401k vs 403b

[supton]

I know 401k is for private, 403b is what places of education use for retirement. Beyond that I'm a bit clueless. My question, which is better to put money into? I have a 401k, wife has a 403b that is just sitting. I don't know what her future job prospects are, but, it's possible that she might keep at either teaching at a university, or perhaps go into a research position at a university. At which time I'm guessing (?) that we could start putting money into her 403b. Or put all the more into my 401k. [I'm guessing 403b plans would allow you to roll prior plans together? Like you can on 401k's.]

?

 

[SatinSilver]

I'm not sure about 403b's. But let's deal with your 401k. Do you receive a company match? If so how much do they contribute for every dollar you invest? Many times their contribution is in the form of company stock. Is this the case with yours? What company manages your account, ie Fidelity, Vanguard etc?

 

[bepperb]

The most important aspect would be to put money into whatever has a company match. From there I'd be interested in the investment options of both, and who is managing it, to make the decision.

 

[supton]

I finally revisited my 401k, and realized that I ought to be doing more, at least what I can in order to get the full company match. So I'll do that. I've got mine set to "moderate risk" IIRC, and I'm about to hit 37 with > 90% of one year's salary, mostly in a 401k, for retirement. Paltry, and behind, but not horrible (I started at 23, but it seemed that, whenever I thought about putting more in, the market would flucuate, I'd lose some pay, and I'd wind up too nervous to throw more money at it--a bit smarter now). In the future I'll see about raising it up each year, and hopefully some big jumps when I can (get rid of a car payment, wife gets job, that sort of thing).

The company has some sort of retirement plan too, but from what I can see, they put in a very small amount. I don't understand it yet. All through Schwab, so I'm guessing it all acrues money at about the same rate.

Long ways away from maxing out my 401k contribution; simply have too many other things at the moment. Even w/o car loans I couldn't do the max, as it'll be the house that needs the money. Then it'll be the kids college, or wedding, or some other excuse.

 

[JHZR2]

my wife has a 403b and I have a different system similar to a 401k. My undeerstanding is as you describe - 403b is for nonprofit, 401k is for for profit.

Im sure some nonprofits match dollars put in, but my wife's is a hybrid with a pension, so she gets no match. The intent is solely to decrease taxable income.

Id guess that 403 and 401 are different so that for profit comapnies can have some tax advantage for their employees' match payouts.

Is one better or worse? My wife actualy had multiple options of 403b companies to go with. We picked vanguard to park money with low index fund type cost structures.

So the big questions are:

-which offers a company you like with lowest investing costs?
-which account would get a match and are you already maximizing the match?
-does one of you come close to hitting the IRS limits for how much being put in?
-Is your income level appropriate to allow you to qualify for a Roth IRA?

 

[dparm]

Yes, 401k and 403b are the same basic idea. Typically a 401k gives a bit more flexibility to the benefactor -- you have some degree of choice on how that money is invested, though the account maintenance & admin fees cost more. 403b has lower costs, but less choice.

Again, your mileage may vary. Do your research on the funds, management, fees, etc.

 

[eljefino]

If you're skipping out on company match I'd actually consider debt for other things you list, particularly student loans for tuition. Naturally cutting living expenses is an evergreen nag. But that's free money!!!

The best match I've ever heard of is only around 15%, right? There must be a place to shave to get there.

I'd even consider the 401k as part of your rainy day fund, though if the match is in company stock you want the rainy day to consider them going bankrupt.

 

[supton]

Yeah, I chose poorly: I should have have put more in years ago, and I shouldn't have taken on my truck loan. Live and learn. Company match maxes out at 6% though, so I'm going to put my contribution at 7% for now, and figure out how to make it balance in the budget (upped our tithing this year, health insurance rises each year, just realized we've been spending a lot on groceries and dining out recently, etc).

Managed to get rid of school loans, but bought too many cars over the years, and have two payments at the moment. Those should be paid off in 3 years; it'd be 2 if I wasn't saving for retirement. Mortgage was refi'd last year, so it's at a decent rate too (3%?), with most of the payment going to principle; and isn't much more than rent.

 

[99Saturn]

I'm not that familiar with a 403b.

I would add to the comments that once you contribute enough to max out the company match in both accounts (if available), consider an IRA (go through some research for ROTH vs. Traditional and what's right for you). You'll have a bit more freedom in the IRA versus the 401K.

 

[supton]

Originally Posted By: eljefino
I'd even consider the 401k as part of your rainy day fund, though if the match is in company stock you want the rainy day to consider them going bankrupt.


Match is not in the company stock. Having the 401k as a rainy day fund is not something I've ever thought of... Heavy penalties for early withdrawal, but I guess I never thought of it as some sort of emergency fund either. I *think* I'm around 6 months in savings, so that front is good too. But maybe I don't need to increase it, if said 401k is my emergency fund? Never thought of that...

 

[bullwinkle]

I put in the maximum that the company matches (6%) & $5K per year each for myself & spouse in a self managed IRA (both all stocks), and any other surplus goes in money market or CDs. That way, when interest rates rise again, I should have some protection when the market corrects.

 

[SatinSilver]

If you withdraw funds from a 401k after you've separated from the company there's a 10% penalty if you're under the age of 59.5. Then you'll be taxed on the withdraws as income. So not a good idea for a rainy day fund but I see what was being alluded to.

Does the company match 1:1 up to the 6%? Or .5 for every dollar you put in?

