403b/IRA questions from a beginner

[Dagmar]

My husband and I are trying to get our retirement accounts in order, and I have a few basic questions.  I am new to finance and investing, and I've been browsing this site and forum for the past month, and plan to read some of the suggested investment books this summer.  In the meantime, I wanted to know if I'm on the right track.

salary: 51k (husband is a teacher, I stay home with our toddler)
403b: 23k
Roth IRA: 5k (all college savings)
bank savings (emergency fund, plus a couple others): 10k
only debt is mortgage: owe 93k with 26 years to go

I have a Roth IRA with Franklin Templeton that I plan to switch over to a Vanguard Target Retirement Fund.  I plan to use this account both for college savings for our child and as a retirement fund. My husband has a 403b with AXA and also contributes to a pension (which we've never counted towards our retirement).  It looks like the 403b choice AXA Moderate-Plus isn't so great, so we are looking into switching it.  Apparently, we have to call each vendor to get a list of their options, and we're working on getting this.  (The vendors are: AXA Equitable, MetLife, VOYA, Oppenheimer, Security Distributors, VALIC, Lincoln Investment, Aspire, Waddell Reed, Great American, Thrivent Financial, and Horace Mann.)  From other threads I've read on here, it seems like 403bs can have crappy options.

I'm interested in the Vanguard Target Retirement 2045 fund -- it seems like that fits with my very basic knowledge (so far!) of what I'd like my asset allocation to be.  The 2045 is: 57% US Stocks, 32% International Stocks, 7% bonds, and 3% international bonds.  At our current rate, we wouldn't be able to retire for 30 years (we're in our early 30s), but I hope to work full-time again in several years, part-time sooner, and save most of that, so hopefully we're at our slowest savings rate at the moment.

We currently contribute $300 a month to the 403b, split 60/40 Traditional/Roth.  We'd like to up it to $450 a month.  We also have my husband's two extra paychecks a year, which total around $3800 after taxes.  We also plan to start contributing $50 a month to my IRA for the college savings, once I switch it to Vanguard.  The current plan is to put the 403b savings into Traditional ($5400/year, though less this year) and put the extra paychecks, plus college savings, into my Roth ($4200/year).  I would also like to put any extra savings, as our frugality increases, into my Roth.

On the tax side of things, we're pretty close to the upper limit for the earned income credit.

There's no employer match for the 403b.

My questions:

a) Should my husband also open an IRA with Vanguard -- especially if the 403b options aren't great?  Is there any reason not to do this?  We have the minimum amount needed to open one.  It looks like, based on our AGI, that he can take a full deduction on Traditional contributions even though he has a retirement plan through work.  Would a Traditional or Roth be a better choice for him then?

b) Should we not increase the 403b contribution until we switch it to new vendors/funds?  I read the recent 403b thread that talks about surrender periods and other fees, so we'd need to find that out. The Kiplinger article posted in that thread also recommends just putting new contributions in a new account, and leaving the old if necessary.

c) Is it weird to use my Roth for both college and retirement?  I like this option based on what I've read about it, and I don't mind keeping track of what's what.  However, I wasn't planning on using the IRA as much for retirement when I opened it, but now it looks like we will be.

d) What do we need to ask the 403b vendors when we call, besides what are the available funds and their expense ratios?  And if they offer a 457?

I hope I'm not the person posting questions that have been answered elsewhere -- every time I read a new thread, I feel overwhelmed, like I just learn about more information that I don't know.  I really appreciate any advice, and nothing is too obvious to tell me!  I figure we'll read up on things and choose a 403b option for my husband in the next couple of months, but I am eager to get things going in the meantime, too.

Thanks!

[MDM]

My husband and I are trying to get our retirement accounts in order, and I have a few basic questions.  I am new to finance and investing, and I've been browsing this site and forum for the past month, and plan to read some of the suggested investment books this summer.  In the meantime, I wanted to know if I'm on the right track.

Dagmar, welcome to the forum.  It appears you are learning well!

It looks like the 403b choice AXA Moderate-Plus isn't so great, so we are looking into switching it.  Apparently, we have to call each vendor to get a list of their options, and we're working on getting this.

