Starting Taxable Account vs. Increasing 403b

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trumpet83
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Starting Taxable Account vs. Increasing 403b

Post by trumpet83 » Sat Apr 14, 2018 5:13 am

Hi everyone,
The decision I'm trying to make that I am hoping some of you would share your knowledge about has to do with whether I should open a Taxable Account or simply increase my 403b contributions.

Over the past two years my wife and I have paid off about $45K in student debt. During this time, I started several small businesses to generate extra income. While paying off the loans I dropped my contribution to my Fidelity 403b ($53K spread between FSTVX, FSIVX, FSITX) to fifty dollars. During this time, I have struggled with the decision of how to approach the 403b account because I think that if I'm lucky enough to live to 59.5.

I can't imagine that with my teacher pension and social security in the near future that there wouldn't be plenty of money. I could see if I wasn't a pension employee and needed to have these rules to try to keep me from touching retirement funds, but I would hit 30 years of teaching at 52 and I imagine I'd like to at least have the choice of going out if I wanted. I feel like there isn't much good in being rich on a website and not in "real life". Not trying to be flippant.

I know that our best chance of seeing a really high number is with this account, but I believe the lack of liquidity probably won't give us many choices in our life that we wouldn't already have if we manage money with good sense up to that age anyway.

I know that supposedly I could still take money from the 403b, but that there would be an extra 10% penalty. Though, I doubt that psychologically I would be able to pull it out knowing that this would happen so I'd still be likely not to touch it. I also know of the possibility of using a SEPP, but it seems like that would essentially include a small "penalty" as well.

Here is the solution I am leaning toward. Maintain status quo on the 403b. Open and fully fund Roth IRA's for my wife and I through Vanguard so that there can at least be access to the contributions. Open a taxable account through Vanguard to invest the money I make through side businesses to allow us to retire a bit early, purchase land, or just leave it in there but know we could get to it if we needed.

Thank you very much for any input you can share!

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Tyler Aspect
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Re: Starting Taxable Account vs. Increasing 403b

Post by Tyler Aspect » Sat Apr 14, 2018 10:48 am

Welcome to Bogleheads.

What is your current age?

Do you have 6 months worth of expense in a money market fund or high interest online savings account? Populating the emergency cash is an important savings goal as well.

Investing in Roth IRA, and populating the emergency cash would be the highest priority items. Vanguard Prime Money Market is a possibility for emergency cash saving.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

trumpet83
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Re: Starting Taxable Account vs. Increasing 403b

Post by trumpet83 » Sat Apr 14, 2018 11:04 am

Thank you for the reply.

I'm 34. My wife is 31. No children. Six months of spending is right about 20K for us and we are at 17K. Of course, I wouldn't add a taxable account until this crosses that threshold.

We keep checking accounts for our short term inflow and outgo, but use a Synchrony account for savings that gets about 1.5%. I also have potential access to a Whole Life Insurance account that my parents started when I was very little that could get me about 4 grand if I ever needed to cash it out. Other than our home and a 0% car loan that I could potentially write a check for if needed we don't have any major overhead.

My parents had land to give my wife and I years ago, so we built a house on it and probably have about 120K in equity, but I can't imagine any circumstance where we would go that route.

Beyond that, I'm a tenured teacher so that SHOULD be a pretty reliable income source. My wife's job would be more of a risk in terms of possible chance that it could be lost and she makes considerably less. She also contributes to a 403b and her work is set up with a pension system although I don't believe it is going to be quite as significant as what teachers typically receive in my state (Maryland).

BlackcatCA
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Re: Starting Taxable Account vs. Increasing 403b

Post by BlackcatCA » Sat Apr 14, 2018 1:22 pm

You may wish to maximize 403b before opening a taxiable account, since 403b contribution lowers your AGI and your taxes. If your side businesses are successful you'd want a lower AGI.

I second the suggestion of Roth IRA; it can be a backup emergency fund.

