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Author: drdalt Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76115  
Subject: 403b,401K, Roths...aarrgh! Date: 5/31/1999 11:58 AM
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Hello Fooldom,
I have been lurking out here for some time and only recently delved deeper into "managing my own finances". I am in the process of setting up my first self managed portfolios but suddenly realize that I know little about the tax consequences of my decisions. My questions are the following:

1. I am currently contributing to a 403 b through my employer (A Public school).I am contributing pretax dollars and using this account as a tax shelter. I have been doing this for about 5 years now. I do not have the option of contributing to a self managed index fund through my employer. How is this account different for tax purposes compared to a self managed IRA (say a ROTH)? Can I do both? Is there a limit on the amount I can contribute to the 403B? I know that I can only contribute $2000 per year to a ROTH.

2. My wife is contributing to an employer matched 401k. We have maximized her contributions in order to receive the maximum company match. Once again I am setting up a ROTH for my wife and know that there is a $2000.00 contribution limit. The empoyer 401 K allows the employer to select a pretax or post tax contribution to the account (401K). What is the difference in terms of tax consequences? Are there penalties for contributing too much pre tax?

3. Assuming that I am able to get answers to any of the above questions how about this one.... Since I am currently 35 years old and still have some time on my hands should I roll my 403 b into a Roth? The value of the account is currently 8000 dollars. Will I do better in the long haul managing my own fund?

Thanks in advance for any guidance and tax wisdom you can provide.


drdalt
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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10945 of 76115
Subject: Re: 403b,401K, Roths...aarrgh! Date: 5/31/1999 1:09 PM
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Greetings, Drdalt, and welcome. You wrote:

<<I have been lurking out here for some time and only recently delved deeper into "managing my own finances". I am in the process of setting up my first self managed portfolios but suddenly realize that I know little about the tax consequences of my decisions.>>

As a lurker, then cetainly you have seen references to and have read my Foolish Retirement Plan Primer available at http://www.fool.com/retirement, right? :-) It answers virtually all of your questions.

<< My questions are the following:

1. I am currently contributing to a 403 b through my employer (A Public school).I am contributing pretax dollars and using this account as a tax shelter. I have been doing this for about 5 years now. I do not have the option of contributing to a self managed index fund through my employer. How is this account different for tax purposes compared to a self managed IRA (say a ROTH)? Can I do both? Is there a limit on the amount I can contribute to the 403B? I know that I can only contribute $2000 per year to a ROTH.>>


As you discovered by reading the primer (!), the contributions you make to your 403b plan are excluded from your current year's income, so they are tax-deferred. You may contriubte up to 25% of your earned compensation or $10K per year, whichever is less. Anything you earn within the 403b plan also is tax-deferred. Nothing gets taxed until you retire, and then anything you take gets taxed at the ordinary income tax rates in effect in that year. Your contribution to a Roth is made with income that's already been taxed. All earnings within the Roth also grow tax deferred, and at retirement all withdrawals will be totally free of tax. You may contribute a maximum of $2K per year as long as your adjusted gross income remains below $150K per year. And you may contribute to both your 401k and the Roth IRA at the same time. In the 403b, you may only invest in annuities and/or mutual funds. You can invest in virtually anything within the Roth.

<<2. My wife is contributing to an employer matched 401k. We have maximized her contributions in order to receive the maximum company match. Once again I am setting up a ROTH for my wife and know that there is a $2000.00 contribution limit. The empoyer 401 K allows the employer to select a pretax or post tax contribution to the account (401K). What is the difference in terms of tax consequences? Are there penalties for contributing too much pre tax? >>

The 401k plan has the same contribution limits as the 403b. As to contributing too much to the 401k, it's highly unlikely that will occur. Excess contributions left in an account result in total plan disqualification for all plan participation and immediate taxation and penalties. Plan administrators just don't let that happen. Post-tax contributions allow any earnings on those contributions to grow tax-deferred. At retirement, those contributions come back untaxed, but the earnings on those contributions are taxed at ordinary rates.

<<3. Assuming that I am able to get answers to any of the above questions how about this one.... Since I am currently 35 years old and still have some time on my hands should I roll my 403 b into a Roth? The value of the account is currently 8000 dollars. Will I do better in the long haul managing my own fund?>>

Sorry, but while you're still employed in that job you can't do that. The money must remain in the 403b until you terminate that employment. As to whether you would be better off, that all depends on how you would invest that money as compared to what you do within the 403b plan. Given you can only use mutual funds, you probably could do better, but that's no guarantee.

See Steps 3 and 4 of my 13 Steps to Foolish Retirement Planning at the previous link. If you're not getting a match in your 403b plan, then possible your first $2K should go into a Roth, and then use the 403b. Understand your plan and do the analysis suggested in Step 4 to see if that's a reasonable course of action for you.

Regards..Pixy

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Author: drdalt Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10954 of 76115
Subject: Re: 403b,401K, Roths...aarrgh! Date: 5/31/1999 9:13 PM
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Thanks Pixy,
I will try to lurk more carefully through the halls of fooldom. This place is huge but there are many treasures laying deep within. Thanks for the clarification on the 403 b, 401k, and roths!

drdalt

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Author: tonyw44 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10965 of 76115
Subject: Re: 403b,401K, Roths...aarrgh! Date: 6/1/1999 10:24 AM
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The odds are good that you cannot move the money out of your 403b unless there's a termination of employment. Then you can roll it over. But there, you have to ask yourself whether or not it's worthwhile to do so. If the investment options are good, then you might want to stick with them. And if the investment options in your new job are good, then you might want to move it there.

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