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  1. #1
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    Default Which is the best option; Roth IRA or 457(b)

    I know I don't make a whole lot of money, so I need to invest the best way possible. I have read different opinions on which route is the better of the two, and I'm still unsure which is best for me. I am 23 years old and started a 457(b) plan that is not matched by the city. I am investing $2000 a year right now, and I make just under 30k a year so it's not going to affect my taxes hardly at all. I know have the option to begin a Roth IRA, and need help figuring out which plan, or combinations of the two, is best for me, or if I should be doing something different than these options. Also, how will factors like getting married, having kids, or increasing my salary affect the way I invest?

    I know that's alot to ask, but I would greatly appriciate any help at all.


  2. #2
    Permanently Removed CALFFBOU's Avatar
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    I am not a Financial Expert, but wouldnt the Roth be better since you pay the taxes up front?

    I will forward your post to a friend who will can answer this.

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    Forum Member FireCapt1951retired's Avatar
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    As stated by Bou. The Roth is nice because you pre-pay the tax and when you start drawing it out it is tax free (remember it's unlikely taxes will be smaller in 36 years), including all profits made, unlike the 457b which is not taxed until you start withdrawing. Make sure your aware of the age limits for withdrawing it. Even starting at 50.00 or 100.00 a month into a Roth along with your 457b, at your age it could be of great benefit. You increase your contribution in the future when possible. Here's a link to a wikipedia site that gives a good explanation. If possible, you should try and do both. Always make sure you know what funds all your contributions are going into. You do have a choice of funds and the ability to control which funds your money goes into. It would be advisable to know a little about all the funds in both the 457b and Roth that are offered. Always keep track of the funds and you can normally move them between funds but you have to do some research. You must always look at the fees and performance of the funds your invested in. You can also look up 457b's for an excellent explanation of this type of IRA. Basically what you'll be doing for the next 35 years is taking a dollar cost averaging approach but make sure that you keep your funds diversified to cover the ups and downs that go with any investment strategy. This is a very short version but hope it helps.

    http://en.wikipedia.org/wiki/Roth_IRA

    Here's another link. It's for 457b's and has some excellent advise for the investment novice. If you ever get the time, take an investment class, it does help.

    http://www.457bwise.com/wisemoves/start457.html
    Last edited by FireLt1951; 06-01-2007 at 09:30 AM.

  4. #4
    Permanently Removed CALFFBOU's Avatar
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    From a trusted Financial wiz-


    Without knowing the total situation is difficult to give a definitive answer, but there are definite tax advantages to pre-tax accounts over after-tax accounts such as the IRA/ROTH. One thing a lot of people do not consider is that, $2000 invested in a pre-tax account goes a lot farther than a post tax account because of the reciprocal.

    For someone in the 25% tax bracket the reciprocal is .75, 15% bracket is .85, basically you divide net (after tax) dollar amount to see what the pre-tax value is.

    So for instance, your friend assuming the 15% bracket, in order to invest $100 per month in a ROTH would equate to approximately $133/month invested in a pre-tax account. The advantage is obviously, you're investing more money and would receive greater returns or accumulation simply because of the dollar amount put in.

    Another way to use the reciprocal is when considering purchases, you can use it to determine how many hours or dollars you actually need to make in order to buy your item. It's always kind of fun to show people that.

    Another advantage for the 457, 403b and 401k is the potential for borrowing from those accounts at much lower rates than traditional loans. Better to pay yourself back than a bank, right?.

    I would recommend continuing to invest in qualified accounts and as income and responsibility increase, begin to diversify his investment strategies, to include ROTH, UGMA, UTMA (for kids') and even certain life insurance vehicles (not for life insurance itself). But at 30k a year, save as much as possible and when income gets over 50k a year, meet with a CFP.

    It's rather early here, and I'm working on my first cup of coffee, so I hope that was helpful.

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    Forum Member FireCapt1951retired's Avatar
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    Bou,

    The problem with a lot of these programs is that the individual doesn't get help from a financial adviser after signing up for the withdrawing of their funds from their check (at least not without some of the outrageous fees most charge). The individual usually ends up keeping them in the same funds they started with because of a lack of knowledge dealing with their ability to move the money around in the funds through the funds sites. I had 3 different accounts and this is common practice in these areas. It pays off to take a good class or a couple of good seminars so they understand the concept of how to operate within the system. They must also continually keep track on the web sites of all the accounts they hold, then make good decisions as to their allocations and reallocations. Financially educating yourself is a necessity in todays world. If they do it right and invest for that 30-35 year period, they will do quite well.
    Last edited by FireLt1951; 06-01-2007 at 01:46 PM.

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    I recently attended a financial seminar with a guy who handles public safety pensions/financial planning all the time. His advice was to max out the 457 first, then go for the Roth. Mostly for the reasons Bou had.

