My employer offers a 457b plan through Nationwide. The plan has limited funds which I can invest. The fees are rather high for what they are.

Target date fund = .91%
Mid cap index = .68%
SP 500 index = .45%

I can get these funds for free or almost free from Fidelity.

My question. Is pretax savings worth the extra fees? Im currently in the 24% bracket. Is it as simple as subtracting the percentages. 24-.45= 23.55% savings?

Yeah, that's fairly high. Place like Fidelity or Vanguard have significantly lower fees on most of their passively managed funds (anywhere from 0.05% to 0.2%), and offer a wider variety of fund options too.


You may be able to make similar pretax contributions on your own in a Traditional IRA through Fidelity/Vanguard, which you could then use to invest in their funds with significantly lower fees.

However, there are some catches with a Traditional IRA:

a) Contribution limits in an IRA are lower than a 457b: $6k/year if under 50 or $7k if 50+ in IRA, vs. $19,500 in a 457b. (But if you want to contribute more than $6k/$7k you could potentially contribute to both, maxing out the IRA contribution to invest in lower fee funds, and then contributing any additional to the 457b for use with the higher fee funds.)

b) You can't withdraw from an IRA without paying a 10% penalty until you're 59.5, with a few limited exceptions for things like paying for college, buying a house, or paying major medical bills. 457bs have no early withdrawal penalty fee.

c) You can't deduct Traditional IRA contributions on your taxes if your household AGI is over $76k (single) or $125k (married), since your employer offers the 457b retirement plan. If your income is over those limits, your only option for pretax contributions would be the 457b, and you'd just have to deal with the higher fees.

But even if you're over the limit to make pretax contributions to a Traditional IRA, you may be able to contribute post-tax to a Roth IRA. The income limit for that is higher, at $140k for single or $208k for married. The difference is that with a Roth, you'd pay income tax now on these contributions, but won't be taxed on any gains or withdrawals at retirement. (Tax now with Roth IRA vs. Tax later with Traditional IRA.) Roths still follow the other IRA rules, though... Same annual contribution limit of $6k/$7k, and same early withdrawal penalty before 59.5 with a few exceptions.

^^^^ Thanks

I forgot to add we are over the income limits for a Roth IRA and the tax deductions for a traditional IRA.

quote:

Originally posted by gpbst3:

My question. Is pretax savings worth the extra fees? Im currently in the 24% bracket. Is it as simple as subtracting the percentages. 24-.45= 23.55% savings?

Other things to consider: Does your employer do any matching contribution? If so, you won't get that outside of your employer and that's usually a slam dunk, yes, contribute to your employer's program as you're leaving money on the table.

To answer your question, it's not as simple as that.

If you're saying your marginal tax bracket is 24% and assuming all your contributions will be at that tax rate (that is, even after you deduct your contributions, your marginal tax rate will still be 24%), then what that means is: for every $100 you contribute pre-tax, you're only taking $76 out of your cash flow. That is, if you didn't contribute the $100, all you'll have in your pocket is $76 after the 24% tax and before any state income tax.

The assumption is when you retire and start taking money out, every $100 you withdraw will be taxed at a lower rate because you'd be at a lower income level presumably plus money has been compounding with a higher starting amount. But it's a guess where tax brackets will be in the future.

The impact of the ,45 is simply inside the fund and it affects the net return on the investment. The fund invests your money. Your investments gain in value. But the total value is reduced by .45% as that's the fund's charge for managing your investment.

With regards to the fees and assuming your employer doesn't offer any match, then I suppose you can just shop for the lowest cost. While history is no guarantee of future performance, I would look at where I think I would get a better net return overall. You should also consider the inherent risk/reward profile of each investment fund and gauge that according to your investment goals and aversion to risk/volatility.

Is the 457 available as a Roth account ?

does your employer offer a match ?? if yes -- I'd contribute to get the match using the SP500 Index offering


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There is no matching and no 457 Roth.

Every dollar you pay in fees in a tax deferred account is that many dollars the will not grow into the future. So, do the math. Assume a growth rate for the future and subtract the fees each year and compute the future value of $1 until you have to/want to draw on that money and that is the cost of the fees over time.