Tax time! 403(b) or IRA

[stash]

My quick story:

30 Years old
27 Year old spouse
Married filing jointly
Combined Gross Income $125,000

403(b) (mine) - Principal LifeTime 2045 R1 Fund - 1.66% Expense Ratio - 1.5% company match
403(b) (spouse) - Tiaa-Cref - The Lifecycle Index 2050 Fund - .49% Expense Ratio - 0% company match

Other financial notes:
$10,000 Student Loan @ 1.5%
$40,000 Student Loan @ 5.5%
No mortgage, payments, or other debts.
$10,000 emergency fund

We did what we could last year and maxed out one of the 403(b) accounts. We are currently looking at a tax bill of $500. If I fund a traditional (deductible) IRA with $3000 each for 2013 (due to phase out limits), it changes our tax bill to a $1,200 refund. I understand that this is only deferring taxes until later, but does that make this the right or wrong thing to do?

Moving forward, on top of getting the company match, is it better to take advantage of the tax-deferred 403(b) accounts first, or max out an IRA first (whether Roth or Traditional)?

I feel as though we are squarely in the 25% tax bracket and nothing will really change that. Therefore any 403(b) contributions are essentially saving 25% and using that savings to grow interest. On the other hand, I’m in love with the idea of Roth IRAs but would then only be able to fund them partially, if at all.

A lot of advice I read says to max out IRAs before maxing out 403(b)s, but no one mentions the immediate tax benefits. What am I missing? Please. Help.

[Cromacster]

I disagree that you are solidly in the 25% tax Bracket.

My wife and I have roughly the same gross income as you.  If you can contribute roughly 22% of your income to your 403(b), while taking standard deductions.  It puts you in the 15% income bracket.  Which, if you are already maxing one of them, only requires about 8k additional pretax contributions.

While you don't list much about your financial situation.....you do make a considerable amount of money.  It might be worth looking at where your expenses are going in order to put more towards your pretax retirement to get into the 15% bracket while also fully funding the roth.

Also, it's worth it every year to revist your withholdings to try to minimize any return or overage, which it sounds like you are doing.

Welcome to the forums!

Edited:  Added a spreadsheet that I use,  Might not be applicable for your situation but it is easily modified. Also setup for MN state taxes, so that will probably need to be changed.  It helps you realize how changing withholdings, 401K or 403b, etc will affect your paycheck, AGI, taxes.

[stash]

Thanks for the reply. I'm confused about the tax bracket then. For a married couple, the 25% bracket starts at $72, 500. If we maxed both 403(b) accounts, plus the standard deductible, we would still have about $6K or $7K until we get down to that number. With the phase out limits we are limited to contributing a total of $6,100, which brings us right to the bottom of the 25% bracket. Perhaps we are on the same page about this but I just worded it unclearly in my first post? If so I apologize.

The reason I am going over all this is to better plan for our taxes for this year, adjust our holdings, and do our best to plan for our retirement moving forward. My biggest hangup is what order, and what type, of investment to make. We have no options for our 403(b) other than what is stated. Do we max out the 403(b) accounts first, or do we max out an IRA first (after the pathetic match)? If/when we contribute to an IRA, do we use the tax-deferred traditional IRA to save on taxes immediately, or take the taxes upfront and invest less into a Roth which will help with early retirement? I keep bouncing back and forth in my head about which makes more sense.

[Cromacster]

125,000-Standard Deduction (12,200)-Personal Exepmtion (7,800)-403(b) (35,000) = 70,000

This would roughly be your AGI if you both maxed your 403(b), but it missing a few other things that you can deduct.

Edit: 
Read the following:
http://www.madfientist.com/traditional-ira-vs-roth-ira/

http://www.madfientist.com/retire-even-earlier/

http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/

Do we max out the 403(b) accounts first, or do we max out an IRA first (after the pathetic match)? If/when we contribute to an IRA, do we use the tax-deferred traditional IRA to save on taxes immediately, or take the taxes upfront and invest less into a Roth which will help with early retirement? I keep bouncing back and forth in my head about which makes more sense.

Well, if you can't max out both accounts, without knowing anything about the actual investments.  It might be wise to contribute to yours to get the match, then put as much as you can towards the wifes.

So for your situation, if you can't contribute enough to your 403(b) to get into the 15% bracket, I would probably choose to do the traditional IRA to reduce your taxes as much as possible.  If you can get into the 15% bracket, I would consider the Roth.

[stash]

Oh, interesting, I guess I wasn't aware of the way the exemptions work. Thanks for that clarification.

I have been reading madfientist lately and I am definitely going to give them another read as I try to wrap my head around all of this.

I think I am going to try to see if we can max out both 403(b) accounts and fund a Roth IRA and try to compare that to if we maxed out the one 403(b) and maxed out two deductible tIRAs. I'm not sure what will work out best but thank you for your explanations - I will see if I can get us down to the 15% bracket.

[Cromacster]

Glad I could provide a starting point.

Along with the Madfientist I would recommend reading through JLcollinsnh blog.  Lots of good stuff in here.

http://jlcollinsnh.com/stock-series/