Author Topic: Roth 403b or Index Fund?  (Read 2845 times)

olivia

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Roth 403b or Index Fund?
« on: April 29, 2013, 09:42:25 PM »
I'm very new to MMM, but have already started implementing some major changes and am looking forward to implementing even more.  I'm not super familiar with investing beyond your standard regular stocks/403b/IRA, so I'm continuing to read more here and will move over to Bogleheads eventually. 

I have a 403b that I contribute 5% to and my employer matches 5%.  I can't contribute more than 5%-that's the max I'm allowed to contribute with my years of service.  (Only been at the job for 2 years.)  So since I couldn't increase that, several months ago I increased my contribution to my Roth 403b to 15%.  Both 403bs are through Vanguard. 

However, I'm wondering if I would be better served by opening an index account with Vanguard instead of putting 15% in the Roth 403b.  (I would like to do both but am currently saving for a down payment for a house, so for now I need to do one or the other.)

Thank you in advance for any input and pointers!     

Joel

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Re: Roth 403b or Index Fund?
« Reply #1 on: April 29, 2013, 10:28:30 PM »
A Roth 403b is the vehicle that your funds are stored in, those funds could still be invested in an index fund within that account.

Depending on your tax situation you may want to contribute to a traditional Ira though.

AtlantaBob

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Re: Roth 403b or Index Fund?
« Reply #2 on: April 30, 2013, 06:46:15 PM »
As Joel said, a 403(b) is only a vehicle, and the funds inside it can be invested in anything (index stock fund, dividend mutual fund, bond fund, etc.)

However, I'm surprised that you can only contribute 5% to your 403(b). Your matching may be maxed out at 5%, but I don't recall any rules that would supersede the IRS-imposed $17,500 / year maximum contribution to your 403(b). You might want to ask your HR department to double-check that limit -- it seems strange. Also, you may want to check and see if you have access to a 457(b) plan, which is often available to folks who have a 403(b). [For those who don't know, a 403(b) is basically the public-sector/non-profit (non-Federal) version of a 401(k).]

That being said, if you're saving up for a downpayment within the next 5 years or so, even an index stock fund may be too risky for you. Stock index funds are great over a period of 7+ years, but you have to be ok with the fact that they may fall 50% or more within a year. My suggestion is that you go for a very short term bond fund (VFSTX), or a dividend-focused index fund for the short run (dividend-focused funds tend to hold their value better in a down market). If you're looking to buy a house in the next 6-12 months, a money market fund might allow you to sleep better at night (since the amount of interest that you'll gain in a short-term bond fund/dividend mutual fund will be minimal in that time period).