HomeRetirement403b sucks

403b sucks

So Wife Ninja had a meeting with the San Diego District guy that is in charge of setting up teachers 403b plans. He sat down with her and explained all of the benefits, investing strategies, and insights in regards to the plan. She came home with a page of notes and I could tell she was excited to explain what they talked about. After talking through the logistics, we decided the 403b is not for us.

For the last three years, I’ve consistently invested 15% of my gross income between my TSP (Government version of a 401K) and my Roth IRA. If I continued investing the same dollar amounts, but added Wife Ninja’s income, we’d only be contributing about 9%. That means, either I or she, needs to be contributing an additional 6% to reach the 15% goal.

Yes, the 403b could be used to help us towards that goal, but three things are holding me back…

1) There is no match. If the school was offering a 5% match on contributions, then you better believe we’d be all over that thing. I would never pass up free money. But there isn’t one. So the attractiveness of a 403b becomes exponentially less sexy.

2) She doesn’t plan to teach for more than a few years. If she opened up a 403b and we move to Seattle (which is the current plan), than we will have to go through the process of rolling the 403b in to an IRA. Sure it’s not the most miserble process out there, but it’s one I’d prefer to avoid if possible. Especially seeing that she will probably work for a few different school districts during her working years. The less accounts out there, the better.

3) The Roth IRA is most likely a better option for us anyway. We anticipate our income only increasing from this point forward. A larger income, means more taxes. It would be smart for us to open up a Roth IRA in her name while we are in a relatively low tax bracket. The Roth IRA is a freakin’ HOT investment for a 23 year old woman. Wife Ninja is hot, Roth IRAs are hot, so it makes sense the two should begin a relationship.

Let’s assume our combined gross income over the next year will be $90,000. This means we would need to put $13,500 towards retirement each year to meet that 15% goal. If I max out my Roth ($5,000), she maxes out her Roth (another $5,000), then we are only $3,500 short of our $13,500 goal. I’m also currently contributing 5% to my TSP, which works out to $3,100/yr. I get that 5% matched by my employer for an additional $3,100 contribution. All said and done, we’ll be contributing $16,200 over the next year, which works out to 18% of our gross income. Sounds like a pretty good deal to me.

I honestly can’t think of one reason why we should sign up for the 403b. Anyone have an argument FOR the 403b? Would you handle our situation differently? Were you totally bored out of your mind today, since this post actually talked about finances?!

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  1. Can you do all 4? 2 Roths, your 401K and her 403B or do you not have enough dough to do that?

    You may get to the point where you won’t qualify for roth anymore with 2 incomes, so I’d do roth for as long as I could. Plus, you can use it for a first time home purchase.

  2. Since by the plan you’ve laid out, you’re at 18% in retirement savings – NO, you don’t need that 403B unless the school district makes a change about the match/lack. I would definitely max out Roths, go for the utmost match in your TSP and then and only then use the 403b to top off to 15% if/when your salaries grow. great problem to have, right?

  3. I had money in a 403(b) when I was teaching, and there was no match, and when I left teaching I had to roll it over to a Roth. In all, it was a big pain in the patoot. Now, I’ve got a 401(k) that I used to contribute to until I realized that with no match, it didn’t make sense to contribute to that instead of to my Roth, because right now we’re not even close to maxing out contributions. So I ditched that, and in the long run it will be another big pain in the patoot. You know more about this than I do, but I don’t see any reason to invest in the 403(b).

    • “I had money in a 403(b) when I was teaching, and there was no match, and when I left teaching I had to roll it over to a Roth.”

      How would that work? I’m not familiar with any way in which a qualified (tax-deferred) account could be moved into a non-qualified (after-tax) one.

      • Yeah, I’m probably not using the correct terminology. Perhaps it would be better to say that I moved it (rather than rolled it) to a Roth. I’m sure there were fees involved. My husband and I moved all our retirement funds at the same time (unhappy with the performance of the old funds) and some of them were rollovers and some of them we had fees on. The details are now fuzzy to me. Sorry for perpetuating confusion!

        • Maybe you did a Roth *conversion*, in which case you would have had to pay all taxes upfront. That makes sense now.

  4. Since I’m not American, I’m not really familiar with these retirement options. But I’m certain, together, you’ll make a great plan for your retirement years.

  5. Depending on the 403(b), it might have better funds than your TSP. If you rolled it over, it always would because you can roll it over anywhere.

    So, you can have a TSP forever. Or, you can have a 403(b) now which, after freedom, becomes a Vanguard IRA. I’d rather have the Vanguard than the TSP. I’d really look at dumping the TSP for the 403(b) for a little while at least.

    • The TSP, fortunately, has some pretty great funds with very low maintenance/expense fees. I’m pretty happy with them, but you do make a great point with the flexibility of rolling accounts.

