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Author: BruceCM Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75532  
Subject: Re: 403 v 457 Date: 3/17/2011 3:25 PM
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Catt
Good his father is improving.

Technically, there is no such thing as a "401(a)" plan. All qualified plans must meet the requirements of sect 401(a). But generally, it is used to denote a qualified defined contribution plan that is funded either by employer contributions only, or is a pension style plan requiring annual % of salary contributions. In the world of private employers, these are almost always funded by the employer. With public employers, it may be funded by the employer, the employer + employee or sometimes soley by the employee.

But to the 403(b) vs. 457(b) plan, for a Government employer, its kind of 6 of one, half-dozen of the other, and for me, the most important factor would be investment choices and resulting expenses, and perhaps your expected retirement age vs. beginning age for the PERS (I assume in your case, CalPERS) pension starting age.

A 403(b) is the public employee version of a 401(k), with a couple of differences. You can only invest in mutual funds (including ETFs) or annuity contracts (yuk). You set up your own account but you will be restricted to the investment choices offered by the vendor. Generally, you cannot rollover the account balance to your IRA until you separate from service or reach 59 1/2. They can be set up to allow for loans or hardship withdrawals, neither of which should you ever do.

A 457(b) is technically deferred compensation, although it shares a lot of the characteristics of a retirement plan. Unlike a 403(b), a qualified plan or a traditional IRA, there is no penalty for making withdrawals prior to age 59 1/2, which make these a good alternative to use as income if you retire prior to 59 1/2 and prior to the start of your pension. Historically, the drawback to these has been limited and expensive investment alternatives. And although you can't afford it now, in future years when you can, the contributions you make to a 457(b) may be in addition to the maximum annual contributions you can make to a 403(b) or other employer sponsored retirement plan.

Both of these, it would seem, are on a Fidelity "Platform", which means Fido will provide you the investment choices. I couldn't see these on the web site you referenced. Most certainly, all choices will be Fidelity-based, who has a reputation for broad fund selection, but in the choices will typically be some high cost funds along with some that are more reasonably priced. Once you know what these are (their symbols), you can run a check on them at the Morningstar web site...at which point we can discuss them further if you'd like.

One other possible savings method you shouldn't overlook. If you are married and file a joiht tax return, you can have an adjusted gross income of up to $90,000 in 2011 and make deductible contributions to your traditional IRAs...both of you. You DH is 50, so assuming you're not yet 50, you could contribute $6,000 (his) + $5,000 (yours) = $11,000 to your IRAs and be fully deductible, meaning you'd have exactly the same tax benefit as contributing to an employer provided retirement plan. If these above plans have no employer match, I would suggest you contribute only to your deductible IRAs, as you can set them up wherever you wish (like Vanguard) and have full control over your investments, which includes your ability to invest in only ultra low cost but well diversified selection of ETFs. Only if you need or plan to save more than $11,000 per year would I then consider the 403(b) or 457(b) plans.

BruceM
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