Author Topic: New mustachian employer 403b allocation question  (Read 2615 times)

mr threelittlebirds

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New mustachian employer 403b allocation question
« on: October 17, 2014, 05:56:14 AM »
Hey everyone, I am fairly new here and have been reading the forums quite a bit lately.  I have a specific question about my 403b account through my employer and where to allocate my resources. 

A little background.  My wife and I have two children, one born recently and she is on Maternity leave.  We have never had a large income but I make over $50,000 and only started my career two years ago.  We have a mortgage and student loans.  However through MMM we are able to survive on my income and so when she goes back to work we can stash away her income (which won't be much as she will mainly be taking care of two children and working when I am home with the boys).  So our savings rate is not a much at this time. 

My employer has a 403b match of half of what you contribute up to 3% on their end and 6% on my end.  Also if the organization does well for that financial year they will also dump a certain amount in the account (in the past around $300-$400).  I contribute 6% to my 403b and receive their 3%.  I was in their default retirement account based on age and when you will retire, I am 28.  I hear everyone talk about index funds and Vanguard but am not sure how that applies to my employer account.  I will attach my spreadsheet of the options we have to choose from and how they have been doing.  Let me know what you all think about where to put my current and future money. 

Also down the road when we start to save more I think the general goal is to get employer match on 403b, then max out roth, then max out 403b, then taxable accounts?  I know this is down the road for me I just want to make sure I am starting in a good place to make up for early financial mistakes. 

Thanks.

clarkm04

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Re: New mustachian employer 403b allocation question
« Reply #1 on: October 17, 2014, 07:18:21 AM »
You are restricted by the funds in your 403(b), which are mostly Principal with some PIMCO.

Based on your spreadsheet, Principal Global has a large, mid, and small cap index funds all under .25% expense ratios.  I would invest in those.

The bond and international funds are higher, but doable sitting at ,70ish for the bond and around 1 for international.

My suggestion would be to keep placing the 6% to get the match and then have that be 100% stock using those 3 index funds mentioned above.  Then when you open a ROTH, have your bond and international in there and treat everything as one large portfolio.  Since you may not open a ROTH for a bit, doing the International and bond in your 403(b) and then selling when you open your ROTH and the allocation is right might be a good way to go.

I like your plan of 403(b) > ROTH > Max 403(b) > Taxable

That's what DW and I are doing.  Just make sure to watch where your taxable income is.  If you are borderline, you can save easy money by stuffing your 403(b) more to avoid a higher bracket.

Good luck!

mr threelittlebirds

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Re: New mustachian employer 403b allocation question
« Reply #2 on: October 17, 2014, 07:53:35 AM »
Thanks, I am currently in the "Multiple Sub-Advisors PTEFX Principal LifeTime 2050 R5 Fund" that has a 1.03% fee and has been having around 5% return since its beginning in 2001.  There is "Principal Global Investors PLFIX LargeCap S&P 500 Index Inst Fund" that is under 5% return but also has lower fees around 0.16%.  There are other options that look like they have better returns but honestly I don't really know the difference.  I am thinking of going 50/50 between those two but I see that there also are the two S&P 400 and 600 as well.  Maybe split 33% in each? 

Thanks for the feedback.

DrF

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Re: New mustachian employer 403b allocation question
« Reply #3 on: October 17, 2014, 08:04:27 AM »
I would transfer all funds immediately to the PLFIX fund (large cap 500) which has a 0.16% fee (this is the lowest). Also, change any future allocation to the PLFIX fund. It seems like you are just starting out, so keep it simple and put everything into the same fund at your work (the least expensive fund).

It seems like you earn less than the cutoff for the traditional IRA - so this means that you should open a Traditional IRA and NOT a ROTH. Please read this post if you are in doubt. http://www.madfientist.com/traditional-ira-vs-roth-ira/

Putting money into a traditional IRA will reduce your tax bill even further because all contributions will be pre-tax. It sounds like you have a fair number of deductions, so you shouldn't be paying much in state or federal taxes. If I were you I would put my # of deductions to like 3 or 4 to have as little taken out as possible every paycheck. If you are + or - more than ~500 dollars at tax time, then you are doing it wrong and should optimize your deductions accordingly.

Open up your Traditional IRA with Vangaurd or Fidelity or whatever, and if you want, you can diversify your portfolio by doing a bond fund, international, mid cap, or small cap fund in your IRA. Try not to do too many of these all at once. After you get the hang of things (learn more) then you can adjust. Make sure you get the lowest cost INDEX funds you can find for your Traditional IRA. These should be around 0.07% or less. I would MAX the Traditional IRA before adding any more to your 403b (after getting the match of course).

Also, VERY important here, your wife can open a Traditional IRA too! Make sure both you and your wife have a Traditional IRA and you contribute $5500 to each every year before you add any additional to your 403b. There are better options available from Vanguard or Fidelity than your employer has, so it is better to put money in your IRA before going back to the 403b.

Hope this helps.

DrFunk

mr threelittlebirds

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Re: New mustachian employer 403b allocation question
« Reply #4 on: October 17, 2014, 08:29:53 AM »
Thanks Dr Funk.  I know there is a $17500 limit and a $5500 limit for yearly contributions, for some reason I thought $5500 had to be to a Roth, but it makes sense to put it in a tax deferred account.  So employer match then $5500 into a traditional IRA and then max out the $17500 amount.  I will readjust if our income changes when the little ones are in school in a couple of years and she can work more. 

As for deductions, we had run into issues when one person works full-time and the other part-time and filing jointly.  For some reason the part-time income was not really taxed much because Uncle Sam thought that was the only income for that person and we had to pay taxes at the end of the year.  I agree it would make sense to try not to be far off from what we need to pay to maximize investing the income rather than having the government hold it for a year and give it back at no interest.  However our income has never been consistent as we were supporting each other while one finished school.  I will take all of this into account.

Thanks

DrF

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Re: New mustachian employer 403b allocation question
« Reply #5 on: October 17, 2014, 08:53:06 AM »
Income limitations for traditional IRA tax deferral. If married filing jointly, you have to earn less than $96,000 (modified AGI) to get the full deduction.

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/2014--IRA-Contribution-and-Deduction-Limits---Effect-of-Modified-AGI-on-Deductible-Contributions-If-You-ARE-Covered-by-a-Retirement-Plan-at-Work

So, when your wife goes back to work if you go over this then I would MAX out the 403b before putting money into a ROTH. My personal preference though.

Good luck!

teen persuasion

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Re: New mustachian employer 403b allocation question
« Reply #6 on: October 17, 2014, 02:08:13 PM »
OP, you mentioned that your income is over $50k, MFJ and have two kids.  If you put as much possible in your 403b, esp if you can max it, you could be eligible for EITC and the retirement savers credits.  Contributions to tIRAs won't work to lower your AGI for the EITC (they also test line 7 wages);  in this scenario it is better to contribute to the 403b before moving on to the tIRAs.

My state also matches the EITC at 30%, so we save even more on both fed and state taxes.  The phaseout rate on the EITC for us is 21%, so every dollar DH puts in his 401k makes us eligible for .21 more in EITC, .063 in state EITC, saves .04 in state tax and .10 fed tax, or 41.3% altogether.  HSA contributions are even better, since they also save the 7.65% FICA, for a total of 48.95%.

Run the numbers to see if you can get your income in EITC range, and/or in Retirement savers credit range.  Contribute at least $2000 to your 403b and to a tIRA for DW for the best return here.