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mindy

Roth Vs. 403(b)...and Other Questions

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First, thank you so much for what you all do here. We are recommending the site and book to all the teachers we know. So many teachers have no idea how much they are being taken advantage of. It is so sad!

 

My husband, Jason, is 38, in his second year of teaching fulltime in Oregon, and is just getting started saving for retirement. (I am 34 and work halftime at home now freelance to care for our 18-month-old daughter. I’m writing on Jason’s behalf because he’s even busier than I am.) Anyway, we are pretty far behind and want to get our investment strategy in order asap. If anyone has any advice, I have several questions and would appreciate any suggestions or thoughts. (Please bear with me if I end up giving too many details.)

 

Our combined household income is about $50,000 at the moment, so we don’t have a lot to work with, but we want to save as much as humanly possible. To begin with, we have $18,000 in a regular old savings account, and I have $10,800 in a rollover IRA in a Vanguard 2040 fund. We want to divide the $18K into retirement investments and smarter savings options (money market, CD, plus a 529 for our daughter).

 

We are thinking of starting up both a Roth IRA and a 403(b).

 

Regarding the 403(b), Vanguard is a listed vendor, so we would go with them. Jason’s district does not match any funds on the 403(b), however, so we wonder if it makes better sense to start by just funding as much as we can with a Roth, and then put any leftover funds into a 403(b) afterward. Which would you put a greater priority on, the Roth or the 403(b)?? For example, if we have about $400 to sock away each month, should we (a) put it all in a Roth, (b) put it all in a 403(b), or © split it up between the two?

 

Also: If we get both a Roth and a 403(b) started through Vanguard, does anyone have any suggestions about avoiding overlapping holdings? What about using a Target Fund, like 2045, for one or the other? Any advice on how to choose Vanguard funds for two different accounts without duplication??

 

Meanwhile, I have that rollover IRA with Vanguard (2040 Target Fund, about $10,800). I have been talking of late to my dad’s broker at Edward Jones (I know…here comes that big load!), who feels the 2040 fund is too conservative for my age and comfort level (he’s right---I do think I can handle a more aggressive portfolio). He recommends transferring it out of Vanguard to an IRA of three American Funds, all of which are good funds, but of course there’s that hefty upfront 5.75% load (plus other fees, I’m sure, which I have yet to discuss with him, although I will). I know this a no-load zone . . . but what do you think about the possibility of putting my $10,000 into the managed American Funds IRA and just letting it sit (i.e., not contributing anything), while we start putting chunks of money into a Roth IRA and/or 403(b) through Vanguard? It seems like it might make sense to have a smaller portion of our savings in a managed fund and a larger portion in index funds. Any suggestions??

 

Phew! That’s about it for now. I have a lot of questions.

 

Mindy

 

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First, thank you so much for what you all do here. We are recommending the site and book to all the teachers we know. So many teachers have no idea how much they are being taken advantage of. It is so sad!

 

My husband, Jason, is 38, in his second year of teaching fulltime in Oregon, and is just getting started saving for retirement. (I am 34 and work halftime at home now freelance to care for our 18-month-old daughter. I’m writing on Jason’s behalf because he’s even busier than I am.) Anyway, we are pretty far behind and want to get our investment strategy in order asap. If anyone has any advice, I have several questions and would appreciate any suggestions or thoughts. (Please bear with me if I end up giving too many details.)

 

Our combined household income is about $50,000 at the moment, so we don’t have a lot to work with, but we want to save as much as humanly possible. To begin with, we have $18,000 in a regular old savings account, and I have $10,800 in a rollover IRA in a Vanguard 2040 fund. We want to divide the $18K into retirement investments and smarter savings options (money market, CD, plus a 529 for our daughter).

 

We are thinking of starting up both a Roth IRA and a 403(b).

 

Regarding the 403(b), Vanguard is a listed vendor, so we would go with them. Jason’s district does not match any funds on the 403(b), however, so we wonder if it makes better sense to start by just funding as much as we can with a Roth, and then put any leftover funds into a 403(b) afterward. Which would you put a greater priority on, the Roth or the 403(b)?? For example, if we have about $400 to sock away each month, should we (a) put it all in a Roth, (b) put it all in a 403(b), or © split it up between the two?

