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columbuskid

403(b) Or Roth Ira?

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Hello, everyone... I've been watching and reading for awhile now, trying to decide on the best investment products for myself. I'm a 26 year old social studies teacher in Columbus. I bought Dan's book and read it through. Now I'd like to draw on some other folks' experience.

 

My dilemma essentially boils down to choosing between poor initial 403b choices or a Roth IRA. But whose?

 

Although I initially pursued a 403(b) through Columbus Public Schools, I found that they offer rather poor choices. VA's. That's about it. Downtown is dragging their feet about offering other choices, and anyway, CPS doesn't match employee contributions to their 403b.

 

With all that in mind, should I forget about a 403b for now and open up an IRA with someone? I'm in a lower tax bracket than I think I will be when I retire, so that's helpful. If someone out there thinks I'm on the right track (for me, anyway), who offers the best IRA? I'm leaning toward Fidelity--they've slashed their expense ratios and offer "no fee" IRA's--but do people think Vanguard or someone else would be better?

 

Or geez...would a tax-deferred 457 be better?

 

I could really use your advice out there, especially about who offers the best IRA!!

 

Thanks, Jeff

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Hi Jeff,

 

Welcome.

 

It's great that you started to educate yourself. Great. I wonder if you accessed www.diehards.org from the Morningstar site. There are discussions that go on regularly that will educate you, as well as direction for reading and internet sites. It's a great site.

 

A ROTH IRA is a great investment. Go with it.

 

Fidelity and Vanguard has numerous funds available for investment, so you need to pick the fund in the fund family.

 

Now Fidelity and Vanguard are both no load fund companies.

 

I'm guessing that this is your first ROTH IRA investment?

 

To me , I prefer Vanguard over Fidelity because their annual expense fees are signicantly lower, and the lower the expense that you pay the higher your returns will be over time.

 

 

At Vanguard, there is a $10 fee for starter accounts under $5,000 but the lower expenses generally make up the difference. There are a couple of their funds that wil not charge you the $10 fee. YOu can call them at 1 800 onboard and ask which funds that would be, but if you pay the 10 fee for a different fund its not a biggie. I'm not sure the amount that you are able to can contribute for this year. I think that its 3K. Januaru 1. 2006, you can contribute again. (so there will be only one $10 fee)

 

Vanguard has some Target funds, ask them about them.

 

There is also a book called Morningstar that you can find in better libraries that analize every fund. It's the bible of mutual funds.

 

Let us know which funds that you will be considering if you wish our opinion.

 

As far as the 403b--are you sure that your employee does not offer a no load company? Please list the companies that are available. Some no load companies, but not limited to are USAA , Investco, TIAACREF, Fidelity , vanguard

 

Ira

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IRA--

 

Thanks for your reply! I appreciate any help. I've been reading everyone's posts for awhile and it seemed as though I could relly learn something by asking advice. Just like in the classroom...beg, borrow and steal!!!

 

I have been to Morningstar and the forums. I asked the same question to the Diehards and I'm wondering what kind of replies I'll get.

 

Here's a list of the companies that are offered by CPS to employees for their 403b (I've been told to stay away from many of these...or else their name gives them away i.e. VAII C)

ING

West Life Insurance

Citistreet

American Express

Variable Annuity Marketing Comp

Paul Revere (ha!) Variable Annuity

Nationwide

Lincoln National

Fidelity Standard Life Security

NEA Valuebuilder/Nationwide

Horace Mann Insurance

Met Life

American Capital

National Educational Services (Great American Life Insurance)

Northern Life Insurance

The Equitable

Putnam Investor Services

Allianz Life Insurance Educators

Investors

Planmember Services Pro

 

For 457's, they offer:

Ohio Public Employees Deferred Compensation Program

GALIC

ING Aetna

 

Not too good (?)

 

Anyway, thanks for your reply. Jeff

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ColumbusKid...I started with a VA foolishly but it got me started and I subsequently came around to the philosophy mostly shared here. Along the way I started putting into a Roth account whenever my tax situation allowed, just like your situation now..it is a golden opportunity which I am glad I took. Now about 18% or so of my portfolio (at age 64) is in Roth accounts (3-way split w/Vanguard Emerging Markets/Primecap Core/Small Cap Index). These funds are doing as well as most funds this year, made a tad better by the low fees, no agent costs, etc. Two of the three are managed.

