- quote -

In this case, this might be a very poor strategy. The OP has a 457, not a
401k, and there are favorable differences. One is the ability to withdraw
funds WITHOUT PENALTY at any age as long as the contributor has separated
from service. While the OP may not want to withdraw funds upon his early
retirement, he should carefully consider that he may want to keep his
options open and not throw this opportunity away by rolling the funds into
an IRA.

Elizabeth Richardson

On Mon, 1 May 2006 10:44:13 -0500, "iarwain" <iarwain_8[at]hotmail.comwrote:


- quote -

Assuming the plan is a government 457 and the participant has
terminated employment, there is no premature distribution penalty
associated with 457 withdrawals.

As for whether the plan will provide any type of withdrawal other than
a complete withdrawal and whether there are any custodian imposed
surrender charges, commissions, etc., see the plan document, ask the
custodian, or, if you have a good HR group, ask them.



-HW "Skip" Weldon
Columbia, SC

iarwain wrote:
- quote -


You definitely don't want to do all of your saving in qualified
accounts, that money is intended for retirement and can only be accessed
in limited circumstances (and even then, with a tax hit). But there are
plenty of cash needs well before then, that most people aren't able to
pay for out of a regular paycheck (down payment on a home, home
maintenance and improvement, automobile purchase & repair, perhaps
education for children, vacations, recreational gear.....)

Plus as you mentioned, you might want to leave the qualified dollars
alone and live off other money - whether early in retirement, or simply
during a year off at some point or something like that.

I don't think there's any rule of thumb on how to allocate between the
two, it's so specific to the individual. One thing you mentioned, the
pension, suggests that you might not have as high a need for retirement
savings as the typical employee. It's not a given that you max out
qualified plan contributions - as a starting point you might take a look
at your marginal tax bracket and see how much immediate tax savings that
extra dollar is getting you.

-Tad

iarwain wrote:

- quote -

Your benefit dept should spell out the withdrawal provisions, but the
457 does not have a 10% withdrawal penalty for under 62 withdrawals.
You can take thosewithdrawals as you wish once you retire.

It's not that the post-tax account has no value, it cerainly does. Given
a 15K/yr limit for 401 this year, it would take a high savings
percentage for most people to max out and still have money to invest.
Similarly, given the generally low savings rates, most people will
retire to a lower bracket, and would be best off using the pre-tax
savings to the fullest extent possible.

Talk to your benefit dept about the 457 withdrawal rules. The
information publicly available is far less than that for regular 401 or
IRAs.

Lastly, my best advice on the post retirement planning; look at your tax
bracket and consider converting an amount into a Roth IRA to 'top off'
that bracket. Over time, that Roth money will continue to grow, untaxed,
and you will optimize the taxes paid on all withdrawals.
For example, in 2006 the Joint rate of 15% ends at $61,300. Say in
December, you dry run your taxes, and find that taxable income is
$51,300. You convert $10,000, and pay 15% on that. This strategy is
worth thinking about. Keep in mind, you cannot convert from 401/457 to
Roth. It has to stop in a regular IRA first, even if for a day.

JOE

Original poster here.
To be honest, the diversification problem isn't really that much of an
issue with me. Between the 457 choices and the Roth IRA I think I can
get decent diversification.

I'm more concerned with rules of withdrawal from the 457, although I
was just reading that unlike a 401k, you can withdraw from a 457 at any
age after you leave your job. But do you still have to take
"substantially equal" withdrawals to avoid a tax penalty? And what
does "substantially equal" mean exactly?

See, the appealing thing about keeping a taxable account to me is that
I can do whatever I want with it, whenever I want, and withdraw as much
or as little as I may need. My plan has been to retire early
(hopefully) with a pension and use the taxable accounts to fill in any
needed income and stretch that out as long as I can before getting into
the 457. To answer someone's question, I plan on being in a lower tax
bracket when I retire.

By some of the responses here, I get the impression some people don't
see the value in a taxable account. Do you think then that outside of
an emergency fund all your investments should be in tax deferred
accounts? In a lot of ways this would be an easier thing to do, since
with the 457 I can save the money back while keeping more to spend now
at the same time. It's mostly just the withdrawal rules that put me
off, which I confess I'm not completely familiar with at this time. I
need to learn more. If anybody knows anything about withdrawal rules
for 457s I'm listening.

joetaxpayer wrote:
- quote -

Good point. To go further, if you have some good choices in your
401(k), but cannot construct a diversified portfolio with just those
choices you are happy with, you can round out your portfolio by making
complimentary investments in your IRAs and taxable accounts. For
instance, if your 401(k) has only large cap choices that you like, you
can allocate more of your other investments to small caps,
international, bonds, etc., and have a well-rounded portfolio.