 

Also: If we get both a Roth and a 403(b) started through Vanguard, does anyone have any suggestions about avoiding overlapping holdings? What about using a Target Fund, like 2045, for one or the other? Any advice on how to choose Vanguard funds for two different accounts without duplication??

 

Meanwhile, I have that rollover IRA with Vanguard (2040 Target Fund, about $10,800). I have been talking of late to my dad’s broker at Edward Jones (I know…here comes that big load!), who feels the 2040 fund is too conservative for my age and comfort level (he’s right---I do think I can handle a more aggressive portfolio). He recommends transferring it out of Vanguard to an IRA of three American Funds, all of which are good funds, but of course there’s that hefty upfront 5.75% load (plus other fees, I’m sure, which I have yet to discuss with him, although I will). I know this a no-load zone . . . but what do you think about the possibility of putting my $10,000 into the managed American Funds IRA and just letting it sit (i.e., not contributing anything), while we start putting chunks of money into a Roth IRA and/or 403(b) through Vanguard? It seems like it might make sense to have a smaller portion of our savings in a managed fund and a larger portion in index funds. Any suggestions??

 

Phew! That’s about it for now. I have a lot of questions.

 

Mindy

 

 

1. Keep 3-6 months of expenses is cash/money market or CD's for emergency.

 

2. Look to your state run 529 plan first. They usually have lower fees and a state tax deduction.

 

3. Keep your Vanguard IRA Rollover where it is at Vanguard. The 2040 fund has 10% bonds/cash which is where you should be based on your age. 3 American funds are not going to be more aggressive unless they are all emerging markets or small cap. I'm sure he picked funds with great returns but the returns already happened. Also those 3 funds will not be more diversified than the 2040 fund at Vanguard.

 

4. Don't worry about overlap and having more than one target date fund. The 2040/2045/2050 all have about the same allocations currently. The rate at which they get more conservative over time is where they differ.

 

5. Max out your Roth first and then do the 403b. You are already in the 15% federal tax bracket, deferring taxes at that rate when they will probably be higher in the future is silly. The Roth contributions growth is tax free and none of the investment or sources of retirement income that you have currently are tax free.

 

 

 

 

 

 

 

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Hi

 

I think you need to take a step back before you do anything becuase you may end up doing too much to your determent. So don't do anything just yet.

 

 

I would say this. You are on the right track. You are thinking about it(retirement) and are offering specific things you may want to do. This says you are fairly educated on the subject. You picked a good if not the best company with Vanguard.

 

I would advise not moving your money to American becuase that load will set you back and the fees are higher than Vangurd. Also as the previous writer said your Vanguard account is already diversified for you. American funds will not give you the same diversification with three funds. I'm going to beg you to continue doing what you are doing on your own and to stay away from brokers at this point. I know dad always knows best but your a big ###### now and will learn to do this on your own.

 

You can't go wrong with a Roth or a 403B with Vanguard. The broker is not helping you get more aggressive. He is helping himself to a commision. But you do get a tax deduction with a 403B which will lower your taxes and increase your tax refund

 

What is your risk tolerance? Are you sure you could stand to lose 50% of your money overnight and still

not be tempted to panic? I thought I was aggressive too until I experienced a major downturn in 2001.

 

I would call vanguard retirement services. For a fee of about 200.00 they will offer you guidance. This may sound like alot of money up front but its a lot less than what you will end up paying a broker

over time.

 

If you really want to get more aggressive I would ask vangurd to add a fund that would work with your current funds that might give it a kick-maybe the Vanguard growth index .

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Hi

 

I think you need to take a step back before you do anything becuase you may end up doing too much to your determent. So don't do anything just yet.

 

 

I would say this. You are on the right track. You are thinking about it(retirement) and are offering specific things you may want to do. This says you are fairly educated on the subject. You picked a good if not the best company with Vanguard.

 

I would advise not moving your money to American becuase that load will set you back and the fees are higher than Vangurd. Also as the previous writer said your Vanguard account is already diversified for you. American funds will not give you the same diversification with three funds. I'm going to beg you to continue doing what you are doing on your own and to stay away from brokers at this point. I know dad always knows best but your a big ###### now and will learn to do this on your own.

