teacher 403b - last couple of years

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ps56k
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teacher 403b - last couple of years

Post by ps56k »

We were at a dinner tonight with some teacher friends
and the subject of retiring came up - along with the 403b topic.

If someone never took advantage of the 403b program,
but would like to make use of it in their last couple of years
does it make any sense...... $16k + $5k catchup = $21k

A - it reduces current taxable income (which receives a bump prior to retirement)
B - it adds a little (4yrs x $20k = $80k) to a "new" deferred account

Thoughts ??
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House Blend
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Re: teacher 403b - last couple of years

Post by House Blend »

Maybe. Depends on their marginal tax rate now, versus the tax they will pay in retirement when the money is withdrawn.

But I think for most people, the later taxes are lower, so deferral is a plus.

To decide whether they are "most people", they need to make some guesses about their (a) spending rates (b) sources of income and (c) the taxation of those sources of income (e.g., SS income, dividends, capital gains, etc are all taxed differently) in retirement.

BTW: the new limits for 2012 are $17K + $5.5K catchup.
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Re: teacher 403b - last couple of years

Post by sschullo »

Since you asked for some thoughts here are my 2 cents worth:
Regarding B: "adds a little into another new deferred account."
I am a retired teacher as well. Over 70% of our colleagues, teachers, have $0 in their 403b, so $80,000 is not chump change and if you think about it long term after you retire, that money can grow. Assuming you don't need it for your retirement needs so you could think about it for your heirs, a favorite charity, purchase an RV or unexpected health problem in retirement. Pension plans have options for your heirs but they are costly.
In 15 years, at 3.5% stable value fund, which is very low risk, for example, that $80,000 will grow to over $200,000.
If you learn a little about investing and use a balance of bonds and stocks and get 7%, for example, that $80,000 grows to about $330,000. The latter requires that you know about risk and return and read up about investing. Since you have been here at this forum, I think you know a lot about investing.
Does this make sense? Absolutely!
Good luck,
Steve
Never in the history of market day-traders’ has the obsession with so much massive, sophisticated, & powerful statistical machinery used by the brightest people on earth with such useless results.
Alan S.
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Re: teacher 403b - last couple of years

Post by Alan S. »

Before you elect your contribution amounts, be sure to understand that if you have 15 years of service, there is an additional catchup option under 402(g) that must be applied prior to the age 50 catchup limit. Calculation and timing of these additional catchup contributions can be complex, so you should check into this with the plan administrator if you are interested in contributing more than 22,500. Here is an article that shed some light on the details. There is a 3 item test required to determine potential amounts:

http://www.tiaa-cref.org/public/about/n ... 7_126.html
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Epsilon Delta
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Re: teacher 403b - last couple of years

Post by Epsilon Delta »

You may find that withdrawals from the 403b are exempt from state tax, either because there is a specific tax exemption for teachers retirement income or a more general provision that exempts some or all retirement income from state income tax.
This can mean the tax rate on withdrawals is much lower than on current income.

Sometimes in the final year of work it can make sense to max out the 403b even if you have to make a withdrawal immediately after retiring to pay for living expenses. This avoids paying state income tax.
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Re: teacher 403b - last couple of years

Post by ps56k »

What happens after the teacher retires....
Does the 403 acct continue to live at the financial provider,
or must you transfer the funds to your own personal IRA acct ?

My wife has her 15+ yrs into the district.
But she never mentioned the district had a 403 plan until I happen to find out recently....
like last year at the group dinner !!

SO - for those 15+ yrs, she just deleted the email announcement,
and we never setup the 403 accts or took advantage of it.
Now - ??
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Peter Foley
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Re: teacher 403b - last couple of years

Post by Peter Foley »

Yes it makes sense to take advantage of it. In the year of retirement you might create a situation where the teacher's salary - deferral for the first half of the year + pension for the second half of the year creates a low tax year in terms of marginal rates. That might allow one to take some capital gains tax free that year.
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Re: teacher 403b - last couple of years

Post by texasdiver »

Yes it most definitely makes sense provided that you avoid getting sucked into expensive annuity products sold by insurance companies.

I have been maxing out my 403(b) since beginning teaching 6 years ago (after a mid-life career change from a Federal job with a science agency into teaching HS science). Here in Texas we have the opportunity to open our own 403(b) accounts directly with Vanguard or Fidelity without going through a broker or advisor which is what I did. The only expense I have in my plan is that I can't get admiral shares regardless of the account balance. So the only "fee" charged to my 403(b) plan by Vanguard is the difference in fees between investor and admiral shares. But a lot of teachers around here get caught up by so-called investment advisors who market variable annuities to them as a 403(b) and trap them into a world of endless fees and low returns. The state does a poor job of explaining exactly how to open your own 403(b) plan on your own and avoid an advisor. I had to do some phone calling around to figure it out. Even my own HR department didn't have a clue.

