Should I put less in my retirement plan to fund a Roth?December 9, 2011: 5:05 AM ET
I'm 38 years old and single, and I currently contribute about 14% of my $60,000-a-year firefighter salary to my employer-sponsored 457 retirement plan. I'd like to shift some of that to a Roth IRA to diversify the tax consequences when I start withdrawals. My employer doesn't offer a match, so how should I go about splitting the contributions? –Jason Gray, Boulder, Colo.
The decision to split your retirement money between a tax-deferred plan (like your 457 or a 401(k) plan) and a Roth IRA comes down to what you expect your tax rate to be after you retire. If you think your taxes will be higher than what you're paying now—because your income is higher, say, or Congress has raised tax rates—you want to sock as much as possible into a Roth, since you can withdraw the earnings tax-free in retirement. If you think you'll pay lower taxes in retirement, you should put more in a tax-deferred plan now.
That said, it's almost impossible to know what your taxes will be in the future. By splitting your money between tax-deferred plans and a tax-free Roth, you can in effect diversify your tax risk. And without a company match, you're not missing out by dividing your money.
What you should also consider is whether the expenses on your 457 plan are higher than you'd like. "In my experience with deferred compensation plans, and 457 plans in particular, these plans are often held with insurance companies, within annuities," says Ted Toal, a financial planner in Annapolis, Md. "If that's the case, the internal costs of the 457 plan are probably pretty high, so it would make sense for you to shift some money to a Roth." With your own account, you can choose investments with very low expenses, such as Vanguard index funds or exchange-traded funds.
Especially if your company plan is expensive, it's safe to go with a 50/50 split between the two options. Sock 7% of your pre-tax salary into your 457, and put another 7% into a Roth. Maintain that split as your salary goes up until you max out the Roth ($5,000 a year now). After that you can throw the rest into your 457.
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