We will discuss the Roth 457 and the Roth IRA. We will also talk about investment options and help you determine which investment is best for you.
What Is a Roth 457 Plan?
Although you may have heard of a Roth IRA, have you heard of the Roth 457? A Roth Investment Retirement Account (IRA) is an investment account that allows you to withdraw funds from your retirement account without having to pay taxes. It is also known as the Roth 457 (b) Plan.
Roth 457 Definition
“A Roth IRA is an individual retirement account (IRA) under United States law that is generally not taxed upon distribution, provided certain conditions are met. The principal difference between Roth IRAs and most other tax-advantaged retirement plans is that rather than granting a tax reduction for contributions to the retirement plan, qualified withdrawals from the Roth IRA plan are tax-free, and growth in the account is tax-free.” – Wikipedia.com
History of the Roth 457
The Roth IRA was first envisioned in 1989 by Senator Bob Packwood of Oregon and Senator William Roth of Delaware. The idea eventually became law in 1997 and was called the Taxpayer Relief Act of 1997. As a result, the Roth 457 is names specifically for section 457 of the law.
The beauty of the Roth IRA and the Roth 457 plan is that you can withdraw money during your retirement and not have to pay taxes on your money. In contrast, a normal IRA requires that you pay taxes when the investment is withdrawn during retirement.
The Roth 457 allows you to pay the taxes up front as you save for retirement. This can be advantageous for many investors because they pay the taxes on their investment while their earnings are highest. For example, most people will earn more while in the workforce before retirement. This prevents taxes from being a burden when the money is needed the most while on a fixed income retirement later in life.
How the Roth 457 Works
Investors can sign up for a Roth 457 with a brokerage firm or through your employer. Keep in mind that not all employers offer the Roth 457, so you may have to check first. Begin making monthly or weekly contributions to the Roth 457. Tax will be paid up front on each contribution that you make. As the investment grows on your contributions, so will your retirement options. When you are 59 ½ years old, you can begin taking out money from your Roth 457, tax free!
Why You May Consider a Roth 457
- Future withdrawals are tax free during retirement.
- Roth 457 is offered by most brokerage firms in the USA.
- Advantageous tax savings if you are taxed at a higher rate later.
- High contribution limits for the Roth 457.
- Increasing contribution limits as you age.
Investing in a Financial Advisor
Navigating the world of investment and finance grows more complicated and difficult each year. Learning how to manage taxes, create wealth, manage investments and estate planning can be a daunting task. It’s much simpler and easier to depend on the expertise of a financial advisor to accomplish financial goals. Contacting a professional financial advisor can simplify strategic wealth management for you.
However, first we should discuss investment basics. Moreover, it is important to understand the basic concepts of investing and the types of investments available.
Different Investment Choices
There are a number of different types of investments that are available for investors to choose from. Moreover, technology of the 21st century has made it easier than ever to choose many different investment options. For example, investments can include things like stocks, bonds and real estate. In addition, there are many new investment opportunities like cryptocurrency and micro investing.
Types of Investments:
- Mutual Funds
- Real Estate Trusts (REITs)
- Real Estate (Land/Homes)
- Precious Metals (Gold, Silver, etc.)
- Cryptocurrency (Bitcoin)
Investing 101 for Beginners
The Step-by-Step Investment Process
- Establish Goals
- Assess Personal Finances
- Determine Risk Tolerance
- Develop Investing Timeline
- Begin Allocating Funds for Investment
Step 1: Establish Goals
The first step in the investment process should be to determine what your financial goals are and what you wish to accomplish. Where do you see yourself in 10, 25 or even 50 years? The average life expectancy for Americans is around 78 years old. However, you may have family members that live to be in their 90s and beyond. If you retire at 65 and live to be 95, will you have enough money invested to last through your retirement years?
Write Down Your Goals
If you want to retire at age 65 and move to Hawaii, then write that down as part of your goals. Begin by creating a journal, a spreadsheet or plan where you list exactly what you have planned for the future. This serves two purposes. First, writing down your goals makes what you want explicitly clear. It gives you a starting point and also provides you with the details that you will need to determine how you will reach your goals.
Step 2: Assess Personal Finances
Learn to Budget, Save, Pay Off Debt and Live Below Your Means
Budgeting is one of the critical steps that can help you take control of your life and control personal finances. In addition, preparing a budget allows you to not only know where your money goes, but also allows you to plan where your money will go in the future. Finally, it’s important that your money works for you, not against you in your investment process.