 

[Mark_Walk]

Look at both plans to see if there is a match and maximize that. Beyond that I would look at which plan offers the most diverse group of investment options to pick from.

 

[99Saturn]

Just FYI, IRA contribution limits were increased this year to $5,500.

Also, once past the company match a ROTH would be a good rainy day fund as to avoid penalties if a need arises to withdraw.

 

[supton]

Company does $0.25 per dollar, up to 6%. I haven't seen any fees listed on statements, but I haven't made any changes to the plan in 13 years either.

403b is sitting, not even sure how to add to it--wife was adding to it through her job, when she was employed. She just had another offer at the college she teaches at, but we've never inquired about benefits, as it's a part time job (and this offer is again just one course). So, the thinking is, if/when she can add to her plan, if it was worthwhile. Sounds like, based upon zero research, that it's probably similar to my 401k; probably worthwhile if only for the diversification.

Now, the idea of just going to the 6% that my company matches, and rolling the rest into an IRA/Roth... Hadn't thought about that yet. I know squat about stocks, so I'd probably just find some index fund (Vanguard?) to put the money into.

 

[AdmdeVilleneuve]

One thing to keep an eye on is that most 403b plans offered by schools, universities, etc, use a variable or fixed annuity as the investment vehicle. In other words, you are getting a tax deferred retirement contribution placed in another tax deferred investment product. Kinda like wearing a belt and suspenders, except there is an extra layer of costs involved to you for the purported benefit of this product.

Check to see if there is an investment company, like Vanguard or Fidelity, managing the 403b. If so, the investment choices will be increased and much easier to monitor. For example: Fidelity Fund (ticker FFIDX); old school fund that just plods along. Easy to find, easy to research. With an insurance company managing the 403b, choices become more obscure, may be limited to just a few things, and have restrictions on when and how you can move into or out of them.

If there is no match on the 401k or 403b money, a Roth IRA (up to the contribution limit) would be an excellent choice. No tax advantage with the Roth IRA contribution, but you cannot beat tax free distributions at withdrawal. It is worth checking to see if you have a Roth 401k plan. They exist, but are rare.

 

[SatinSilver]

Originally Posted By: supton
Now, the idea of just going to the 6% that my company matches, and rolling the rest into an IRA/Roth... Hadn't thought about that yet. I know squat about stocks, so I'd probably just find some index fund (Vanguard?) to put the money into.


If Schwabb is the managing firm then they probably have their own index funds the money is invested in. Your more conservative funds would be large-cap funds that invest in large well established companies like GE, Boeing etc... They have steady earnings, lower risk.

The 403b maybe able to be invested into Vanguard. Just call them up, I'm guessing their number is 1-800-Vanguard. Sometimes if the value of the fund is under a certain amount like 5k, the company will cash it out and send you a check if it sits idle too long.

 

[Drew99GT]

Originally Posted By: supton
Originally Posted By: eljefino
I'd even consider the 401k as part of your rainy day fund, though if the match is in company stock you want the rainy day to consider them going bankrupt.


Match is not in the company stock. Having the 401k as a rainy day fund is not something I've ever thought of... Heavy penalties for early withdrawal, but I guess I never thought of it as some sort of emergency fund either. I *think* I'm around 6 months in savings, so that front is good too. But maybe I don't need to increase it, if said 401k is my emergency fund? Never thought of that...


There are things in the tax code for which you can withdraw early from a tax deferred retirement account (401K/403B). The only one that really applies to most people is very high medical bills in excess of 7.5% of your AGI.

Roth accounts, for that reason, make great rainy day funds since you can withdraw principal tax free at any time.

 

[JHZR2]

Originally Posted By: 99Saturn
Just FYI, IRA contribution limits were increased this year to $5,500.

Also, once past the company match a ROTH would be a good rainy day fund as to avoid penalties if a need arises to withdraw.


Only if you earn less than $160k in the household. Otherwise Roth is off limits.

Though perhaps you can put post-tax dollars in a separate IRA and then just do a Roth conversion each year?

 

[99Saturn]

Originally Posted By: JHZR2
Originally Posted By: 99Saturn
Just FYI, IRA contribution limits were increased this year to $5,500.

Also, once past the company match a ROTH would be a good rainy day fund as to avoid penalties if a need arises to withdraw.


Only if you earn less than $160k in the household. Otherwise Roth is off limits.

JHZR2's right, there are income limits that stop you from contributing to a Roth. I believe the limits for 2013 are actually $178K in order to make the full $5,500 contribution and then a calculation for a lesser contribution is allowed past that for a $5K or $10K window (in other words a lesser contribution is allowed up to either $183K or $188K). This is for married filing jointly.

As far as I know, the limit is on contributions not on withdrawals, so if you contribute to a Roth in 2013 but in 2014 you are not eligible to contribute, you can still withdraw the 2013 contribution penalty free in 2014. This is all assuming contributions are your income contribution (in other words not a rollover or a conversion), which I believe has a waiting period (5 years?).

Originally Posted By: JHZR2
Though perhaps you can put post-tax dollars in a separate IRA and then just do a Roth conversion each year?

I've heard about this but never done it, so I have no experience, very interesting point though. As far as I know, the Roth conversion income limit expired in 2010, which opened up this loophole. However, in this case, wouldn't you be putting pre-tax money into a Traditional IRA and then converting the following year to a Roth. You'd count the money as income in the following year and pay the associated taxes at that point?
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Edit: Contribution limits are higher over 50 years old ($6,500 in 2013) below is a link to contribution limits - never a simple answer

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IRA Income Limits