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Starting Out In A 403(b)

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Hi, I am 26 years old and about to start my first job after finishing grad school-I definitely want to invest the max for retirement that I can, which is apparently 20% of my salary, which will end up at a little less than $8,000. I am offered a 403(b) or a 403(b)7. From what I have read, it seems like a 403(b)7 is the better choice since I can choose mutual funds rather than annuitys. Is this right?

 

My employer is a University and does not match my contributions. The only company that is accepted for 403(b)7s is Verity Investments. Does anybody know anything about this company? I would rather go with Vanguard because I have heard good things about them, and my husband has his retirement account with them; however, transferring money every few months is just going to be too complicated for my schedule during the upcoming few years. Should I go with Verity?

 

What about using a Roth IRA instead or in addition to the 403(b)7? There is no information from my employer about how to set up a Roth and I am not quite sure how to start doing that. Can I go with any company for that?

 

Thanks,

Alison

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Hi Alison,

 

Welcome to the site. Good for you for getting started on retirement savings so early! Based on the information you provided, you can actually contribute $12,000 to either a 403(b) or a 403(b)(7), or a combination of the two. Thanks to recent changes in the law you are no longer limited to contributing a percentage of your salarly. Instead you can contribute up to $12,000. If you haven't already I recommend that you take a look at the 403(b)wise FAQ section. It's at:http://www.403bwise.com/faqs/index.html

 

It looks like your investment options are pretty limited. Have you asked your employer to add additional vendors?

 

As you mentioned you can contribute to a Roth IRA instead of, or in addition to a 403(b). Take a look at this story from 403(b)wise called "403(b) or Roth IRA?" at: http://www.403bwise.com/wisemoves/403bvsroth.html It compares the two plans and offers suggestion depending on your situation. As far as setting up a Roth IRA, it's a simple as contacting your prefered vendor. Visit the sites of vendors you like and you'll see all the information you need. Good luck and stay in touch.

 

Dan Otter

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Guest Chuck Yanikoski

Dan is right about the Federal limits -- though employers may impose more stringent restrictions if they like. If this is happening in your case, it is all the more reason why you should consider supplementing your 403(b) with a Roth IRA.

 

I join Dan in congratulating you on your early and evidently serious start. The rare few who start out with your approach rarely regret it.

 

However, at your age, you may have big expenses in your future: marriage, kids, a house, a job loss. You may need serious cash in these situations, and you may not be able to get it from 403(b) plans, or not without a penalty. (Roth IRAs are more flexible this way.) So even though the tax advantages are enormous, and you SHOULD by all means contribute to your 403(b), you should also have some funds set aside in a place where you can get them quickly and without penalty. Otherwise, you MAY regret it.

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Dan is right about the Federal limits -- though employers may impose more stringent restrictions if they like. If this is happening in your case, it is all the more reason why you should consider supplementing your 403(b) with a Roth IRA.

 

I join Dan in congratulating you on your early and evidently serious start. The rare few who start out with your approach rarely regret it.

 

However, at your age, you may have big expenses in your future: marriage, kids, a house, a job loss. You may need serious cash in these situations, and you may not be able to get it from 403(b) plans, or not without a penalty. (Roth IRAs are more flexible this way.) So even though the tax advantages are enormous, and you SHOULD by all means contribute to your 403(b), you should also have some funds set aside in a place where you can get them quickly and without penalty. Otherwise, you MAY regret it.

I am a little confused about the Federal Limits and that Employers may impose more stringent restrictions. According to IRS Publication 517, Tax Sheltered Annuity Plans, the Maximum Exclusion Allowance has been repealed. How can an organization say that you are limited? In other words, if the IRS sets the limit at 12K, why would an employer have the right to place "more stringent restrictions" on an employee? Thank you.

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Guest Chuck Yanikoski

The Internal Revenue Code describes what 403(b) contributions may be excluded from taxable income, but they do not force any employer to provide such a plan or to permit maximum contributions, nor do they force any product vendor to provide funding mechanisms for such a plan or to permit maximum contributions. Plan sponsors and product vendors are free to impose any limits that they want, as long as they are not LESS stringent than the Federal tax code (and as long as they are not illegally discriminatory). There is simply nothing in the law or the regulations that prevents additional restrictions or limitations.

