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Retirement Saving Options—my thoughts

Quick preamble–you can contribute to a Roth or Traditional IRA until April 15th 2008 and have it count for 2007. Up to $4000 if you’re under 50 and $5000 if you’re over 50. Just a reminder.

I’ve been musing and mulling over options for retirement savings. We just got a package for the 403(b) (the educational institution version of the 401(k), but I’ll be calling it a 401(k) from now on to avoid confusion) that I’m apparently eligible for even though I’m only part-time. But I don’t get any contribution match.

I also have the options of Roth and Traditional IRAs because of our income level.

Without the match, I think going an IRA route would be the best idea for now. We can better control which funds we invest in. I’m not sure what funds are available in the hospital’s plan. Except for the tax advantage there’s no reason to do it. And I can get tax advantages with IRAs as well.

There are various reasons why I’m going with the Roth instead of the Traditional. I think Ciaran at Chance Favors gives a lot of good explanations for why the Roth is a good option.

Now, if by some miracle we pay off the debt and pass the $5000 contribution limit each for 2008, then we might consider the 401(k) option.

Why? It’s tax-advantaged and it doesn’t fall under the IRA limits.

Now if there was a match, we might look more into this (though we couldn’t yet set up any kind of regular contribution). Free money is free money and an automatic return on investment. Plus the pre-tax nature means I could put more in it than in a. As long as there was a decent index-type fund available it’d be a go.

Of course, there’s a limit on that too…but I highly doubt we’d make it that far and pay off a lot of debt this year. The time value of money means that we’re planning to do some investing now even though we haven’t paid off all our debt, though we’re putting more in to debt repayment. Our loan rates make this even more possible.

So for now, Roth IRA with the 403(b) option as a backup in case things start going fantastically. Ironically, a fantastic year might mean we can’t contribute to a Roth. But then again, fantastic for us would be $40,000/year.

Again, these are my thoughts and I’m not a finance, investing, or retirement professional. Just a library professional. And as such, I can tell you that 666 is not an exciting Dewey Decimal number. Something about glass-working. Very much a let-down. (see, you’re going to learn the whole Dewey on this blog!)


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February 5, 2008 at 11:12 am

{ 15 comments… read them below or add one }

JB February 3, 2008 at 4:17 pm

I think the Roth and then possibly 403(b) backup is a great idea. My work also offers a 403(b) with no match. My first year, I focused on maxing out my ROTH and this year, I’m contributing a very small amount to the 403(b) also, because I’m trying to decrease my taxes for the year. I don’t care for the 403(b) plan my work offers, because the fees are high…but I figure any money I save for retirement is a good investment and when I leave this job I will roll the 403(b) over to a IRA at Vanguard.

Meg from The Bargain Queens & All About Appearances February 3, 2008 at 4:22 pm

Thanks for the link to Chance Favors! My husband and I are looking into starting a Roth IRA and the site looks very informative.

mrsmicah February 3, 2008 at 4:29 pm

You’re welcome, Meg. Even though I knew a fair amount about them, I still learned some stuff there. Plus it’s a good place to double-check things you think you know.

Brad F February 3, 2008 at 5:14 pm

1. The 403b is almost always a bad idea. Most of the time, the school will stick with with bad fund choices and a “load” for services of a financial advisor who couldn’t find his a’s with both hands.

2. If you are part-time, the Roth is probably the better choice. Right now, your marginal tax rate is quite low. As a result, the tax savings provided by the traditional IRA is likely to be small. Over a long time period, the Roth’s tax benefits will easily make up the difference.

3. In a pinch, the Roth can serve as a backup emergency fund as you can take out contributions without paying a penalty.

mrsmicah February 3, 2008 at 5:39 pm

I agree, Brad. 2 and 3 are really good reasons for us. And I’d look into 1 if we get past the $10,000. I really don’t like the idea of being stuck with limited choices.