Ibond is another idea: it can serve as 2 nod tier emergency fund also, after the 1-yr holding period. Interest is tax deferred and it currently has better yield than saving rates I have seen.

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BL
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Re: Starting Taxable Account vs. Increasing 403b

Post by BL » Sat Apr 14, 2018 1:37 pm

I would also check into the possibility of a 457, or is it 457b? Most states have it and it is often not well known to teachers, etc. The 457 allows you to withdraw after employment without penalty.
Is the 403b available as a Roth? Not sure if that would help or not if rolled over to Roth.

I think you are too young to give up on most retirement funding. Too many things can change in the meantime.

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FiveK
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Re: Starting Taxable Account vs. Increasing 403b

Post by FiveK » Sat Apr 14, 2018 2:06 pm

trumpet83 wrote:
Sat Apr 14, 2018 5:13 am
The decision I'm trying to make that I am hoping some of you would share your knowledge about has to do with whether I should open a Taxable Account or simply increase my 403b contributions.
Probably the 403b, unless
a) the 403b fees are extremely high, or
b) you expect your marginal tax rate at withdrawal to be much higher than your current marginal tax saving rate.

And if "b" applies, do you have a Roth 403b option?

See Investment Order for many general comments.

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grabiner
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Re: Starting Taxable Account vs. Increasing 403b

Post by grabiner » Sat Apr 14, 2018 3:32 pm

There are ways of getting money out of a 403(b) before age 59.5 without penalty if you retire early. Therefore, as long as the money is being saved for retirement, and the 403(b) is decent (yours is with Fidelity, so it should be), you might as well save there to have more money.

The main way to get money out of a 403(b) is as a series of Substantially Equal Periodic Payments; you withdraw a designated amount every year according to an IRS formula, and you cannot change this formula until you turn 59.5 (or for five years if you start it after 54.5). You will pay regular tax, but no penalty.

Since the amount you withdraw is fixed, you will want to take other savings out of a Roth IRA (contributions can always be withdrawn tax-free) if you need additional money.
Wiki David Grabiner

trumpet83
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Re: Starting Taxable Account vs. Increasing 403b

Post by trumpet83 » Sun Apr 15, 2018 11:58 am

Thank you all very much for the input. Regarding some of the specific clarification questions...

1. We do have access to a 457b, but there is only one provider available: Nationwide Retirement Solutions. From what I know, Nationwide is primarily an insurance company which is usually a sign of high fees. My Fidelity 403b seems to be the best provider I could have. For years, my account was with ING (now Voya), but I transferred everything to Fidelity and got into indexing once I read the books you all have read. When I started out, I just knew I should be starting something and the companies that charge those account fees are the ones sending their reps out to schools to get teachers to sign up. I've since mentioned it to other teachers that "Ya know, they charge you 1.2% of your entire account every year for those "free" donuts in the lounge". They say "Oh, that isn't much". I guess these people aren't nearly as impressed by compound interest as I am.

2. No, the 403b doesn't seem to be available as a Roth.

From all that I gather of this advice my plan is going to be to first fully fund the Roth IRA since that is the most flexible option. Then, I will begin ratcheting my 403b up toward maxing it out. If I make it all the way up to maxing that out as well I could revisit the taxable account idea, but ultimately you all showing confidence in the 403b plan I have and the options available pretty much give me a confidence in that approach that I didn't quite have going in.

krow36
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Re: Starting Taxable Account vs. Increasing 403b

Post by krow36 » Sun Apr 15, 2018 12:49 pm

It is possible to make penalty-free distributions from a 403b plan at age 55. It's only allowed after separation from your last employer's 403b, not a previous employer's 403b. Check if your district's plan allows it. https://www.irahelp.com/slottreport/age ... on-penalty

You are fortunate to have Fidelity for your 403b provider. You should max it if at all possible! :happy

retiredjg
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Re: Starting Taxable Account vs. Increasing 403b

Post by retiredjg » Sun Apr 15, 2018 12:57 pm

Having a pension argues more for Roth than for traditional. If there is money left after filling two Roth IRAs, maybe split it between the 403b and taxable.