 

Some people would place their bonds and safest funds in the Roth, but at your age I would go for a bit more risk because over time (which you have) you will have better gains than the indexes most likely....Then you can take out just enough to keep you in a lower bracket after you retire. Also, should you die it goes to the beneficiary tax free...since taxes have been paid at the beginning of the investment.

 

You rock!..Dan

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Hi Jeff,

I also want to welcome you to this site and to congratulate you on starting so young. I started about ten years later than you and I was put into two horrible investments before I found the right way and the only way to invest in my humble opinion.

Unfortunately, all of your choices are horrible. Absolutely horrible!

The only one I would suggest you check out is the Ohio Public Employees Deferred Compensation Program. They might, just might, have a cash account or a money market account where you can start contributing your tax deferred contributions. Then, from time to time transfer it to Vanguard, Fidelity, TR Price TIAA CREF or any other no load low fee company. Be darn sure that they do not have transfer fees.

It has been discussed from time to time about forgetting the 403b route because of the high fee choices and go with a Roth IRA. I would first ask your employer if they would put one of the no load companies on the list. Call Fidelity Investments yourself and ask them what the status with your district. Don't wait for somebody else to do this. You are the activist now. NOBODY else will do this, the unions, the district and no financial adviser for obvious reasons will lift a finger for you. Great things do happen, but you have to ask and be persistent. Adrian at the Vanguard diehard forum is one tough, smart guy who has been persistent at this for years.

In the meantime start contributing to a Roth ERA right away. You can choose any company you want. Around here we use Vanguard and TIAA CREF for the most part. Continue to learn about this. It is really pretty easy once you learn the vocabulary.

Hope this helps,

Steve

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Guest Sierra

The only one I would suggest you check out is the Ohio Public Employees Deferred Compensation Program. They might, just might, have a cash account or a money market account where you can start contributing your tax deferred contributions. Then, from time to time transfer it to Vanguard, Fidelity, TR Price TIAA CREF or any other no load low fee company. Be darn sure that they do not have transfer fees.

================================================

Steve:

 

Inservice transfers from a 457(b) to another eligible retirement plan are not allowed.

 

Peace and hope,

Joel

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Jeff,

Scratch that option of using the 457. But are you sure the Ohio Public Employees Deferred Compensation Program does not offer a 403b as well?

Until you can petition your district to get a no load company on the list, use the Roth IRA.

Steve

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Guest Sierra

Steve: Ohio teachers like those in your Golden state and here in the Big Apple have a 457(b) available to them. Following are the highlights of the Ohio Plan. I would advise all teachers in Ohio to use the 457(b) as their plan of choice because it is no-load and the 10 percent penalty tax does not apply as it does with 403(b).

 

Joel

================================================

Your Plan Highlights

Investment Option Descriptions

LifePath Portfolios

Barclays Global Investors LifePath 2010 Portfolio seeks total return for investors retiring in approximately the year 2010. The

fund uses an asset allocation approach; a neutral mix would be 30% equities, 60% debt securities and 10% cash. The allocation

changes, becoming more conservative, as the fund nears its maturation date of 2010. The fund allocates assets among securities contained

in various domestic and foreign indexes; it may invest up to 20% of assets in securities traded in foreign markets.

Barclays Global Investors LifePath 2020 Portfolio seeks total return for investors retiring in approximately the year 2020. The

fund uses an asset allocation approach; a neutral mix would be 65% equities and 35% debt securities. The allocation changes,

becoming more conservative, as the fund nears its maturation date of 2020. The fund allocates assets among securities contained in

various domestic and foreign indexes; it may invest up to 20% of assets in securities traded in foreign markets.

Barclays Global Investors LifePath 2030 Portfolio seeks total return for investors retiring in approximately the year 2030. The

fund uses an asset allocation approach; a neutral mix would be 70% equities and 30% debt securities. The allocation changes,

becoming more conservative, as the fund nears it maturation date of 2030. The fund allocates assets among securities contained in

various domestic and foreign indexes; it may invest up to 20% of assets in securities traded in foreign markets.