 

You can't go wrong with a Roth or a 403B with Vanguard. The broker is not helping you get more aggressive. He is helping himself to a commision. But you do get a tax deduction with a 403B which will lower your taxes and increase your tax refund

 

What is your risk tolerance? Are you sure you could stand to lose 50% of your money overnight and still

not be tempted to panic? I thought I was aggressive too until I experienced a major downturn in 2001.

 

I would call vanguard retirement services. For a fee of about 200.00 they will offer you guidance. This may sound like alot of money up front but its a lot less than what you will end up paying a broker

over time.

 

If you really want to get more aggressive I would ask vangurd to add a fund that would work with your current funds that might give it a kick-maybe the Vanguard growth index .

 

 

Thanks, both of you, many times over, for your replies.

 

Tony, you say I have "picked a good if not the best company with Vanguard." Just curious: what companies do you prefer for high-quality no-load/index/do-it-yourself funds?

 

You also say I may be in danger of doing "too much," which seems like sound advice (my head is spinning with all the things I want to do to get our finances in order). I guess that's what Vanguard Retirement Services, or maybe even an in-person meeting with a CFP, might help clear up, right? Any advice, meanwhile, on a basic strategy, i.e. how to prioritize the various bits and pieces of financial organization when you're starting from just having a checking/savings account and a rollover IRA? I gather from ricky.bobby's reply that we should set aside several months' expenses in a money market for emergencies, and I know we need term life insurance, and a will. As far as retirement savings goes, though, I guess we mainly just need to open a good Roth IRA for now, and come as close to fully funding it as possible.

 

I'll go see if I can find information on that Vanguard Retirement Services thing, meanwhile. Thanks again. I promise not to make any decisions in haste! You guys are a great help, cheers.

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Hi Mindy,

Welcome to the forum. You have already been given some good advice. First, I want to say stay away from that broker. I don't know how you could be more aggressive with the 2040 fund with its 90% stock allocation. In fact, one could argue it is too aggressive for your age.

 

If you feel you need advice, find a fee-only financial adviser. You pay that person by the hour, not based on how much you invest. A good fee-only financial adviser should be able to help you in all financial matters.

 

However, I think you can do this on your own. Here is a good book for a beginner: http://www.amazon.com/exec/obidos/ASIN/047...7466883-4345620

 

I like the Roth IRA. You can access some the funds later if necessary so it could be your back up emergency fund. Here is another good book to help you with questions about asset allocation: http://www.amazon.com/About-Asset-Allocati.../qid=1172343204

 

I agree with Tony that you need to slow down and make good decisions. You can start by opening a Roth IRA with Vanguard. For now, you can invest in the same fund as your IRA. When you know more, you can make changes. That 18k is the basis for an emergency funds so you have that covered. Next, you can see about some term life insurance and a will since you have a child. Things do happen. It is wise to prepare for them. For the record, I have all of my funds with Vanguard.

 

Keep asking questions. It is your money. Best Wishes.

 

Joe

 

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Tony, you say I have "picked a good if not the best company with Vanguard." Just curious: what companies do you prefer for high-quality no-load/index/do-it-yourself funds?

 

 

 

I would say Vanguard. It just doesn't get any better. I also have American Funds and Fidelity but I invested in American only out of circumstance because at the time it was my only good choice at the place of employment.

Looking back, I wish I had less funds. Vanguard pretty much has all you need and then some!!

 

It really pays to stick with one fund family. Its so much easier that way. Keep things simple as possible!!

 

Also, If I may offer some other advice , don't forget to build a stake in bond funds and TIPS (inflation protected securities) along with a cash position. Both are available through Vanguard too

 

Diversification is crucial too if you decide to pick individual funds instead of your target retirement fund

 

Have:

 

A large cap blend fund, a mid cap blend fund, a small cap blend fund . Blend means the fund has both value and growth issues. Then add an international fund too. I would index it all the way!!

 

You will get good basic help here. Don't be fooled into thinking a broker or CFP who works on commission is goint to do better for you. If you must seek help, Fee Only or Vanguard Retirement services by phone might help.

 

If you stick this game plan out-maxing out your Roth and then adding to your 403b as much as possible you will be fine. BUY and Hold is the key. Don't let some salesmen talk you out of your funds with promises of better returns because they usually can't deliver the goods long term. Trust me on that. I have a not so pretty history with that.

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ricky.bobby and Tony made good suggestions for your situation. I agree you should set aside 3-6 months living expenses (maybe even more), get term life insurance for both of you if you don't have it, then fund Roth IRAs for both of you.

