457 or taxable account?

[Guest pleasehelp]

I have been contritubing to the 457 under the "Savings Plus" program as a California state employee. I am 49 years old, and am in the 15% tax bracket. Would I be better off contributing monthly to a taxable account? I already contribute the maximum to my Roth and will continue to do that.

[E as in ERISA]

One of the advantages of both the Roth and 457 is the tax free buildup in the account -- which a taxable account doesn't have.

If your tax bracket doesn't change much from when you're working to when you retire (e.g., 15% tax bracket for both), then there is generally not a lot of difference between the Roth and 457. E.g., assume you have $5,000 discretionary income. You can put $4,250 per year into the Roth (after paying taxes), invest at 6% (???), have $120,000 at age 65 and take out $10,500 per year for 20 years. Alternatively, you can put the $5,000 into the 457 (no taxes going in), invest at 6%, have $140,000 at age 65, take out $12,300 per year but pay $1,800 in taxes (net the same $10,500).

You can't do that with a taxable account -- because both the "contributions" and earnings will be taxable as you go. E.g., you can put $4,250 per year in the account (after paying taxes). But right from the start your investment income will be taxed. So your net earnings rate will only be about 5%. Using the same scenario, you'd only have about $9,600 per month at retirement.

The actual results depend on how you're investing, etc. (e.g., appreciating assets vs. income producing assets, etc.) You should do an analysis of your own specific situation.