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CTinker

Did I make the right call?

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I finished reading Boglehead's Guide to Investing last week and have been making some moves.  I had only been contributing to my Roth IRA at Vanguard because I knew 403b's were notorious for fees.  After getting some advice at the Bogle Forum and finding you guys, I decided to open a 403b.  I was going to go with Aspire after checking 403wise but then saw some posts about the NEA Direct plan on this forum.  I sent the paperwork to open the NEA Direct Plan with Security Benefit.  Did I make the right call?  My options are below.

image.thumb.png.afae556417ed9ee65167b35ac6429a1e.png

 

Now I've listened to some of your podcasts and found the "Adding a 457" episode.  I was already told by my employer last year that 457s were not available.  I wonder if I should keep pushing... 

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Well Security Benefit's NEA DirectInvest is certainly the best plan in your 403b list. I wrote a page to document that plan's fees and how to build a fully diversified portfolio.

With respect to whether or not you've made the right decision, I'd need to know how much you're investing every year:

  1. If you're investing less than or equal to the IRA maximum then I see no reason to use the 403b at all. The IRA will give you slightly lower costs, but most importantly it is completely in your control rather than in your employer's control.
  2. If you're investing more than the IRA maximum then using the 403b in addition to the IRA is the ideal move.
  3. If you're investing more than the IRA maximum and 403b maximum then you need to push for access to a 457b.

The other thing to consider is that Security Benefit's NEA DirectInvest only comes in the Traditional variant. An IRA on the other hand comes in both Traditional and Roth variants. I argue strongly that most people are better off using Traditional, but the answer to this question can't be known until the game is over. Since you seem to have a Roth preference, I figured I'd point that out.

Yes, you can push to have your employer add a 457b. You can also push to have your employer add Vanguard and Fidelity.

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20 minutes ago, EdLaFave said:

Well Security Benefit's NEA DirectInvest is certainly the best plan in your 403b list. I wrote a page to document that plan's fees and how to build a fully diversified portfolio.

With respect to whether or not you've made the right decision, I'd need to know how much you're investing every year:

  1. If you're investing less than or equal to the IRA maximum then I see no reason to use the 403b at all. The IRA will give you slightly lower costs, but most importantly it is completely in your control rather than in your employer's control.
  2. If you're investing more than the IRA maximum then using the 403b in addition to the IRA is the ideal move.
  3. If you're investing more than the IRA maximum and 403b maximum then you need to push for access to a 457b.

 

Thanks, Ed!  Actually reading your write ups was one of the main reasons I went for NEA Direct.  There are a couple of reasons I'm going to 403b now over the Roth:

  • My wife has been working part time while also being a stay at home mother for the past 7 years.  Our tax bracket has been low due to this so I figured I should pay the taxes now expected our bracket to increase.   She could be rejoining the workforce sometime next year when the youngest enters Kindergarten. 
  • We have too much invested in taxable and I am going to sell some of it to allow me to contribute $10,000 from the paycheck to 403b.  This will  shelter some assets before my children fill out a FAFSA.  
  • By transitioning to funding the 403b instead of the Roth I can bring my AGI down to get the Earned Income Tax Credit.

I hope this switch isn't misguided but it seemed to make sense to me.

36 minutes ago, EdLaFave said:

With respect to whether or not you've made the right decision, I'd need to know how much you're investing every year:

I had only been contributing around 4k a year to my Roth but I'd like to bump that much higher when my wife is also working.  I hope to continue our 1 income lifestyle while using the second income to pay ourselves.... but we'll see about that.

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You picked the best choice. Aspire offers more choices however because you can self direct into any fund you want.  What I don't like about Direct Invest is the limited  Vanguard choices but the Vanguard  choices  they do offer are good and all you really need to build a diversified portfolio. It's a great way to go and Aspire is a little more expensive.Perhaps limiting your choices is a good idea so you won't own too many funds with no real corresponding benefit.

A 457b is useful to you if you wish to go to saving  beyond the 403b contribution limitations because you can use both a 403b and a 457b to their maximum allowed amount.  I would push for the 457b addition but just make sure its not used to introduce more subpar insurance linked mutual funds. However you are in a good place as it is.

 

Good Job!!

 

Tony

 

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1 hour ago, CTinker said:

Thanks, Ed!  Actually reading your write ups was one of the main reasons I went for NEA Direct

That's great. I'm really happy to have been helpful.

1 hour ago, CTinker said:

I'm going to 403b now over the Roth:

  • My wife has been working part time while also being a stay at home mother for the past 7 years.  Our tax bracket has been low due to this so I figured I should pay the taxes now expected our bracket to increase.   She could be rejoining the workforce sometime next year when the youngest enters Kindergarten. 
  • We have too much invested in taxable and I am going to sell some of it to allow me to contribute $10,000 from the paycheck to 403b.  This will  shelter some assets before my children fill out a FAFSA.  
  • By transitioning to funding the 403b instead of the Roth I can bring my AGI down to get the Earned Income Tax Credit.

I just want to make sure we aren't having a miscommunication. It is common for people to use the word Roth when what they're actually referring to is an IRA (which can be either Roth or Traditional).

  • Yes, if your tax bracket was artificially low then the desirability of a using a Roth increases, similarly a Traditional becomes more desirable when your rejoin your larger tax bracket.
  • Provided capital gains aren't prohibitively large, I generally support selling taxable shares to fund living expenses while temporarily increasing contributions to tax advantaged accounts. At the very least dividends can be used to carry out this maneuver without impacting your taxes at all. 
  • I'll trust your math on the EITC, but maximizing tax credits is generally a great idea.
1 hour ago, CTinker said:

I hope this switch isn't misguided but it seemed to make sense to me.

