Should I be maxing out my 403b, or not?

[WyoArcher]

Hello! I'm new to the forum and seeking some investment advice. I'm 44 years old, have zero debt, fund my Roth IRA to the max each year and contribute to my employer's 403b up to the matching 4%. I've heard a lot of negative feedback about maxing out 401k/403b plans and that one should only invest up to their employer's match. However, I am financially able to max out my 403b each year but I'm hesitant to do so based off of the negative feedback posted all over the Net. Should I be maxing out my 403b ($18k/year) or is there a better alternative for investing that I should consider first? And when/if my 403b is maxed out, what other investment options would be recommended for extra funds that would be available? Vanguard index funds? Any help or guidance would be greatly appreciated.

[MDM]

WyoArcher, welcome to the forums.

Yes, you should maximize 403b contributions.  Now you have some positive feedback from the Net. ;)

So we need to go beyond "yes vs. no" and ask "why?".  The answer is all about maximizing your after-tax results.

Investing up to the match is likely the highest guaranteed ROI available to you, so that is indeed the first place to put money once basic expenses are covered.

You have zero debt (congratulations!) so there is no need to compare loans payments vs. investment returns.  Didn't see anything about HSA eligibility so we'll also skip that topic (but can return to it if applicable).

Next, look at the investment options, and costs thereof, available to you in an IRA (essentially infinite) vs. your 403b.  Some 403b plans have very high fees so your next money (after the "up to the match" above) would go to the lower fee investments you can get in your IRA.  Other 403b plans have institutional grade funds with lower fees than you can get as an individual investor so you would fill up the 403b first.

If you still have investable income, fill up the remaining space in the combined IRA+403b bucket.  Better to use tax-advantaged funds of any kind vs. taxable investments.

But if you still have investable income after filling the IRA+403b bucket, by all means do invest it!  Vanguard, Fidelity and Schwab all offer low fee index mutual funds and ETFs.

The choice of "traditional vs. Roth", both for IRAs and 403bs, should be based on your estimation of current tax rate vs. what tax rate you will pay when you withdraw.

Answers above could lead to more questions - if so, just ask.

Good luck!

[WyoArcher]

Thanks MDM for taking the time to explain my options. It was much appreciated. More homework ahead for me, but that's okay…I'm learning a lot!

[fartface]

I am age 40 and contribute $1450/month to my 403b in addition to maximizing Roth + pension contributions every year.

I don't regret this move one bit, and would recommend the same for you.

I have been lazy, but will probably increase my 403b to $1500/month soon to get to the 18K for the year...

Additionally, I put as much as I can into the FIRE (taxable Vanguard brokerage) account each month. So, yes, I also recommend you balance out your retirement funds with an ER fund -- especially if you can start with admiral shares of VDADX or VTSAX.

[Dicey]

Other considerations:
Are you able to save more in non-retirement savings? If you RE, they're easier to tap into.

What is your taxable income rate? Now that I'm FIRE, I can see that for many of my early years, I would have been better off paying the taxes, as my post-retirement income is considerably higher that I ever imagined it would be and higher than at least half of my earning years. The argument that you are saving more than you would have if you had paid the taxes has some merit, but mostly, I think, for people who are not good savers. If you are mustachian and a good saver AND you want to retire early (is that redundant?), I think a case could be made for getting the match and then investing the rest in taxable accounts, depending on your income level and savings rate. Or buy rental property with the amount over the match. Loads of tax savings via that route, but somewhat more work.

[WyoArcher]

Thanks for all of the guidance everyone.


 

[WyoArcher]

My Roth and 403b plans are now maxed out. I have $10k+ to invest immediately. Put yourself in my shoes; how would you invest this money? Which fund/s specifically and asset allocation? Would you invest 100% of it into index funds? Would you suggest spreading it out over different assets, i.e. index funds, precious metals, real estate?

As you can tell I am ignorant when it comes to investing. I might not be providing enough personal information, but I am just looking for more specific scenarios that will make my money work for me while avoiding stupid mistakes along the way. GOAL: INVEST…CONTINUALLY FEED THE FUND…and FORGET ABOUT IT.

Is anyone willing to share their personal investment portfolios with me? Not your private, personal information…obviously. Can you share investment scenarios? Asset allocations? Preferably someone in my age group, as my level of investment risk will be more conservative than someone in their 20's.

FartFace (interesting username btw!) since you are in my age group (sorry) can you give me some specifics on how your assets are allocated? Meat and potatoes ;)

Does anyone recommend (or currently utilize) Target Retirement Funds? Good option, or should I avoid these? I've heard mixed feedback.
Thanks guys!

[MDM]

My Roth and 403b plans are now maxed out. I have $10k+ to invest immediately. Put yourself in my shoes; how would you invest this money?
Which fund/s specifically and asset allocation? Would you invest 100% of it into index funds? Would you suggest spreading it out over different assets, i.e. index funds, precious metals, real estate?