I'm guessing you're probably in the 25% tax bracket? If so, that $23,000 403(b) contribution is only costing you $17,250. The government is essentially chipping in nearly $6 grand. Yes you'll owe it back down the road but you'll be paying taxes at your average tax rate when you withdraw, not your marginal tax rate and for someone with a middle class income that is a big difference.
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Re: teacher 403b - last couple of years

Post by ps56k »

At this point - since we've lost the previous 15+ years of the 403b -
I'm mostly looking to reduce the taxable Gross Income
vs focusing on the 403b from the investment point of view.

I have no need for any type of annuity,
so it would be a coin toss between the couple of remaining equity investment mutual funds.

The school district listed 403b plan vendors are:

American Century Investments
AXA Equitable
Ameriprise Financial Services Inc (IDS/Amer Ex)
Fidelity Investments
Great American Life Insurance Co
Horace Mann Companies
Kemper Investors Life
ING ReliaStar
Lincoln Investment Planning Inc
Metropolitan Life Insurance Co.
Oppenheimer Funds
Travelers Insurance
Variable Annuity Life Insurance Company (VALIC)
texasdiver
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Re: teacher 403b - last couple of years

Post by texasdiver »

ps56k wrote:At this point - since we've lost the previous 15+ years of the 403b -
I'm mostly looking to reduce the taxable Gross Income
vs focusing on the 403b from the investment point of view.

I have no need for any type of annuity,
so it would be a coin toss between the couple of remaining equity investment mutual funds.

The school district listed 403b plan vendors are:

American Century Investments
AXA Equitable
Ameriprise Financial Services Inc (IDS/Amer Ex)
Fidelity Investments
Great American Life Insurance Co
Horace Mann Companies
Kemper Investors Life
ING ReliaStar
Lincoln Investment Planning Inc
Metropolitan Life Insurance Co.
Oppenheimer Funds
Travelers Insurance
Variable Annuity Life Insurance Company (VALIC)
Depends on the specific fees of course, but at first glance I would think that Fidelity would be your best bet by far. You should have all the low cost Spartan index funds available which are comparable to Vanguard. Definitely avoid the life insurance companies. My wife has a horrid 403(b) plan through Standard Insurance provided by her employer (a public medical clinic) that overlays a 1.25% management fee on top of the mutual fund fees.
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ps56k
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Re: teacher 403b - last couple of years

Post by ps56k »

tnx for the replies....

I was thinking of either going with Fidelity or American Century...
- Fidelity - currently have our IRA's there from when they had an office in our downtown building
- American Century - had their mutual funds for several years
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ps56k
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Re: teacher 403b - last couple of years

Post by ps56k »

After going over our 2012 taxes with TurboTax - I have about $60k in divs and cap gains.
SO - looking at the 403b to help reduce the overall taxable income, with the investment being secondary.

If we take a closer look at say Fidelity - and set it up for the next couple of years,
what things should we look for - fees, types of bonds - total vs TIPS, etc - ???
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Re: teacher 403b - last couple of years

Post by Easy Rhino »

Look at fees and fund selection.

The importance of fund selection depends on what you'd be planning on buy it. If you're planning on 60% bonds and 40% stocks, then the bond choices are approx 50% more important than the stock choices.

And you're going to have to contrast this with other providers available to you... odds are they're all going to have higher fees than an Vanguard IRA would... but since you're going to be retiring in a few years it's not a big deal.
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Re: teacher 403b - last couple of years

Post by ps56k »

The hardest thing is finding the "403b portal" to find out about :
- what is being offered to the employee plan
- what are the fees or charges
- etc

For Fidelity -
Why can't I find a place for a POTENTIAL new 403b plan employee....
https://www.fidelity.com/

There is general Retirement Planning -
https://www.fidelity.com/retirement-planning/overview

They have a portal login and phone number for EXISTING customers,
and for Employers - looking to setup a workplace plan.
http://workplace.fidelity.com/403b.html
https://401k.fidelity.com/public/conten ... e/Landing/

but I can't seem to find just a normal place to do a little research...
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ps56k
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Re: teacher 403b - last couple of years

Post by ps56k »

SO - I finally filled out the paperwork for the Fidelity 403b, and just mailed it back...
Don't really need the extra retirement funding,
this is more to reduce our taxable income by 10%

I picked the Fidelity Puritan fund as a starting point - FPURX -
Seemed like an easy blend - 60/40 - stocks/bonds -
and didn't have everything in the entire world as do the Fidelity target date funds.