This link discusses Roth TSP, but the same reasoning applies to you. (The TSP is the federal employe's "401k like" plan).

investorpeter
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Re: Starting Taxable Account vs. Increasing 403b

Post by investorpeter » Sun Apr 15, 2018 1:44 pm

I would increase the 403b before starting a taxable investment account.

I would also look into the actual options offered by the 457b. There will likely be at least one index fund option amongst numerous other high-fee options. If you work for a government as opposed to a non-profit, the 457b is actually more flexible than a 403b in that you would have access to the funds without penalty prior to age 59.5 if you left your current job.

krow36
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Re: Starting Taxable Account vs. Increasing 403b

Post by krow36 » Sun Apr 15, 2018 5:15 pm

trumpet83 wrote:
Sun Apr 15, 2018 11:58 am
1. We do have access to a 457b, but there is only one provider available: Nationwide Retirement Solutions. From what I know, Nationwide is primarily an insurance company which is usually a sign of high fees.
Are you considered a Maryland state employee? Probably not if you work for a K-12 school district. But if you do work for the state, the Maryland 457 (Deferred Compensation Plan) is a good one for you even though it is administered by Nationwide. Although they are the record keeper and administrator, the plan’s offerings, fees, etc. are controlled by the state, and the fees look low.
https://www.marylanddc.com/tcm/maryland ... rt.pdf?r=1

trumpet83
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Re: Starting Taxable Account vs. Increasing 403b

Post by trumpet83 » Sun Apr 15, 2018 8:20 pm

krow36 wrote:
Sun Apr 15, 2018 5:15 pm
Are you considered a Maryland state employee? Probably not if you work for a K-12 school district. But if you do work for the state, the Maryland 457 (Deferred Compensation Plan) is a good one for you even though it is administered by Nationwide. Although they are the record keeper and administrator, the plan’s offerings, fees, etc. are controlled by the state, and the fees look low.
https://www.marylanddc.com/tcm/maryland ... rt.pdf?r=1
I'm pretty sure that all public school teachers are considered employees of the state at least for pension purposes. Certain aspects of our pension benefits seem to vary from county to county though. Thank you for linking to that page regarding the 457b and how it compares to the 403b. Since I could potentially have one of those as well it looks like that would be another thing to potentially have before a taxable account.

I appreciate everyone's ideas. You have really been a great help.

Determined
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Re: Starting Taxable Account vs. Increasing 403b

Post by Determined » Sun Apr 15, 2018 8:35 pm

Can you retire full benefits after 30 years on MD? Asking because I am jealous. Ohio now requires to teach to 60 and 35 years. If I retired at 30 I would get half of what I get at age 60. I love teacing, but I wish I had the option to retire with full benefits sooner.

krow36
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Re: Starting Taxable Account vs. Increasing 403b

Post by krow36 » Mon Apr 16, 2018 1:52 pm

I suspect that teachers having a state pension is not enough to be considered a MD State employee. Here’s a definition of a State employee, from the 457 plan document (bold added):
http://msrp.maryland.gov/plandocument457.pdf
Employee - Any person employed by the State, and classified as an employee of the State under the State Personnel and Pensions Article of the Maryland Code, or other relevant provisions of Maryland law. Employee as used herein also includes persons specifically authorized to participate in this plan by State Personnel & Pensions Article, subtitle 35. Members of the General Assembly; members of the judiciary; employees of the legislative branch of the State; and contractual and temporary employees of the State shall be included within this definition. Employees of autonomous and independent units of State government, including regional authorities are included within this definition, but persons employed by political subdivisions or local governments are not included as Employees eligible to participate in the Plan. A person is not an eligible Employee merely because the State provides a source of funding for the wages of such employee, directly or indirectly. There is no minimum age or period of initial service necessary to participate in the plan as an Employee.
The 457 has this to say about eligibility:
http://msrp.maryland.gov/plans.htm
ELIGIBILITY & COVERAGE
All state employees are eligible to participate in the 457 and 401(k) plans.  Employees of state educational facilities also are eligible for the 403(b) plan.  State educational institutions include state colleges, state universities, the Maryland Department of Education, the Maryland Higher Education Commission, the Maryland School for the Deaf and Maryland Public Television.
I’ve found this same situation in a number of other states. There is a low-cost 457 available to state employees including state university employees, but not to teachers because they are not state employees although the state does pay for a good part of their salary.

