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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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