Contribute to 403(b) or taxable account?

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vaught
Posts: 34
Joined: Fri Aug 11, 2017 2:00 pm

Contribute to 403(b) or taxable account?

Post by vaught » Mon Aug 21, 2017 5:24 pm

My wife is a school teacher for a public school district. She has a salary of $48,500 (importantly, we file taxes as married filing separately in order to allow her to take advantage of Public Service Student Loan Forgiveness). We are fortunate that we do not need her salary to help with expenses because of a pay increase I received recently.

Fortunately, she has an excellent 457(b) plan. We have decided to contribute the maximum $18k to this. Very low administrative fee and access to low ER Vanguard funds.
She also is able to contribute to a 403(b.

I was excited to hear this as that was an easy way to shield $36k of income.

However, upon further investigation of the 403(b) plan, her school district has ONLY one provider (American Fidelity) and there only investment option is a variable annuity. Therefore what I thought would be an easy decision is now not as easy. Our options are:

1. Invest $18k in 403(b). The expense ratio is roughly 1.8% (of which 1.25% of that is the mortality and expense fee which I just don't see the value in at all).

2. Do not contribute to the 403(b) and pay the taxes and invest the after tax remainder of her income into a taxable account.

I am leaning towards option 2 but welcome any thoughts as to whether I am oversimplifying this. Since it might be relevant, I already contribute my max of 18k to my 401k (with a 4% match on top) and we both max our Roth IRAs.

bigred77
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Re: Contribute to 403(b) or taxable account?

Post by bigred77 » Mon Aug 21, 2017 5:54 pm

vaught wrote:
Mon Aug 21, 2017 5:24 pm
My wife is a school teacher for a public school district. She has a salary of $48,500 (importantly, we file taxes as married filing separately in order to allow her to take advantage of Public Service Student Loan Forgiveness). We are fortunate that we do not need her salary to help with expenses because of a pay increase I received recently.

Fortunately, she has an excellent 457(b) plan. We have decided to contribute the maximum $18k to this. Very low administrative fee and access to low ER Vanguard funds.
She also is able to contribute to a 403(b.

I was excited to hear this as that was an easy way to shield $36k of income.

However, upon further investigation of the 403(b) plan, her school district has ONLY one provider (American Fidelity) and there only investment option is a variable annuity. Therefore what I thought would be an easy decision is now not as easy. Our options are:

1. Invest $18k in 403(b). The expense ratio is roughly 1.8% (of which 1.25% of that is the mortality and expense fee which I just don't see the value in at all).

2. Do not contribute to the 403(b) and pay the taxes and invest the after tax remainder of her income into a taxable account.

I am leaning towards option 2 but welcome any thoughts as to whether I am oversimplifying this. Since it might be relevant, I already contribute my max of 18k to my 401k (with a 4% match on top) and we both max our Roth IRAs.
What are the chances your wife will stay employed with this exact same school district for the next decade plus?

All you have to do is switch districts at some point and you can roll all those contributions over to a IRA with a low cost provider and invest how you choose. If she may take a break at some point I would invest in the 403b. If she has the option of switching districts at some point I would also contribute to the 403b.

JW-Retired
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Re: Contribute to 403(b) or taxable account?

Post by JW-Retired » Mon Aug 21, 2017 6:28 pm

vaught wrote:
Mon Aug 21, 2017 5:24 pm
Fortunately, she has an excellent 457(b) plan. We have decided to contribute the maximum $18k to this. Very low administrative fee and access to low ER Vanguard funds.
She also is able to contribute to a 403b .... (added: but it isn't a good one)

I am leaning towards (added: no 403b) but welcome any thoughts as to whether I am oversimplifying this. Since it might be relevant, I already contribute my max of 18k to my 401k (with a 4% match on top) and we both max our Roth IRAs.
Maxing 2 x $18k in employer plans and 2 x $5.5k in Roths seems to me like plenty of tax advantaged savings. Like you mentioned, if you can save more just invest it in a taxable account (which can be a very handy thing.)
JW
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TropikThunder
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Re: Contribute to 403(b) or taxable account?

