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I have decided to max out my 457 Plan for 2015 (max out is $18k/year). I have the choice to either make contributions to this fund Traditionally (pre-tax) or as Roth (post tax). What do you think I would be better off doing? A little info about me which could impact decision is that my salary is about $40k/yr and I will be filing Married Jointly.
You are going to contribute 45% of gross? Does your wife make money?
Yes I am, we have been very fiscally sound the last 5-10 years in terms of living below our means and I will be able to afford to do this. And no, my wife does not work.
Your taxable income would be less than 20k at worst so you wouldn't gain much from pretax contributions. I'd go roth. You should be claiming the savers tax credit if you are aware of it already
At your income level I would look at:
- how far away are you from retirement?
- what are the chances you will get taxed more in retirement?
Ex: if you were 42-52 making 40k/year , that your income will not increase more than 1-2%, and most importantly your COLA will remain the same or lower in retirement I say Traditional IRA. Save on taxes now (qualify for more credits) and you will most likely not go over the 15% tax rate in retirement also; if you got taxed much at all (low tax bracket).
If you were my age or younger 22-32 just starting out and have 30+ years to climb the ladder and fully intended to... I would say go for the ROTH. You are most likely to end up in a higher tax bracket when you retire, so having some "tax free" money around will be nice for emergencies and such.
Yet my wife and I ade 29 and not following our own advice and instead maxing my 401k and her 403b because Personal Finance is after all Personal. My wife in academia and working her way up, she wants to do research and teach AKA low pay till you make professor. So her federal loans qualify for "income based repayment" and "federal loan forgiveness" after 10 years of on time income based payment.
--- income based payments are based on Adjusted gross income as a couple.
--- so in our case we benefit in the long run two folds from this: lower payments for 10+ years and federal loan forgiveness at the end of 10 years.
---> and yes my jobs offer ROTH 401k
---> Traditional payments on her +85k federal loans would have been ~$900/month while only ~$220/month on income based.
So it is not always a one size fits all, you may have some other "outside" circumstances that changes your decision making.
I have decided to max out my 457 Plan for 2015 (max out is $18k/year). I have the choice to either make contributions to this fund Traditionally (pre-tax) or as Roth (post tax). What do you think I would be better off doing? A little info about me which could impact decision is that my salary is about $40k/yr and I will be filing Married Jointly.
Any opinions/suggestions would be appreciated!
Yes, go with the Roth. At the rate you're going it sounds like your taxable income in retirement could be higher than it is now, so that's why I vote for Roth.
Hello WS...based on the basic information, you'll likely benefit more from post-tax/Roth 457 contributions. The reason is your income is so low which translates into a low tax bracket. If you're contributing to a 457 account I assume you're in the public sector, so it's possible you'll be pulling in a pension at some point. If this this the case, don't overlook the chance that you'll be in a higher tax bracket once you retire. According to the author this this post [url=http://457planinfo.com/attack-of-the-457-plan-tax-zombies-part-1-of-2/] there's a pretty decent chance of getting bit by the tax man once you retire and start taking a pension.
Someone asked for my opinion for his 457 plan, whether he should go deferred or Roth, it made me think about the same question about IRA. AFAIK Roth IRA not only differs from traditional in when it's taxed and whether the earnings are taxed, it also has less restriction/penalty in withdrawal. What about 457 plans?
Another question is, in what scenarios are people in higher tax bracket in retirement? I tend to think most commonly the tax bracket will be lower as you no longer have employment income.
I see this poll has 100% voted for Roth...
So far as I can see (for 457 at least):
Deferred: pay tax later when (likely) in lower bracket, but earnings are taxed, too.
Roth: pay tax now when (likely) in higher bracket (ouch), but earnings are tax-free.
There's not enough information to answer the question. The OP has said what they earn. They don't say what their joint return looks like and what their state income tax burden is.
If they're in the 28% bracket with a fairly hefty state income tax, it makes sense to shelter the income in a traditional tax deferred plan; particularly if it's possible that they'll retire to a state with no/low income tax. If they're in the 25% bracket with minimal state income tax burden, paying the tax now with a Roth makes more sense.
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