One might think the school district administration...or the union leadership...would work to provide this for the teachers...but no....

I'm interested in the Vanguard Target Retirement 2045 fund -- it seems like that fits with my very basic knowledge (so far!) of what I'd like my asset allocation to be.

Target Date Retirement funds are perfectly reasonable investment vehicles.  Pick one that corresponds with your desired asset allocation, not necessarily the one associated with your planned retirement year.

salary: 51k (husband is a teacher, I stay home with our toddler)
We currently contribute $300 a month to the 403b, split 60/40 Traditional/Roth.  We'd like to up it to $450 a month.  We also have my husband's two extra paychecks a year, which total around $3800 after taxes.  We also plan to start contributing $50 a month to my IRA for the college savings, once I switch it to Vanguard.  The current plan is to put the 403b savings into Traditional ($5400/year, though less this year) and put the extra paychecks, plus college savings, into my Roth ($4200/year).  I would also like to put any extra savings, as our frugality increases, into my Roth.
On the tax side of things, we're pretty close to the upper limit for the earned income credit.
a) Should my husband also open an IRA with Vanguard -- especially if the 403b options aren't great?  Is there any reason not to do this?  We have the minimum amount needed to open one.  It looks like, based on our AGI, that he can take a full deduction on Traditional contributions even though he has a retirement plan through work.  Would a Traditional or Roth be a better choice for him then?
b) Should we not increase the 403b contribution until we switch it to new vendors/funds?  I read the recent 403b thread that talks about surrender periods and other fees, so we'd need to find that out. The Kiplinger article posted in that thread also recommends just putting new contributions in a new account, and leaving the old if necessary.

You are in an interesting situation.  For a couple with one young child and $51K gross income, there are a half dozen changes in your marginal tax rate as you go from $0 to $18K in traditional 403b contributions.  Contributing $14K puts you over 30% on federal income tax alone, so you might want to do $14K to the traditional 403b and use the Roth option for any IRAs and the final $4K of the 403b if your cash flow can handle it.

See the following links for more details, and feel free to ask more questions as needed:
http://forum.mrmoneymustache.com/forum-information-faqs/case-study-spreadsheet-updates/
https://www.bogleheads.org/wiki/Traditional_versus_Roth
https://www.bogleheads.org/wiki/Marginal_tax_rate
http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/

c) Is it weird to use my Roth for both college and retirement?  I like this option based on what I've read about it, and I don't mind keeping track of what's what.  However, I wasn't planning on using the IRA as much for retirement when I opened it, but now it looks like we will be.

Not weird.

d) What do we need to ask the 403b vendors when we call, besides what are the available funds and their expense ratios?  And if they offer a 457?

In addition to the funds and ERs, ask if there are any other fees you have to pay if you choose that vendor.

The school district (or, sometimes, the state government) has to offer a 457 option, just as they have to offer a 403b option, with certain approved vendors.

[MustacheAndaHalf]

Ideally you'd pressure your 403(b) administrator to provide Vanguard, Fidelity or Schwab as a vendor - each of whom has low-expense ratio index funds.  Just by the names of some of the ones you list, I expect you'll be looking at paying 1% annually to some of those vendors.  While at least 401(k) administrators (and I assume 403(b) as well) have a fiduciary duty to find lower expense ratios, they don't seem to get sued often enough to make it happen. 

The more significant point may be tax credits - see MDM's reply.  If Traditional option 403(b) contributions can provide you additional tax credits, that could be more significant than the expense ratio.  Look at the top level MMM forums for "taxes", and you can probably find hundreds or thousands of dollars a year from planning things correctly.  Look at the tax credits first, even before expense ratios. 

After tax credits, if you still have 20% of your income to save somewhere, you might try maximum contributions to Roth IRAs.  That will give you lower annual expense ratios, and control over your investments.  A Vanguard Target Retirement is a good, low cost way to set it and forget it.  Which is probably a good idea when juggling a toddler!  Good luck.

[Dagmar]

Thanks for the responses!  I especially appreciate the info on tax credits versus expense ratios.