Andrew Stevens February 3, 2008 at 5:44 pm

I too am of the opinion that the correct order is:

1) 401(k) with match
2) Roth IRA (if you qualify)
3) 401(k) without match up to limit

If you don’t qualify for the Roth then I’m pretty indifferent between 401(k) without match and a traditional IRA. It would depend on how good your 401(k) plan’s investment options are. The 401(k) does have some legal advantages: you can borrow from it (not recommended except in a real emergency, but still an advantage) and I believe it has more protection from creditors if something really bad happens.

Ryan S. February 3, 2008 at 6:37 pm

I think there’s no question that your decision right now is correct given that you’re not getting a match on the 403(b)–which is for non-profits, not just educational institutions. If you were getting a match, it would be a different story; I hope you’re doing your Roth with a discount broker or no load mutual fund family. Hope all is well.

Christine February 3, 2008 at 8:10 pm

Please do give us the whole Dewey system on these posts. That would be charming.

Amanda @ Me vs Debt February 3, 2008 at 9:28 pm

You inspired me with your first post. I opened a Roth IRA with Sharebuilder last week. Seems like a good deal except for the $25 account maintenance fee. With a mere $500 to invest that’s a 5% fee! I’m very seriously considering slowing down debt reduction to make a few extra contributions. More on that later…

vh February 3, 2008 at 9:34 pm

Hmmm… Take a look at what they offer. I’ve never been overly thrilled with TIAA-CREF, but now the Great Desert University offers Fidelity (among others). My financial advisor likes Fidelity as well as Vanguard.

If you’re not getting a match and your budget doesn’t allow you to save more than the max for the Roth, you’re prob’ly better off with the Roth than the 403b. My tax lawyer remarked that she doesn’t much like 401k’s and 403b’s, because chances are your taxes won’t actually be much lower in retirement and because transferring pretax investments to your heirs is really problematic. She said given her choice, she’d max out the Roths and then put whatever else she could invest into regular mutual funds.

SJean February 3, 2008 at 11:17 pm

Off intended topic (but you started it!) do you think the dewey decimal system is still relevant, with the age of computers and powerful searches? I don’t, but I’m not a library professional. 🙂

On topic, i think you made a good decision.

mrsmicah February 3, 2008 at 11:33 pm

SJean, as long as we’re using books at libraries, then yes. Because otherwise we couldn’t use the non-fiction section of the library. Sure, we could organize them by author, but that would mean we’d miss out on all the side-benefits of classification.

For example, if you want to read Total Money Makeover, you have to be able to find it among the 100,000 other books/items in our library. So you look it up online and it’s 332.024 R ish. You go there and you notice Jean Chatzky’s books, so you grab one too. You then browse or come back later for similar stuff. You’d be able to find it under “Ramsey” too, but you wouldn’t get all the handy benefits.

Traditional card catalogs with actual cards—not very useful in the age of computerized searching.

SJean February 4, 2008 at 12:49 am

Point taken. Like i said, i’m not a professional!

I do more shopping/browsing on amazon, but when in an actual library, i suppose a system is needed, and the dewy decimal system is a great one.

Dan February 4, 2008 at 10:20 am

There are things that can happen that make the Traditional IRA better than the Roth. For instance, the fair tax has been a heated topic recently on the financial blogosphere. If it was implemented with no provision to tax previously untaxed Traditional IRA and 401K contributions, then they would fair better than the Roth.

That said, if you earn less than 65,100, you’re only paying 15% in income tax on what you contribute to the Roth. It’s not too likely that you’d be paying a lower rate in retirement, so the Roth wins or at least ties the Traditional.

On your note of a fantastic year making you ineligible for the Roth, I would also love to be in that position. As a married couple filing jointly, you’d have to earn $169,000 in 2008 to be fully excluded from contributing to a Roth.

deepali February 4, 2008 at 2:01 pm

Good post – I actually don’t put anything into my 403b because my org does it with or without me. I’m funding a Roth IRA to the max for 2007. For 2008, I will also fund the Roth to the max, but I am also going to start putting in my 403b, a little bit. Honestly, I like it for the psychological factor – it comes out of my paycheck before my paycheck hits my bank account, so it’s already “gone”.

And TIAA-CREF actually does a fairly good job and is pretty highly rated. My org’s contributions go to a TIAA-CREF account. Mine will go to a Vanguard account (I like them as well).

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