Barclays Global Investors LifePath 2040 Portfolio seeks total return for investors retiring in approximately the year 2040. The

fund uses an asset allocation approach; a neutral mix would be 100% equities. The allocation changes, becoming more conservative,

as the fund nears its maturation date of 2040. The fund allocates assets among securities contained in various domestic and foreign

indexes; it may invest up to 20% of assets in securities traded in foreign markets.

International Stock Funds

Templeton Foreign Fund seeks long-term capital growth. The fund invests primarily in stocks and debt securities of companies and

governments outside of the United States. It maintains a flexible investment policy and can invest in all types of securities and in any foreign

country, developed or underdeveloped. The fund generally invests up to 25% of assets in foreign debt securities.

Vanguard International Growth Fund seeks capital appreciation. The fund invests in a broadly diversified array of non-U.S. equity

securities, primarily common stocks of seasoned companies. The fund invests in up to 30 foreign stock markets, emphasizing companies

with above-average growth potential. The fund will generally have representation within all countries included in the MSCI-EAFE Index.

Small-Cap Stock Funds

MFS New Discovery Fund seeks capital appreciation. The fund normally invests at least 65% of assets in equities of companies that

the advisor believes have superior growth prospects. It generally focuses on companies with small market capitalizations relative to the

companies in the Russell 2000 Index. It may also invest in fixed-income securities, including up to 10% of assets rated BB or lower. The

fund may invest up to 20% of assets in foreign securities.

FPA Capital Fund seeks long-term growth of capital. Current income is secondary. The fund invests primarily in common stocks of medium

and small companies that the advisor believes have above-average ability to increase market value. It may also invest in U.S. government

and government agency obligations, corporate debt securities, preferred stocks, and convertibles. In selecting investments, the advisor

considers a company's profitability, book value, replacement cost of assets, and free cash flow. The fund may invest up to 10% of

assets in foreign issues.

Mid-Cap Stock Funds

Vanguard Capital Opportunity Fund seeks long-term total return. The fund invests primarily in equities of

small and mid-cap U.S. companies. It typically concentrates investments in as few as 25 to 50 stocks. To select investments, the advisor

tries to find stocks with strong industry positions, excellent prospects for growth, superior return on equity, and talented management

teams. The fund may short stocks up to 10% of assets. It may invest up to 15% of assets in foreign securities. The fund may

also invest up to 10% in both convertibles and high-yield bonds.

Large-Cap Stock Funds

AIM Constellation Fund seeks capital appreciation by investing primarily in stocks, emphasizing small to mid-size emerging growth

companies. Companies in which the fund invests typically fall into two categories: companies that have experienced above-average and

consistent long-term earnings growth, and companies that are currently experiencing a dramatic increase in profits.

13

Large-Cap Stock Funds (continued)

American Century Income & Growth Fund seeks dividend growth, current income, and capital appreciation. The fund invests

primarily in common stocks selected from a universe of the 1,500 largest companies traded in the United States. Management

employs optimization models to construct a portfolio that provides a total return and a dividend yield that may exceed those of the

S&P 500 index. The fund may also invest in foreign securities.

Dodge & Cox Stock Fund seeks long-term growth of principal and income; current income is a secondary consideration. The fund

intends to remain fully invested in equities with at least 65% of assets in common stocks. It may invest in preferred stocks and convertibles.

Management seeks companies with financial strength and a sound economic background.

Fidelity Contrafund seeks capital appreciation. The fund invests primarily in common stocks and convertible securities that management

judges to be undervalued. It may also invest in preferred stocks, warrants, and debt securities. Management seeks companies

that are currently out of favor with the investing public and that may have favorable long-term outlooks because of termination

of unprofitable operations; changes in management, industry, or products; or a possible merger or acquisition. The fund may invest

up to 5% of assets in lower-quality debt obligations. It may also invest in foreign securities.

Fidelity Equity-Income Fund seeks income; potential for capital appreciation is also a consideration. The fund normally invests at

least 65% of assets in income-producing equity securities that have a demonstrated yield higher than the composite yield of the

stocks in the S&P 500 index. It may invest the balance of assets in all types of domestic and foreign securities, including bonds and

convertibles. The fund may invest up to 20% of assets in debt securities rated below investment-grade. It does not intend to invest in

debt securities of companies without proven earnings or credit.

