Deferred Compensation/457(b) Plans
I work for a state agency in Mississippi, and recently I found out (apparently I missed this in orientation a couple of years ago) that we have an option to participate in a governmental 457(b) plan—which is to say, deferred compensation.
If you're confused, then don't worry, because I am too!
As a state employee, I already am obligated to contribute 9% of pre-tax dollars of my paycheck to what amounts to a state pension, as in there's no choice in the matter. I also have a Roth IRA I don't max out every year (having only started it a couple of years ago and also, hey! I'm a government worker).
And yet I'm curious if I should contribute pre-tax dollars to the deferred compensation plan, and if so, how much. It appears to be similar to a 401(k), but honestly, I find it a bit confusing.
If any of you can explain a 457(b) plan to me like I'm a five-year-old, I'd really appreciate it! And of course I'll take recommendations as to whether I should contribute to something like this or just do more with the Roth I have going. I will say that there are some good options, such as Vanguard target date funds, for the deferred compensation, so I'm not bothered with their choices. (And then I get to ignore asset allocation issues as someone else will take care of those for me.)
I feel like I know both too much and waaaaaaay too little. Definitely too little, but just enough to be dangerous to my own finances.
Thanks in advance for any help any of you can provide!
There's really not enough information in your post to give you a good recommendation. More info on the pension is needed, and whether or not you also expect to receive any Social Security. The choice between pre-tax or Roth is based on the margin tax rate on the money now vs. what the marginal rate would be in retirement.
The other key is that 457b plans can have different withdrawal rules, so you need to find out what they are. Yours is governmental, so it should be okay, but I've heard of some that force you to take distributions when you leave (and if you leave for another job that can be expensive tax-wise).
Without more information, I'd lean toward maxing the Roth IRA first, but as I said when I started, there's really not enough data to help you.
Continental Op said:
If any of you can explain a 457(b) plan to me like I'm a five-year-old,
I can't, but I use the same phrase at work! I start my new government job tomorrow. I'll see if they mention this.
Hi there! While (a) I'm not a financial advisor, and (b) I haven't looked at the details of your 457(b) plan, I can tell you that in general, public sector 457(b)s are a great deal. Here's why:
- They work exactly like a traditional 401(k), in that you can defer up to $19,500 in income pre-tax
- The 457(b) limit is usually in addition to any pension and 403(b) contributions
- You can take withdrawals from the 457(b) with no penalty after separating from service. There's no age minimum, but you do have to pay income tax on distributions (this is the part where you really need to read the fine print, but this is generally true for public sector 457s)
So should you prioritize the 457(b) or the Roth IRA? That's a question for your tax professional, and there's always going to be guesswork involved, but usually when I run the calculations, pre-tax beats after-tax (Roth-style) savings in the long run.
Again, none of this is intended to be financial advice, but my wife is a public employee, and the 457(b) has been one of the great unexpected benefits.