403b vs. Roth IRA

Discussion in 'General Education' started by Ms.Holyoke, Jul 17, 2018.

  1. Ms.Holyoke

    Ms.Holyoke Habitué

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    Jul 17, 2018

    My school district offers a 403b plan, but I do not believe that there is a match. Is it worth investing in a 403b without an employer match? I am leaning towards maxing out my Roth IRA contributions next year instead.
     
    Last edited: Jul 17, 2018
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  3. viola_x_wittrockiana

    viola_x_wittrockiana Comrade

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    Jul 17, 2018

    There's more to consider than employer match. Personally, I favor a Roth IRA, but that's just me. Take into consideration the tax benefits/liabilities of each, as well as any potential penalties. Look at when your money is available to you at no penalty. The earning potentials are similar, but how much control do you want over your investments? What fits your lifestyle and expected financial needs?
     
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  4. readingrules12

    readingrules12 Fanatic

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    If there is no match like you say, then a ROTH IRA would be what to go first. Here is why. With a ROTH IRA, all the money that you put into and
    all the money that you earn as the money grows is tax free. For example, lets say you put $500/month into a ROTH IRA for 30 years. This is $6000/year x 30 years which is $180,000. Then if it grows at 9 %/year (close to average stock market price) then you will get about $891,451. The $711,451 growth you get in the stock market, you don't pay a penny in taxes since it is in a ROTH IRA.

    If it is a 403b. The tax is deferred (delayed) until you take it out when you retire, but that $711,451 you will pay taxes on. That could be over $200,000 in taxes! Now the math I used is only compounded annually, so the actual amount would be higher. Go the ROTH IRA for sure.
     
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  5. Ms.Holyoke

    Ms.Holyoke Habitué

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    I've just been reading that 403b's have very high fees. If I do contribute some to a 403b, I would want to research the plans. I am planning on maxing out my Roth IRA contribution this year, but I need to figure out if I also want to contribute to a 403b. I am likely going to be in a financial situation where I can do both, and I know that a 403b contribution will lower my taxes. I'm also in a state with a teacher pension plan. My friend says that if we work into our 60's, we can get 80% of our salary. I'm wondering if teachers need to save as much as employees in the private sector because we have our pensions.
     
    Last edited: Jul 17, 2018
  6. readingrules12

    readingrules12 Fanatic

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    That is wonderful that you can maximize your Roth IRA. With 403bs they usually have a variety of funds that have different fees. Some are higher than others. There usually are some that don't have high fees and still give a good rate of return.

    I would find out exactly what your pension gives out. Pensions can vary a lot from state to state and it would be great to know exactly what you will be getting. I know some states have even changed rules where some have been grandfathered into the old rule system. Therefore your friend could have a slightly different package. Should be someone in district who can help you with that. It is also probably online for employees.
     
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  7. Ms.Holyoke

    Ms.Holyoke Habitué

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    Jul 17, 2018

    My friend is in the same state as me so I believe we pay into the same pension system. I will check though but I believe that it is a pretty good percentage of your salary (if I stay in teaching until I am about 60).
     
  8. svassillion

    svassillion Companion

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    Jul 17, 2018

    You're correct about the 80%.
     
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  9. Tyler B.

    Tyler B. Groupie

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    I would agree that the Roth is the way to go. Ideally, you could max out your Roth each year and also contribute to the 403b. If asked by new teachers on staff, I tell them to go with a target date Roth through Vanguard due to the very low expenses and high performance.

    Also, as a new teacher your income tax will be low, and this favors going with the Roth. The 403b will be more valuable when you are at the top of the pay scale.
     
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  10. futuremathsprof

    futuremathsprof Connoisseur

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    Jul 18, 2018

    Presently, the max annual contribution for a Roth IRA is $5,500, so you would actually contribute $458.33/month. Everything else is exactly correct.
     
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  11. Ms.Holyoke

    Ms.Holyoke Habitué

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    Jul 18, 2018

    ^
    For a Roth IRA, I know that you do not have to pay taxes on the principal, but what about the earnings?

