Jean tackles a question from a reader who will be contributing to both a 457(b) plan and 403(b) plan. What's the best strategy?
Q: I recently received a promotion and raise and I now qualify for my organization’s 457 plan, in addition to the 403(b) plan I was already contributing to. I was maxing out my 403(b) and now I’m in a position to save even more. I currently do all of my contributions via the Roth option. My employer’s 5% match is automatically pre-tax. I had about $110,000 saved for retirement before I stopped checking in mid-March. What do you recommend to fully leverage both plans? My understanding is that I can take withdrawals from the 457 plan at any time with no penalty. Should I treat it as a savings investment vehicle for other goals – not just retirement. I’m 36 and married with no kids. Thanks!
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A: It’s no secret that I am big fan of saving in a tax-advantaged way, whenever you have that option. So, I would advocate for putting away as much as you can into both of these plans knowing that you’re putting that money away for retirement. A 457(b) plan is for government and some not-for-profit employees. (It’s much more common than the 457(f) for highly compensated employees.) Because these plans were designed for people like police officers, for example, who retire before age 59 ½, you can take withdrawals from that 457 plan if you retire (or leave your employer) with no penalty. However, you still have to pay taxes on that money. And that can, if you’re doing well with those investments, be a pretty significant bite.
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So, bottom line, I wouldn’t necessarily treat the 457 as a saving or investment vehicle for your other goals. I’d treat this as a retirement plan, which is what it was established to be, and save on the side for other things that you are thinking about, things that are more short term. When we talk about the other goals that we have in life, typically we’re talking about things like down payments for a house, and that may be something that you’re looking to do in the next three to five years. That money doesn’t belong in stocks or other higher risk investments anyway. And so, I’d carve my funds into shorter-term goals and longer-term goals, and let this account do the work that it was set up to do. Good luck!
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