    • “I’d rather have the Vanguard than the TSP. I’d really look at dumping the TSP for the 403(b) for a little while at least.”

      Not sure why you’d say this. The TSP is his first of all, while the 403(b) would be hers. And while TSP has fewer fund choices than Vanguard, TSP expense ratios are even lower.

  6. It sounds like you don’t need it, and it is too bad there is no match.

    Still, I do think dogatemyfinances makes a good point. Rolling it over is actually good (and extremely simple) because you now can put it in any funds you like. I always have had good options for my work based plans, but I still liked the freedom of moving it to vanguard when I switched jobs.

  7. Seems like you have it all figured out. The only reason you would want to use that 403b is if you maxed out both Roth IRAs and the TSP. doegatemyfinances makes a good points about the difference in funds, but I can pretty much guarantee there aren’t any funds with a guaranteed 100% return (like you get with your match) in the 403b plan.

  8. If she’s in teaching, then there’s a good chance she’d be investing with TIAA/CREF, and they provide pretty good retirement options. I should caution you that if you have a TIAA/CREF account and want to roll it over to a traditional IRA, you may have to do it through a transfer payout annuity that does the rollover in 10 annual increments. It’s automatic, but annoying. (Obviously this may not apply to your situation, but it did to mine after I left teaching.)

    If there’s no employer match, that defeats the primary attraction of the plan. On the other hand, you can contribute only $5K at your age to any combination of Roth and traditional IRAs, and the 403(b) has a higher contribution limit that lets you save more money tax-deferred.

    • True, if we were maxing our Roths and still not meeting the 15% goal, then I would probably just up my TSP contribution percentage. I like the funds I invest in (great expense ratios) and see no benefit to her 403b.

  9. Have you run any numbers on what your taxes will be in 2010 and then in 2011? You might want to check that because it sounds like with Mrs N working full time, you will definitely go up a few notches in the tax brackets for state and local tax. The tax-deferred benefit of a 403b might make it worthwhile, even without the matching amount.

  10. I’ll rally for the 403b, might as well go against the grain here since I’m already on your bad side for being a Coug.
    My teaching history is 1 year in CA, 3 years in WA, 1 year in CA, 1 year in WA (yes, we moved A LOT). I opened up my first 403b (in CA) at age 22 and I am happy that I did. It just set the foundation for saving (which you obviously have, so you don’t need to do it for that reason). When we moved back to CA 3 years later I thought I would contribute to the same one, but it was not an option in the new school disctrict, so I opened a new one. Now I have CalSTRS, WATRS, 2 403bs and a Roth (that we started at age 25). I do plan on rolling the 403s to the Roth this year (1 more thing on the to do list before baby). Sure, 5 retirement accounts is not a super fun thing to keep organized, but now as a 30 year old stay at home mome (read:no income!) I am happy with the fact that the money is saved, I made a good choice my first year teaching (which SO many teachers do not do and only rely on the state contributions), and now the money is my to do what I want with.
    All that said, it sounds like you are way more organized currently (and married, which I was not my first year working) so the 403 doesn’t seem like it needs to be in your Ninja portfolio;) Kudos to her for meeting with the district rep too!

    • I didn’t listen to anything you said, ’cause I still can’t get past the fact that you are a Coug. Haha, kidding. Your investing craziness stresses me out 🙂 But hey if it works for you then BOOYA!

  11. Assuming the investment options aren’t too bad she should definitely contribute. The tax sheltered growth alone is worth having to do a rollover. You should be saving at least 15% of your gross income and she should be doing likewise.

    • We will be contributing 15% as I stated a few times throughout the article. I disagree that the tax sheltering is a benefit. Right now we are in a relatively low tax bracket. If all goes as planned our incomes will increase throughout the years and we will then be in a higher tax bracket when we retire. A Roth is a better option for us as we can pay taxes now (while in a low bracket) instead of later (when we are in a high bracket) like we would have to do with a 403b. The Roth should be best for our tax situation. Can’t beat tax free growth.

      • I don’t disagree that a Roth is better assuming that distributions remain tax free. With the way Congress has been acting lately, that’s a big assumption. The major problem as I see it is that Roth IRAs have a $5000 contribution cap. That’s not enough money to save. That’s why I also recommend your wife contributing to the 403b.

        • Between our 2 roths and my 401K, we will already be saving 18% of our gross combined income. I don’t think there is a need to open a 403b because we already contribute an adequate amount. If down the road, however, we want to invest more than 403b is definitely a reasonable option.

          • One more thing to think about…You might consider saving as much as possible while there are no kids in the picture because your ability to save will dramatically drop once the stork pays you both a visit.

  12. Another commenter (Lola) already spoke to what my argument for a 403(b) is – the benefit to your taxes. It can help reduce the amount you pay out to state and federal per paycheck.

    • read my response to ParaTrooperJJ above. I think the “benefit” of tax sheltering isnt as great of a benefit as tax FREE growth.