 

Since you are looking for the smart way to invest, you obviously want to learn whatever you can. It wouldn't hurt to ask your dad's broker what funds he recommends for you AND WHY. See if you agree with his rationale and risk tolerance. (We'd even be interested in hearing about his thoughts.) Then I'm sure you can find similar funds within Vanguard without loads. Several people on this board are good at identifying which funds in Vanguard match particular goals.

 

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Thanks so much for all of your replies. I love this forum!

 

I told the Edward Jones broker that, after thinking about how fees would impact our returns, my husband and I have decided against going the route of loaded funds. Thanks to your advice, we will step back, take a deep breath, educate ourselves more about asset allocation, etc. (I've put several books on hold at the library), draw up a thoughtful investment strategy, and then choose quality no-load funds for a Roth IRA with Vanguard. In addition to a Roth, we'll plan on setting up a money market account (probably with an online bank, like Zions, for a good rate) for emergency and home renovation funds, researching and acquiring term life insurance, and finding a good estate planning lawyer to help us draw up a will.

 

By the way, I'm curious about one small technical detail. When you set up an IRA through Vanguard so that money is automatically moved from your bank account to your IRA each month, what happens if you accidentally exceed the maximum yearly contribution ($5000)? Just wondering.

 

Thanks again!

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Thanks so much for all of your replies. I love this forum!

 

I told the Edward Jones broker that, after thinking about how fees would impact our returns, my husband and I have decided against going the route of loaded funds. Thanks to your advice, we will step back, take a deep breath, educate ourselves more about asset allocation, etc. (I've put several books on hold at the library), draw up a thoughtful investment strategy, and then choose quality no-load funds for a Roth IRA with Vanguard. In addition to a Roth, we'll plan on setting up a money market account (probably with an online bank, like Zions, for a good rate) for emergency and home renovation funds, researching and acquiring term life insurance, and finding a good estate planning lawyer to help us draw up a will.

 

By the way, I'm curious about one small technical detail. When you set up an IRA through Vanguard so that money is automatically moved from your bank account to your IRA each month, what happens if you accidentally exceed the maximum yearly contribution ($5000)? Just wondering.

 

Thanks again!

 

 

A 6% penalty tax is imposed on the excess amount if it is not removed from the plan by April 15th of the folowing year. You have the option to apply the excess to an IRA for 2009. Any earnings on the excess must be removed and are subject to income taxation.

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Probably too late for your decisions. I recommend fully funding a Roth IRA for one of you now, if not both of you. Write the $5,000 or $10,000 check out of your savings to fully fund the Roth for 2008. Take the extra monthly income, $400, and have it automatically withdrawn montlhy into one of the online money markets. www.bankrate.com is a good place to start for those. Go out and get life insurance also, to protect your daughters future. You do get a tax deduction for the Oregon state Oppenheimer 529 plan. Register on www.upromise.com to earn additional college monies, it's free, easy and no committments need to be made.

 

In 2009, then have monthly withdraws to fund your Roth IRA's. You will also have a better idea of monthly discretionary income.

 

 

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Probably too late for your decisions. I recommend fully funding a Roth IRA for one of you now, if not both of you. Write the $5,000 or $10,000 check out of your savings to fully fund the Roth for 2008. Take the extra monthly income, $400, and have it automatically withdrawn montlhy into one of the online money markets. www.bankrate.com is a good place to start for those. Go out and get life insurance also, to protect your daughters future. You do get a tax deduction for the Oregon state Oppenheimer 529 plan. Register on www.upromise.com to earn additional college monies, it's free, easy and no committments need to be made.

 

In 2009, then have monthly withdraws to fund your Roth IRA's. You will also have a better idea of monthly discretionary income.

 

 

Thanks very much for your reply. We started up a Roth for my husband, and we funded it for 2007 (this was prior to April 15) and part of 2008 (a total of about $5200), plus set it up so that $400 goes in there automatically each month. Not enough income to open up a Roth for me, too, just yet, unfortunately. We also took $10k and put it into Vanguard Prime MM. And we're holding off on the 529, despite the state tax benefit, because we're so strapped for cash, and everyone seems to suggest focusing on retirement first, which makes sense to us now. Thanks for the tip about upromise.com---didn't know about that before.

 

Mindy

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