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Does anybody have a suggestion as to a good place to hold a 403(b)? My wife needs to set one up and fortunately you are free to choose anyone you want. I tried Scottrade but they can only do 401(k)'s. I'd like to be able to choose mutual funds and/or individual stocks and with low transaction costs. Scottrade would have been nice as they have no-fee mutual fund transactions. Anybody else have a suggestion besides Fidelity? TIA

buylower
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buylower,

You wrote, Does anybody have a suggestion as to a good place to hold a 403(b)? My wife needs to set one up and fortunately you are free to choose anyone you want. I tried Scottrade but they can only do 401(k)'s. I'd like to be able to choose mutual funds and/or individual stocks and with low transaction costs. Scottrade would have been nice as they have no-fee mutual fund transactions. Anybody else have a suggestion besides Fidelity? TIA

Have you checked into Vanguard? TIAA-CREF? T. Rowe Price? These are all excellent fund companies.

Personally, I'd stick with a mutual fund company when setting up a new new retirement account. Brokerages tend to cost too much in fees for a transaction, so you'll probably be stuck buying into no-fee mutual funds for a while anyway. Once you accumulate some assets, rolling some or all of the funds over into a brokerage might make sense.

In any case, I don't think you'll find many brokerages that offer a 403(b); but many mutual fund companies do.

- Joel
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Thanks for the advice Joel. After some more reading, I'm wondering whether it makes sense to even open a 403(b). My wife is only 26, so I'm thinking it may make more sense for her to open a Roth IRA. Then I'd be able to use Scottrade. I believe we're in the 27% fed. tax bracket but not yet to the point that taking the extra income would put us into the next bracket. This way all that money would be tax-free when she retires.
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A Roth IRA is a good idea but the limits of contribution to it are much less than to a 403b. Why not do both even if you cannot fully fund the 403b.
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BuyLower,

You wrote, Thanks for the advice Joel. After some more reading, I'm wondering whether it makes sense to even open a 403(b). My wife is only 26, so I'm thinking it may make more sense for her to open a Roth IRA. Then I'd be able to use Scottrade. I believe we're in the 27% fed. tax bracket but not yet to the point that taking the extra income would put us into the next bracket. This way all that money would be tax-free when she retires.

Try to do both. IRA contribution limits are quite low, so she should be able to max it out quite easily.

403(b)s are generally more flexible than 401(k)s. There are often no investment restrictions and no means testing. Costs are negligible. In fact, her 403(b) has almost all the advantages of a conventional IRA without the low contribution limits. Since her employer will let her place it anywhere, she can invest in superior investment products at a minimal cost. Also, her 403(b) can never be garnished or seized, even in bankruptcy -- protections not available to IRA accounts in all states. (IRAs are state regulated.) Definately get her to take advantage of her 403(b) if she can.

Also, regardless of the type of retirement account, if you're just starting to accumulate assets, invest them directly at a mutual fund company first. For instance, you obviously want to open a ScotTrade account. ScotTrade offers Vanguard funds in their NTF program, so let's compare investing in Vaguard's S&P500 fund (VFINX) directly vs. through ScotTrade.

With a Vanguard 403(b), you can invest any amount per pay period. With a ScotTrade IRA, you will need to accumulate $1,000 before you can make your first purchase. In the interm, your money must sit idle -- ScotTrade has no cash sweep vehicle. With Vanguard, any incremental contribution will be added to the account. With ScotTrade, there will be a minimum for any additional contribution. These differences are actually set by Vanguard; not ScotTrade. These differences mean that your wife's contirbutions may have to be held in reserve and purchases made at less frequent intervals. Less frequent contributions makes dollar cost averaging less efficient.

Of course a brokerage account does offer one attractive feature. It makes it easy to switch between different investments. You can invest directly in a company's stock. You can invest directly in bonds. You can invest in ETFs. You may even be able to buy options.

In general though, the problem with a brokerage remains the same: The granularity of the investment must be coarse, either through a constraint of the investment product or simply to minimize trading costs. Investing directly with a mutual fund can sometimes let you circumvent this limitation. Before you sign up for a brokerage account, make sure you're in a position to take advantage of it.

- Joel
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There are often no investment restrictions and no means testing.

My understanding is that 403(b)(1) allows variable annuities as investments and 403(b)(7) allows mutual funds, and that is it as far as allowed investments go. That means no individual stocks.
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Joel, CABob, and Mark,

Thanks for the thoughts. All of what you say makes great sense. I think I'll set her up with the vanguard index fund to start out with on the Roth and max it out.

If we set up a joint Roth however, we wouldn't be able to max it out at 10% of her gross salary (assuming I understand the limit correctly is $6000). Were I to make it an individual Roth, then yes we'd be able to max it out and then start on the 403(b). I am basically putting 15% into my 401(k) and 1.5% into a pension plan, (16.5%) total.

buylower
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buylower,

You wrote, If we set up a joint Roth however, we wouldn't be able to max it out at 10% of her gross salary (assuming I understand the limit correctly is $6000). Were I to make it an individual Roth, then yes we'd be able to max it out and then start on the 403(b). I am basically putting 15% into my 401(k) and 1.5% into a pension plan, (16.5%) total.

Of course you can't actually have a joint retirement account; but I think I understand what you're saying. You plan to effectively use her income to fund both of your Roth IRA accounts. Fair enough.

There's another variable here -- your own 401(k) plan. How much of that is matched? How cost-effective are the plan options? Can your wife do better with her 403(b) plan? If so, you might want to cut back on your own 401(k) to fund the Roth IRAs and let her pour as much of her income as she can into her 403(b).

- Joel
Many happy returns...
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Let's see (all funding is pre-tax):

I have a 401(k) pension plan that I can put up to 1.5% that is 100% matched by my company (6 fund choices).

I have two other plans that I can put up to 15% into combined:

Investment Plan in Fidelity (16 fund choices) that is unmatched
or
Stock Investment Plan (we are employee owned w/ plan to go public when the market gets better for IPOs) that is matched based on a profit formula which has been around 25%. Once we go public I will be able to divest portions of the stock I have accumulated to put in the investment plan. We will then be able to purchase the common at a discount.

So it seems like a good plan of action would be to continue funding the 1.5% match and put 15% in the stock investment to get a maxium match. I would therefore be putting away almost 22% of my salary while contributing just 16.5%. When we go public I can divest and rebalance to prevent myself from becoming too weighty in our stock. Then use my wife's salary to fund our Roth and if we still can afford it, fund her 403(b) which is wholly unmatched.

I doubt that with all the matching funds I get her 403(b) would be more cost effective. I sure we would both pay some maintenance fees and any purchases do not have a cost in either case.

This has been a good excercise that was long overdue. Fortunately it seems like I have been doing things fairly well. Thanks again for the ideas and forcing me to think.

buylower
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