      • It’s getting a little spicy in here.. Simma Donna! : )

        My name is showtime, long time reader, second time poster..ahem. Ok

        IMHO it is worth considering if you could save an extra 10% off your income tax this year by pulling your combined income under the $68K mark using tax deferred accounts.

        2010 Tax Brackets
        Tax Bracket Single Married Filing Jointly
        10% Bracket $0 – $8,375 $0 – $16,750
        15% Bracket $8,375 – $34,000 $16,750 – $68,000
        25% Bracket $34,000 – $82,400 $68,000 – $137,300

        I understand where you’re coming from on the Roth being tax free when you’re pulling it out in retirement, and think there are a couple things that people our age need to keep in mind.

        First line of thinking:
        We invest pre-tax funds (401k, 403b) now so that when we retire and quit our jobs, our income is nill so we fall into the lowest tax bracket. Unfortunately I misplaced my crystal ball so I’m not sure if our government is going to raise the taxes on the lowest income brackets, thus negating that plan.

        Second line of thinking:
        We invest post-tax income to a Roth while we are in lower tax brackets, expecting taxes to be higher overall when we go to pull that money out.

        You’re already going the same direction I am, “Makin’ it rain” on both sides of the fence to ensure we’re covered on both accounts.

        Keep on, keepin’ on Ninja.


  13. Don’t do the 403(b). I agree with your analysis and your decisions. I would suggest you allocate your retirement dollars in this order: #1 to TSP, but only enough to get the 5% match; #2 to Roth IRAs; #3 to HSA; #4 to unmatched TSP.

    Have you heard about health savings accounts (HSAs)? They are triple tax advantaged: deductible contributions (like a 401k), tax free growth (like a 401k), and tax free withdrawals (like a roth) for qualified medical expenses. You can only contribute $3050/year, and only if you have a high deductible health insurance plan plus some other caveats. They are awesome for healthy, young people, and that includes Ninja and Wife Ninja.

  14. I have had to deal with rollovers at the day job and JEBUS 403(b)s are a HUGE PAIN. TIAA-CREF does NOT make it easy. I would say for 76% of the population the 403(b) would be the way to go simply because most people WOULDN’T set up and fund the Roth. You are different so listen to your gut you’ll do fine.

    There is some discussion to be had, albeit a boring one, to see what would happen to taxes today if you could lower your adjusted gross income. For instance you can only deduct student loan interest if your adjust gross income is less than X amount. The 403(b) may bring you under X amount whereas the Roth wouldn’t.

  15. My wife and I were in the exact same situation only a few months ago and made a similar choice. My work sponsors a 401K and 401K Roth, and since were only pulling down about 75k a year, we figured maxing out at $16,500 would be enough for now.

    On the other hand I would like to point out that, at least in my experience, 403b’s are just as good of a place to stash your savings as a 401k. It seemed to me that generally the same rules apply and the contribution limits are the same.

  16. When your wife becomes a stay at home mom you can still max out her IRA! Some women prefer to have their own retirement savings (hence I have my own IRA and 401k) although still join incomes/future retirement income because we’re super independent and like to have things in our name 🙂 Obviously not an issue you all have! Looks like you made up your mind for no 503b. And since you’re saving 18% of your COMBINED income, you’re a-ok!

  17. YOUR 403(b) doesn’t sound great or the right choice for your situation, but ours:

    1. is matched up to 6 or 7 percent (exact number determined by the state annually),
    2. gives a choice of Fidelity (and 6 other less good investment options, though TIAA-CREF isn’t so bad),
    3. is easier than contributing to a traditional IRA and then converting to a ROTH (since we’re above the income limits),
    4. allows us to save more of our income than just 10K,
    5. comes in both traditional and Roth flavors.

    It isn’t the 403(b) itself, but the combination of your 403(b) terms and the situation you’re in.

  18. “Wife Ninja is hot, Roth IRAs are hot, so it makes sense the two should begin a relationship.”

    Seems like good logic to me DN… Keep up the good work!

  19. Ok, I say that your plan should get top priority. However, just keep in mind that you do have the 403b option if you think you should give more. Even with the 18%, you may be moved to increase that in the near future. I think you have a good plan, but just keep that option in the back of your mind just in case. Or, as someone else mentioned, up your savings so you can take advantage of time, and prepare to divert some of your income in case you guys have a baby.

  20. Assuming you were the sole breadwinner for the past 3 years, before wife ninja took the teaching job, ever consider asking wife ninja to contribute 15% of her fair share too now that she’s bringing home some dough (She might hate me for saying this though)? That way, you’ll never have to mess with the calculation should either one of you get a raise/cut since everything’s by percentage.

    You can still keep your hypothetical 18% in the investment vehicles you’ve selected (Can’t really go wrong with that) but anything more than that, I might take a little bit more risk by investing in something like businesses or real estates.

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