I've searched unsuccessfully for an answer to the following question. Sorry if it has already been discussed.Here's my question:I am 29 years old and currently contribute to a 403b plan offered through my employer. Can I also open a Roth IRA? If so, which one benefits me most? I believe the maximum annual contributions to each are $10,500 and $2000 respectively. My 403b is invested in the Vanguard SP Index, and currently contribute about $300/mo. I realize the benefits largely depend on the returns on the investments I would make relative to the S/P, but is one of these investment vehicles inherently better than the other? My objectives are long term buy and hold. If I were to open a Roth IRA I would likely invest in a combination of Dow companies, probably the Foolish Four or a variation of it. So, any suggestions on what combination of contributions I should make relative the 403b and Roth?Should I max out on the 403b before opening a Roth? Or give priority to the Roth and then direct the remaining to the 403b? Can I even be invested in both?Thanks in advance for guiding me through these fun and exciting dilemas, FOOL ON!
If your employer matches any part of your 403b money, be sure you contribute enough to get the maximum. You can also have a Roth if your adjusted gross income is less than $150000, married. You can contribute $2000 a year to the Roth independent of what you do with the 403b. If your Roth is with a mutual fund company, you will likely put mutual funds in it. If you go that way, Vanguard is a good choice, Janus is another. If you go with a discount broker, you might choose the Foolish Four. Only problem is that $2000 divided among 4 stocks can be a significant amount of trading costs. My suggestion would be to start with one of the Vanguard index funds, and after the account has grown to $10000 or so, switch to individual stocks. Best wishes, Chris
Maudobucks-Great post, I'll do my best to answer your questions and try to provide a little subjective insight.I am 29 years old and currently contribute to a 403b plan offered through my employer. Can I also open a Roth IRA? If so, which one benefits me most? Yes, you can contribute to both accounts. Both accounts have significant tax advantages, but my recommendation (based on your age) is to prioritize your Roth contributions. The earnings on this account are never taxable; this advantage is worth more than the 25 - 35% tax deduction you would save by contributing the funds to your 403b. My objectives are long term buy and hold. If I were to open a Roth IRA I would likely invest in a combination of Dow companies, probably the Foolish Four or a variation of it. So, any suggestions on what combination of contributions I should make relative the 403b and Roth? I won't make specific recommendations, but I do believe you should hold your more aggressive investments in your Roth IRA. Due to your long holding period, you can tolerate large price deviations and your should try to maximize return. I do not recommend trying a Foolish Four strategy until you have $1500 to put in each stock (total account balance $6000). Transaction costs can be prohibitative for this strategy, so it doesn't make sense to have four $500 positions.Best of luck.- Matt
<You can also have a Roth if your adjusted gross income is less than $150000, married. You can contribute $2000 a year to the Roth independent of what you do with the 403b.>Great, so I can have both. My employer does not match nor contribute any additional money to the 403b. Since I'm not maxing out on the 10,500 allowable through the 403b should I continue to increase my contributions and only open a Roth when I max out on the 403b? Or would it better (in terms of long term tax advantage) to open a Roth PRIOR to maxing out contributions on the 403b?<Only problem is that $2000 divided among 4 stocks can be a significant amount of trading costs.>Actually, I have a discount brokerage account with Scottrade and am charged $7/trade. If I were to open a Roth I was thinking four Dow stock (4 x $7= 28), and keeping them for 18 months. This, I thought would be relatively low in terms of trading costs (28\2000= 1.4%)
I think that most people will benefit from first fully funding the Roth, since you get to choose what to put in the account. Of course if you need the tax deduction now, you'd have to choose the 403B.The long-term tax advantages of Roth/403B are almost the same. The exception is because with a Roth, you pay taxes before you put the money in, and with the 403B you pay taxes after you take the money out. Thus If you expect your tax rate to go up, favor the Roth; If you expect your tax break to go down, favor the 403B.
The earnings on this account [Roth IRA] are never taxable; this advantage is worth more than the 25 - 35% tax deduction you would save by contributing the funds to your 403bActually, per dollar salary earned, if one's current and retirement tax rates are the same, and if the investments return similar rates, then it is a wash.However, there are features of a Roth IRA that may make it advantageous to max that out before maxing out the 403(b) or other "salary deferral" program:1. One can open a Roth IRA with just about any financial organization--a bank, a brokerage, a mutual fund family, etc. However, 403(b) requries that one uses an "approved custodian" on the employer's approved list. For many of us, that means our options are quite a bit more limited, and some organizations don't even offer a low-fee custodian. (I am among the fortunate few that at least have TIAA-CREF available as one of my employer's "approved custodians".)2. Unlike "salary deferral" programs, you can access your contributions at any time without additional tax and without penalty.In contrast, 401(k) or 403(b) might or might not offer loan privileges, depending on the particular plan, but taking contributions out early could be subject to both income tax and penalty.3. There is no required minimum distribution at any age, unlike "salary deferred" programs. That means you can potentially allow your Roth IRA to continue to grow indefinitely, even past 70.5 years old.
maudobucks,I am also a teacher and I am in a very similiar situation as you. IMHO, I second the suggestion by MarkOYoung for the reasons he stated. Also to be aware of in the Roth, you can invest money in indivdual stocks whereas the 403b(7) you can't. This gives you more potiential for a higher return(or a bigger loss--let's think positively though--this is long run, remember). You can use the 403b(7) as your as you would call it safe haven in mutual funds which are more diversified. Best of luck to you in the future.Tag
Just wanted to take a minute to thank everyone who replied. In light of the suggestions, I plan to:1) Contribute $2000/yr to my Roth IRA (initially ivested in dow stocks)2) Pile additional annual investment savings into my 403b (invested in vanguard s/p 500 index)Again, thanks to all the Fools who replied.
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