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ivan41

Retirement Planning Advice - 403 b/457 b - Texas

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Good Morning! I am a 30-year-old from Dallas, Texas and I just completed my first year of teaching (2nd Grade Bilingual, Math & Science). I recently found out about this forum and I was hoping to attain some advice regarding 403 b and 457 b retirement options provided through my district (I apologize in advance for all of the detail, but I wanted to provide as much information in advance, in case it was necessary for you to provide the best advice possible).

First: A friend of mine immediately signed up with AXA upon starting teaching last year (we are both first year teachers). After reading the various posts on this forum, I think it would be best to transfer her investment to another provider. Based off the list of providers, which option would you recommend? I am looking for a do-it-yourself option with the lowest recordkeeping expenses and with diverse fund options (i.e. fund options with the lowest possible expense ratios). Here is our provider list: https://www.trs.texas.gov/TRS Documents/certified_companies_list.pdfASPire Financial Services and Commonwealth Annuity are also eligible providers, but they are not listed. Based off the feedback on this forum, I am currently considering the Security Benefit – NEA Direct Investment, ASPire, and The Vanguard Group, but I am not sure if any of the other 47 or so providers would also be a qualified option.

Second: I actually did not enroll in a 403 b retirement plan because I was wary of the options and the pitches by the salesmen (I also have a Roth IRA, so I was content contributing to that). Upon reading the posts on the forum, I also confirmed with my employer my eligibility for a 457 b plan. Although, I feel that I only have enough at the moment to max out my Roth IRA contributions, I wanted to find out whether it would be best to contribute to a 403 b or a 457 b (in case I was able to save above the $5,500 I already set aside to the Roth account). Would you recommend the 403 b or the 457 b plan and what aspects of each plan would I need to consider the most in making my decision?

*I have attached the 457 b plan options and fees.

My current retirement plans are the following:

·       Teacher Retirement System (TRS) – Defined benefit retirement plan (pension trust) (member contribution is 7.7% of creditable compensation)

·       Vanguard S&P 500 Index ETF (VOO) – Expense ratio: 0.04%

·       Vanguard Target Retirement 2055 Fund Investor Shares (VFFVX) – Expense Ratio: 0.15%

If you need additional information, please feel free to let me know. Thank you in advance!

 

Texas 457 Investment Options.pdf

Texas 457 Investment Fees.pdf

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Wow, I don’t remember ever seeing such a long vendor list. 

I think your best options are Vanguard and Fidelity. NEA DirectInvest is a fantastic plan, but the company is exploítative and if you don’t have to deal with their nonsense then you’re better off. I documented all 3 plans here, but the Vanguard bit is out of date since they updated the plan last year. You can search the boglehead form or here to find discussion on the new Vanguard change. Long story short, it helps folks with 66,666+ account balances and slightly hurts folks below that threshold...still a great plan either way  

If I were your friend, I’d run away from AXA today.

If your district is like mine then Vanguard is there for a 403b and Fidelity is there for both a 403b and 457b. So in terms of cost and building a great portfolio you’ve got great options.

I can’t remember the exact differences between a 403b and 457b. I think it has implications for withdrawal/rollover. Since a difference in fees won’t be an issue, you can google those terms and choose whichever sounds better for your needs. 

https://www.investopedia.com/articles/personal-finance/111615/457-plans-and-403b-plans-comparison.asp

...I know you didn’t ask about this, but I always make the case that a traditional IRA is preferable to a Roth. So that may be something to consider when you sort all of this out and begin lower level optimizations.

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Ivan

You do have some good options. 457b and 403b are very similar in make up.  Actually you could actually do both options if you wanted to. What it comes down to on which you choose is the fees and the choices you have. Delve deeply into the fee structure -administrative fees, managerial fees,12b1 fees , expense ratios etc. Leave no rock unturned when it comes to fees-DO YOUR RESEARCH !!! AND absolutely stay away from insurance company investment products. Actually you could  do both 457b-403b options if you wanted to in order to get the funds you want. I would be careful about getting professional advice. Many of these so called experts that service the k-12 market will lie and distort facts. 

It seems you have Fidelity available in your 403B. If they have their index funds that would be a good choice. Direct Invest through Security Benefit has been discussed  as another good choice but on principle of how the NEA and Security Benefit operate I would find a different way if possible although others like it.. Aspire through their self direct option is yet another good choice. Check out Blackrock, they have some very low index funds but just like with Fidelity you must be selective. Dimensional Funds might work too and I've heard good things about how they operate. AXA sucks. Vanguard Fidelity, Blackrock, Dimensional and ASPIRE are reasonable and smart choices.  I could not open your 457 attachments. The easy choice is always Vanguard or Fidelity index funds if you want the cliff notes approach.