Is anyone willing to share their personal investment portfolios with me? Not your private, personal information…obviously. Can you share investment scenarios? Asset allocations? Preferably someone in my age group, as my level of investment risk will be more conservative than someone in their 20's.

Does anyone recommend (or currently utilize) Target Retirement Funds? Good option, or should I avoid these? I've heard mixed feedback.

At your age we had ~90% stocks / 10% bonds.  There was no plan to that - just looking out the rear view mirror and telling you what it was - but it is defensible albeit somewhat aggressive.

You could do a lot worse than the Three Fund Portfolio.

100% into index funds is very defensible, particularly for someone "ignorant when it comes to investing."  Note there is absolutely no shame in that: it describes the vast majority of people.

Precious metals could go back up, but seem (to me - for whatever that's worth) more likely to revert down toward their inflation-tracking norm.

Target Date Retirement Funds are perfectly valid as a place to start, and perhaps even as a place to stay.  They are what we have recommended to younger family members just starting their investments.  Consistent with the risk tolerance noted above we have tended to recommend "later" target dates than the investors' current ages would otherwise suggest.

[WyoArcher]

Thanks MDM. I was looking back at your previous post and did a little more research and comparison of Vanguard's Admiral Shares/Index Funds. After some consideration I believe the VTSAX just might be the way to go. Very low cost and seems to be a good mix across the market. Thanks again!

[jwillis84]

Like a 401k the IRS "allows" the 403b to be offered as a Traditional or Roth version. The difference being whether you pay taxes now or later. I tend to think taking the tax break now (Traditional) is a better strategy since in your earning years it helps reduce your taxable income when calculating taxable gains against any sales in your taxable portfolio.. so you get a two-for-one tax benefit. A reduction in AGI for end of year taxes and a tax break on any gains should you rebalance, have to sell or move balances between investments in your taxable accounts. In your early years (less than 55) your more likely to experiment and "need" this tax cushion or buffer.. while your learning.

Any Traditional savings can then be "converted" to Roth in years when you have low earnings coming in. Say because of a job change, loss or in those final twilight years before retirement when your partially employed or experience a forced reduction in pay for whatever reason. And you'll be at a lower taxable income rate anyway because of your overall earnings that year, so you will pay less.. another two-for-one tax savings opportunity.

If your lucky and end up with it all converted to Roth by retirement you'll never have to deal with with paying taxes again.

As for the simple answer to the simple question: My opinion.. YES.. Whole heartedly

Even a bad set of investment choices can start to look good when you consider that money put into that 403b is shielded from taxes on the growth.. which artificially "reduces" the expense ratio.. and you'll get another chance to roll-over either when changing jobs or at the end of your career to a personal IRA. "Missing" the opportunity is costly, once that contribution year is gone.. its gone forever.. as they say "its like giving up free money".

A tax favorable investment is almost always better than a taxable investment account, unless its also serving as an emergency fund.

As for in what? Any Institutional Fund with incredibly low expense ratios. If they offer a Vanguard and you are partial to that and they have a similar Fidelity Spartan. I would go with the Vanguard. Simply because the difference between the two is not just the expense ratio.. but also the "tracking error".. between two funds tracking the same index, what is different about them is their tracking error. If you have Vanguard in another account and in this 403b account they will track together.. if you have them mixed they will not.

Vanguard has a method and purpose in alignment with its owners (us) and makes its trades to maximize profits and minimze taxes for (us). Fidelity is a "for profit" company with owners (not us) and might be swayed in various ways to make decisions that don't always benefit (us) if the tracking error is not too great. I'd rather not take the risk.. even if I cannot prove such a situation.

One other thing to consider is to fully explore all options to you.

Some employers offer a 403b and a 457 plan or even also a 401k plan. Since the Bush tax cuts ( Economic Growth and Tax Relief Reconciliation Act of 2001 ) and since made permenant. The maximum allowed contributions were "decoupled" meaning you can max out each "type" and still not hit the ceiling. The maximum was only for each type, not in total.

I max out a 403b and a 457 and a personal Roth-IRA, all tax favorable accounts each year. The 403b and 457 reduce my taxable income. Then I put the rest into a non-dividend returning fund/stock which serves as an emergency fund. It does not by itself throw off taxable cash, so it grows. When I do have to dip into it, the gains are long term and subject only to my reduced taxable income rate for long term capital gains for the year.. sometimes "zero".

When I don't need to dip into the emergency "fund" it grows through its own reinvestments.. this also helps compensate for years in which the market is down and even this investment is affected.. but since I don't sell it, the real value always rebounds with the market... I'm not loosing stock when the market goes down.. I have the same number of shares tomorrow as I had yesterday. Berkshire Hathaway B shares are an example.. and because of the anti-tech leaning of its leader tends to run counter to most bubbles.

Non-dividend producing stocks are beneficial to moving gains around from high income years to low income years, so that you ultimately pay less on the gains determined by your capital gains tax rate.