My sister-in-law, who is a CPA, also recommended we do as much Traditional as possible.  I wasn't entirely sure why, but it looks like these links will help explain it to me.  I had downloaded the case study spreadsheet already but hadn't managed to do anything with it yet.  I guess it's time to study up on taxes!

I'm thinking that my husband should open a Roth with Vanguard with the savings we currently have, in addition to me switching my Roth over there.  That way, if someone should happen to give us a lot of money for my child's college fund, we'll still have plenty of room to contribute for retirement in Roth, in a place of our choosing.

Not sure how much this matters: I also have $800 in some type of pre-tax account from the brief period when I was in the carpenters' union.  I was going to convert this to my Roth.  I figure it's such a small amount that it's not a big deal to add it to our income for this year.  Let me know if there's some reason I shouldn't do this.

Thanks again.

[MDM]

I had downloaded the case study spreadsheet already but hadn't managed to do anything with it yet.

To get started, try the following number (assuming they are accurate) in cells G2 and below.
Filing Status            2   
# Exemptions         3   
# Children <17       1   
# Children for EIC   1   
         Adult #1  Adult #2
Ages           30           30

Then put =51000/12 in cell B2, and see the graph around cell H73.  If you are using Excel 2013 or later the graph title should make sense, otherwise it may not - see cell F91 for the reason.

[teen persuasion]

Money contributed to a traditional 401k/403b account will increase your EITC (thru lowered AGI AND lowered line 7 wages), while contributions to a traditional IRA will only lower your AGI.  So if you are eligible for EITC, put as much as possible in traditional 401k/403b accounts, not Roth.  If you want to fund Roth accounts, too, make them Roth IRAs.

My state matches EITC at 30%, and CTC at 33%, so there is an added incentive for me to maximize those credits.  Contributions to DH's 401k save us fed tax, state tax, plus the increased fed EITC and state match of EITC (.10 + .04 +.21 +.063 = .413 or 41.3 % gain on $1 added).  The .21 is the phaseout for us (more than one child), and .063 is 30% of that .21 phaseout.  For one child it looks like the phaseout is maybe 16%, so your gain would be different.


We fully fund a family HSA (which saves FICA as well as all the rest), then DH's 401k as much as possible.  Our fed tax hits zero, and the EITC and CTC come back as refundable credits.  I then use that refund to fund our Roth IRAs, since there is no further tax advantage to traditional for us at that point. 

[Dagmar]

To get started, try the following number (assuming they are accurate) in cells G2 and below.
Filing Status            2   
# Exemptions         3   
# Children <17       1   
# Children for EIC   1   
         Adult #1  Adult #2
Ages           30           30

Then put =51000/12 in cell B2, and see the graph around cell H73.  If you are using Excel 2013 or later the graph title should make sense, otherwise it may not - see cell F91 for the reason.

Thanks, that makes sense, and now I see where I should be watching the numbers change.

Money contributed to a traditional 401k/403b account will increase your EITC (thru lowered AGI AND lowered line 7 wages), while contributions to a traditional IRA will only lower your AGI.  So if you are eligible for EITC, put as much as possible in traditional 401k/403b accounts, not Roth.  If you want to fund Roth accounts, too, make them Roth IRAs.

My state matches EITC at 30%, and CTC at 33%, so there is an added incentive for me to maximize those credits.  Contributions to DH's 401k save us fed tax, state tax, plus the increased fed EITC and state match of EITC (.10 + .04 +.21 +.063 = .413 or 41.3 % gain on $1 added).  The .21 is the phaseout for us (more than one child), and .063 is 30% of that .21 phaseout.  For one child it looks like the phaseout is maybe 16%, so your gain would be different.


We fully fund a family HSA (which saves FICA as well as all the rest), then DH's 401k as much as possible.  Our fed tax hits zero, and the EITC and CTC come back as refundable credits.  I then use that refund to fund our Roth IRAs, since there is no further tax advantage to traditional for us at that point. 

Thanks for the info on the tax credit -- I think my state does 10%, but I'll check on it -- and good point about using the tax refund for the Roth IRA.