Fidelity Growth Company Fund seeks capital appreciation. The fund invests primarily in various common stocks including preferreds,

convertibles, and warrants issued by companies that the advisor believes have above average growth potential, measured by

earnings or gross sales. To select investments, the advisor focuses mainly on smaller, lesser-known companies in emerging areas of

the economy. It may also seek investment opportunities in revitalized or well-positioned larger companies in mature industries.

Fidelity Magellan Fund seeks capital appreciation. The fund invests primarily in common stocks and convertible securities. It features

domestic corporations operating primarily in the United States, domestic corporations that have significant activities and interests

outside the U.S., and foreign companies. No limitations are placed on total foreign investment, but no more than 40% of assets

may be invested in companies operating exclusively in one foreign country.

Vanguard Institutional Index Fund seeks capital growth. The fund seeks investment results that parallel the performance of the

S&P 500 Index. The Fund employs a passive management strategy designed to track the performance of the S&P 500 Index, which is

dominated by the stocks of large U.S. companies.

Balanced Funds

Dodge & Cox Balanced Fund seeks income, conservation of principal, and long-term growth of principal and income. The fund

may invest up to 75% of assets in common stocks and convertible securities. It may invest up to 20% of assets in American

Depository Receipts. The fund typically invests in investment-grade debt securities. It may invest in government obligations, mortgage

and asset-backed securities, and corporate bonds. When selecting securities, management may consider yield to maturity, quality, liquidity,

and current yield.

Bond Funds

PIMCO Total Return Fund Shares seeks total return consistent with preservation of capital. The fund invests at least 65% of

assets in debt securities, including U.S. government securities, corporate bonds, and mortgage-related securities. It may invest up to

20% of assets in securities denominated in foreign currencies. The portfolio duration generally ranges from three to six years.

Stable Value

Guaranteed Return Option (GRO) is a stable value investment option offered and administered by the Program. It is designed for

the safety-oriented participant who is seeking a current competitive rate of return. Principal and interest are protected against market

loss. The fund is a well-diversified portfolio of high quality fixed-income instruments with strong credit ratings, including bond and

mortgage securities. The fund also invests in contracts issued by banks and insurance companies that provide principal protection for

the diversified bond portfolios, regardless of daily market changes. The annualized interest rate is declared each quarter and guaranteed

through the end of that quarter by banks and insurance companies. The GRO is not a mutual fund.

14

Glossary of Investment Terms

Understand the terms

Below are some common investment terms and their definitions. For more general investing information, visit www.ohio457.org.

STEP

10

Glossary of Investment Terms

Asset Class Descriptions Asset classes identify funds that tend to have similar investment objectives

and strategies, and generally react in a similar manner to market

fluctuations as other funds in the same class. Spreading your investment

selections across several asset classes, a technique known as asset

allocation, can help maximize your total return based on the level of risk

you are willing to accept. Asset allocation does not protect against a loss

in a declining market.

Balanced Funds Balanced funds are funds that seek both income and capital appreciation by

investing in a generally fixed combination of stocks and bonds. Risk and

return is typically moderate to low.

Blend Funds Blend funds will generally hold a mix of volatile growth stocks with the more stable

value stocks, providing style diversification within one fund.

Bond Funds Bonds are loans or debt instruments issued by governments or corporations

that need to raise money. When investors buy a bond, they are actually

loaning money to the government or company. Bonds are issued for a set

period, during which interest payments are typically made to the

bondholder. Bonds are generally a more conservative form of investment

than stocks, and usually provide a more steady flow of income. Typically,

bonds have a lower long-term total return than stocks.

Growth Funds Growth funds invest in companies expecting higher than average revenues

and earnings growth. They are broad-based stock funds, although

most prospectuses permit investing in bonds for defensive purposes.

Investments usually include large, mid and small capitalization stocks in a

wide variety of sectors. Funds have the ability to invest heavier in one

market cap and overweigh in one or more sectors. Mangers like to employ a

"buy and hold" strategy by keeping stocks for an average of 3-5 years and

only selling if company fundamentals, such as earnings or growth

prospects, change.

International Stock Funds International funds, also known as foreign funds, contain stocks from

companies located outside of the United States. Most international stock

funds seek long-term growth of capital. These funds typically have higher

risk due to political factors, currency fluctuations, differences in accounting

standards and foreign regulations, as well as higher return potential. Risk

and return is typically high.

