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Retirement Saving for retirement - questions about pensions and pension schemes, 401k's, public and private company pensions, and other saving schemes.

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  #1  
Old 07-23-2007, 04:27 PM
bskaggs bskaggs is offline
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Join Date: Jul 2007
Location: TX/Dallas + USA
Posts: 2
Default increase 403 B or put into roth IRA

Hello,
I am getting close to where my employer will match up to 8% of what I put into my 403B. I am currently contributing 4% and am thinking of increasing it to 8% in another month.

My question is should I max out what they will match or take that additional money and put it into an IRA or roth IRA instead?

Other info if needed:
-I am 26 and my wife is 25. we have a 2 year old daughter
-Currently renting
-have 10X life insurance for me and my wife
-have additional disablity insurance for me
-have started a 529 for daughter for college
-managable debt (just 1 car payment with .09% interest rate)
-have 6+ months of savings

Any advice would be welcomed. Thanks and I am glad I found this forum. I have really enjoyed reading all the discussions.

Thanks,
B
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  #2  
Old 07-24-2007, 01:48 AM
Mynion Mynion is offline
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Join Date: May 2007
Location: Central Ohio, USA
Posts: 278
Default Re: increase 403 B or put into roth IRA

B,

First off, I'd like to congratulate you on the job you are doing with your finances. While your savings rate may not be as high as you like, you are much further ahead financially than many your age. You've taken steps to protect your young family, and are taking advantage of several quality programs available to you.

That being said, let's answer your question. Unfortunately, the answer is not as simple as one might think. The obvious answer is: never pass up free money, increase your contributions to max out the company match.

But the economics are very different. The "real" answer is: "it depends". You see, the quality of your 403B is a huge factor. Putting free money into low quality investments with high fees (which most 403B's have, mostly hidden), doesn't necessarily benefit you more than taking that money instead and putting it into high quality investments in a Roth IRA. At least in an IRA/Roth you have complete control over quality, fees, liquidation, and choice. With your 403B you do not.

Let's do some simple math using a financial calculator to see how your actual return is impacted by the company match. If you take $2000/year and grow it out at 7% for 40 years, you'd have $427,280. Now, if your company matches 100% of that amount, then let's grow $4000/year out at 7% for 40 years, we get $854,438, or double. Now what we want to know is, what rate of return would we need to get to grow $2000/year deposit into $854,438? Answer: 9.53%. So the actual difference over 40 years that the company match made was an increase of 2.53%. As you can imagine, if you are paying 2-3% more in hidden fees/sales charges in your 403B, it could be leaking back out as fast as your company is putting it in.

This applies to 401k's as well...

What you need is a financial plan/strategy that coordinates well with everything else you are currently doing. Because of regulations, I cannot provide specific financial advice to you over the internet. If you qualify for a Roth IRA, it is more beneficial to you than a traditional IRA, especially when you factor in your age.

Keep up the good work! While I am not a fan of 529's or Retirement Plans like 401k's/403b's, they do have their benefits.

Chris
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Old 07-24-2007, 03:42 AM
Dru Dru is offline
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Join Date: Mar 2007
Location: USA
Posts: 321
Default Re: increase 403 B or put into roth IRA

Excellent advice by Chris here. Also let me add my congratulations on your diligence and foresight.

I also am not a fan of programs where you give up control of your assets as they accumulate and grow. As Chris demonstrated, the quality of the investment, and tax treatments at distribution, can make a great difference on which direction is best.

Considering a 529 plan, the strength of the investment depends greatly on the college you choose to attend, state or private, in state or out of state, or other factors. Each state has different ways they treat these plans. If you plan for your child to attend the local state college and then she wants to go to a music school out of state, you may find your dollars are not what you expected them to be. Be sure you understand these details.
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Old 07-26-2007, 12:14 PM
bskaggs bskaggs is offline
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Join Date: Jul 2007
Location: TX/Dallas + USA
Posts: 2
Default Re: increase 403 B or put into roth IRA

Thank you for the advice guys. By reading your responses should I rethink the 529 plan, and possibly put that into a Roth? If I read the rules correctly you can withdrawal w/o penalty for higher education for qualified family members.

I work in higher ed, so the possibility of my children's college being covered through tuition remission is a strong possibility, if they choose to go to school where I am employed. Of course time could change things...(I still have 17+ years until my daughter is in school)

Am I too Roth IRA happy or is that a viable source?

Thanks again for all your assistance. I am so glad I found this site.
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Old 07-27-2007, 04:25 PM
Mynion Mynion is offline
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Join Date: May 2007
Location: Central Ohio, USA
Posts: 278
Default Re: increase 403 B or put into roth IRA

bskaggs,

In order for a distribution from a Roth IRA to remain tax-free, it must be what's called a qualified distribution.

To be qualified, the distribution MUST be:
  1. Made on or after the date you become age 59 1/2; OR
  2. Made to your beneficiary, or to your estate, after you die; OR
  3. Made to you after you become disabled within the definition of the IRS code; OR
  4. Used to pay for qualified first-time homebuyer expenses.
There is also a restriction on withdrawals within 5 tax-years (please note: tax years are not calendar years).

Lastly, the IRS limits your contributions to the Roth IRA, and you may not be able to contribute later if your household income increases. This could prevent you from making contributions later.

The Roth IRA is a great retirement planning product, for those who qualify for it.

There are 2 other ways you can build a tax-free savings for your college education funding.
1. Investment Grade Permanent Whole Life Insurance (UL and VUL are not as good)
2. Municipal Bonds (preferably in a muni bond mutual fund)

Using life insurance requires professional guidance. The product needs to be structured/designed properly to maximize cash values, and it has to be from a very high quality insurance company, preferably mutual. This is the ideal solution, but it may not be the easiest to afford.

The Municipal Bond mutual fund route is an effective way to go, providing better early liquidity, possible state tax-free status, and lower cost (maybe). The life insurance is the way to go for those that have a comprehensive financial strategy, designed by a professional.

My permanent life insurance policy will fund both my children's education funds, allow me to maximize my pension, provide financial security during my working years, protect our savings from lawsuit, provide disability coverage, and eventually provide me with a considerable income in retirement. There isn't another financial product (401k, Roth's, stocks, etc) that exists that can do all of this.

Chris
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  #6  
Old 02-19-2009, 03:45 AM
Jhonny Jhonny is offline
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Join Date: Feb 2009
Location: Romania
Posts: 5
Default Re: increase 403 B or put into roth IRA

8% is enough I'd say
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