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Stillwater007

Starting a better late than never 403b...or 403bROTH?

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Hello everyone and Happy NYE,

I am relatively new to this site and have found it helpful so far!

I am a public school Educator in the Houston area and will be eligible to retire and receive a pension 5 years from now. I do have 35k in an tIRA and 9 months in savings, but after following wise advice, I am in position to be able to save and invest about 40% of my gross pay.

For educators on here who were able to retire early, what savings/investment strategies have you done to make early and current retirement achievable?

What are your thoughts on 403b and 457s which my District offers (Vanguard is an option)?
 
My District does have Vanguard listed as a provider. But there is a 3rd party involved that handles the transactions. Here is the link

And did you do a ROTH or Traditional?
 
This one is tough for me to determine because I am near the top of my tax bracket(22%) and when I retire, I will be in the same bracket(22%), but near the bottom.
 
Finally, a 403b Roth is also an option. Should I invest into a 403b Roth and then a Traditional IRA? Or 403b and a ROTH IRA? OR....a 403b and a 403bROTH? Can I do that?? I know I have certain limits despite the combinations.?

I appreciate the advice from educators and others that have knowledge regarding Educators.

Thank you and may everyone have a better New Year!

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Welcome!  Third party administrators are pretty normal these days, and their fees are usually only a minor inconvenience, and shouldn't stop you from investing with Vanguard.

As far as Roth vs. Traditional, it comes down to comparing your tax bracket in the current year to your expected tax bracket in retirement.  There are a lot of variables that you haven't given us, like your age, income tax filling status, pension as a % of your final income, Social Security eligible, etc.

When you say you are near the top of the 22% bracket, are you considering the standard deduction into the formula?  Are you able to deduct your traditional IRA contributions, or is your income too high? This and/or a traditional 403b contribution can further reduce your taxable income. If this could get you down to the 12% bracket (or close to it) that would likely be a wise move.  If you can defer taxes now at 22% now and pay them in the future at either 0, 10, or 12% you should do that.

My hunch is that since you have a relatively small traditional IRA balance (35K) and are only 5 years from retirement, you could definitely be saving more in tax deferred without creating a tax problem.  The exception might be if your pension and social security would immediately upon retirement put you at a higher income than you are at now.  Many teachers have a gap of a decade or so between retirement and pension/SS/RMDs, when they can safely spend down a traditional (tax deferred) account without putting themselves in a higher tax bracket.

Doing some of both pre and post tax is usually a good idea.  A traditional 403b and a Roth IRA is a good combination for many people (instead of the other way around).

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1 hour ago, Stillwater007 said:
What are your thoughts on 403b and 457s which my District offers (Vanguard is an option)?
 

 If you have Vanguard and  if you stick to their index funds  then that will be your best option most likely. I don't see where you listed your other choices? These days there is always a third party involved in 403bs/457bs. I would do a basic 3 fund index portfolio . Even with additional management/administrator fees you will come out better going the Vanguard index fund route.

Since you only have five years until retirement and a pension plan you actually could go with a two fund portfolio. 75% into Vanguard Total Stock Market Index, and 25% Vanguard Total International Index. You could add a bond fund but being so close to retirement I wouldn't bother with it unless an all stock portfolio scares you and you'd rather dial back risk. In that case you could drop 50% in the total, 25% in the international and 25% in a Vanguard Bond Index.

1 hour ago, Stillwater007 said:

For educators on here who were able to retire early, what savings/investment strategies have you done to make early and current retirement achievable?

Save like crazy, every penny you can into low cost index funds regardless if the market goes up or down. 

1 hour ago, Stillwater007 said:

ROTH or Traditional?

This is a personal choice and other  folks might disagree but at your stage before retirement I would go 100% Roth and pay your taxes now as you go. It will be completely tax free once you retire. No RMD's to worry about. You can maximize both your 403b and 457b.  If you could pull that off that would be awesome for you.You could be putting close to $40,000 away yearly if not more because of catch-up provisions. Once you retire you can consolidate all your accounts over to a Vanguard IRA for easy management and possibly(MOST LIKELY) lower cost.

I apologize for my very straight forward answers. If you have further specific questions someone will certainly answer them. You will probably get some varying opinions on what to do. Ultimately its your choice.

Also. DO THIS ON YOUR OWN WITHOUT SALESPERSON/ADVISOR INTERFERENCE.

