Ok, fellow readers, I’ve got a question for you. I think that Roth IRAs are the bomb, and my wife and I have had one ever since I learned about how cool they are. There is one problem with the Roth IRA though; that pesky $5,000 per year deposit limit.
At my work, however, we have a new option. I have a 457b plan (much like a 401k, but you can begin withdrawals when you stop working, rather than waiting until the magical age of 59 1/2). I chose this over the 401k because of the ability to withdraw, without tax penalty, your balance if you ever leave service. You don’t have to wait until the full 401k age. And, you have the same contribution limits as the 401k, much higher than the Roth IRA.
My employer has offered a Roth version of the 401k, but again, I didn’t want the age limitation. Now they have the Roth option for 457b accounts. I’m certainly taking advantage of that by putting future contributions into a Roth 457b plan instead of the traditional 457b plan.
Should I Convert My Account into a Roth?
Here’s the weary query I put to you; should I convert my current 457b balance into a new Roth 457b account? Just like converting a traditional IRA to a Roth IRA, you have to pay taxes on the entire balance. On the plus side, there is no penalty to be paid.
So what do you think? Here are my options.
Option 1: Leave the account as is.
I could leave the money I have in my 457b, and just put future contributions into the new Roth 457b. The pro is that I don’t have to worry about paying a tax on a rollover; on the other hand, the money in the old 457b account will be taxable when I withdraw the funds in the future.
Option 2: Make the rollover, and pay the piper his due.
This is the option I’m leaning towards, but it’s definitely going to cost me. With a total of about $20,000 in the account, my employer will withhold about $7,500 for taxes (about 35%). After I do my taxes next year, the actual taxable amount will be closer to $3,000. Still, that’s a huge chunk of change. On the other hand, when I retire I won’t have any taxes to pay on withdrawals.
What would you do?
So I leave this question for you, readers: Which option would you choose? This is definitely an open question, with many variables missing, so I will give you a little more info. I’m 30-35 years old, and will be able to retire from my government job at 2/3 of my salary at the age of 55-60. I do not plan on working after retirement, and I plan on travelling a lot afterwards. I shouldn’t have any debt at retirement, except for a possible car payment. Any other government workers out there with this option?