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Ed: Thank you for the feedback. I spoke with a Vanguard representative and she was able to provide me with this document: http://www.vanguard.com/pdf/403BBP_102017_web.pdf. It might be useful for your blog - thanks for directing me there  btw! In essence, there is a flat $5 fee/per month for the 403 b plan. Would you say that the benefit of the Traditional IRA stems from the ability to contribute tax-deductible contributions? If so, would you advise prioritizing 403 b contributions as opposed to my Roth IRA contributions? I ask because I am not sure how I would start a Traditional IRA without it being offered by an employer (I would still have to see if any of the 403 b organizations would offer a Traditional IRA contribution option). 

Tony: I will definitely continue to do my research. Hence, my delay in initiating the 403 b/457 b investment. I was having trouble uploading the files - let me try a picture. 

image.thumb.png.2f684283b5a6e0c349ca1286795ffcf0.png

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Ivan

You have great options. I am glad to see I was right recommending Blackrock. I used them in my 457b and was very pleased.

Diversity in investment types is good. Since you have good choices in your 403b and 457b you might want to check if they offer a 457b Roth or 403b7 Roth option in addition to the tax deferred option.Most do now. You might consider doing a portion of your savings in a Roth option(tax free on retirement withdrawal). As far as the traditional IRA, I wouldn't do it now as it would be redundant to your 403b or 457 b tax deferred options plus contribution limits are much less.. When you do finally retire you will probably consider rolling all your 403b/457b taxable money into a traditional IRA. I know there is debate in regard to Roth vs Traditional tax deferred 457b/403b savings as well as IRAs as to which is the better approach. I say do both Roth and Traditional . Thats what I did and I have more options as a result now that I am retired.

 

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Tony: That will be my next step, to see if any of these providers offer a Roth 403 b option. Just to confirm, do you know if all of the LifePath Index Funds belong to the BlackRock portfolio?

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On 7/10/2018 at 9:50 PM, ivan41 said:

Ed: this document: http://www.vanguard.com/pdf/403BBP_102017_web.pdf. It might be useful for your blog -

Would you say that the benefit of the Traditional IRA stems from the ability to contribute tax-deductible contributions? If so, would you advise prioritizing 403 b contributions as opposed to my Roth IRA contributions? I ask because I am not sure how I would start a Traditional IRA without it being offered by an employer (I would still have to see if any of the 403 b organizations would offer a Traditional IRA contribution option).

Thanks.

I just wanted to be explicit about a few things. IRAs, 401ks, 403bs, and 457bs are all tax advantaged accounts. How tax is assessed on these accounts is determined by whether the account is a Traditional or a Roth. Some employers may not offer a Roth option, but that is a decision they’ve made...it isn’t the result of the tax code, plenty of employers offer both Roth and Traditional variants of tax advantaged accounts.

I argue that a Traditional account (IRA, 403b, whatever) is likely the best choice because our tax code is progressive. Suppose your highest tax bracket is 24%.

Every dollar you contribute to a Traditional account saves you that 24% tax. Then in retirement when you withdraw the money, the first dollars won’t be taxed at all, the next Y dollars will have the lowest tax rate, and so on and so forth. Every dollar you contribute to a Roth account requires you to pay the full 24% tax.

Very few people will have more taxable income in retirement than they had when working. For those that do it would be ideal to have enough in a Roth so the portion of their retirement income that is above (or at least equal to) the highest income bracket when working comes from a Roth. However, that takes a lot of planning and predictive powers and if you wind up using Traditional dollars for a tax bracket higher than when you were working then take comfort knowing that you will likely still have a lower effective tax rate than a Roth because you took advantage of the lower brackets.

However, everything I’ve said is based on the notion that the tax code won’t change. We know that is false because it literally just changed. Taxes are currently “low” and some would reasonably argue that tax rates in retirement might be higher and thus increase the attractiveness of a Roth (pay the flat low tax now rather than the high progressive tax later). I don’t find this argument to be unreasonable, but I make full use of Traditional accounts when given the option. 

I should also say, I view this as an optimization and something you shouldn’t fret over. Figuring out how to earn more money, spend less, and invest cheaply are essential. 

...I forgot to mention an IRA is an individual retirement account. So your employer won’t be involved. My account is with Vanguard and they give me the option to do Roth or Traditional. So if you can’t figure it out, give them a call and they’ll walk you through it. 

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13 hours ago, ivan41 said:

Tony: That will be my next step, to see if any of these providers offer a Roth 403 b option. Just to confirm, do you know if all of the LifePath Index Funds belong to the BlackRock portfolio?

Ivan

Yes Blackrock has the life path funds and they are similar to Vanguard target funds but if I remember correctly they are are composed a little differently. I liked them and put several teachers in it after we got the 457b plan on board at my district. At the time they had lower expense ratios than Vanguard. Life path funds are a good choice if associated with Blackrock which it appears they are.

