Ok, so my wife will soon be employed as a teacher. The school offers a 403 and 457. She has a ROTH and a lingering TSP account from a short stint working for the USG. The plan is she will work for no more than three years, then head overseas to work at an overseas school - likely moving every few years. Thinking ahead, what retirement investment vehicle would be the best to prepare for retirement - 20 plus years away? Would it be smart to invest in a 403B and roll it over down the road? What if the international school doesn't offer a similar retirement vehicle, is it wiser to simply invest in a private account after maxing out a ROTH? Could she open a solo 401K? Any thoughts or insights would be greatly appreciated.Cheers!
A tax advantaged account allows your money to grow tax free until retirement. Those that allow pretax contributions are then taxable when you take distributions in retirement. Roth is after tax and then tax-free in retirement.These are all great programs that encourage you to save, and they allow your money to earn returns and compound even if you are not contributing every year.Once you have maxed those programs or if one is not available, investing in a taxable account in the long term buy and hold mode (LTBH in TMF lingo) is quite efficient. You pay taxes only when you sell and then at capital gains rates.Picking investments that you can hold long term can be a bit tricky, but for example an S&P 500 Index Fund is a good one to start with. With practice, you can select stocks that meet requirements.But note that a big stock market crash can force you to sell and pay taxes while in a tax advantaged account like a Roth you can sell and buy later without tax liability. So keep that idea in the back of your thoughts. Plan accordingly. You do not want to hold and let all your gains go away.
The plan is she will work for no more than three years, then head overseas to work at an overseas school - likely moving every few years.Before you do anything, be sure to review the tax rules for an American working overseas. Some things that are a benefit can negate others.
You haven't provided quite enough info, so I'll make a couple of assumptions.I assume the school district she works for is government based and not private non-profit. I'll also assume the school district is not matching her contributions (rare for governements).In my experience, the 403(b) sponsors are a shady group. Usually insurance companies, they are very good at hiding expenses. Unlike qualified retirement plans, 403(b) and 457(b) sponsors do not have to provide a comprehensive report on their annual expenses and charges as required by ERISA. Instead, its up to the individual states on what sponsors are required to do for the benefit of plan participants. But in my experience, the employee is really on their own. So depending on how much quality info your wife is given....if not much, I don't think I'd contribute to the plan. Yes, tax deferral through compounding adds to the account over the years. But excess fees can negate some or all of this tax deferral benefit.If you also have a retirement plan at your work, you are married filing jointly and your adjusted gross income (AGI)is under $96,000 for 2014, you can fully deduct your traditional IRA contributions of $5,500 each. If AGI is between 96,000 and $116,000, then part of your TIRA contribution is deductible and over $116,000, none is and it would make more sense to contribute after tax to your Roth IRAs. If you are a stay at home or your employer does not offer a retirement plan you participate in, then you (not your spouse) may deduct your TIRA contribution up to an AGI of $181,000 for 2014. But I think I would definitely contribute to a deductible TIRA first. The only reason I'd contribute to a 403(b) or 457(b) is if there is an employer match or the sponsor gives detailed breakdown of expenses they charge.As to overseas teaching...is this through the DoD of Dept of State? If so, then it will be considered U.S. Income as it will be taxed as would any U.S. Employer. If a foreign government employer, the ability to contribute this to an IRA in the U.S. will depend on how much of the foreign income is excluded from U.S. Tax. Generally, that part of foreign income subject to U.S. Tax can be contributed to one's IRA. There may be some exceptions to this that you'd probably need to speak with a tax preparer familiar with the country's foreign income and tax treaties it has with the U.S.BruceM
Thinking ahead, what retirement investment vehicle would be the best to prepare for retirement - 20 plus years away?I seriously doubt that 20 years from now, the tax laws will be the same. My approach, best to have a little in each vehicle. You won't come out with the best possible tax treatment but you won't come out with the worst either.JLC
Thanks all! Indeed there is no matching for either 403 or 457. The concern we have is using either of these options for four years locally, then hit the overseas schools (which are likely to not be DOD or DOS) for an unknown period of time, perhaps until retirement. So we would have this four year old 403/457 sitting there for many years with no ability to add to it - though we could roll it over - but options for a rollover are limited if she isn't able to open another IRA (she does have a personal ROTH). So we are thinking of private options - and wondering what options might exist that might be wise to start now, as opposed to waiting when we move overseas, so we could have continuity regardless of the type of work she ends up with. Hope that makes sense. Though she wouldn't be self employed, could she open a private IRA with the same income limits and tax deductions (assuming US earned income) as a standard 401K (trying to clarify Bruces response)? Could she then continue to invest in that vehicle with foreign earned income, though she wouldn't be taxed on it (assuming she meets those requirements)?Cheers!