Post by TropikThunder » Mon Aug 21, 2017 11:09 pm

bigred77 wrote:
Mon Aug 21, 2017 5:54 pm
What are the chances your wife will stay employed with this exact same school district for the next decade plus?

All you have to do is switch districts at some point and you can roll all those contributions over to a IRA with a low cost provider and invest how you choose. If she may take a break at some point I would invest in the 403b. If she has the option of switching districts at some point I would also contribute to the 403b.
Just be careful if AF has any sort of surrender charges for getting out of the annuity. It's my understanding that even if it's done as a post-employment rollover to an IRA there can still be fees (but I can't find a reference online that spells it out).

vaught
Posts: 34
Joined: Fri Aug 11, 2017 2:00 pm

Re: Contribute to 403(b) or taxable account?

Post by vaught » Tue Aug 22, 2017 9:43 am

TropikThunder wrote:
Mon Aug 21, 2017 11:09 pm
bigred77 wrote:
Mon Aug 21, 2017 5:54 pm
What are the chances your wife will stay employed with this exact same school district for the next decade plus?

All you have to do is switch districts at some point and you can roll all those contributions over to a IRA with a low cost provider and invest how you choose. If she may take a break at some point I would invest in the 403b. If she has the option of switching districts at some point I would also contribute to the 403b.
Just be careful if AF has any sort of surrender charges for getting out of the annuity. It's my understanding that even if it's done as a post-employment rollover to an IRA there can still be fees (but I can't find a reference online that spells it out).
You are correct about surrender charges. Not only does the plan have a high ER but it has an 8 year surrender fee schedule.

sco
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Re: Contribute to 403(b) or taxable account?

Post by sco » Tue Aug 22, 2017 12:49 pm

Personally, I'd just put it in Taxable.

You could also approach the school about adding another option. Like Fidelity. But that may just be a waste of time.

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grabiner
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Re: Contribute to 403(b) or taxable account?

Post by grabiner » Tue Aug 22, 2017 10:34 pm

vaught wrote:
Mon Aug 21, 2017 5:24 pm
1. Invest $18k in 403(b). The expense ratio is roughly 1.8% (of which 1.25% of that is the mortality and expense fee which I just don't see the value in at all).

2. Do not contribute to the 403(b) and pay the taxes and invest the after tax remainder of her income into a taxable account.

The 403(b) is that this decreases her income, and thus the payments made under income-based repayment; conversely, if she invests in a taxable account, the dividends will increase her income and thus her loan payments. This is free money if she qualifies for Public Service Loan Forgiveness. That makes it a good deal despite the high expenses; she may save more in loan interest than she pays in expenses.

My rule of thumb is to consider a taxable investment if the total of all extra expenses over time exceeds twice your tax rate on qualified dividends. You are paying 1.6% more than a low-cost portfolio, which would be 30.4% over 19 years. (It's actually a 26% loss after compounding.) Thus, if you don't pay state tax, the payment is no longer relevant to PSLF (she will pay off the loans on schedule anyway, or the loans have already been forgiven), and she still expects to stay with the same school district for 20 years, she might consider a taxable investment.
David Grabiner

duuuuuude
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Re: Contribute to 403(b) or taxable account?

Post by duuuuuude » Tue Aug 22, 2017 11:32 pm

I know you said American fidelity was the only option, but I'm just making sure you've turned over all your stones...

Check to see who the districts 3rd party administrator is (usually it's a credit union)...

They 3rd party administrator has a list of vendors the district employees should be able to choose.

No one told our teachers this!

In my situation, American fidelity also seemed like our only option because they came to our school sites every year to sign people up (I'm sure they brokered a deal with our district for that access)...they did this for years and are still doing it! Free money for them! 1+% off everyone's 403b!

After realizing it's the 3rd party administrator that approves the actual 403b vendors, not the ones on site who show up to sign you up, Vanguard was on the list and I signed up with them directly...no more bogus American fidelity variable annuity fees! (I had them in vanguard funds too, but he fees were eating away at the returns!).

I had to look into all this on my own because our district didn't know too much about this (except that we could sign up with American fidelity because they showed up in our staff lounges).

Good luck!

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