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I am not mathematically intelligent enough  or clairvoyant enough to figure out which investment option will turn out superior. Because of that I own IRA's, both Roth and Traditional and taxable accounts. When I was working I had Roth and Traditional 403b and 457 accounts . I like the fact that this approach gives me options in terms of taxes. Thats all I know and I'm o.k with it. The fact I saved at all and did as well as I did makes me feel I did something right even though early on I screwed up royally. The number one piece advice to being successful is save all you can on a consistent basis in a diversified low cost portfolio and stay away from those dishonest annuity salespeople who work for organizations like AXA. It may sound harsh but their antics set me back early on.They don't care about you. My investments only started to flourish once I got rid of them.

Ivan, you are asking good questions and doing some good research at your age that I wish I had done. Of course ,you do have more options than I ever had at your age. Still I applaud you for doing your homework.

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2 hours ago, tony said:

Ivan

Yes Blackrock has the life path funds and they are similar to Vanguard target funds but if I remember correctly they are are composed a little differently. I liked them and put several teachers in it after we got the 457b plan on board at my district. At the time they had lower expense ratios than Vanguard. Life path funds are a good choice if associated with Blackrock which it appears they are.

Tony: I was able to confirm that the LifePath funds are associated with BlackRock. Thank you!

3 hours ago, EdLaFave said:

I should also say, I view this as an optimization and something you shouldn’t fret over. Figuring out how to earn more money, spend less, and invest cheaply are essential. 

...I forgot to mention an IRA is an individual retirement account. So your employer won’t be involved. My account is with Vanguard and they give me the option to do Roth or Traditional. So if you can’t figure it out, give them a call and they’ll walk you through it. 

Ed: Thank you for all of that information. So, I also have both Traditional and Roth accounts with Vanguard. I started my Traditional account with funds from a Roller 401(k) from a previous employer. Since then, I have continued to contribute after-tax money to the Traditional account (Vanguard S&P 500 Index ETF (VOO)). Now, it's just a matter of optimizing my money allocations, like you said. 

Out of curiosity: Would you know if my after-tax contributions to the VOO account in my Traditional Vanguard account are in any danger of being double-taxed once I choose to make qualified withdrawals (age 59 1/2 to 70 1/2)? I feel there may be an obvious answer, but I wanted to make sure. 

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I’m not terribly knowledgeable about non-deductible contributions to Traditional tax advantaged accounts. On the face of it, it seems like a useless thing to do...why not just go Roth directly? I know people use this technique as part of a Backdoor Roth where they follow up the contribution with a conversion to Roth...only folks who earn too much to contribute directly to a Roth need to do this. 

I’ll let others answer your questions because it is just something I haven’t hand to face.

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On 7/11/2018 at 10:41 AM, ivan41 said:

Tony: I was able to confirm that the LifePath funds are associated with BlackRock. Thank you!

Ed: Thank you for all of that information. So, I also have both Traditional and Roth accounts with Vanguard. I started my Traditional account with funds from a Roller 401(k) from a previous employer. Since then, I have continued to contribute after-tax money to the Traditional account (Vanguard S&P 500 Index ETF (VOO)). Now, it's just a matter of optimizing my money allocations, like you said. 

Out of curiosity: Would you know if my after-tax contributions to the VOO account in my Traditional Vanguard account are in any danger of being double-taxed once I choose to make qualified withdrawals (age 59 1/2 to 70 1/2)? I feel there may be an obvious answer, but I wanted to make sure. 

ivan41, have you been filing the IRS Form 8606 for each of the years that you have made post-tax contributions to your tIRA? That is what prevents you from being taxed on them a 2nd time when you take a distribution on them in retirement. Each year has a separate form (2015, 2016, etc.), and each year’s form uses the numbers from the previous year’s form, starting with the first year you made a post-tax contribution.

If you have not been sending in the 8606 forms each year, you can still do it. You can send all the pre-2018 forms to the IRS any time. The 2018 form should be included with your 2018 tax return.  Vanguard doesn’t know whether you took a deduction on your tIRA or not, and the IRS will assume you took a deduction unless you document the post-tax contribution with the 8606 forms. So it’s up to you.

The form:  https://www.irs.gov/pub/irs-pdf/f8606.pdf

The instructions for the form:   https://www.irs.gov/pub/irs-pdf/i8606.pdf

It’s easy to make a mistake on the form if you don’t read the directions carefully. Even CPAs have been known to fill them out incorrectly.

What you should have been doing each year is immediately convert the post-tax tIRA to a Roth IRA. There is currently no income limit to this process, which is called a back-door Roth. 

An explanation of the backdoor Roth IRA:  https://thefinancebuff.com/the-backdoor-roth-ira-a-complete-how-to.html

Please forgive me if you know all this and are on top of the process. Not knowing is fairly common.

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