We'll see how things go...
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Re: teacher 403b - last couple of years

Post by bogleenigma »

ps56k,

Fidelity Puritan isn't a bad choice. If you're not able to utilize the Puritan Funds (Index Funds) or just want to contribute and forget it than Puritan is probably one of your better choices. Puritan is one of Fidelity's oldest funds and one of its best performing over time. It's allocation is very similar to Vanguard Wellington Fund. The following graph is quite instructive.

http://tinyurl.com/d63s57p
Notice that, since 1947 it has out-performed the Wellington Fund. What this graph doesn't show you is that recently it has under-performed Wellington.
http://tinyurl.com/cqlujte

With its ER of 0.59% it is far better than many funds in the industry. Over a lengthy period of time you could be ascertained that an indexed portfolio with lower expenses would likely trounce Puritan, but over the time-frame you're talking about, this is probably an OK fund choice.
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Re: teacher 403b - last couple of years

Post by otbricki »

Epsilon Delta wrote:You may find that withdrawals from the 403b are exempt from state tax, either because there is a specific tax exemption for teachers retirement income or a more general provision that exempts some or all retirement income from state income tax.
Also some states don't exempt taxes on contributions to 403b plans. This is something that you might want to watch.

My wife is in Valic. It's a miserable plan with fees slathered on top of high ER investment choices. I've seen negative actual returns on cash in Valic because of the fees. Still it's nice to have that initial contribution free of federal taxes and to have compounding work tax deferred.
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ps56k
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Re: teacher 403b - last couple of years

Post by ps56k »

mdpsychcrnp wrote:Fidelity Puritan isn't a bad choice. If you're not able to utilize the Puritan Funds (Index Funds) or just want to contribute and forget it than Puritan is probably one of your better choices.
Wondering what you are referring to - "Puritan Funds (Index Funds)" ?
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Re: teacher 403b - last couple of years

Post by jwtietz »

I started to contribute after the first 14yrs. When I retired after 36yrs the bal was over 1mil. Now I am stuck with high taxes and having to roll it into a roth. My opinion is that it is a good thing at any time.
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Re: teacher 403b - last couple of years

Post by ps56k »

SO - What happens after the teacher retires....

Does our Fidelity 403b acct continue to live at the financial provider,
or must you transfer the funds to your own personal IRA acct ?
Since my wife never told me they had a 403b, we only started recently,
and will only have about $20k in the 403b at retirement.

Is there some required timeframe / window ?
Do you receive notice from the 403b gatekeeper ?
Last edited by ps56k on Sun Aug 04, 2013 7:21 pm, edited 1 time in total.
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Re: teacher 403b - last couple of years

Post by livesoft »

In general, if the amount in the 403(b) is more than $5,000 then it can live at the current financial provider forever. Or one can roll it over to an IRA.

I have a 403(b) with an old employer that I have not contributed to in almost 20 years.
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Re: teacher 403b - last couple of years

Post by ps56k »

Wife has a 403b from being a teacher.... with Fidelity - invested in the Puritan Fund.
She just retired - so no more contribution activity with the 403b.

She also has a Traditional IRA - also with Fidelity - invested in a couple different funds.
Some of the tax year contributions were deductible and some were not,
and we have been tracking the Cost Basis via TurboTax and have the various backup forms.

She is 62 - and we don't need access to the money, just sitting there is fine -
and in dealing with the local Fidelity office,
they don't seem all that knowledgeable in dealing with their targeted marketing audience - IRA Rollovers -

I guess my concern is how the pre-tax accounting for the 403b balance
is handled moving forward with a rollover into an existing Traditional IRA account
that has deductible and non-deductible amounts already being tracked.

SO - trying to consolidate any future book keeping -
what can or should we do with the existing Fidelity 403b account ??
Looking for general comments on this somewhat typical retirement rollover scenario -
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Re: teacher 403b - last couple of years

Post by Peter Foley »

If you are planning on doing Roth conversions you should not roll over the 403b. When doing a Roth conversion the pre tax and post tax contributions of all IRAs are considered in the calculation. It would likely be more tax efficient to do IRA to Roth conversions before moving the 403b. (The post tax would be a higher percentage of the converted funds.)
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