 

It was fairly common for this to happen under the MEA rules, because most people did not understand them. So plan sponsors and vendors often imposed somewhat arbitrary limits (either percentage of compensation or dollar amount or both), and either would not allow exceptions or would allow them only with documented calculations that validated the exception. Under the current, simpler rules, such limitations are less necessary or appealing -- but it seems to be taking a while for all the plan sponsors to get comfortable that it is safe to go into the water.

 

In cases where plan sponsors are imposing extra limitations, the cause may be inertia, ignorance of the new rules, or just lack of time to get around to updating things. A little rational discussion may resolve the problem, in such casas.

 

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The Internal Revenue Code describes what 403(b) contributions may be excluded from taxable income, but they do not force any employer to provide such a plan or to permit maximum contributions, nor do they force any product vendor to provide funding mechanisms for such a plan or to permit maximum contributions. Plan sponsors and product vendors are free to impose any limits that they want, as long as they are not LESS stringent than the Federal tax code (and as long as they are not illegally discriminatory). There is simply nothing in the law or the regulations that prevents additional restrictions or limitations.

 

It was fairly common for this to happen under the MEA rules, because most people did not understand them. So plan sponsors and vendors often imposed somewhat arbitrary limits (either percentage of compensation or dollar amount or both), and either would not allow exceptions or would allow them only with documented calculations that validated the exception. Under the current, simpler rules, such limitations are less necessary or appealing -- but it seems to be taking a while for all the plan sponsors to get comfortable that it is safe to go into the water.

 

In cases where plan sponsors are imposing extra limitations, the cause may be inertia, ignorance of the new rules, or just lack of time to get around to updating things. A little rational discussion may resolve the problem, in such casas.

Thank you. Just to be sure I am understanding this correctly...If an employer wants to limit the 403(b) employee contributions to say, $5,000, they can arbitrarily do that? I don't know, maybe it is me, but that makes no sense. If the Internal Revenue Code allows 12K, I do not see how a company can now say it can only be $5K. I would think that if they did this, it would no longer be a 403(b) by regulation. I am very new to this line of work, so please excuse my ignorance. Thanks!

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Guest Alison

Hi,

Thanks for all the replies to my original post. I have some more questions.

 

My employer gave me a list of companies that I can go with and apparently there is only this one which (I now know) is a local brokerage firm. I went over and met with a guy there today and he said that indeed I can contribute up to $12,000. I am very glad about that. If I can afford it, I'd like to contribute the max to both my retirement and an IRA. Is Roth the best type??? I will look at the resources you recommeded on the subject of the Roth vs. 403(b).

 

Apparently, I am only allowed to put my money into one company through this local brokerage firm, which is American Funds. I am not allowed to use Vanguard which I would prefer. He said they (American Funds) offer only actively managed funds. However, all of the reading I have done has suggested that I go with index funds, and with only 100% stocks at this stage of my life. The guy I spoke with said that one philosophy of investing is index funds and buy-and-hold, but that his philospohy is that the market is not the right place to be and to have only some stocks but also bonds and cash investments. This is not what I think I want to do but this is the only company I am allowed to invest with through my job. I will try to lobby them for better diversity of companies but I'm not counting on any quick response.

 

Maybe these questions are not specific enough to the 403(b) forum, if not, just say so and I will look around for a different forum! :)

 

Thanks again for your help.

Alison

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Alison,

 

If you wouldn’t mind could you list the companies that you can go with? In both the 403(b) and 403(b)(7). Then perhaps some forum members and guests could give you some pros and cons about each company (perhaps some relevant experiences) and related approaches.

 

If your 403(b) options are limited, maxing out a Roth IRA before contributing to the unmatched 403(b) might be a wise decision. If you choose Vanguard for the Roth IRA (another wise decision, in my opinion), you will likely have better and cheaper investment options. You can do something like choose the best investment options in the 403(b) and then use the Roth IRA to fill out your asset allocation.

 

Alec

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Guest Erik

Alison,

 

The difference between the American Funds and Vanguard is that Vanguard does not have any distribution fees, nor do they impose charges, so the broker you went to is not compensated to sell you Vanguard. If you use the broker, then it is not right for you to ask for Vanguard - that would be akin to asking the mechanic to fix your car for free. However, if you are confident in your ability to choose your funds ( which there is no reason why you shouldn't, some people just aren't though), and you want to use Vanguard, then you need to tell your employer to add them to their list of investment options.