I haven't explored a backdoor Roth IRA, but that might be something else to consider depending on how much you earn.

I'm still pretty new to investing (~16 yrs) and have trouble focusing on too many variables... so I'm sure you can do better.


Good luck

[TomTX]

While there are advantages to tax-deferred (traditional IRA) funds, I have become more and more enamored with Roth, unless you pay a very high income tax rate. This favoring is mostly due to the RMD "feature" of traditional IRA, combined with the additional Social Security tax you can be trapped into when drawing on Social Security and also pulling Traditional IRA funds.

[RobLang]

I'm late to the game in posting here. Just officially joined the MMM community so I can participate more in the discussions.

I just started a new job and I've been contemplating this same question. The 403(b) plan is pretty mediocre / outright bad in my opinion. It's through TIAA CREF and the fees are rather high. The cheapest fund available to me, which is a Russell 3000 equity index, has a 0.61% expense ratio. Other funds in the plan have expense ratios well above 1%). Dumb. I'll definitely be taking advantage of my employer's matching contributions, but the question is whether to contribute beyond that level. Are the tax-deferred benefits of a 403b lost if it comes with a high fee eating away at the gains?  Would it maybe be better to limit my contributions just to the matching level and then invest the rest on my own in lower fee (and possibly higher performing) funds that I'm already in like VTI or SCHB?

Trying to weigh and determine options. I know tax-deferral benefits are big, but at what threshold of plan fees are those benefits negated?
I'd really love to find a good algorithm tool that could help me see different possibilities and outcomes of these choices long-term. Plug in some data and see what that shows. I haven't done a ton of digging yet, but I haven't found one immediately available either. Any recommendations?

Thanks!

[MDM]

I'm late to the game in posting here. Just officially joined the MMM community so I can participate more in the discussions.

I just started a new job and I've been contemplating this same question. The 403(b) plan is pretty mediocre / outright bad in my opinion. It's through TIAA CREF and the fees are rather high. The cheapest fund available to me, which is a Russell 3000 equity index, has a 0.61% expense ratio. Other funds in the plan have expense ratios well above 1%). Dumb. I'll definitely be taking advantage of my employer's matching contributions, but the question is whether to contribute beyond that level. Are the tax-deferred benefits of a 403b lost if it comes with a high fee eating away at the gains?  Would it maybe be better to limit my contributions just to the matching level and then invest the rest on my own in lower fee (and possibly higher performing) funds that I'm already in like VTI or SCHB?

Trying to weigh and determine options. I know tax-deferral benefits are big, but at what threshold of plan fees are those benefits negated?
I'd really love to find a good algorithm tool that could help me see different possibilities and outcomes of these choices long-term. Plug in some data and see what that shows. I haven't done a ton of digging yet, but I haven't found one immediately available either. Any recommendations?

Thanks!

In short, 0.61% is probably ok.  For the longer version...:

Here is the "usual advice", current as of the posting date.  See the 'Investment Order' tab in the case study spreadsheet for the latest version.   
"Max..." means "contribute up to the maximum allowed for..., subject to your ability to pay day-to-day expenses."   
   
It is up to you whether to consider "saving for a house down payment" as a "day to day expense", vs. lumping the down payment savings in with "taxable investments" at the end.   
If you are renting, you may not be throwing away as much on rent as you might think.  See   
   http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/ for some thoughts.
   
In the lists below, thinking "first your 457 (if you have one), then your 401k and/or 403b" wherever "401k" appears is likely correct -   
   unless your 457 fund options are significantly worse than those in the 401k/403b -
   due to penalty-free access to 457 funds at retirement, even if younger than 59 1/2.
   
Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).   
   
Current 10-year Treasury note yield is ~2%.  See   
   http://quotes.wsj.com/bond/BX/TMUBMUSD10Y
   
WHAT   
0. Establish an emergency fund to your satisfaction   
1. Contribute to 401k up to any company match   
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.   
3. Max HSA    
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level   
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)   
6. Fund mega backdoor Roth if applicable   
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.   
8. Invest in a taxable account with any extra.   
   
WHY   
0. Give yourself at least enough buffer to avoid worries about bouncing checks   
1. Company match rates are likely the highest percent return you can get on your money   
2. When the guaranteed return is this high, take it.   
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.   
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see   
   http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
   if you want even more details on that topic).  See also
   https://www.bogleheads.org/forum/viewtopic.php?f=2&t=182081,
   http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-overwhelming-student-loan-debt-how-would-you-get-started/msg868845/#msg868845
   and other posts in that thread about exceptions to the rule.
5. See #4 for choice of traditional or Roth for 401k   
6. Applicability depends on the rules for the specific 401k   
7. Again, take the risk-free return if high enough   
8. Because earnings, even if taxed, are beneficial   
   
The emergency fund is your "no risk" money.  You might consider one of these online banks:   
   http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001
      
If your 401k options are poor (i.e., high fund fees) you can check   
   http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/
for some thoughts on "how high is too high?"