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edietel

403B To Roth?

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Hi everyone,

 

I haven't posted in a while (though you can consider me inspired by tony's encouragement earlier this week...). My question has to do with whether or not to consider a ROTH 403b.

 

My wife and I just began our 403b contributions back in September, and we both plan to work at least another 21 years in public education (when I'll have 30 years in the NH Retirement System and she will have 26 or so). Not a lot of money in these accounts yet (about 2k in each). My wife's 403b is with ASPIRE, and her district matches up to 3% (unheard of, I know!). I have a 403b with Vanguard currently.

 

I was just looking over the OMNI options for my district this morning, and noticed several ROTH 403b options (one of which is ASPIRE, who offers a ROTH 403b and a ROTH 457). I hadn't considered this back in the fall, mostly because I didn't understand ROTH very well. Now it has me thinking. When we retire, the money we take out of her 403b will be taxed. Would it be best for me to stick with my current arrangement, or go the ROTH route? ASPIRE's fees are higher than Vanguard (though I do currently pay OMNI $3/month just to use Vanguard...), but is it possible that having untaxed withdrawals later in life would actually save us money?

 

Is it even possible to move from a 403b into a ROTH 403b (or 457 for that matter)?

 

I don't necessarily feel the need to switch (it's not like I am locked into a predatory AXA plan or anything), but - if it would be smart to do so - switching sooner rather than later would be ideal.

 

Thanks for any help you can offer!

 

-Erich

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Whether it’s better for you to use a Roth 403b than a traditional 403b depends a lot on your tax bracket now and in retirement. This article might help you understand the choice. Are you maxing out your Roth IRA accounts?

"The Case Against Roth 401(k)” by The Financial Buff, Harry Sit

Is it even possible to move from a 403b into a ROTH 403b (or 457 for that matter)?

 

I’m not sure what you mean by “move”. Your 403b account remains a traditional account. You can start a Roth 403b and contribute to it and stop contributions to the 403b, or split your contributions between the 2 accounts. The same for the 457 and Roth 457. You can never convert a Roth account to a traditional account, but you can convert a traditional account to a Roth. The latter conversion for a tIRA can happen anytime. Conversion for a 403b and 457 has to take place after severance from the employer, with age restrictions, and involves rolling over the traditional account to an IRA.

Quitting the employer that is sponsoring the plan allows for the 403b to be converted to an IRA at any age. Then, conversion of the traditional IRA to a Roth IRA is ideally done when your tax bracket is very low (0% and 10%) due to high tax deferred contributions, or both of you not employed and able to live off of your taxable account or ??

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Edietel

 

Krow's article offers informative scenarios but its a bit complex for my tastes or perhaps my IQ :)

 

I would suggest one of you do the Roth and one of you do the tax sheltered. If your wife's match is in a tax sheltered account than she should be the one doing the tax sheltered account .This approach gives you best of both worlds. I would, not sweat a small difference in fees in order to create that arrangement.

 

I have Roth 457 accounts, and IRA tax sheltered accounts (previously 403b accounts before transferring upon retirement ) and taxable accounts outside of retirement. Having different types of accounts offers you flexibility. I call it tax diversification and it gives you options.

 

Tony

 

More importantly I do think you need to save more than you have so far. I would try and put 25-% of your combined salary in your retirement plans every year starting immediately.

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Since you have a Vanguard 403b, I don't think a Roth 403b is not an option for you. The options to get contributions into the Roth category are your 2 IRAs, your wife's 403b and her 457. I think the match on your wife's 403b is required to be put in a traditional 403b, not a Roth. Of course her contribution could be split, but need not be. And of course you two could decide to go traditional in all of the 403b and the 457 accounts for now and convert to Roth later in a lower tax bracket.

 

Tony is right on, that the important decision is the one on how much to contribute to your retirement accounts! Don't focus on small fee differences. Aspire is a very good deal because they allow you to use Admiral class funds which partially cancels out the 0.15% fee they add on. The $36 per year fee will become insignificant as your account balance grows. Every 403b provider has a similar fee, often much larger.

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Thank you, Krow and Tony. My gut is telling me that diversification is a good idea, even though that article suggests otherwise...

 

My wife's district only offers 403b options (4 of them, 3 ripoff annuities + aspire). So, no Roth option for her. My district offers what I posted previously, and I think the Roth option might make sense to switch to.

 

What would you suggest I do with the ~$2,000 that will be in my vanguard 403b at the end of this school year? Should I try and get that money into the aspire Roth, leave it where it is, or something else altogether?