 

Best Wishes 

Tony

 

 

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13 minutes ago, MNGopher said:

Welcome!  Third party administrators are pretty normal these days, and their fees are usually only a minor inconvenience, and shouldn't stop you from investing with Vanguard.

As far as Roth vs. Traditional, it comes down to comparing your tax bracket in the current year to your expected tax bracket in retirement.  There are a lot of variables that you haven't given us, like your age, income tax filling status, pension as a % of your final income, Social Security eligible, etc.

When you say you are near the top of the 22% bracket, are you considering the standard deduction into the formula?  Are you able to deduct your traditional IRA contributions, or is your income too high? This and/or a traditional 403b contribution can further reduce your taxable income. If this could get you down to the 12% bracket (or close to it) that would likely be a wise move.  If you can defer taxes now at 22% now and pay them in the future at either 0, 10, or 12% you should do that.

My hunch is that since you have a relatively small traditional IRA balance (35K) and are only 5 years from retirement, you could definitely be saving more in tax deferred without creating a tax problem.  The exception might be if your pension and social security would immediately upon retirement put you at a higher income than you are at now.  Many teachers have a gap of a decade or so between retirement and pension/SS/RMDs, when they can safely spend down a traditional (tax deferred) account without putting themselves in a higher tax bracket.

Doing some of both pre and post tax is usually a good idea.  A traditional 403b and a Roth IRA is a good combination for many people (instead of the other way around).

Hello MNGopher,

I had a feeling I was leaving out some variables.

I am 49yrs old (turn 50 end of 2021), current Head of Household (but Divorced). 

My Pension will be 70% of the average of the last 5 years of my career.  I am a bit frugal because currently my expenses are roughly 55-60% of my salary so while my Pension should cover most expenses, extra Savings will come in handy when I least expect it. But I am not SS Eligible. I could work around 2-3 years after Retirement to qualify for SS, but there is a Law/Rule that cuts my SS into crumbs if I tried to claim it.

Unless the tax laws change significantly, I don't see myself putting myself into a higher tax bracket. Best case scenario is I drop to a lower tax bracket, "worse" case is I stay in the same tax bracket. In all Likelihood, I stay in the same bracket, but just at the lower end.

Also, one thing I should mention is that when I retire, I am considering teaching overseas for a year or two. While it can test the limits of taxes on my income, the extra money on top of my pension should be nice. 

Ultimately, I want to retire in Panama. I have family there and the cost of living in the country there is very affordable.

Thanks for the advice and I noticed you're a Golden Gopher? My Daughter is currently a Sophomore at the University of Minnesota. She loves it there. 

 

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24 minutes ago, tony said:

 If you have Vanguard and  if you stick to their index funds  then that will be your best option most likely. I don't see where you listed your other choices? These days there is always a third party involved in 403bs/457bs. I would do a basic 3 fund index portfolio . Even with additional management/administrator fees you will come out better going the Vanguard index fund route.

Since you only have five years until retirement and a pension plan you actually could go with a two fund portfolio. 75% into Vanguard Total Stock Market Index, and 25% Vanguard Total International Index. You could add a bond fund but being so close to retirement I wouldn't bother with it unless an all stock portfolio scares you and you'd rather dial back risk. In that case you could drop 50% in the total, 25% in the international and 25% in a Vanguard Bond Index.

Save like crazy, every penny you can into low cost index funds regardless if the market goes up or down. 

This is a personal choice and other  folks might disagree but at your stage before retirement I would go 100% Roth and pay your taxes now as you go. It will be completely tax free once you retire. No RMD's to worry about. You can maximize both your 403b and 457b.  If you could pull that off that would be awesome for you.You could be putting close to $40,000 away yearly if not more because of catch-up provisions. Once you retire you can consolidate all your accounts over to a Vanguard IRA for easy management and possibly(MOST LIKELY) lower cost.

I apologize for my very straight forward answers. If you have further specific questions someone will certainly answer them. You will probably get some varying opinions on what to do. Ultimately its your choice.

Also. DO THIS ON YOUR OWN WITHOUT SALESPERSON/ADVISOR INTERFERENCE.

 

Best Wishes 

Tony

 

 

Hello Tony,

Thank you for your personal choice and perspective. I definitely want some ROTH as part of my retirement, I just don't know how much I want to go in. But I do like investing in both a ROTH and a tIRA. I just need to figure out the percentages. 50/50 or even 90/10? I know I can always tweak it at anytime.