Pay Off All Debts
Before you can start the investment process, you must pay off all debts. Now that you’ve established your budget, cut personal spending to the bare minimum. You will take extra money that you have leftover in your budget and use it to pay down debts. Create a list or accounting of your debts, the corresponding balances and interest rates that you maintain. Use this information to help you keep track of your progress as you pay down debts.
Living Below Your Means
While following a budget, you should be living below your means (hopefully). Unfortunately, living below your means is a philosophy that most people don’t follow these days. Living below your means requires that you spend less than what you make. For example, if your take home pay is $1500 per month, then living below your means is only spending $1,000 per month.
Save Money Every Paycheck
Put Aside 10-15% of Your Regular Income for Investment
One of the habits that can help you reach your goals in the investment process is to start saving each paycheck. Make it a habit to take 10-15% of each paycheck and save it. After a short time, you will realize that you don’t even miss the money.
Step 3: Determine Risk Tolerance
Active Versus Passive Investing; Aggressive Versus Conservative Investing
To start, you must determine what style of investor that you are. First, the major categories of investment include active management or passive management. For example, a portfolio manager can determine what investments are in your fund and make decision for you using passive management; however, active management means that you reserve more control of your investments and perhaps you even use online services to trade individual stocks on a daily basis.
Second, you must determine if you are an aggressive or a conservative investor. Aggressive investing is utilized by those who want to take more risk and capture greater returns. This type of investing is considered acceptable for younger investors and for savvy investors who want to dedicate a small portion of their portfolio to higher risk. Conservative investing is a lower risk style of investing. Returns tend to be lower than the aggressive style, but come with lower risk. This style is best for those that desire lower risk and those who are getting closer to retirement age.
Step 4: Develop Investment Timeline
Estimate Retirement Age and How Much Money You Need to Retire
How old will you be when you retire? This is one of the questions that you want to answer during the investment process so that you can gauge your progress toward retirement. In addition, you can set goals for how much money you need when you reach the milestones of 30, 40, 50 and 60 years old and so forth.
First, if you live in the United States and were born after 1960, you may be eligible to retire at age 67. Second, if you were born earlier than 1960, then the age requirement is 66. These are the ages where you may be eligible for Social Security Benefits. Consequently, you can look at the United States Social Security Benefits Website for additional details. They also offer a retirement calculator and benefits planner there.
Determine How Much Money You Need to Live on
You Will Need 70-80% of Your Current Salary for Retirement Expenses
While thinking about budgeting, take a closer look at how much money you need to live on each month. For example, what basic amount of money do you need each month to cover expenses? You need enough money to pay for a place to stay, food, electricity, etc. Don’t include things like vacations, luxury items or entertainment. Once you determine how much you need to live on, you can then start to figure out what retirement expenses look like.
Another common rule of thumb for estimating how much money you need when you retire is the 70-80% Rule. In other words, many experts believe that you will need at least 70-80% of your current income to make ends meet. For example, if you bring home $3,000 each month, then you will likely need approximately $2,100-2400 each month in retirement. This is a realistic way of estimating what you need to retire if you don’t want to do complicated calculations or spend a lot of time on the topic.
Step 5: Begin Allocating Funds for Investment
This step is the final step in the investment process. You will begin depositing money into your investments. The easiest way to start is to allocate a percentage of your earnings each month. You will then review your investment portfolio each year with your investment advisor to determine whether it requires changes. Your investment advisor can help you through the investment process.
Ideally, your investments will be divided into groups, with a certain percentage of your total investment allocation going to each group. For example, you may have chosen to invest in stocks, real estate, precious metals and cryptocurrency. You may be investing 50% in stocks, 25% in real estate, 20% in precious metals and 5% in cryptocurrency. Obviously, the percentage allocated to each group you choose will be determined based upon your risk tolerance.
Final Thoughts on the Roth 457 Plan
For many investors who want to keep things simple and focus on other parts of life, the Roth 457 plan can be a great investment solution. In addition, it has tax benefits and offers peace of mind, turn-key investing. However, the Roth 457 is not for everyone. We recommend contacting a professional financial advisor near you to get solid guidance on your investments.
Disclaimer: It is important to note that Piggy Bank Coins does not provide financial advice. We do not endorse or recommend any financial investments. Instead, we provide information for educational purposes to those seeking knowledge regarding personal finance. However, in the spirit of transparency, note that the author is an investor in cryptocurrencies, precious metals and some equities.
In addition, The Federal Trade Commission (FTC) requires that Piggy Bank Coins disclose to readers that we may receive commissions when you click our links and make purchases. However, this does not impact our reviews and comparisons. Moreover, we try our best to keep things fair and balanced, to help you make the best choice for you.