Is a 403b a good option?

[SumpChump]

Anybody know if a 403b is better than a Roth or other common retirement tools? Any distinct benefits or negatives?

A buddy of mine, well off, said... "it's not bad but heck just buy regular S&P 500 stock at a 1% service charge seller and you'll outperform the guys who play games with your money and charge a heck of a lot more in "maintenance" fees".

 

[surfstar]

a 403b is just a type of retirement account. Usually gov't based. It all depends on what your investment options are within the account. Low cost mutual/index funds matter. 1% is NOT low cost. 0.10% ER (expense ratio) IS low cost (vanguard and similar funds)

It also depends on whether you think your taxable income will be higher now, or in retirement. If you are in a higher tax bracket now, then use a pre-tax vessel like a 401k/457b/403b. If your annual income is likely to go up throughout your career, then fill up your Roth IRA first, then pre-tax options.

I suggest you review some things at bogleheads.org. The BITOG for index fund investing.

 

[R80RS]

A 403(b) is a tax deferred retirement plan, similar in some respects to a 401(k), for employees of schools, non-profits, and the like. Employee contributions are made pre-tax, so participating in a 403(b) reduces your taxable income. Distributions are taxable, as with 401(k)s and regular IRAs. Investments are generally in deferred annuity products that appear similar to mutual funds. 403(b)plans are offered through providers like Fidelity, Vanguard, and insurance companies. As with all such investments, some providers are better and some are worse. Because 403(b) investments are in deferred variable annuity accounts the fees can be substantially higher than a similar 401(k). Your buddy needs to look at his summary plan description for information on his employer match (if any), vesting, and so on, consider the value of his tax deduction, and then look at his plan fees and decide if the benefits of participating minus the costs are attractive versus his other options.

Final comment - S&P 500 index funds are available for MUCH less than 1% from providers like Schwab, Vangaurd, Fidelity, and from discount brokers in the form of ETFs. No one should be paying 1% for a S&P index fund.

 

[Kuato]

I like the Roth, as it is taxed up front...historically, taxes have only climbed so you can expect more of the same. Withdrawal is tax free.

But why not do both? A Roth maxes out at only 5-6k per year depending on your age, add the 403b to it.

And your buddy may not be far off the mark either.

 

[SumpChump]

Ah yes, I meant .10%ER for the S&P 500.

IS the S&P500 "safe enough" to be a significant part of a low ER strategy retirement plan?

I assume it is so... because if the S&P500 every really makes an unrecoverable flop... golly... there isn't much of an economy left at all then.

 

[opus1]

The Roth is good if you believe the government isn't going to change its mind and start taxing it somehow when the time comes to withdraw the money.

Food for thought...

 

[SumpChump]

Originally Posted By: surfstar

If your annual income is likely to go up throughout your career, then fill up your Roth IRA first, then pre-tax options.


My income will be unfortunately fairly flat (I'm one of the lowest paid fully educated professions around) over the rest of the career, perhaps increasing by 20% ($10k over the remainder).

Your thoughts on this information and where to go ... Roth vs. Pre-tax.. vs S&P 500low ER%

 

[QuietPortage]

There's a lot to discuss here, but I'll try to give some basics, and what I do for myself.

If your employer matches 401k/403b contributions, first max out the amount of money that they'll match. In my case, that's 5% of my salary. It's free money. Don't ever give that up.

Next, I have a Roth IRA at Vanguard. Their maintenance fees are some of the lowest in the industry.

Depending on how long you have before retirement, you can invest in one of the target funds that automatically becomes more conservative as your retirement date nears. More stocks now for growth, more bonds later for income and security. Expense ratio: 0.18%. That's a safe way to go. Make regular contributions and let it ride. The maximum annual contribution is $5,500, or $211 direct deposited from 26 paychecks throughout the year. My Roth money is in their Total Stock Market Index Fund VTSAX, as I have a long way to go before retirement.

Then, if you can afford further retirement savings, put further money into your 401k/403b. The maximum for the year is $18,000.

So, I save in this order:
1. 401k/403b matching
2. Roth IRA max contribution
3. 401k/403b remaining contribution

 

[QuietPortage]

On to your buddy's advice. It isn't entirely correct, but he's on the right track.

Stick with index funds. Vanguard's S&P 500 fund and Total Stock Market fund have expense ratios of 0.05%. Actively managed funds charge many times that. The target funds that I mentioned in my previous post are cheap too, and invest in index funds themselves.

Shoot me a PM if I can help further.

 

[bubbatime]

Does your employer offer company match into the 403b? Always take the company match (be it a 401K, 403b, or Roth 401K. Than max out a Roth IRA. Than max out your 403b.

So in conclusion, put in enough to get the company match (free money), max out a Roth IRA, than max out your 401K or 403B if you still have investable money left over.

Edit: Looks like bandito beat me to it. Solid advice.

 

[surfstar]

Originally Posted By: Bandito440

So, I save in this order:
1. 401k/403b matching
2. Roth IRA max contribution
3. 401k/403b remaining contribution


I second this as a great rule of thumb. Always contribute up to the match in a 401k/403b.

and +1 for a target date retirement fund is a great, one-stop option for all the diversity you will need.