    Also, I was working as a sub for a new months and I had to pay into an OBRA account. I have about $400 but the fees are 18 dollars a year! I need to find a way to move that money before it disappears!
     
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  12. Ms.Holyoke

    Ms.Holyoke Habitué

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    I heard that the requirements in our state are make it harder for a new teacher to get a pension, as you have to work for more years until you're older. Do you know if the pension itself is guaranteed in teacher contracts?
     
  13. Tyler B.

    Tyler B. Groupie

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    With a Roth, your contributions come from money that you already paid taxes on. All the earnings from the account can be taken out tax free upon reaching retirement age. With a 403b, your contributions come out pre-taxes, so they actually reduce your taxable income—thus reducing your taxes.

    Also with a Roth, you can withdraw your contributions tax free at any time. But if you touch the earnings, you will pay very high penalties. So let's say years from now you look at your Roth and see that you've put in $50,000 and earned $10,000 in gains for a total of $60,000 in your Roth. You decide to buy a house and take out the $50,000. There's no taxes or fees on that withdrawal. However, you also destroyed your retirement fund, so be careful about taking money out.
     
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  14. futuremathsprof

    futuremathsprof Connoisseur

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    According to Google, “Any earnings generated in a Roth IRA are tax-free because you pay taxes on the contributions upfront.” :)
     
  15. futuremathsprof

    futuremathsprof Connoisseur

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    Hey, long time no see Tyler B! <waves enthusiastically>
     
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  16. readingrules12

    readingrules12 Fanatic

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    Yes, I was waiting for someone to bring that up. $5500 is max for age 49 or less, $6500 for age 50 and above. I used $6000 as it was in the middle and it makes the math a lot easier in an example to use $500/month than $458.33/month.
     
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  17. readingrules12

    readingrules12 Fanatic

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    Tyler, liked hearing from you. You give good financial advice, and wish we heard your voice more often.
     
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  18. svassillion

    svassillion Companion

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    I don't believe it's in our contract since the MTRS is a separate entity from school districts. It used to be that you could roughly determine when you'd be eligible to receive 80% by adding the age when you retire to the number of years in service to equal 90. However, that's changed and new teachers need to be at least 60 to retire so the formula adapted. However those who were teaching before they made that change are grandfathered into it. This is the chart that will be relevant to you.
    https://mtrs.state.ma.us/wp-content/uploads/2018/03/retirementpercentagechart-tier2.pdf
     
  19. Ms.Holyoke

    Ms.Holyoke Habitué

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    That makes sense!! Thank you. Do you know what happens to the $$ that we pay into the MTRS? I read that we have a savings account for our retirement with our contributions. So do we get our pension from that money and what happens if/when we run out?
     
  20. svassillion

    svassillion Companion

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    From what I understand, it's a defined benefit plan so the payment that is calculated at retirement is guaranteed for the longevity of life. The liability is put on the Commonwealth but it's a trade since the teachers pay more into their own retirement than those who pay into/receive social security. Every year you'll get a statement from MTRS summarizing your contributions and balance which is more common for defined contribution plans that last only as long as your balance allows, but I think this is just record in case the teacher leaves MTRS (for example they move to another state) and needs to be paid out or transfer the funds.
    https://westfield.massteacher.org/pdf/pension.PDF
     
  21. svassillion

    svassillion Companion

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    From what I understand, it's a defined benefit plan so the payment that is calculated at retirement is guaranteed for the longevity of life. The liability is put on the Commonwealth but it's a trade since the teachers pay more into their own retirement than those who pay into/receive social security. Every year you'll get a statement from MTRS summarizing your contributions and balance which is more common for defined contribution plans that last only as long as your balance allows, but I think this is just record in case the teacher leaves MTRS (for example they move to another state) and needs to be paid out or transfer the funds.
    https://westfield.massteacher.org/pdf/pension.PDF
     

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