Dear Dr. Don,
I am 29 years old and I work for a quasi-state agency with a defined pension plan. In addition, I have
the option to contribute to 401(k) or 457 plans, but my contributions are not matched.
Despite not getting a match, I have contributed, on average, more than 10 percent of salary
to my 457 plan for the last four years. I've read recently that if you are not getting an employer match,
a Roth IRA is a better vehicle.
I now have the option to open a Roth 401(k) through my employer plan. Should I switch my
457 contributions all over the Roth 401(k)? Or, because it is all unmatched, is it better to invest in a Roth
IRA and forgo the employer-sponsored plans. Is there any benefit to contributing to a 457 and a Roth
Sometimes, too many options can be overwhelming!
-- Mired Mary
To add to the mix, Congress is considering amending the tax code to allow Roth 457 plan contributions.
In all cases, you're considering an investment in a tax-advantaged retirement account. The
401(k) and 457 plan accounts are tax-deferred, where you contribute pre-tax dollars and ordinary income tax
is due on qualified distributions out of the accounts.
The Roth IRA, Roth 401(k)
and, potentially, Roth 457 accounts are funded
with after-tax dollars, and qualified distributions
out of these accounts are free of federal income
The decision to pay the tax man upfront is typically made based on your marginal income tax
rate now versus the marginal rate you expect to face when you take qualified distributions out of these accounts.
Often these accounts make sense for people early on in their working career because they are
in a lower tax bracket now than they expect to be in the future.
Interactive work sheets abound on the Web that can help you decide whether tax-deferred or
Roth-type accounts make more sense in your situation. I like Fidelity's four question
work sheet as well as any I've used.
Once you decide between tax-deferred and taxed now, you can look at your investment choices and
annual expenses in the different plan accounts. Paying excessive fees is a drag on returns. Not having good
investment choices is just a drag.
If you've been putting all your money away in retirement accounts, maybe it's time to consider
a taxable account. There are other financial goals besides retirement, and you can manage your taxable accounts
to reduce the impact of taxes on your investments.