 

[SumpChump]

No employer match here.

Any way to compare a chart of a slickly named managed .3x%ER vanguard retirement fund to a plain jane .05%ER S&P 500 Vanguard fund? A chart website?

 

[bubbatime]

Originally Posted By: surfstar
It also depends on whether you think your taxable income will be higher now, or in retirement.


I hear this often. If you have 25 or more years to retirement, I believe this country will be drastically different in 25 years as it relates to taxes. Health care, entitlements, defense spending, out of control budget deficits, all mean one thing. Higher and higher taxes. If you are in the 18% tax bracket now, dont expect to be paying 18% taxes in 30 years. Expect to be paying 30-35% or more.

The current system is completely unsustainable without drastically raising taxes or drastically lowering spending.

Even more reason to use a Roth plan that grows tax free, assuming the govt doesn't change the plan and start charging taxes.

 

[Alfred_B]

No employer match will mean that, all things equal, the only differences between 403b and ROTH will be a) the contribution limit ($18k for 403b versus $5k for ROTH), and b) your projection where your marginal tax rate will be at age 59.5 versus now.

 

[QuietPortage]

If you're looking to compare how funds have performed, you can plug the tickers into any of many financial websites. I use Yahoo Finance when making basic comparisons. The ticker for Vanguard's S&P fund is VFIAX.

How long do you have before retirement?

 

[NMBurb02]

Originally Posted By: R80RS
Investments are generally in deferred annuity products that appear similar to mutual funds...Because 403(b) investments are in deferred variable annuity accounts the fees can be substantially higher than a similar 401(k).

While the rest of what you said is great, this piece is off the mark. You can invest in mutual funds within a 403(b).

Originally Posted By: http://www.403bwise.com/participants/getwise_basics.html
The 403(b) has often been referred to as a Tax Deferred Annuity (TDA) or a Tax Sheltered Annuity (TSA). This is a misnomer and gives the false impression that a participant must invest in annuity products. This is not true. Way back in 1974 Congress granted participants the ability to contribute directly in mutual funds when they added paragraph 7 to the code creating the 403(b)(7) custodial account.

OP, because you do not have a company match on your 403(b), just skip the first step in the investment order others have proposed, so max out a Roth IRA and then max out the 403(b). I am not a fan of target retirement funds, particularly if you are near the end of your career (which it sounds like if you are only expecting a 20% pay increase over the remainder of your career) because they tend to get overly conservative as they near the target and may be only returning 30-50% of what you would get from an index fund. I suggest doing some research to find well performing mutual funds that have a long track record (such as having been started prior to the recession in the 80s) so you can see how they have performed during economic downturns and how they recovered in relation to the market as a whole. Take your time with that research and perhaps park your initial investment in an index fund.

 

[SumpChump]

Originally Posted By: Bandito440
If you're looking to compare how funds have performed, you can plug the tickers into any of many financial websites. I use Yahoo Finance when making basic comparisons. The ticker for Vanguard's S&P fund is VFIAX.

How long do you have before retirement?


Well, if 60-65 is the earliest goal (which it seems in my profession)... I have 25years left. Thanks for your thoughts on this.

 

[QuietPortage]

Originally Posted By: SumpChump
Originally Posted By: Bandito440
If you're looking to compare how funds have performed, you can plug the tickers into any of many financial websites. I use Yahoo Finance when making basic comparisons. The ticker for Vanguard's S&P fund is VFIAX.

How long do you have before retirement?


Well, if 60-65 is the earliest goal (which it seems in my profession)... I have 25years left. Thanks for your thoughts on this.

I've got about the same. You're in a fine place to be in equities. Don't worry about more conservative investments until you're closer to retirement. If the market tanks, it'll have plenty of time to recover by then. Resist the urge to mess with your investments if the markets drop.

VTSAX is where my Roth money is. Vanguard is cheap, and their website/app are easy to maneuver. I have direct deposits set up so I don't have to worry about it.

 

[BMWTurboDzl]

Originally Posted By: opus1
The Roth is good if you believe the government isn't going to change its mind and start taxing it somehow when the time comes to withdraw the money.

Food for thought...


Not to mention the income limits for Roth's contributions.

 

[R80RS]

Originally Posted By: NMBurb02
Originally Posted By: R80RS
Investments are generally in deferred annuity products that appear similar to mutual funds...Because 403(b) investments are in deferred variable annuity accounts the fees can be substantially higher than a similar 401(k).

While the rest of what you said is great, this piece is off the mark. You can invest in mutual funds within a 403(b).



I said 403(b) investment options are generally deferred annuity products - I didn't mean to imply they are strictly limited to annuities. You are correct, you can invest in mutual funds in a 403(b), but only if a mutual fund option is offered by the plan provider. Many (if not most) 403(b) plans are invested in annuity platforms with an insurance company as plan provider, unless the plan sponsor is sharp and shops around. In my experience the most common 403(b) plan provider is an insurance company offering an annuity only platform, although as you point out it doesn't necessarily need to be. I've personally seen very large 403(b) plans offered through insurance providers with 250 to 300 basis point annual expense and insurance costs.