I’ve been trying to figure out the risks/rewards of the 457 plan I have at work.
TLDR: What’s the math on a lump sum tax bill from a 457b disbursement (marginal rate income tax) vs the loss compounding of putting the money in taxable account in VTSAX plus capital gains.
What I have: Maxed out 403b, HSA, Roth for SAHM and myself. Sufficient savings in MMA and post tax investments in total stock index.
I have about one year’s salary in taxable VTSAX. Even though I can’t truly afford to max them all out, I’m close.
I’m interested in selling some of my taxable account to fund living expenses so I can max out retirement accounts effectively moving this taxable savings into retirement accounts.
My company (large hospital system), matches into the 457b so of course it put in enough to get the match (<5%). I want to max out the 457 in addition to the 403b, HSA, and Roth’s but I’m afraid to put too much into the 457b. I will fully fund the other 3 regardless. I’m aware that the 457b plan is subject to the company’s creditors. Ideally I would withdrawal money from it first and maybe use it to bridge retiring early before other accounts are available.
I’m waiting to hear back from HR about my disbursement options for the 457b.
My concern is that some plans make you take the money all at once upon separation from the company thus causing a large one time income tax bill.
How do I figure out if the one time lump sum distribution tax bill is less than the taxes I would have paid up front putting it in VTSAX also figuring in the lost compounding from having less money invested in the taxable account since it is after tax.
So $15k / year in 457b x 10years at marginal tax rate at the end VS $15k(times marginal tax rate) in VTSAX x 10years (times capital gains)
Unless I’m wrong, I’m thinking about this like the Roth conversion ladder where it’s better to spread the distribution over the years to reduce total tax percentage paid by staying in lower brackets. I’m afraid the one time distribution would take most of the earnings like a lottery payout.
Thanks
Submitted April 06, 2019 at 09:25AM by amocer http://bit.ly/2WNrFWH
