1. Wow, I did not even know these plans existed. They sound like they might be a good idea. I’m always looking for a good retirement account, since an IRA is not a good option for me within my specific financial situation. My employer does not have a 457, but my wife’s might. Thanks!

    • Miguel,
      We’ve loved our 457 plans so much so that my wife and I refer to them as “millionaire makers.” I sure hope you wife has access to this invaluable account. If your wife is a school teacher or government employee, there is a good chance that she has a 457 option. If so, it’s hammer time! Good luck, Ed

  2. Dustin

    Excellent post. In terms of good 457 plans, Alabama actually has a pretty good one available for educators along with a decent pension plan. The best choice is a SP 500 index fund with no “no administrative, membership, investment, transaction, sales or commission fees for participating fees.” They don’t advertise what fund it is, but the Boglehead forum indicated it was VFINX.

    • Dustin,
      Great piece of information for my Alabama friends and readers. VFINX has an expense ratio of .14%…we can certainly live with that! Thanks for the data point. Ed

  3. Lucas

    Thanks to Ed, I encouraged my wife to max out her 457 this year. We are behind this year so we were not able to also max out the 403b. However, even with this advice we will have deferred
    $18000 in 457 money
    $3100 in 403b money

    for me, $18000 in TSP money. I figure by the end of the year we will be at $39,1000 deferred. This should lower our taxable income below the limit(I think its around 90k magi) and so the plan is to both contribute another 5500(total $11000) bringing us to deferred savings of $50,100!! It’s still not the 50% savings goal I wanted but it’s darn close. Next year I hope to max out everything…too bad that this year we missed an opportunity to save another $15k on her 403b.

    One thing that I never thought of is if you have to leverage one person’s salary because of the access they have to 457, you may even want to rethink who is paying for health insurance. In our case, we were on her health insurance which actually made it difficult to max out both tax vehicles because she doesn’t make as much as me and so there wasn’t much left in the paycheck. In the future I may put health insurance on my salary(larger) so we can more easily max out tax savings on her paycheck(our tax savings as we file jointly)

    I just wanted to tout an example of someone who learned from Ed! In our case we have the potential to sock away $70k in deferred income–something I never knew until I started reading this blog. MadFientist really helped me appreciate the power of tax deferred.

    • Lucas, you pathetic loser…you’ll only save $50k this year and fall below your goal of a 50% savings rate! Well, on second thought if you’re gonna fail, you might as well do it a la Lucas. Way to fail brother!

      Great point on the coordination of healthcare benefits. At our last job, I took care of the health insurance while my wife carried the dental and vision insurance. We did so to make sure there was a enough money to max out all of our accounts. We take a team approach to our finances to best optimize our savings; it sounds like you two do the same.

      It always makes me feel good to hear people are learning something from my posts. I think every teacher, policeman, fireman, and government employee should be a millionaire. The tools are there, and we just need to show them the way. Keep it going “loser!” Ed

  4. Lucas

    haha I will be a rich loser thanks to you! Ed…I have a question for you. After reading Gocurrycracker he agrees with you that all tax deferred savings should be maxed out even before Roth contributions. My question is…is there any value in Capital gains savings at this point? Like I said it looks like we have about $70k of tax deferred space. We will be lucky to hit that number and wouldn’t be able to do any capital gain savings after that. Do you think we should diversify a bit or hit as much tax deferred stuff as possible? I am just trying to stay cognizant of the fact that we will pay ordinary income on these contributions at some point(as opposed to the cap gains rate)

    • That’s a good question because at some point you’ll have a whole bunch of money waiting to come in as ordinary income. Here’s what we’ve done: First, we take $18,375 in 72t IRA distributions. These distributions are covered by our 2017 Free Money + 10% income limit of $43,500. This leaves us $25,125 of room to do a Roth Conversion. Truth be told, if I had it to do over, I would have held off on the 72t distributions because we have to take them until the age of 59.5. That would have allowed a bigger Roth Conversion space. At any rate, you could use a Roth IRA Conversion ladder to turn all that taxable ordinary income into Roth moolah. You wouldn’t have to get all converted, just enough to keep your tax rate low.

      I guess the ideal situation is to 1.) have ordinary income that falls in the Free Money range, 2.) a good chunk of tax-free Roth income, and 3.) a nice taxable account that has 0% capitals gains due to your total income remaining in the 15% tax bracket. I’m working on the #2 money right now: we did a $30k conversion last year and we’ll do a $20k conversion this year. We almost have $9k in our taxable account; VTSAX is right around the corner!

      The worst case scenario for me is that I’ll have to pay some tax at the 15% rate. If our IRA accounts got really big, we’d consider opening a charitable trust. I’ll have to bone up on that first. I’m still trying to figure this out myself.

      • Lucas

        Thanks Ed. Sounds like you think it’s ultimately best to max out every tax deferred dollar first. Hopefully some day we can make it to a cap gains account but I guess worse case scenario we just would need to draw that 457 money with in the “free zone” or yea pay a little tax on it.

