We’re back to the digital mailbag to answer your questions!
For this week:
- Are new investors part of an “unlucky cohort” that won’t achieve financial independence in the often-cited timelines?
- Is it worth it to hire a tax professional? And if so, how should I find one?
- Can you help me understand all these confusing public sector retirement accounts?
- Should I do a Roth conversion now or just make a contribution to a Roth IRA?
- Thoughts on the recent bank runs and instability in financial markets
- So much more!
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Previous Q&A Posts
Your Questions Answered: Volume One
Your Questions Answered: Volume Two
Your Questions Answered: Volume 3 (Podcast)
Your Questions Answered: Volume 4 (Podcast)
Your Questions Answered: Volume 5 (Podcast)
Your Questions Answered: Volume 6 (Podcast)
QA7: Financial Freedom Fast-Tracks and Climbing Plateau Busters (Podcast)
QA8: What If We Run Out of Water? (Podcast)
QA9: What is the Point of Financial Optimization?
Q1: Are new investors part of an “unlucky cohort” that won’t achieve FI in the often-cited timelines? (00:05:52)
This is the Wild Ride We Signed Up For (Clipping Chains)
Who’s Afraid of a Bear Market? (Early Retirement Now)
Stock Market Performance After Bear Markets (Ameriprise Financial)
Market Timing: Why It (Still) Doesn’t Work (Clipping Chains)
Q2: Is it worth it to hire a tax professional? And if so, how should I find one? (00:16:40)
IRS: Directory of Federal Tax Return Preparers with Credentials and Select Qualifications
Value Spending: How to Really Save Money (Clipping Chains)
Q3: Can you help me understand all these confusing public sector retirement accounts? (00:21:48)
403(b) vs. 457(b): What’s the Difference? (Smart Asset)
EP 29: Back in the Weeds with the Frugal Professor
Q4: Should I do a Roth conversion now or just make a contribution to a Roth IRA? (00:25:36)
The Bold and Beautiful Roth Conversion Ladder (Clipping Chains)
Roth Contribution Limits (IRS)
Updated Roth and Traditional IRA Contribution Limits (Investopedia)
Q5: Thoughts on the recent bank runs and instability in financial markets. (00:31:40)
Why Silicon Valley Bank Collapsed — And What Comes Next (The Ezra Klein Show, Podcast)
The Non-Bailout Bailout (Ones and Tooze Podcast)
A comment on 457b, as I do disagree somewhat with the frugal professor on this one. A 457b is a delayed compensation plan offered by a governmental or non profit employer. This delayed compensation part is very important. Unlike a 401k or 403b, the money in the account is not yours. This means if your employer were to go bankrupt, the money in a 457b can be seized to pay off the employers creditors. Low risk if you work for a federal or state employee, but if working for a small non profit this may be a much more significant risk.
In addition, 457b have non standard distribution options governed by each plan specifically. Most cannot be rolled over into another retirement account. Many have poor distribution options, so if your plan states you have to withdraw all the 457b money within a year of separation from your employer, you are going to have significant tax drag. If your plan allows for withdrawals over the next 5-10 years after separation from employer, this is a much better option, but not nearly as good as typical 401k where money can remain in the account until usage in retirement.
Now, the contribution limit for 457b is separate from 401k/403b limits, so it does allow a greater amount of total money into retirement accounts. However, because of the additional risk and often poor distribution options, I would argue a 457b should be the last account funded, and serious consideration should be given to if the particular 457b is worth funding at all.
Thanks for this follow-up!
Fair critique. However, there is a distinction between governmental and non-governmental 457b plans: https://downshiftfinancial.com/457b-plans-governmental-vs-non-governmental/. The differences between these have large implications for credit risk. I have access to a governmental 457b, so credit risk is off my radar. But for someone with access only to a non-governmental 457b, I think your concerns have merit.
I completely agree, if you have access to a governmental 457b, it may as well be treated equal as a 401k equivalent with an additional contribution limit, especially because of the excellent roll over and distribution options. I do think in general, though, non-governmental 457b accounts should be handled with much more caution.