I’ve made some huge changes to where my money will be invested this year. This post will explain what I was doing previously, currently and why I decided to make this change.
For most of you reading this you probably know a little bit about my current allocation. For those of you who don’t I’ll explain a little about it. Until February, I was contributing $440 out of my bi-weekly paycheck to my individual brokerage account, which I refer to as my dividend portfolio. I was also contributing $200 out of each bi-weekly paycheck to my 457(b) . 457’s are similar to 401k’s in that the contributions to these employer sponsored plans are pre tax. I also max out my Roth IRA each year but in a more sporadic fashion, but to keep it uniform it would average out to about $211 per paycheck.
My new strategy is dramatically different. I will be putting $0 into my individual account from my paychecks. This will change when I get a raise in July or when we finalize our new contract, whichever comes first. The new contribution won’t be much from just the July raise, but if the new contract goes our way it could end up being a pretty substantial contribution. Much less than $440, though. I will now be contributing $795 from each paycheck into my 457. This is the most that I can put in to reach the maximum of $18,500. My Roth IRA contribution will remain unchanged, it will still be $211 per paycheck.
If you compare the two charts you can see that my total paycheck deduction will only be slightly different. In my old strategy I was “paying” $801 to invest $851. This $50 extra is due to the tax advantages of the 457 account. With my new strategy I will be “paying” $807 to invest $1,006. Again, this $199 extra is due to the tax advantages of the 457.
With my new strategy I will essentially be paying $6 more to invest another $155. That’s a difference of $4,030 per year. For this one change I will increase the amount I’ll invest this year by 4 grand! This will also decrease my taxable income. For example, if you made $30,000 per year and you put $10,000 into your 457 plan, you will only have $20,000 of taxable income, before other deductions of course. So making this change will net me $4,030 more this year as well as decrease my taxable income by $18,500!
This seems like a no brainer and it really is. I’ve always been a little apprehensive to make this change for a few reasons.
- My employer doesn’t match any of my 457 contributions. That’s a terrible reason not to take advantage of this account and I now see that.
- I wasn’t thrilled about the selection of funds that were offered to us. The tax advantages of this account far outweigh the slightly larger expense ratio than say a Vanguard fund.
- My take home pay is going to be significantly less. I believe this is still a legitimate concern but, not a reason to ignore these tax advantages. With my old strategy I could simply choose to skip a contribution if I needed some extra money. With the new strategy, I can cut back my 457 contributions but it won’t take effect immediately. This plays into the importance of having an emergency fund.
Another advantage to 457 accounts is that the money is immediately available, penalty free after you separate from your employer. This works out great for those of us working towards early retirement and financial independence. Moral of the story, always question your strategy and make the changes that will benefit you. I think it’s too easy to get stuck in routines and not explore other options. Let me know what you guys think!