  5. Great post. For some a 457 can allow you to harvest free capital gains in your taxable account which is such a bonus. Maybe not a #8 since everyone can’t do it, but its awesome. With my 457 you really have to watch the fees. There is one Large Cap (S&P500 benchmark) fund with fees of 0.1320% and one bond fund with 0.1316%. The admin fee is 0.129%. So my total fees are approx 0.26%. I can live with that, but if you pick other choices then fees can be much higher.

    • Thanks Mr. Wheat. Does a 457 make free capitals gains possible by reducing total income to the 15% tax rate? Yes, yes, yes to the fees comment. I see variable annuities all the time, so I see the worst of the worst. Ed

      • Yes for us it reduces income enough to harvest significant FREE capital gains. Harvesting gains is a bit complicated due to the way it stacks with other income and deductions. Michael Kitces has a nice article on how it stacks. I found that I could only estimate what I could harvest for free using tax software. I used last years return and adjusted for this years estimates.

  6. Hello Millionaire Educator

    I am an avid reader of FI blogs. I am looking for a resource which points me to one of the best places in the US to retire from tax and cost of living perspective. To be specific, I would prefer to pay minimum state taxes on my retirement withdrawals and also minimal property taxes. Of course, cost of living has to be in check as well. What I don’t mind is sales tax because we are a low consumption household. Can you point me to a blog/article from the FI community which talks about this?

    I understand that during retirement, I can convert a small portion of Pretax money in 401K/IRA to Roth each year and that will prevent overall taxation but I am looking for more US state specific information instead of the taxation hacks which I am already aware of.


    • Vishal,
      It appears that we might be sharing the same brain. I find myself thinking of such optimization ideas all the time. A few good website to play with are:

    • How Money Walks
    • This looked good too
    • If I were to pick a state based solely on its no income-tax status, low property tax, and overall low cost of living, I would look at: rural and small town Tennessee or rural and small town north Florida. Tennessee seems like an awesome choice since they are in the process of phasing out the Hall Tax (the tax on dividends and capital gains) over the next four years.
      North Florida might work for you too, especially if you pick up an inexpensive home ($50k or below) and make it your homestead. You’d only pay school tax on such a home with no property tax. However, Florida homes that do not have the homestead exemption pay “full freight” if you know what I mean. Florida has mild winters, but I can’t discount those hurricanes.

      I used to be interested in Texas, but it seems the property tax there can go sky-high depending on the municipality. That aside, Texas is an awesome place to us. I hope this helped. Please share anything you learn regarding super efficient tax locales. Thanks for the question, Ed

  7. I am lucky in that I have access to a 401a (notice not 401k), 403b (I max) and a 457. However, I haven’t started funding it yet. I need to start doing that, even if it is $50 a paycheck.

  8. Charles

    Hi Ed,

    I’m a police officer and my wife is a teacher. We’ve been doing exactly what you described in this article and were 3k short of 1.5MM.

    You are absolutely correct! Funding these to the max will eventually make you a millionaire. Along with LBYM of course.

    We front load my 457 and my wife’s 403b and 457 so that they are fully funded by April 1st. And we draw down off a taxable account to fund our living expenses for the first three months.

    I urged my Village officials for years for a 457 and I was granted not only a 457, but a low cost one- Fidelity which I nearly begged them for.

    In place of the usual high cost vendors that serve municipalities such as ICMA and Nationwide.

    I did the same at my wife’s school district and even got a petition signed by other teachers for the purpose of getting a low cost 457 vendor. The only choice was AXA!

    Fortunately, they have Vanguard for their 403b.

    So we were able to secure Aspire for the 457 vendor. I too realized how beneficial 457’s were with the added benefit of the no age restriction penalty.

    However, I would like to inform others that the way Aspire is advertised- at least at my wife’s school district is very misleading.

    At my wife’s district and I suspect at others, Aspire is listed with the names of 10 Financial Advisors next to it, from Edward Jones.

    This would make one believe you needed to get “serviced” from Edward Jones in order to participate and YOU DO NOT!

    I learned by accident while speaking with an Aspire rep that we could do a “self-directed” 457 plan with Aspire and NOT need Edward Jones.

    So when we filled out Aspire’s paperwork, we simply wrote in “self-directed” where they asked for a salesman’s, I mean Financial Advisor.

    We selected the fund we wanted to invest in, Vanguard Total Stock Market and continued to fund it annually.

    54K in those three accounts, plus 11k in our Roth IRA’s and now were contributing additional money in our taxable account at Vanguard using VTSAX as well.

    I hope others learn that if they have shitty 403b/457 options but happen to see Aspire, know that with a self-directed account, that will be as close to Vanguard like fees that you will get.

    Were blessed to have Vanguard and Aspire for her and Fidelity for mine.

    Keep up the great work!

    • Nicely done Charles! Yes, we also signed up for Aspire in Douglas, GA, and there was a lot of confusion. I do remember that we opted for the “self-directed” option and did all of the investing ourselves. I also remember a number of screw-ups and hassles when I rolled our 457 money to Vanguard, but eventually it got there. I also believe there is a lot of intentional confusion on 403b-457 provider lists because when employees think that “full service” is their only option, vendors, middlemen, and advisors get charge fees on your assets under management. It’s quite a scam; I view it as legalized theft. Any way, great job by you and your wife! Ed

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