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    Forum Member DeputyChiefGonzo's Avatar
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    If someone tries to talk you into a David Lee Roth/Van Halen IRA, it's a scam.. or it could be the title of a reunion album!
    ‎"The education of a firefighter and the continued education of a firefighter is what makes "real" firefighters. Continuous skill development is the core of progressive firefighting. We learn by doing and doing it again and again, both on the training ground and the fireground."
    Lt. Ray McCormack, FDNY

  8. #8
    Forum Member FireCapt1951retired's Avatar
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    Quote Originally Posted by gunnyv View Post
    I recently attended a financial seminar with a guy who handles public safety pensions/financial planning all the time. His advice was to max out the 457 first, then go for the Roth. Mostly for the reasons Bou had.
    Gunny,

    That can be a true statement but it depends on what 457b's his employer offers. You must always decide by what type and how many funds are available to you within the options. Some offer many funds others have fewer. My employer only offered 2 vendors that handled 457b's. I actually held an account in both for diversification purposes. I did start a ROTH plan but I was much older then because they didn't come out with it until the late 90's.

    If the individual does it right and raises their level of contributions as financially allowed, over a 30-35 year time span, they'll do quite well. Any type of savings over your career gives you an upper hand.

    There are a lot of so called financial wizards (there's a few I know and trust) out there but people must be vigilant in educating themselves on financial matters in order to make better choices. Again, it's smart to take classes, seminar's and read a lot on investment strategies, market trends etc. It doesn't always require a lot of money each pay to pay off in the long term but everyone should gain knowledge of the system and how to play it to their advantage.
    Last edited by FireLt1951; 06-04-2007 at 12:14 PM.

  9. #9
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    Roth IRA. Let me know if you want details as to why. There are several websites out dealing with personal financial planning. I studied it in college.

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    Default Send me some info

    I would like some info on that please



    Quote Originally Posted by ArkansasFan24 View Post
    Roth IRA. Let me know if you want details as to why. There are several websites out dealing with personal financial planning. I studied it in college.

  11. #11
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    Personally, if you can go with both, do both. The Roth is great because you pay the taxes on it now.
    The downside is that you are limited with the amount of actual money you can invest each year. I don't have the specific number off the top of my head, and I'm not going to look it up for this thread.

    The concept is that you pay fewer taxes now, saving you money in the future.

    The 457(b), is also very good for a couple of reasons. First, it allows you to lower your earned income each year, and it allows you to deposit more than the Roth does each year. You are also allowed three catch up years, if you wish to contribute more than the annual allowance.
    My 457 contributions have lowered my actual income down to a lower bracket, which greatly helps me now.

    The concept behind this is that in the future, as you begin to draw on your plan, you will be in a lower tax bracket than you would be while working, due to being on pension.

    Now, a big down-side to the 457; the city has the ability to take your money if they declare bankruptcy. Not many people know, or are aware of this. I believe that it happened in Orange County, CA about 20 years ago, or so. I do believe they were able to recover the plan, but it took some time.

    Is it a huge gamble? I guess that is up to the individual to determine. I participate in both a Roth and my deferred comp. I do emphasize the deferred comp, because I am able to invest more money each paycheck. I can then make a big push at the end of the year after I max-out on my deferred contributions, and place that extra money into my Roth, so I have about the same amount of income all thru the year. It also allows me to maximize my retirement contributions.

  12. #12
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    Quote Originally Posted by jasper45 View Post

    Now, a big down-side to the 457; the city has the ability to take your money if they declare bankruptcy. Not many people know, or are aware of this. I believe that it happened in Orange County, CA about 20 years ago, or so. I do believe they were able to recover the plan, but it took some time.

    Is it a huge gamble? I guess that is up to the individual to determine.
    Did the County administer their 457 plan?

    Ours is administered by a Financial Corporation and all the City does is payroll deduct contributions. So I'm struggling to understand how my City could take MY money that's being held by a third party?

  13. #13
    the 4-1-4 Jasper 45's Avatar
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    Here is a little information on the happenings of 1994 in Orange County, CA:
    Employees participating in an Orange County 457 plan apparently have lost 10% of the assets in the plan, and may lose as much as 22%. They have stopped contributing to the plan, causing it severe cash flow problems, said some labor leaders.

    The losses have brought home to many public employees the flaws in the 457 plan, where all of the assets belong to the employer until the employee retires.

    Defined contribution plans such as 457s are critical to many governments; they usually cost less to administer than defined benefit plans.

    Employee concerns about 457 plans arose after Orange County officials seized 10% of the assets in an $80 million county-managed 457 plan. But the percentage loss could rise to at least 22% for all employees in the plan depending on the outcome of bankruptcy litigation, county labor leaders say.

    A county official declined to comment on how many employees have stopped contributing. However, a source familiar with the situation said the plan has no net incoming cash flow now.
    http://www.pionline.com/article/1995...TSUB/502200732

    It's a quirk in the law, I guess.

  14. #14
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    Late to the party, but hopefully this advice will help.

    Roth should be maxed out, then the remainder should go to the 457. The reason being is that although you are paying taxes now, the taxes being paid are at a lower tax rate than in the future. This is assuming you are younger, and in a lower tax bracket, and expect to be at a higher bracket in the future. For me, I am only pulling about 50k now, but god willing I make it long enough, will be making 100k when I retire. For that reason, I would be paying more taxes in the future. And since the 457 contributions will be taxed upon withdrawal, that means I will be paying more in taxes later.

    Of course if you are towards the end of your career, and do not expect to be in a higher tax bracket, then as CALFFBOU mentioned, the 457 is for you since you will be saving taxes right off the bat.

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