 

For what it is worth, American Funds, have performed very well compared to their peers (including Vanguard).

 

If you are dead set on using Vanguard and you cannot get your employer to add them, tell the broker that you want C shares, and then transfer the accumulated American Funds shares every 18 months via a 9024 exchange to Vanguard.

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Guest Chuck Yanikoski

To answer your question about the IRA piece of it, in your case, I would absolutely recommend the Roth, for three reasons:

 

1) Since you are young and since you are saving so much, there is a good chance that you will be in a higher tax bracket when you retire than you are now. So it is smart to pay your taxes now at the lower rate, and get your money out tax-free later.

 

2) It is also a good idea, I believe, to have some balance between accounts that give you a tax break today (like 403(b)) and ones that give you the tax break when you withdraw (like Roth IRAs)-- because no one REALLY knows what the future holds, so having some of both kinds helps you to hedge your bet.

 

3) Because Roth contributions are after-tax, they magnify the value of the contribution. At a 20% tax rate (to use an easy number), $1000 contributed to a Roth IRA is the tax equivalent of $1,250 contributed to a traditional deductible IRA. This is not just true the day you make the contribution, it is true for the life of the plan, assuming all else is equal (including tax rates).

 

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Guest Guest_Joel L. Frank

If the investing public understood the following National Association of Securities Dealers rule they would stay away from loaded funds like the SARS!

 

Firstly, no-load as well a loaded funds employ salespersons. One will help you choose a fund on the phone while the other will make an appointment to see you personally.

 

Rule: Both outfits are only required by law to assure that the fund you buy is suitable for you at the point of sale. The ongoing monitoring of your personal situation to assure that the fund continues to be suitable for your is not required. So if both types of salespersons are not going to monitor your account going forward why pay a commission every 2 weeks to acquire the investment? Simple logic says buy the no-load fund.

 

Peace,

Joel L. Frank

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Guest roberta

If you end up buying the American shares, don't buy C shares! The expense ratio of the A shares is as low as Vanguard, so the major issue is that of the commission. If you're buying and keeping them, and once you've had to pay the commission on the funds, there's not much reason to do a 1035 transfer, buy the A shares and then do the price breaks as they come along plus the lower E.R. over the years.

 

Roberta

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Guest Alison

I really appreciate all the helpful advice. I was wondering where I can learn more about the A shares/C shares issue. The broker I met with whizzed through it and only made me feel overwhelmed, so I definitely don't understand what it is all about.

 

I think that doing the transferring money every 18 months thing is just to involvement-intensive for me. I think my best bet is to choose the best choice within American Funds if my employer will not allow me to choose Vanguard. My next question is, what happens when I am no longer with this employer (most likely this is going to be a 3-4 year placement)? Maybe my next employer offers different options...can I transfer the money that I accumulate in my 403(b)7 to a new retirement account or do I leave it in there or just exactly what???

 

How should I go about choosing the best funds within American Funds? The broker was way too much of a fast-talker and I did not feel like I had a great trusting relationship with him but the ones he recommended are 70% Capital Income Builder and 30% Capital World Bond Fund. My concerns is that this portfolio has a low percentage of stocks, maybe 50% or so. My understanding has always been that I should be in stocks at this early stage, but he was saying how that is "such a myth" and that the market is so bad and the dollar is so weak that I should be out of "equities" and in bonds and international cash. ?????

 

Again, thanks so much for all this advice. Even when it is disagreeing with each other I find it helpful! :)

 

Sincerely,

Alison

 

 

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Guest roberta

My previous post got posted b/c I was trying to use the caps lock....

 

Start with the faq on the main page; follow the link the the SEC on the share classes. Sign up with morningstar - free membership and do a search on share classes; there are some good articles and then come back with questions. It's not that difficult; the salesman gets paid. There are advantages and disadvantages to each. Sometimes the advantage is to the house and sometimes to you.

 

Your next reading needs to be on asset allocation to begin to make some choices on which funds.

 

Roberta

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