Jump to content
aninternetuser

Advice on 403b and/or Roth IRA

Recommended Posts

Hi everyone! I'm new to the forum.

I'm in the process of helping a family member with her 403b. She is a young teacher with a couple years of experience working at a school in upstate New York which offers a 403b through Equitable. She plans to stay in New York for only a few years. Unfortunately, there is no employee matching and no other available options like Fidelity or Vanguard. She does have a Roth IRA through Fidelity that I helped her setup not too long ago. Is it worth contributing to this 403b? Or would it be better to mainly focus on the roth instead? I have a list of fund options for the 403b that an advisor from Equitable gave her that I could post here as well. We're newbies at all this so any advice would be appreciated.

Thanks!

Share this post


Link to post
Share on other sites
34 minutes ago, aninternetuser said:

 

.She does have a Roth IRA through Fidelity that I helped her setup not too long ago. Is it worth contributing to this 403b? Or would it be better to mainly focus on the roth instead? I have a list of fund options for the 403b that an advisor from Equitable gave her that I could post here as well. We're newbies at all this so any advice would be appreciated.

Thanks!

Hey  A Internet User

Since she may be in New York  for only  a short while and depending on how much she plans to save during this time,  continuing in  a Roth IRA would be the easy  smart answer. We like index funds  here so make sure she is investing in a Fidelity Index fund or funds and is diversified across asset classes. We recommend  a simple 3 fund portfolio here  1) A Total Market Index Fund, 2) A Total International Index Fund and 3) a  Total Bond Index fund. Or maybe even a target fund  that corresponds with an estimated retirement date. Target Funds are   my personal favorite for inexperienced/ novice investors who are  just now trying to  learn the investment ropes. 

Now if she plans on saving more than an IRA allows, you might want to list for us all her choices available in her school provider list. Also see if her district might have a 457b plan available to her in her school district.

Frankly, I wouldn't bother with the 403b if she only plans to be in New York a few short years and if she won't be saving more than the Roth limit allows which is $6,000.00 max per year unless she is older than fifty then she can put in an extra $1000.00. This would especially make sense if all her  403B choices are high fee insurance products.

By the way it is rare to find a school system that offers a match within a 403b. Some do but they are few and far between.

Regards

Tony

 

 

Share this post


Link to post
Share on other sites

The answer to Tony's question is important: can she contribute more than $6000 to retirement plans? If not, then skip the 403b. Does she have an emergency fund for unexpected expenses? If her school is a public school, it's possible she can use the excellent NY state 457b plan. It is available to NY public schools although the school may not be utilizing it. Are you certain that Equitable (aka AXA) is the district's only 403b vendor? That's unusual for a public school district, but possible. 

The Equitable Series 201 is a variable annuity that has high fees: the lowest fund expense ratio is about 0.6%, most are around 1% or more, and there's a 1.20% admin fee. There's a 5% surrender fee  that lasts 5 years. So we strongly urge against it.

Share this post


Link to post
Share on other sites

Thanks for the replies everyone!

I should add that she is not working at a public school but a charter school instead which probably explains the limited options.

Tony, your thinking basically reflects what I was leaning towards. Given the short time she will be in the state it probably isn't worth opening the 403b. I actually have my own Roth IRA through Fidelity as well with index funds exactly as you specified. I think I will get her setup with a target date fund to start out.

Krow36, given her budget I think it is unlikely that she can contribute more than $6,000 per year. She does have a decent sized emergency fund going last I knew. As you note, Equitable does have high expenses just looking over the available funds they showed me and those surrender fees aren't great either.

So, I think the best move then is to stick with the Roth IRA and invest in one of the Fidelity Freedom Index funds? Looks like the expense ratio is about 0.12% for those which is quite low from what I understand.
 

Share this post


Link to post
Share on other sites
19 hours ago, aninternetuser said:

Is it worth contributing to this 403b? Or would it be better to mainly focus on the roth instead?

This is a false choice.

Your friend can choose between the 403b (roth or traditional), an IRA (roth or traditional), and probably a 457b (roth or traditional). I'm not sure why people seem to only consider Roth IRAs, but please know the Traditional IRA is very much an option and often the preferable option.

New York State has a very good 457b plan that has been discussed at length on this forums.

19 hours ago, aninternetuser said:

a 403b through Equitable...and no other available options like Fidelity or Vanguard

What district? Most districts do not limit their available options to one plan, so I'll remain skeptical until I see that in writing from an official source.

19 hours ago, aninternetuser said:

She plans to stay in New York for only a few years

Your friend should prioritize maxing out the tax advantaged accounts that allow them to build a fully diversified portfolio at rock bottom prices. The fact that they plan to leave their employer soon means that even a high fee investment account becomes attractive because they only have to pay those fees for a short time before they can roll that account over to a new employer or to a rollover IRA at their preferred institution.