 

As for our savings, I agree 100%. We are sitting on significant credit card and student loan debt currently (plus high cost of living here in NH). I initially thought it was best to start our 403bs and prioritize paying down our debt, increasing contributions down the road when much of that is under control. Would you agree with that strategy, or not? I would LOVE to know.

 

Thanks everyone!

 

Erich

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And of course you two could decide to go traditional in all of the 403b and the 457 accounts for now and convert to Roth later in a lower tax bracket.

I missed this comment when I initially posted my reply. I have never heard of this before, and don't quite understand how this works or why someone would do this. Would you mind explaining a bit, for a newbie like me?

 

Thanks again!

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By contributing to the 403b and 457 accounts, you are postponing paying income taxes on your contributions. If you use the Roth option instead, you are paying the income tax now, up front. Your present income tax may (or may not) be higher now than it would be in retirement. Once one or both of you are not employed by the plan’s sponsor, you can convert either the 403b plan to an Roth IRA. If you were in a lower tax bracket, that would be a better time to pay the tax on the contribution. And postponing paying a tax is worthwhile even if the rate stays the same.

At this stage of your retirement investing, I think this is overthinking it. As we’ve mentioned, the amount you sock away for retirement in your accounts, and the length of time it can grow, is what’s important. I think first of all, you need to look at your debt, especially credit card debt. It doesn’t make sense to invest with the possibility of getting maybe 6 to 10% return (and some years the investment will loose value!), rather than paying off debt that you are paying 15 or 20% interest on. You really shouldn’t have any credit card debt. Do you use a budget? YNAB has been recommended by other posters. https://www.youneedabudget.com

I would pay off the credit card debt before contributing to either the 403b or 457 plans. If you can afford it, I’d contribute 5.5k to a Roth IRA for each of you each year (there’s still time to do it for 2016, up until April 18). What to focus on next depends on the interest rates of your student loans.

Just leave the $2000 in your Vanguard 403b. You can't change it to anything else without paying a 10% penalty unless you change employers and then all you can do is roll it into an IRA. What fund do you have it in?

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I am going to check out YNAB. That sounds like a great tool.

 

Why would you suggest contributing to a ROTH IRA instead of a ROTH (or non-ROTH) 403b?

 

The $2,000 is in the 2045 Target Date Retirement Fund.

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If you and your wife were only able to contribute a total of $11,000 to all your retirement accounts (because you are paying off debts, or for other reasons), there’s a few advantages to contributing to each of your Roth IRAs rather than to a Roth or traditional 403b. The IRA is your personal account which you can establish at any vendor, so you can choose a very low-cost one like Vanguard. The Vanguard IRA account will be able to eventually use lower cost Admiral class funds, while a Roth 403b with Aspire will have the additional 0.35% fee. A 403b directly with Vanguard is restricted to using Investor class funds, not Admiral. An employer-based retirement account is often more restricted and more expensive than an Individual Retirement Account (IRA). If you change employers, you will probably want to transfer the old employer-based accounts to the new one, or to an IRA, and that’s not necessary with the IRAs.

The employer-based account does have the advantage of payroll deduction which makes it automatic to contribute. You could organize your income to accomplish the same thing. If there’s an employer match, then contributing to the 403b or 401k should take priority to get the match. Then contribute to the IRA, probably a Roth IRA. Then go back and max out the 403b or 457 if possible.

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I agree with Krow. Budgeting is a great idea. Most millionaires who got that way by saving did it by paying them self first before ever paying bills. Thats what I did. The most important bill to pay was always my retirement account first. Most people do it the other way around.Budgeting works if you stick with your plan. Also eliminating extraneous expenses like that daily starbucks latte or soda can really add up over a months time. Usually its the little stuff that you can do without that can impact your budget.

 

Again I would recommend you save some in different investment vehicles -Roth 403b, tax sheltered 403b, and even taxable funds so you have options should tax situations change in the future. You never know what Congress might do.

 

You can do this!!

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I forgot about the wife's match! It's so rare. Definitely contribute to her 403b to get the match, and then the Roth IRAs and then the CC debt. What is the interest rate on the CC debt?

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Yeah, the employer match is extremely rare. Her district is the only one I know of that does it.

 

Our CC interest rate is 13.49%

 

Thanks for the advice, and for your optimism! It feels impossible sometimes, but I'm really getting a lot of confidence and encouragement from this board.

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