A 457 plan contribution can be an effective retirement tool, that gives you a few options of how to contribute towards it. There are fundamental differences between the taxation of the accounts, as well as limitations and provisions on each, which can make for difficult assessments. This calculator will help you devise a saving strategy to maximize the benefits on both types of contributions to get the most out of your 457 retirement plan.
Let’s begin by reviewing what this calculator may be used for and continue on how to best use it.
Traditionl versus Roth
While both contributions can be equally effective, the best option for accumulating savings will rely heavily on personal means and circumstance. There are clear variances between the two contributions. The best strategy to grow a 457 retirement plan account may be to use a combination of both contributions to their maximum benefit.
Traditional 457 pre-tax elections allow you to make contributions from your income before taxes. This can help lower current income taxes while allowing you to put more money towards your investment. In turn, you can earn more dividends. Both your contributions and earnings will grow tax-deferred until you are ready to withdraw your investment. When the time comes for withdrawal, your investment will be considered ordinary income and will be taxed at the current marginal income tax rates.
On the other side of the spectrum, is the Roth 457 contribution. With Roth, your contributions will be made after taxes, so there will be no tax deductions when you want to access your investment. However, there may be penalties if you choose to withdraw your investment or earnings prior to the account’s age of maturity.
So, which method will help you get the most out of your investment or earnings? Continue reading for more elaborate explanations and how to best use this calculator.
Limits and provisions on contributions
There are various limits imposed on 457 plans from the annual contribution amounts to the age of withdrawal, along with various provisions to allow for increased savings. Currently, the yearly maximum contribution for a 457 plan as of 2017 is set at $18,000 and is not affected by the employer’s matching payment.
In the case of Roth contributions, some penalties may apply if certain account maturities are not met. In order to access your investment without penalty, you must be 59 ½, and the account must be aged a minimum of five years.
The provisions set forth function as tools for individuals to increase savings even further. One such provision is for anyone that is not able to make the full yearly contribution, which allows the individual to catch up with their contributions within three years. While there is another provision if you are over 50, which allows additional contributions of $6,000 annually to a 457 plan account, as of 2017.
Finally, there is another provision that allows further contribution for ‘highly compensated’ employees, based on their employers overall 457 plan participation. In order to be classified as a ‘highly compensated’ and considered for this provision, your salary must be $120,000 or more. For eligibility, you should contact your employer to inquire whether such contribution limit is applicable for you or not.
It is worth noting that both annual maximums and catch up provisions are both indexed and adjusted for inflation, so these figures are always subject to change.
What is this calculator for?
Using the 457 Plan: Roth vs traditional pre-tax calculator is fairly straightforward. It can help you decide which contribution will provide you with more benefits. You just need to provide some basic information about your retirement plan. This includes your age of retirement as well as planned contributions to your retirement account. For accurate calculations, it is also important to have knowledge on the performance of your company’s investment plan selection, and marginal tax rates.
When this information is added to the 457 plan calculator you will be provided with detailed graphs, charts, and tables, outlining the potential value of your 457 plan account using roth or pre-tax, based on your selections. You may use this calculator as a tool to assess different contribution strategies to maximize your retirement savings.
How accurate is calculator?
Its important to note that future rates of return are based on hypothetical scenarios, and can’t be predicted with certainty. Investments that have higher ROIs are subject to higher risk and volatility, and the actual rate of return can vary widely over time, especially for long-term investments. In some cases, there can even be a full or partial potential loss of principal on an investment.
This type of instability in earnings may lead to capital loss. So in some instances, a more stable alternative is to deposit money in the savings account of a financial institution as it offers as little as 0.25% or less interest rate but minimizes the risk of capital loss.
Using the calculator
By using our calculator you will be able to work out the best possible rate of return for your retirement savings. All you need are a few details that you should be able to work out easily or discover online or from your pension provider.
Age of retirement:
It is assumed by the 457 plan that you will contribute to your pension account until the year before retirement. The final payment, therefore, will be at age 62, if you plan to retire at age 63. In this box, simply add your current age and the age that you hope to retire.
There s a limit of $17,500 of contributions for the year 2013, however, you are able to make catch up payments to your Roth tax account if you are aged over 50. This means that the actual contributions could be improved. However, any payments made by the employer are not taken into account and do not affect the maximum contribution. It is worth noting that anyone on a high income may be affected by the upper limits on Roth contributions and that it is indexed to inflation. If you are unsure about this amount, your pension provider should be able to provide the exact figure.
You can also check the boxes that indicate if you wish to increase your contributions to the maximum in the future or to invest any taxation savings alongside your contributions.
Investments: If you invest your tax savings each year the total cash flow between the two account types can be balanced. Investment is an essential part of the Roth plan and will result in a more favorable outcome when compared to traditional pre-tax plans. This is because pre-tax elections reduce your taxable income at the end of the fiscal year and if you don’t reinvest these savings you are actually greatly increasing your ‘spending’ per year.
For instance, if you are making $75,000 you are subject to pay 15% on your taxes, equalling $11,250 in federal taxes for 2016. If you contribute $15,500 pre-tax to your 457 plan your taxable income reduces to $59,500, and the %15 tax bracket dictates that you will pay only $8,925. This creates a surplus of $2,325 for the year, which can then be directed to your Roth to reach your maximum contribution for the year. Therefore in this theoretical scenario the total investment into the 457 plan would be $15,500 pre-tax + $2,325 Roth to equal $17,825)
Maximize Roth contributions: You should always contribute the maximum allowed by the federal tax authority into your Roth account. This means you are maximising the potential tax savings. You can also take advantage of the additional allowances for catch-up for anyone aged over 50.To the right is your total contributions across the number of years left until your retirement.
The next box is a drop down option that details the tax rates and investment returns you are able to expect.
Expected return rates:Your actual rate of return will depend on the way that your savings have been invested, but average earnings range from 7% to 10% over the last 40+ years. The best stability came from savings accounts in banks as this offers a safe investment, free from potential losses. However, do note that savings interest in banks is relatively low.
Tax rates:The current tax rate refers to the amount expected to be paid on taxable investments, while the retirement tax rate is the marginal amount expected to be paid at retirement.
The second part of this calculator offers a series of reports that detail the results of the above information. The first table is the After Tax Comparison. This shows the Roth 457 plan vs the Pre tax 457 and how it will look across the life of the investment. Here you can see that the Roth $%& does slightly better, the longer it is invested.
The second tab is the After Tax Total at Retirement. This shows the full value of each investment for a clear view of the amount you can expect at the end of the investment period. Once again the Roth appears to offer a better return.
The third tab is the Results Summary. This shows a breakdown of each plan detailing the total contributions, the total before taxes, the taxes at retirement and the value at retirement.
It is also possible to see a full Balances by Year breakdown on the final tab. This allows the investor to see the yearly increases and to determine the exact year that it is best for them to retire.