One thing to research is if surrender fees still apply when doing a rollover after employment is terminated. The surrender fees definitely apply if you rollover to a different vendor while continuing employment.

 

3 hours ago, aninternetuser said:

Given the short time she will be in the state it probably isn't worth opening the 403b.

The opposite is true. Very rarely do you want to give up tax advantaged space and planning to be with your employer for a short amount of time only increases the viability of utilizing those accounts.

Assuming they're already maxing out their other tax advantaged accounts then using a 403b becomes more attractive because they're only stuck with the high fees for a small amount of time. The alternative is putting the excess money in a taxable account where they won't be paying high fees, but they will be receiving taxable income forever and are therefore highly likely to owe tax on that income every single year in perpetuity.

3 hours ago, aninternetuser said:

it is unlikely that she can contribute more than $6,000 per year

If that's the case then they should invest in the account that allows them to build a fully diversified portfolio at rock bottom costs. From the sounds of things that's the IRA (traditional or roth).

Share this post


Link to post
Share on other sites

Ed, the OP states that the relative is with a charter school, not a public school district. Charter schools are often private, non-profit organizations that have a single vendor 403b plan. A "governmental 457" is not available to private schools. We don't know what 403b plan AXA is using, or their fees, or even whether the school matches contributions. If the charter school's pay scale is modest which is often the case, I think it's likely that the relative will be in a low tax bracket. I think using either a traditional or a Roth IRA is very reasonable in this case. 

I agree that if AXA waived the surrender fee on separation from employment, an expensive variable annuity could be considered over a short period of time, a few years. I don't think that's likely, but we would have to know the plan name and check its prospectus to know for sure. If the relative could max the 403b over 2 years, that might be worth it. I don't think contributing only 2k or 3k/yr would be worth it, and I'd prefer it to into a brokerage account.

I think your disparagement of a taxable brokerage account is perhaps unjustified. The modest amount of taxable dividends that a fund like Vanguard's Total Stock Market fund generates should not a significant problem for someone likely to be in the 12% bracket while at the charter school.  

Share this post


Link to post
Share on other sites
17 minutes ago, krow36 said:

OP states that the relative is with a charter school

Got it. 

18 minutes ago, krow36 said:

If the relative could max the 403b over 2 years, that might be worth it. I don't think contributing only 2k or 3k/yr would be worth it, and I'd prefer it to into a brokerage account.

I don’t know how you’re defining “worth it”, but if it makes financial sense to put $1 in the tax advantages account then it makes sense to put the next dollar in too. I can’t think of a mathematical reason it would be worth it for 2k, but not 19k.

If you’re saying it isn’t worth a person’s time to set up a 403b account and deal with AXA for such a small balance, then I guess that’s a judgement call. 

21 minutes ago, krow36 said:

I think your disparagement of a taxable brokerage account is perhaps unjustified. The modest amount of taxable dividends that a fund like Vanguard's Total Stock Market fund generates should not a significant problem for someone likely to be in the 12% bracket while at the charter school.  

The size of the distributions are relative to the size of the account, which makes the absolute value of the distributions irrelevant. The only thing that’s relevant is the tax drag as a percentage of the principal.

If the tax drag in a taxable account is just 0.05% of the balance each year then I’d gladly pay an extra 1% fee in year 1 to avoid a lifetime 0.05% fee. The break even point with those figures (and a 7% return before fees/tax drag) is 20 years.

I don’t presume to know their tax situation. The tax drag will be less for low income folks. Of course an index fund will be more tax efficient than an actively managed fund.

My primary point was just that a short time horizon with the current employer increases the viability of using their higher fee plan because you don’t have to pay the large fees for very long before you can rollover to a low cost tax advantaged account and avoid the potentially lifelong tax drag associated with a taxable account.

I use taxable accounts heavily. Roughly 3/4 of my portfolio is in a taxable account. 

Share this post


Link to post
Share on other sites

We tend to over analyze scenarios here which can confuse. The only reason we mentioned Roth IRA is because that's the account the young lady is already in. A tax sheltered IRA would have been just as suitable I guess. Which is better depends, but saving in either one is a good move regardless.Considering she won't be saving more than the IRA limit, why bother even considering a 403b that is expensive and roadblocked with possible surrender fees and requiring the hassle of initiating a rollover.

Looks like charter schools are just as ignorant about offering its employees decent choices as our public educational institutions. Unfortunate.

Share this post


Link to post
Share on other sites

We don't have all the information on the relative, but from the clues given:  1) charter school,  2) young with only a couple years experience, 3) no match,  4) less than perfect 403b vendor,  5) under $6K to invest annually......Roth IRA seems like the logical choice.  She can start making tax deferred investments as her income rises.

 

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

×
×
  • Create New...