My last 403b was through Fidelity. Earlier one was through T.Rowe Price. Such shady organizations !So, to summarize - 401k bad, 403b bad, financial advisor bad.What is the agenda ? Vehicles not bad but most of them are run by bad people ?In the olden days of TMF, people were taught to fish. Now they are getting MREs and probably look no further.
The 403B/457 market is dominated by insurance companies.Valic in particular is shady.The last 403B plan I saw was an Oppenheimer flavor with only Class C shares. While not shady just expensive.Fido gets a black mark because they required qualified plan assets to be rolled into a Fido IRA.That was just an unnecessary step and only served Fido.buzman
1. Before making assumptions on your plan, it might be best to check. One way is to see if BrightScope has it rated. Their system isn't perfect, but it is an indicator:http://www.brightscope.com/2. You probably don't want to check yourself, but these Department of Labor guidelines are good at trying to uncover excessive espenses, and you may want to find an email to inquire about the overseas options. TMF has forums in other countries, so you may be able to post directly on those questions.http://www.dol.gov/ebsa/publications/401k_employee.html3. Have you an idea of how much you can invest? With no match you can always use a low-cost ROTH or IRA from several fine brokerage options, and as Pauleckler suggests even after-tax accounts can serve your investment needs. Unless you're giving up your US citizenship, I know of now requirements to give up your tax-deferred accounts when working overseas.Does this help?BobRYR Home Fool
The concern we have is using either of these options for four years locally, then hit the overseas schools (which are likely to not be DOD or DOS) for an unknown period of time, perhaps until retirement.As I said, if you are working for a foreign government (foreign school district of some kind) and earning foreign income, whether this income may be contributed to a tax deferred U.S. based savings account of some sort (self employed retirement plan or IRA) will depend on whether that foreign income is considered income in the U.S. You'll have to seek tax help from someone who does this...or just Google it. I have no idea because I don't work with foreign income.Once she leaves her U.S. employer, she will be able to rollover the 403(b) to her TIRA...and if the U.S. employer is a government school district, she will also be able to rollover the 457(b) to her TIRA.but options for a rollover are limited if she isn't able to open another IRA (she does have a personal ROTH)As a U.S. citizen (with a SS number) she can open as many IRAs, traditional and/or Roth, at as many different custodians, as she wishes.Though she wouldn't be self employed, could she open a private IRA with the same income limits and tax deductions (assuming US earned income) as a standard 401K (trying to clarify Bruces response)?Yes, as long as it is considered U.S. income, she may open and contribute up to the annual maximum to a TIRA and/or RIRA. And just to help you understand...there is no such thing as a joint or public IRA. The I in IRA means Individual, so by definition, it is private.A 401(k) is a qualified retirement plan that may only be contributed to through employment...either an employer or self employment. Unless the foreign school district she works for has some kind of relationship with the U.S. for tax purposes, it is unlikely they will offer a U.S.-based retirement plan (note: government employers may not offer a 401(k) unless it is a grandfathered pre 1986 (I think that's the date) plan...although the Feds do offer a Thrift Savings Plan, which looks like a 401(k))Could she then continue to invest in that vehicle with foreign earned income, though she wouldn't be taxed on it (assuming she meets those requirements)? By 'invest in' I assume you mean 'contribute to'. Highly unlikely. Money contributed to a retirement plan, with rare exceptions, must have been subject to employment tax, whether it was contributed pre income tax or after income tax tax. Whether the U.S. tax code will treat foreign earned income as earned income eligible to be contributed to a retirement plan will depend on how that income is treated for U.S. tax purposes as I previously mentioned.Now, there is nothing that says she may not save in a taxable account. Yes, realized gains (interest, dividends and realized capital gains) would have to be reported as income each year, and it would not have protection from creditors as retirement plans do...but by carefully picking tax efficient mutual funds or ETFs to be held in the taxable account, the added tax expense can be minimized.BruceM
My 403(b) was run by the notoriously shady Vanguard.--AI
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