So even if your 401(k) doesn't offer everything you want, it may still
offer enough to make it worth contributing.


--
Mark Freeland
nNeEwTs[at]sonic.net

"Sandra Loosemore" <sandra[at]frogsonice.com> wrote in message
news:m3y7xmr869.fsf[at]localhost.localdomain...
- quote -

Good point. Never thought of that strategy.
--
Chris Cowles
Gainesville, FL

iarwain wrote:

- quote -



You can get tax deferral in a taxable account -- just don't sell
anything. Maybe you can't totally accomplish this, but you at least
control when the taxable events occur.

I kind of like that Bernanke (sp?) is talking about cutting the capital
gains tax rate to zero. Shortly after that happens (if it happens) I'm
selling everything that has a gain and shifting all the money in my
daughter's college fund into a new fund to step-up the cost bases.

Bob

iarwain wrote:

snip
- quote -

One of the questions someone advising you would ask (or would know from
your profile); What tax bracket are you in now? in what tax bracket will
you be in when you retire?
There are people who will retire in a higher bracket than are while
working. For them, a 401K is a way to turn long term gains into ordinary
income (not good). Others are in a high bracket now, but will have a
modest income at retirement and are trading 35% tax rate now for 15% at
retirement. So the pretax vs post tax decision is mostly based on that.
I advised one 25 year old, very bright guy, likely to suceed, to put
into the 401 only the amount his employer uses for matching, in his
case, the first 5% is matched, dollar for dollar. Then, put the max into
a Roth, then regular accounts. That is likely the best I could answer
not knowing more about your situation.

You used the expression 'eggs in several baskets'. This typically refers
to choice of investments, i.e. stocks, bonds, etc, not to tax status of
accounts. I'm not splitting hairs here. You may have a 401K, a Roth, and
post tax accounts all in the same investment (and now be diversified) or
all your money in a 401 but with a good mix of end investments. To speak
of diversification, you should look at all investments as a total pie
chart.

JOE

One possible reason to load up your 401(k) instead of investing in a
taxable account is if you think it is likely that you won't be
sticking with the job in the long term. When you change jobs, you can
roll your old 401(k) money over into an IRA, and then do a Roth
conversion on it, paying the taxes out of your other savings --
effectively allowing you to pour far more money into the Roth than the
limits otherwise permit. Of course, this assumes your other income is
under the limit when you do the contribution and it doesn't push you
into a higher tax bracket. This would be a good plan for somebody
who's planning to go back to school or become a stay-at-home parent or
otherwise take some extended time off work.

-Sandra

"iarwain" <iarwain_8[at]hotmail.com> wrote
- quote -

After contributing enough to get the employer's match, the
above is indeed an important reason for not continuing to
contribute to their 401(k).

- quote -

Right, but it really depends on how bad the choices are.
Also, I wouldn't look down my nose at the tax break quite so
quickly. You seem to see it as an inconvenience (e.g. "most
of the taxes will already be paid in the taxable account")
rather than an advantage.

You might want to consider giving the group a more exact
idea of what your 401(k) has and what in particular you wish
it had. It's quite possible the choices are apalling (after
getting the employer's match--can't beat a typically 50-100%
immediate return like that).

I'm maxing out a Roth IRA, funding a 401k (well, it's a 457 actually),
and I have a pension due when I retire (hopefully early). I'm wanting
to also start investing in a taxable account, and live off of that and
the pension for as long as possible while letting the nontaxable
accounts compound (when I retire).

Do you think it's a good idea to invest in taxable accounts before
maxing out the 401k?
The advantages I see with the taxable account is this:
You can only contribute a fairly limited amount to the Roth IRA.
There is only a limited amount of investment choices with the 401k, so
more diversification can be acheived with the taxable account.
You don't have to deal with any rules of withdrawal with the taxable
account, and withdrawals can be made at any time (or age).
I also like the idea that most of the taxes will already be paid in the
taxable accounts.

Obviously, the disadvantage is the lack of tax deferral. But as long
as I'm putting a substantial amount into the 401k, don't you think it's
a good idea to have some taxable investments as well? Isn't it good to
have your eggs in several different baskets?