as per the FAQ, so that makes the plan somewhat less appealing. They make you call or log on to a system to see the plans they offer, so I don't know if they're any good.
A 457(b) without matching actually works similarly to an IRA: you make contributions, get to deduct the contribution from your taxes, invest it, and pay taxes on the money you withdraw after 60. The difference is that the 457(b) plan allows you to contribute up to $17,000 and it's fully deductible regardless of your income. A traditional IRA allows you to contribute only $5,000 per year and if you are single, not all of it is tax deductible with an income above $56,000.
For completeness' sake, there is also the Roth IRA. Your contributions are not tax-deductible, but your withdrawals (after age 60) are. Singles can make full use of this if their income is below $110k. So all those capital gains... well, you won't pay taxes on them. This is a really good deal for young people especially. The limit is also $5,000 per year and it's shared with the traditional IRA. (So you could contribute $2k to the traditional IRA and $3k to the Roth IRA, but not $5k to both.)
Now, to answer your question: let's assume you're single, in your 20s/30s, and your income is below $110k. As a first step, I'd probably max out the Roth IRA. Yeah, you don't get the tax deduction now... but in 30 years, most of the value from your current contributions is going to come from capital gains. Assume an 8% average rate of return, for sake of argument, and a contribution of $5,000. After 30 years, your account would have a value of $50,300. You didn't get a tax break on those $5k, but you're not paying taxes on the other $45k. That's a pretty awesome deal.
$5,000/year is, unfortunately, way too little to save for retirement. The question now is whether you should save the remainder in your 457(b) plan or in a regular, taxable account. This is going to depend largely on the funds offered by your employer. You should check if they have a low-cost target date retirement fund that is made up only of index funds. Given that the plan is offered by Prudential, I think this may not be the case. If so, it's worth thinking about just making contributions to a regular, taxable account instead. You lose money upfront (since it's not tax exempt), but will make up for it over all the years you pay lower fees. You'll also pay only the capital gains tax when you sell your investments, which is lower than the income tax.
As a reference: you should try and save 20% of your income for retirement. More is better, but less can be problematic. Early on in your career, that may be difficult - and it's ok to start saving a little later. Calculations showing the benefit of saving early vs. saving longer are nonsense, because they don't account for inflation and rising incomes (it's easier to save $100 in 5 years than saving $100 today). Just don't postpone saving for too long.
The county does not match your contributions (as some employers do) as per the FAQ, so that makes the plan somewhat less appealing. They make you call or log on to a system to see the plans they offer, so I don't know if they're any good.
A 457(b) without matching actually works similarly to an IRA: you make contributions, get to deduct the contribution from your taxes, invest it, and pay taxes on the money you withdraw after 60. The difference is that the 457(b) plan allows you to contribute up to $17,000 and it's fully deductible regardless of your income. A traditional IRA allows you to contribute only $5,000 per year and if you are single, not all of it is tax deductible with an income above $56,000.
For completeness' sake, there is also the Roth IRA. Your contributions are not tax-deductible, but your withdrawals (after age 60) are. Singles can make full use of this if their income is below $110k. So all those capital gains... well, you won't pay taxes on them. This is a really good deal for young people especially. The limit is also $5,000 per year and it's shared with the traditional IRA. (So you could contribute $2k to the traditional IRA and $3k to the Roth IRA, but not $5k to both.)
Now, to answer your question: let's assume you're single, in your 20s/30s, and your income is below $110k. As a first step, I'd probably max out the Roth IRA. Yeah, you don't get the tax deduction now... but in 30 years, most of the value from your current contributions is going to come from capital gains. Assume an 8% average rate of return, for sake of argument, and a contribution of $5,000. After 30 years, your account would have a value of $50,300. You didn't get a tax break on those $5k, but you're not paying taxes on the other $45k. That's a pretty awesome deal.
$5,000/year is, unfortunately, way too little to save for retirement. The question now is whether you should save the remainder in your 457(b) plan or in a regular, taxable account. This is going to depend largely on the funds offered by your employer. You should check if they have a low-cost target date retirement fund that is made up only of index funds. Given that the plan is offered by Prudential, I think this may not be the case. If so, it's worth thinking about just making contributions to a regular, taxable account instead. You lose money upfront (since it's not tax exempt), but will make up for it over all the years you pay lower fees. You'll also pay only the capital gains tax when you sell your investments, which is lower than the income tax.
As a reference: you should try and save 20% of your income for retirement. More is better, but less can be problematic. Early on in your career, that may be difficult - and it's ok to start saving a little later. Calculations showing the benefit of saving early vs. saving longer are nonsense, because they don't account for inflation and rising incomes (it's easier to save $100 in 5 years than saving $100 today). Just don't postpone saving for too long.
That's not going to be easy (and may not be feasible at all). However, you can try talking to HR and making them aware of Vanguard funds and that they may be more appealing to employees. Many people in HR know shockingly little about investment products, so they fall for the same glossy brochures that many individual investors get swayed by.
You might also want to try talking to people higher up in the county to see if you can convince some of them that a change would be a good idea.
I wouldn't hold my breath, but it can't hurt to try.
You might also want to try talking to people higher up in the county to see if you can convince some of them that a change would be a good idea.
I wouldn't hold my breath, but it can't hurt to try.
It looks like your plan is managed by Prudential.
One thing I wanted to mention while reading over the documents. It looks like you can use the money you invest here to "buy" time in your Pension plan. This to me is a big bonus. You can sock some money away here and if you end up working this same job for 20+ years you can use this money to buy a few more years of service into your pension. This **MAY** be a good idea for you, depending on the scenario.
Also, it's usually better than a generic IRA because the plan administrator has negotiated with Prudential to get some type of lower fee structure. You might find a lower fee structure vs. a traditional IRA.
The general rule of thumb is this:
1. If you are in a higher tax bracket now (aka you make more money now) than you will be in retirement, put money into 401(k) / IRA / 457(b). You pay no taxes on the money now, you pay taxes on the principal + interest at retirement.
2. If your making a low wage now (I dunno, lets say < 50k a year) your better off putting money into a Roth IRA. The money goes into a Roth IRA after tax, but when you pull it out at retirement you pay 0 taxes (on the principal or interest)
This assume the gubernment doesn't decide to Fuck us over on our Retirement plans, change the rules, etc.
One thing I wanted to mention while reading over the documents. It looks like you can use the money you invest here to "buy" time in your Pension plan. This to me is a big bonus. You can sock some money away here and if you end up working this same job for 20+ years you can use this money to buy a few more years of service into your pension. This **MAY** be a good idea for you, depending on the scenario.
Also, it's usually better than a generic IRA because the plan administrator has negotiated with Prudential to get some type of lower fee structure. You might find a lower fee structure vs. a traditional IRA.
The general rule of thumb is this:
1. If you are in a higher tax bracket now (aka you make more money now) than you will be in retirement, put money into 401(k) / IRA / 457(b). You pay no taxes on the money now, you pay taxes on the principal + interest at retirement.
2. If your making a low wage now (I dunno, lets say < 50k a year) your better off putting money into a Roth IRA. The money goes into a Roth IRA after tax, but when you pull it out at retirement you pay 0 taxes (on the principal or interest)
This assume the gubernment doesn't decide to Fuck us over on our Retirement plans, change the rules, etc.