403B vs Roth 403B with Vanguard
Evening YNABers,
I am in the midst of trying to learn about best retirement planning and investing. I am late to the game, but never too late. Since YNAB changed our life 2years ago we've pulled out of a ton of debt and are now in the save/retirement mode.
My wife and I (both in our 40's) both work at a non-profit which offers 403b and/or Roth 403B via Vanguard. This was just made available in 2018. We put in the maximum amount that allowed for our full-employer match in 2018 and are on track for doing so also in 2019.
I have gone through Jesse's investment series, read The Simple Path to Wealth, and am just trying to get my hierarchy for deploying our investment money. Since the Roth 403B is really new, I can't find much to read on it, but assume it acts very much like a Roth 401K.
Through Vanguard I am allowed to allocate how much from my account, as well as my wife's, goes into our employer 403B or Roth 403B, and don't know which I should put our money in.
We started with the 403B, and then switched and most of it is now in the Roth 403B, which if I understand correctly, is taxed now and not at retirement withdrawal, BUT the "matched" portion from my employer WILL be taxed at withdrawal at retirement.
Does this sound correct?
My questions are as follows:
(1) Should I fund my employer-matched 403B, or Roth 403B or some combination of the two?
(2) Should I only fund #1 up to my employer match and then fund a personal Roth IRA (or a personal Vanguard account) OR keep funding #1 past my employer-match? My gut tells me to fund beyond my #1 employer-matched 403B/Roth 403B since it is with Vanguard
Either way, would love any thoughts, insights, or recommendations appreciated!
Matt
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Here are a couple more things to read about Roth vs. Traditional. They talk about 401k, but 403b is essentially the same.
Bogleheads: https://www.bogleheads.org/wiki/Traditional_versus_Roth
The Finance Buff: https://thefinancebuff.com/case-against-roth-401k.html
As for funding order of accounts, this is a good read over at Bogleheads:
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nolesrule According to the "Prioritizing investments" on the bogleheads site, I would contribute up to my employer match first (got it) and #2 and #3 do not apply to me (high interest debt or HSA).
Then it recommends (#4) Contributing to IRA, traditional or Roth spending on circumstance and (#5) Contributing remainder to employer work-based program and then on to #6 and #7.
This is essentially my question, focusing on #4 and #5. What I am wondering is why I just wanted do #5 (remainder of employer-based plan) before #4??? What is the benefit of only contributing to work-based plan up to the match and then moving on to an IRA, then to return back to the employer-based plan?
Our employer based plan is with Vanguard and I have it directed to VTSAX and VBTLX, and just didn't know the benefit of contributing to a personal IRA when I will rarely be able to max it the employer based one?
Sorry ahead of time if I am asking a question that doesn't make sense or is missing an obvious point, I am a newbie to all of this!
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canman So, generally a workplace retirement plan has limited investment options that aren't always the best choices and may have higher expenses. If you are paying a percentage of balance management fee in your 403b or there are add-on expenses on the investments above the standard expense ratio for the fund that will take a bite out of your returns, then the IRA would be less expensive, even for the same investment options.
If, on the other hand, your 403b has no add-on percentage expenses and the ERs for the funds are the standard ones, then it doesn't matter if you go IRA vs. 403b.
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nolesrule That's what I needed! I will do some homework to see if there are additional fees, etc. with Vanguard through my work. What is fantastic is that we are allowed the Admiral Shares and their cheaper expenses without having the initial $10K contribution.
I also suppose that having an IRA is also good for any money that we wanted to put into retirement that didn't come through our work, i.e. side hustle, etc.
Really appreciate your help, thanks again.
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canman If you have earned income from side hustles that would be reported on a Schedule C, you can open up a Solo 401k. That's when it really gets interesting and complicated.
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canman Yeah, VTSAX and VBTLX would be my primary choices, along with some VTIAX for international stock flavor. Wish I had access to those in my 401k.
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For most people, Traditional will be the right choice for 401k/403b, unless they are early in their career and will have a huge increase in income (like a resident medical doctor who makes little but after a few years goes into practice with a very high income).
For IRA, it's a little more complicated, because the ability to deduct a Traditional IRA contribution phases out at certain income levels, and so does the ability for a direct Roth IRA contribution. At that point, there is a process for getting money into a Roth IRA, but having non-taxed money in a Traditional IRA can make that process prohibitively expensive.... so in general I recommend IRA contributions be Roth.
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nolesrule Thank you for all of this. Because of my age/career point (mid 40's) I am leaning the way you are nudging, 403B vs. the Roth option of it. I will check out the links, thanks again.
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canman Consider your broader financial plans in making your decision. I.e., savings and other decisions, other than investing to your employer retirement accounts. In addition to specific personal advice available to you on bogleheads.org/personal finance, This advisory flow chart from the wiki at reddit.com/r/personalfinance is excellent advice in succinct form.
The advice provided by Bogleheads can be very detailed and specific and is dependent on the degree of detail you provide. You can maintain your anonymity while doing so.
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