I think the Roth vs Traditional is an optimization that is significantly less important than making sure you're earning as much as you can, saving as much as you can, maximizing tax advantaged accounts, owning enough bonds to prevent behavioral mistakes or poor mental health, and investing in a low cost diversified portfolio.

Having said that we can't know what is optimal because it requires information from the future, but you are correctly identifying situations that increase the desirability of a Traditional vs Roth.

1 hour ago, CTinker said:

I had only been contributing around 4k a year to my Roth but I'd like to bump that much higher when my wife is also working.

If it were me, I'd max out my IRA and my wife's IRA before contributing to employer accounts (although that's a moot point if you're going to shift a god chunk of money from taxable to tax advantaged accounts). However, because Security Benefit's NEA DirectInvest is such a great plan, this is just another low level detail. You're going to do great.

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12 hours ago, EdLaFave said:

I just want to make sure we aren't having a miscommunication. It is common for people to use the word Roth when what they're actually referring to is an IRA (which can be either Roth or Traditional).

My wife and I have Roth IRAs with Vanguard and I am now opening the NEA Direct 403b through employer.

12 hours ago, EdLaFave said:

Provided capital gains aren't prohibitively large, I generally support selling taxable shares to fund living expenses while temporarily increasing contributions to tax advantaged accounts. At the very least dividends can be used to carry out this maneuver without impacting your taxes at all.

Since we are currently in the 12% bracket there are no federal capital gains tax.  Reinvestment is turned off.

12 hours ago, EdLaFave said:

I'll trust your math on the EITC, but maximizing tax credits is generally a great idea.

AGI was 53k last year which got me a $56 EITC.  If I contribute to 403b to bring income down to 40k I'll get $2,800.

12 hours ago, EdLaFave said:

Having said that we can't know what is optimal because it requires information from the future, but you are correctly identifying situations that increase the desirability of a Traditional vs Roth.

I figure it is good to have money in both kinds of tax advantaged accounts.  It seems like an extra layer of diversification I can utilize in the future.

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On 12/19/2020 at 2:37 PM, CTinker said:

Now I've listened to some of your podcasts and found the "Adding a 457" episode.  I was already told by my employer last year that 457s were not available.  I wonder if I should keep pushing... 

I believe that the Maine state 457b plan is available to school districts. I can't get the MainSaves457 website to work, but state plans are usually low-cost. It should allow you to check out the 3 vendors, their funds and their fees. You could call the state 457b plan and ask what you could do to make it available to your district's employees. https://www.mainesaves457.com/my-savings-plan/#manage

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5 hours ago, krow36 said:

I believe that the Maine state 457b plan is available to school districts. I can't get the MainSaves457 website to work, but state plans are usually low-cost. It should allow you to check out the 3 vendors, their funds and their fees. You could call the state 457b plan and ask what you could do to make it available to your district's employees. https://www.mainesaves457.com/my-savings-plan/#manage

Thanks Krow.  I've been to that site and it is a mess.  It seemed like there were 3 possible vendors available for the 457 but I wouldn't jump to start an account with any of them.

In my digging I did find a program called MaineSTART that is linked from the organization that handles the pensions, MainePERS.  There are some districts on the list of employers but not mine.  I've sent an email and will report back when I hear something.

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Yes on being suspicious of the three 457b vendors. Although the generic 403b plans they offer to school districts are usually (always?) expensive annuities, those 3 vendors have an arrangement with the state that is much different. They are competing with each other and offering custodial accounts, not annuities. They will have an administration fee that may be included in the individual funds' expense ratios, or it might be separate. So you have to consider the funds you want and their ERs as well as the admin fee. 

Maybe a phone call to MaineSaves and to MaineSTART will give you some info? Emails are easy to ignore. Good luck!

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I talked to the Plan Administrator at MaineSTART and emailed my districts central administration.  I BCCed a Union President.  Fingers are crossed...

They seem like a good plan with exclusively Vanguard Funds.

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2 minutes ago, krow36 said:

I'd like to have links to MaineSTART, for future reference. Especially the funds and the admin fees? Good luck!

Here is the main page.

I couldn't find any info on fees which makes me think there are none (maybe I am naive).  Their about page has a good write up on their approach to fees. image attached: image.png.5f632f2ef14b06f65c3d01b3f84b45a6.png

The funds they offer are: 

  • Vanguard FTSE Social Index Fund
  • Vanguard Prime Money Market
  • Vanguard STAR Fund
  • Vanguard Target Retirement 2015 Fund
  • Vanguard Target Retirement 2025 Fund
  • Vanguard Target Retirement 2035 Fund
  • Vanguard Target Retirement 2045 Fund
  • Vanguard Target Retirement 2055 Fund
  • Vanguard Target Retirement 2065 Fund
  • Vanguard Target Retirement Income Fund
  • Vanguard Total Bond Market Index Fund Admiral Shares
  • Vanguard Total International Stock Index Fund
  • Vanguard Total Stock Market Index Fund Institutional Shares

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6 hours ago, CTinker said:

I couldn't find any info on fees which makes me think there are none (maybe I am naive).  Their about page has a good write up on their approach to fees. image attached: 

Interesting how they tell you about how low cost  an option the index funds they offer are(which is true)  but don't mention their fee structure for administration and management. I didn't see it either but I'm sure there must be  additional fees beyond the expense ratio of the funds. The fund choices are excellent.

 

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