Q.: I have underfunded my 457(b) account and will be retiring in five years. Is there a way to make some big contributions to my account? P.G.
A.: Section 457(b) of the Internal Revenue Code allows you to contribute twice the annual maximum for each of the three years prior to your retirement. This catch-up provision is called Deferral Acceleration for Retirement (DAR) and is available only to 457(b) savers. For 2021 the annual maximum is $19,500; therefore, you can contribute $39,000 per year for each of the three years prior to retiring. This translates into a total three-year contribution of $117,000. In my view, this money should be invested in the Roth feature of your 457(b) account.
Q.: I am trying to determine if I'm better off investing before-tax or after-tax. I am 50 and plan to retire at age 65 with 35 years of service. Can you help? D.H.
A.: Age 72 is when annual taxable Required Minimum Distributions (RMD) must be taken from pre-tax retirement accounts like 457(b), 401(k), 403(b) and IRAs. You will be retiring 7 years prior to age 72. It therefore stands to reason you will have less income before age 72 than you will have after age 72. Based on this fact, you should be investing after-tax. After-tax investors receive tax-free income from their after-tax Roth accounts. Moreover, Roth investors need not withdraw a dime during their lifetime from their Roth accounts. Withdrawals are completely voluntary and tax-free.
Of Note: The TRS 403(b) plan offers only pre-tax investing. These long-term pre-tax 403(b) investors are guaranteed to pay more income tax after age 72 than before age 72. I encourage TRS members to forgo investing in the pre-tax TRS 403(b) plan in favor of investing in the after-tax Roth feature sponsored by the Deferred Compensation 457(b)/401(k) plans of the City of New York.
For those who are subject or will be subject to Required Minimum Distributions, the life-expectancy tables upon which the RMD is based will provide you with a small break. Such tables will be issued later this year and become effective in 2022.
Mr. Frank is a fee-only Retirement Financial Planner and a retired city high school Teacher of Accounting. He can be reached by phone at (732) 536-9472, or via email at email@example.com.
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