The 403b has low fees from what I can tell ($1.50 a month). But the 457 has multiple fees, it seems too much?

And I have seen the 2 and 3 fund Portfolios from Bogleheads. Seems like it gives us more control to make adjustments when needed.

No need to apologize. I appreciate your honesty! 

And I don't trust any of the salespeople. AT. ALL. At my school we had lots of the Insurance people posing as Retirement Advisors, and maybe they are, trying to sell Insurance Annuities. I just couldn't trust them!

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As far as ROTH IRAs and 403b's, when is the deadline for each?

If I start contributing now, I BELIEVE I have BEFORE April Tax Day to contribute to 2020 ROTH IRA, then after the Tax Day contribute to 2021.

As far as the 403b, the Deadline is Dec 31, so I can only start contributing to 2021.

Is this correct?

Finally, with extra savings after maxing a 403b and a Roth IRA, is it wise to open up a regular brokerage account to put in extra savings? Or put it somewhere else?

Thank you.

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58 minutes ago, Stillwater007 said:

As far as ROTH IRAs and 403b's, when is the deadline for each?

 

To be clear ,In my post when I was saying "Roth", I didn't mean a Roth IRA. I was assuming you had access to a Roth 403b  or 457b Roth option which allows you to put much more tax free money away than an individual Roth account outside of your school plan. There is a difference in contribution amounts and significantly so. 

The regular IRA has a deadline for contributions by April 15 2021 or around tax due time. A 403b agreement can usually be entered into anytime depending on your school system rules. I would check that. In my school system we could enter a 403b anytime with no deadline.

I personally would not put a penny in a tax deferred account with only five years to go. If you have access to a Roth 403b or a 457b Roth account that would be the way I personally would go. That way it's all yours free and clear of taxes. I have 50% of my money in tax deferred accounts and I am dreading those upcoming RMD amounts I will have to pay. I'm even thinking of starting to do a Roth conversion  every year now while I am in my sixties . I'm researching that option. 

I don't know the mathematics behind it , which is better. It just seem my  financial intuition tells me its the right approach for me and possibly for you. Recent tax reform makes Roths more attractive because of the resulting reduction in tax brackets,. That’s beneficial if you’re in your peak earning years now, because when you put money into a Roth IRA or 403b, you pay the tax first. I also think tax rates will go up during Biden significantly and for years to come as this country becomes more progressive . Something to ponder.  I'm a moderate voter and I prefer conservative measures when it comes to finances even though I tend to be more liberal in my social views. AS you know that's a contradiction because taxes must go up to fund social/progresive agendas.

 

 

 

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31 minutes ago, Stillwater007 said:

As far as ROTH IRAs and 403b's, when is the deadline for each?

If I start contributing now, I BELIEVE I have BEFORE April Tax Day to contribute to 2020 ROTH IRA, then after the Tax Day contribute to 2021.

As far as the 403b, the Deadline is Dec 31, so I can only start contributing to 2021.

Is this correct?

Finally, with extra savings after maxing a 403b and a Roth IRA, is it wise to open up a regular brokerage account to put in extra savings? Or put it somewhere else?

Thank you.

You are correct on those contribution date deadlines.

403b's and IRAs, Roth or Traditional are both great ways to save for retirement, and you seem to be in a situation where some of both will be best.  In general these tax advantaged/tax deferred accounts are preferred to a regular taxable brokerage account, and most people would recommend maxing those out first.  I do have a taxable brokerage account at Vanguard, that's about 40% of my portfolio.  This is not ideal, but until 6 years ago I had terrible 403b choices, so invested a lot in taxable, so that is where I added money, rather than a 403b with a 2.5% expense ratio.  However, It is nice to have all 3 types of accounts in retirement, for tax diversification and flexibility.  I will draw down from my taxable account in early retirement, before I take 403b withdrawls.

Ski-U-mah!

 

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Thank you! Yes, I am definitely doing a ROTH IRA. As far as the 403b, I will crunch the numbers and see how much I should allocate to a regular 403b and a 403bRoth. It looks like Vanguard will allow me to have both, yet not charge me fees for both but just one fee. I will need to confirm with them.

Also, do deductions when filing taxes come into play when putting your money into a Roth or Traditional?

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54 minutes ago, Stillwater007 said:

 

Also, do deductions when filing taxes come into play when putting your money into a Roth or Traditional?