So the question is, does your school district have a 457 provider list? It's possible you could luck out and that Fidelity is on that list also. :happy

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F150HD
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Re: Starting Taxable Account vs. Increasing 403b

Post by F150HD » Mon Apr 16, 2018 2:34 pm

BlackcatCA wrote:
Sat Apr 14, 2018 1:22 pm
You may wish to maximize 403b before opening a taxiable account, since 403b contribution lowers your AGI and your taxes. If your side businesses are successful you'd want a lower AGI.
+1 huge bonus to putting $$ into tax deferred.
trumpet83 wrote:
As a teacher you may also have access to a 457? if so you may be able to contribute to both.

YMMV

trumpet83
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Re: Starting Taxable Account vs. Increasing 403b

Post by trumpet83 » Mon Apr 16, 2018 3:22 pm

Determined wrote:
Sun Apr 15, 2018 8:35 pm
Can you retire full benefits after 30 years on MD? Asking because I am jealous. Ohio now requires to teach to 60 and 35 years. If I retired at 30 I would get half of what I get at age 60. I love teacing, but I wish I had the option to retire with full benefits sooner.
They recently started what is called the "90 system" which means your age + service time has to add up to 90 to receive full health benefits. However, I started my service time while the 30 and out plan was still in effect. Of course, I'm a ways from any of this (just year 12) so I would have to attend some retirement meetings to be sure of the ins and outs. That being said, teaching until 60 would mean 38 years of teaching for me and a similar amount to anyone who comes straight out of college and goes into a job. That's a long time in any field!

Regarding the Maryland State employee, all I know is that I get an official looking document each summer from the state of Maryland telling me what my estimated pension will be in retirement. We do have access to a 457b in my county. Nationwide is the provider and I may look to even beginning a plan with them.

I guess that psychologically, my reason for an interest in a taxable account is that it allows me to take my teaching money and have that provide our "lifestyle" and then my "hustle money" from the side work goes towards growing wealth. Doing it by jacking up the 403b would mean providing a reasonable lifestyle by means of doing all the extra work. However, I know that I'm getting input from a lot of very savvy people on here so I plan to follow the overall theme of advice... do the Roth and then ratchet the 403b upwards to see how high we can get before lifestyle has to change in a way that would be too drastic. Possibly 457b as well.

Determined
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Re: Starting Taxable Account vs. Increasing 403b

Post by Determined » Mon Apr 16, 2018 8:28 pm

trumpet83 wrote:
Mon Apr 16, 2018 3:22 pm
Determined wrote:
Sun Apr 15, 2018 8:35 pm
Can you retire full benefits after 30 years on MD? Asking because I am jealous. Ohio now requires to teach to 60 and 35 years. If I retired at 30 I would get half of what I get at age 60. I love teacing, but I wish I had the option to retire with full benefits sooner.
They recently started what is called the "90 system" which means your age + service time has to add up to 90 to receive full health benefits. However, I started my service time while the 30 and out plan was still in effect. Of course, I'm a ways from any of this (just year 12) so I would have to attend some retirement meetings to be sure of the ins and outs. That being said, teaching until 60 would mean 38 years of teaching for me and a similar amount to anyone who comes straight out of college and goes into a job. That's a long time in any field!
I have been teaching 25 years, and I did not get grandfathered into the change. You are right, 38 years for full benefits is a long time in the same field. We expect there will be some districts that will start to offer buyouts, because it is going to cost them a lot to keep so many teachers on at the top of the pay scale for that long.

As far as investments, my 457 is better than my 403b. I max the 457 and Roth IRA.

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