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Ava

Vanguard 403b or traditional? Seeking guidance

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A little background... I've worked in my district since September 2016.  Before that, I was working in another neighboring district in New York.  I also worked in New Jersey for about 3 years, another school in NY for about a year and a half, and Connecticut for a year.  I'm 31 years old and have been a school counselor since I was 22.... crazy how the years have flown by without much knowledge of 403b's and retirement accounts.
 
I completely fell into all the traps mentioned in the podcasts. I fell for opening up an AXA 403b account at the age of 22, thinking I was being smart for starting my retirement so early.  When I started at another school and considered contributing again, I realized my growth was minimal with AXA.  Before opening up another 403b account with another company (I was considering Voya at the time), I inquired with AXA about transferring my funds.  It was at this point I realized that something wasn't right.  Trying to be more savvy, I asked the Voya "advisor" many questions before opening an account with them. I was told I wouldn't be locked into a surrender charge as long as I didn't put any money into guaranteed accounts.  So that's what I did. 
 
Fast forward to today, I got very lucky that my district has done the hard work for me.  They offer a ROTH 403b with Fidelity and Vanguard 403b.  Learning from the podcast, I created a ROTH Fidelity account.  I am in the process of transferring my AXA and Voya accounts into Vanguard, but I'm not sure if I should open up a Vanguard 403b or IRA account? Part of me feels like I should open up the 403b account so that I have it with the school just in case anything changes, but another colleague suggested I do a Vanguard IRA account so that my money is more flexible.  Does anyone have advice on this?
 
Thanks so much in advance!
 

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1 hour ago, Ava said:
They offer a ROTH 403b with Fidelity and Vanguard 403b.  Learning from the podcast, I created a ROTH Fidelity account.  I am in the process of transferring my AXA and Voya accounts into Vanguard, but I'm not sure if I should open up a Vanguard 403b or IRA account? Part of me feels like I should open up the 403b account so that I have it with the school just in case anything changes, but another colleague suggested I do a Vanguard IRA account so that my money is more flexible.  Does anyone have advice on this?
 
 
 

Ava, welcome to the forum! Congratulations on listening to the podcasts and learning! Because you are transferring your AXA and VOYA 403b accounts to Vanguard, you will have a 403b with Vanguard, whether you contribute further to it or not.

You probably realize that you can only contribute $5,500 per year to an IRA account. You can make a contribution for 2017 up through your tax due date in 2018. You can set up an IRA over the internet, connect it to your bank account and fund it online. Vanguard's Target Date funds have a minimum starting balance of $1000 and index funds have a minimum of $3000 starting balance. I would start with IRA because there are no annual fees on it other than the expense ratio of each fund. Hopefully you can afford to contribute more than 5.5k to retirement so then you should use the 403b in addition to funding the IRA.

You'll get lots of from folks here if you ask questions!   

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Now I haven’t fully studied the new fee structure for Vanguard’s 403b but as I understand it, they charge you a flat fee and give you access to the lower cost admiral shares no matter how much/little money you have.

If I understand you correctly you’ll be contributing to a Vanguard 403b no matter what you do with your old 403bs, which means you’ll be paying that flat fee no matter what. So the real question is, which options allow you to make the most use of admiral shares?

If you prefer a one fund portfolio then admiral shares aren’t available and in terms of fees it doesn’t matter if you roll the old 403bs into an IRA or the new 403b. 

If you prefer a three fund portfolio then admiral shares are available and the question becomes whether your old 403b accounts are big enough to allow you to buy admiral shares in an IRA. If yes then it doesn’t matter if you roll over to an IRA or the new 403b. If no then you can save money by rolling it into the new 403b where you’ll have access to cheaper admiral shares.

Another thing to consider is the fact that rolling money into an IRA makes the “backdoor Roth” less beneficial. So if that is something you may wind up doing then this should be thought out.

The other thing to consider, depending on what other accounts you have, is the convenience factor of having everything in one account. There may be subtle differences in how you could gain access to funds in those accounts too...I ignore this because I don’t expect that to be an issue.

You mentioned Roth as though it were inherently supperior and despite hearing people make such claims I’ve never seen the math. I believe a traditional will be best for virtually everybody because of the progressive nature of the tax code and because most people probably won’t be in a higher tax bracket in retirement. 

When you pay tax on a Roth it is being paid at your highest marginal tax bracket, say 25%. When you eventually pay tax on a traditional, you get to fill up the lower tax brackets first...so even if you end up in the 25% bracket, the effective tax rate can be lower. Of course all of this assumes the tax brackets don’t change because I can’t predict how they might change. 

...now if my original assumption about you definitely contributing to a 403b was wrong because maybe you can only contribute $5,500 per year then maybe you’d be better off rolling into an IRA and only using the IRA in order to avoid the flat fee charges by Vanguard’s 403b. Sorry for all the contingencies and corner cases, but you didn’t provide all of the details I’d need to analyze the situation. 

...also I didn’t know what you meant when you said you have a Roth Fidelity account. It wasn’t clear if this was an IRA or a new 403b. So my post ignored this bit of information. 

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On 11/7/2017 at 7:36 PM, Ava said:
They offer a ROTH 403b with Fidelity and Vanguard 403b.  Learning from the podcast, I created a ROTH Fidelity account. This a Roth IRA isn't it? I am in the process of transferring my AXA and Voya accounts into Vanguard, but I'm not sure if I should open up a Vanguard 403b or IRA account? As I mentioned, because you are transferring your old 403b accounts to Vanguard, you will have a Vanguard 403b account. Whether you decide to start making contributions to it rather than (or in addition) to an IRA is something for you to decide. Part of me feels like I should open up the 403b account so that I have it with the school just in case anything changes, but another colleague suggested I do a Vanguard IRA account so that my money is more flexible. Do you have an idea of how much you intend to contribute per year? Are you contributing to Social Security? It would also be helpful to know what income tax bracket you are in, and if you are filing Single or Married Filing Joint. This info would be helpful when deciding whether to use a traditional IRA or a Roth IRA. Contributing to either type of IRA can be justified and most of us have contributed to both types in the past. To find your tax bracket, use your "Taxable Income", line 43 on your Form 1040, and look up the brackets at  http://www.moneychimp.com/features/tax_brackets.htm 
 
Ed is pointing out that instead of moving the old 403b accounts from previous school districts to a Vanguard 403b plan at your present district, you could have moved them to a traditional IRA. That would avoid the $60/yr fee that the Vanguard 403b will charge. I think that's not an option if the accounts are already at Vanguard. (You have to be 59.5 in order to transfer a current employer's 403b account to your IRA.) If they're not at VG yet, I suppose you could cancel the transfer. Insurance companies are notoriously slow. I'm hoping that you'll get the VG 403b account and be able to contribute to it as well as to an IRA for the many years you have before retirement. 
 
 
 
 
 

 

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It seems to me that it depends how much you put in a year.  With the number of teaching moves you have made you might be better off putting money into a roth ira until you reach the max.  this way if change districts again the roth is seemless with the move.  After you reach the MAX on the Roth you can start contributing to either the Fidlity roth or the Vanguard 403b which are great options i wish I had.

 

Rich

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