With a Roth No because you have already paid the taxes. With Traditional you are paying taxes much later so your taxable rate goes down by the amount of your contribution giving you less taxable income . This assures you will lower your tax bill . But keep in mind it's jut a matter of either paying your taxes now at a current rate or paying them later at possibly a higher rate. When I was doing a traditional I was getting a refund on my taxes every year because I was maxing it out. I always reinvested it and didn't go out and spend it. 

Bottom line is  which ever way you go, Roth or Taxable, saving as much as you possibly can will pay off.

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52 minutes ago, Stillwater007 said:

It looks like Vanguard will allow me to have both, yet not charge me fees for both but just one fee. I will need to confirm with them.

 

No  extra fees for deciding  to go Roth 403b or Traditional 403b. If you are not sure which approach is best, maybe a 50/50 split will work for you. And why bother investing in a Roth IRA if you can invest even more in a Vanguard Roth 403b if the fees are the same? It just seems like an extra you don't need. Once retired than everything can be transferred into a Vanguard IRA. 

Hope I'm not confusing you.

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1 hour ago, tony said:

To be clear ,In my post when I was saying "Roth", I didn't mean a Roth IRA. I was assuming you had access to a Roth 403b  or 457b Roth option which allows you to put much more tax free money away than an individual Roth account outside of your school plan. There is a difference in contribution amounts and significantly so. 

The regular IRA has a deadline for contributions by April 15 2021 or around tax due time. A 403b agreement can usually be entered into anytime depending on your school system rules. I would check that. In my school system we could enter a 403b anytime with no deadline.

I personally would not put a penny in a tax deferred account with only five years to go. If you have access to a Roth 403b or a 457b Roth account that would be the way I personally would go. That way it's all yours free and clear of taxes. I have 50% of my money in tax deferred accounts and I am dreading those upcoming RMD amounts I will have to pay. I'm even thinking of starting to do a Roth conversion  every year now while I am in my sixties . I'm researching that option. 

I don't know the mathematics behind it , which is better. It just seem my  financial intuition tells me its the right approach for me and possibly for you. Recent tax reform makes Roths more attractive because of the resulting reduction in tax brackets,. That’s beneficial if you’re in your peak earning years now, because when you put money into a Roth IRA or 403b, you pay the tax first. I also think tax rates will go up during Biden significantly and for years to come as this country becomes more progressive . Something to ponder.  I'm a moderate voter and I prefer conservative measures when it comes to finances even though I tend to be more liberal in my social views. AS you know that's a contradiction because taxes must go up to fund social/progresive agendas.

 

 

 

Tony,

He can retire in 5 years at age 55 and he currently only has 35K in tax deferred accounts.  If he does retire at around that time, that will give him 17 years in which he can spend from tax deferred and/or do Roth conversions.  I don't see how RMDs will be a problem for him no matter how much he puts in traditional.  Again though, I agree that a mix is probably smart.

 

 

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12 minutes ago, MNGopher said:

Tony,

He can retire in 5 years at age 55 and he currently only has 35K in tax deferred accounts.  If he does retire at around that time, that will give him 17 years in which he can spend from tax deferred and/or do Roth conversions.  I don't see how RMDs will be a problem for him no matter how much he puts in traditional.  Again though, I agree that a mix is probably smart.

 

 

Yes you make a good point. There are always sooo many angles to consider. I worry  though how tax laws might change to our determent in our future.

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12 hours ago, Stillwater007 said:

And I don't trust any of the salespeople. AT. ALL. At my school we had lots of the Insurance people posing as Retirement Advisors, and maybe they are, trying to sell Insurance Annuities. I just couldn't trust them!

I'm glad you get this. So many don't. When I was teaching it was like pulling teeth trying to get teachers to understand what these advisors were doing to them. You are already at third base seeing through that facade although you have a challenge ahead of you the next five years trying to build up your retirement savings but I think you are on the right track. Good luck.

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I'm very experienced in taking RMDs, and they have not been a problem at all for us. Of course individual retirement incomes and size of tIRAs can be vastly different. Because we retired early, our pensions and SS income have been modest. The first 5 or 10 years of RMDs just went into the taxable account and got invested because we didn't need to supplement our income. RMDs started out at 3.6% at age 70.5 in those days, but start at age 72 now so about 3.9%. Our asset allocation is 40/60 stocks/bonds and my tIRA has continued to grow almost every year. Even if larger pensions, SS and tIRA push taxable income into the 22% income tax bracket, I don't see that as something to dread. Only the income above the top of the 12% bracket is taxed at 22%.  

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