15

Large-Cap Stock Funds A large-cap fund invests mostly in stocks of larger companies. Typically,

large-cap stocks are companies with market values more than $10 billion

and include blue-chip and Fortune 500 companies. They are typically more

mature, diversified companies with many products and services. The goal of

this type of fund is usually steady growth of capital. Risk and return is

typically moderate to high.

LifePath Portfolios Each LifePath Portfolio is a pre-mixed fund investing in multiple asset

classes in the U.S. and abroad with an asset allocation of stocks, bonds,

and cash based on a target year (when you expect to begin using your

money). The portfolio then automatically adjusts its asset allocation as the

target year approaches, by investing more and more conservatively,

reducing its investments in stocks and increasing its investments in

bonds and cash.

Mid-Cap Stock Funds Mid-cap funds contain stocks from companies with market values between

$2 billion and $10 billion and often include companies that are well

established and growing. Risk and return is typically moderate to high.

Small-Cap Stock Funds Small-cap funds contain stocks from companies with less than $2 billion in

capitalization, including many start-up companies. Small companies can

grow much faster than big companies, but small company stocks tend to be

more volatile than the stocks of larger companies. Over the long term,

an investor in small-cap stocks must be willing to accept a higher level of

risk resulting from potentially higher market volatility.

Stable Value These options are short to intermediate term, high quality securities. Investors

who seek safety of principal, as well as a competitive rate of return compared

to money market funds, may invest in these options.

Value Fund Type of broad-based growth fund that attempts to purchase stock believed

to be selling at a value. In general, a stock is considered a value if its price

to earnings and/or price to book ratios are below the industry average and

future earnings are expected to rise or remain consistent. Value funds usually

invest in larger companies and are less volatile than other growth funds.

However, small cap value funds are growing in popularity, but they are more

aggressive than typical value funds.

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Hi Jeff,

 

It looks like there are all lossers among the 403b's. Steve and Dan who worked in the same district as I did are real activist for 403B's, and really got a lot accomplished. I suggest that you really follow Steve's advise about 403b's.

 

I have a question, I guess for Joel, Can Jeff invest in both a 457 and 403b. Do you know what the financial limits are?

 

Anyway my choice would be based on your finances; ROTH first, then the other two. The more that you can invest at this stage in your life the better. Make sure to have extra money in non tax deferred funds for emergency.

 

Ira

 

 

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I have a question, I guess for Joel, Can Jeff invest in both a 457 and 403b. Do you know what the financial limits are?

 

 

I have a few friends in a nearby district which has both a 403(b) and a 457 plan. You can fully fund both plans up to the IRS limit every year. This year, that's $14,000, or $18,000 if you're 50 years old or more. So someone in that district can defer up to $28,000 (or $36,000) of their salary in 2005.

 

All they need now, of course, is 28,000 spare dollars to fully fund both plans.

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Thanks to everyone for their insightful comments. I've really learned a lot just from your generous advice throughout this exchange.

 

I've also learned not to be timid about posting a question, since everyone's been so great about sharing their thoughts. I feel much more confident.

 

After I make my choice between Vanguard and Fidelity, I think I'll post a few fund options and see what you folks think.

 

Again, this has been great! What a positive community this is!

 

Jeff

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Hi Jeff,

I hope by now you have read the ARTICLE here on 403bwise.

 

I think that when a person has poor choices using the Roth IRA and taxable funds is the way to go. There are some real advantages to doing that. You don't have to put up with all of the crazy regs that come with 403bs. You can invest with the mutual fund company of your choice and not your employer. Also the money is available whenever you need it, not at a certain age, and you don't have to start withdrawing it at a certain age. You just need to select your funds carefully and put tax-inefficient funds in your Roth and tax-efficient funds in your taxable accounts.

 

You are very savy at a young age. You will be able to figure this out. Keep coming back with your questions, and also check out the discussion board at Morningstar.com. The Vanguard Diehard Forum is one of the best. Ira recommended it in his reply. Best Wishes.

 

Joe

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Jeff,

Glad we could help. Keep coming back. Thanks for the kind remarks.

We know we have a great idea and I think you know it too.

Best of luck to you,

Steve

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