403b vs. Roth IRA

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

  1. Ms.Holyoke

    Ms.Holyoke Connoisseur

    Joined:
    May 14, 2012
    Messages:
    1,863
    Likes Received:
    605

    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
  2.  
  3. viola_x_wittrockiana

    viola_x_wittrockiana Comrade

    Joined:
    Oct 25, 2016
    Messages:
    288
    Likes Received:
    140

    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?
     
    futuremathsprof and Ms.Holyoke like this.
  4. readingrules12

    readingrules12 Aficionado

    Joined:
    Jul 3, 2010
    Messages:
    3,013
    Likes Received:
    470

    Jul 17, 2018

    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.
     
    Ms.Holyoke likes this.
  5. Ms.Holyoke

    Ms.Holyoke Connoisseur

    Joined:
    May 14, 2012
    Messages:
    1,863
    Likes Received:
    605

    Jul 17, 2018

    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 Aficionado

    Joined:
    Jul 3, 2010
    Messages:
    3,013
    Likes Received:
    470

    Jul 17, 2018

    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.
     
    Ms.Holyoke likes this.
  7. Ms.Holyoke

    Ms.Holyoke Connoisseur

    Joined:
    May 14, 2012
    Messages:
    1,863
    Likes Received:
    605

    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

    Joined:
    Aug 23, 2017
    Messages:
    204
    Likes Received:
    147

    Jul 17, 2018

    You're correct about the 80%.
     
    Ms.Holyoke likes this.
  9. Tyler B.

    Tyler B. Groupie

    Joined:
    Feb 21, 2012
    Messages:
    1,271
    Likes Received:
    446

    Jul 17, 2018

    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.
     
    readingrules12 and Ms.Holyoke like this.
  10. futuremathsprof

    futuremathsprof Aficionado

    Joined:
    Jun 27, 2014
    Messages:
    3,911
    Likes Received:
    1,101

    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.
     
    Ms.Holyoke likes this.
  11. Ms.Holyoke

    Ms.Holyoke Connoisseur

    Joined:
    May 14, 2012
    Messages:
    1,863
    Likes Received:
    605

    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!
     
    futuremathsprof likes this.
  12. Ms.Holyoke

    Ms.Holyoke Connoisseur

    Joined:
    May 14, 2012
    Messages:
    1,863
    Likes Received:
    605

    Jul 18, 2018

    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

    Joined:
    Feb 21, 2012
    Messages:
    1,271
    Likes Received:
    446

    Jul 18, 2018

    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.
     
    futuremathsprof likes this.
  14. futuremathsprof

    futuremathsprof Aficionado

    Joined:
    Jun 27, 2014
    Messages:
    3,911
    Likes Received:
    1,101

    Jul 18, 2018

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

    futuremathsprof Aficionado

    Joined:
    Jun 27, 2014
    Messages:
    3,911
    Likes Received:
    1,101

    Jul 18, 2018

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

    readingrules12 Aficionado

    Joined:
    Jul 3, 2010
    Messages:
    3,013
    Likes Received:
    470

    Jul 18, 2018

    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.
     
    futuremathsprof and Ms.Holyoke like this.
  17. readingrules12

    readingrules12 Aficionado

    Joined:
    Jul 3, 2010
    Messages:
    3,013
    Likes Received:
    470

    Jul 18, 2018

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

    svassillion Companion

    Joined:
    Aug 23, 2017
    Messages:
    204
    Likes Received:
    147

    Jul 19, 2018

    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 Connoisseur

    Joined:
    May 14, 2012
    Messages:
    1,863
    Likes Received:
    605

    Jul 19, 2018

    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

    Joined:
    Aug 23, 2017
    Messages:
    204
    Likes Received:
    147

    Jul 19, 2018

    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

    Joined:
    Aug 23, 2017
    Messages:
    204
    Likes Received:
    147

    Jul 19, 2018

    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
     
  22. Ms.Holyoke

    Ms.Holyoke Connoisseur

    Joined:
    May 14, 2012
    Messages:
    1,863
    Likes Received:
    605

    Jul 19, 2018

    Thank you svassillion! This is all new to me so it's a little confusing. My other question is, what happens if the pension system is no longer in place for newer teachers? Can they change the 80% at age 60 chart that you showed me? I have read that a lot of new teachers are worried about their pensions not being funded. And if so, do we get the $$ back that we paid in?
     
    futuremathsprof likes this.
  23. futuremathsprof

    futuremathsprof Aficionado

    Joined:
    Jun 27, 2014
    Messages:
    3,911
    Likes Received:
    1,101

    Jul 19, 2018

    There are so many unfunded liabilities in various states for the public schooling system that the current system is just untenable. That’s why I think teachers should be allowed to invest their money in their own plans and not district-sponsored ones automatically because what if the pension system goes belly up? For millennials and generation Xers, we are in for a rude awakening...
     
  24. Ms.Holyoke

    Ms.Holyoke Connoisseur

    Joined:
    May 14, 2012
    Messages:
    1,863
    Likes Received:
    605

    Jul 19, 2018

    ^
    Right, I was thinking that if I have to pay 11% each year, that I won't be able to save as much as my friends in the private sector. So I was wondering if there is a guarantee that we will get our money back.
     
    futuremathsprof likes this.
  25. readingrules12

    readingrules12 Aficionado

    Joined:
    Jul 3, 2010
    Messages:
    3,013
    Likes Received:
    470

    Jul 19, 2018

    Legally, a state can't just take the $$ away you have put into it. Historically, states and cities have tended to pay their pensions. Even Detroit that was in a historic financial mess was trying to get teachers to agree to over 90 cents on the dollar. It is true that states are possibly going to have quite a difficult time coming up with all the guaranteed pension money. This could mean payments might be delayed or even trying to say to teachers "Hey we'll give you 90 or 95 cents on the dollar right now if you promise not to sue us."

    Some states are trying to take care of this by reducing pension benefits for newer employees (grandfathering the others) or by increasing how much teachers need to contribute into it. I think these more ethical approaches are more likely. The future is impossible to predict. Could you lose some pension money or get payments delayed?--Very possible. Could you lose almost all of it? I know myself and nearly every teacher would be suing if that happened. Don't tell me the government has no money and collects no taxes--we know better than that.
     
    Ms.Holyoke likes this.
  26. Ms.Holyoke

    Ms.Holyoke Connoisseur

    Joined:
    May 14, 2012
    Messages:
    1,863
    Likes Received:
    605

    Jul 19, 2018

    ^
    Ok, that makes sense. Does that mean that the pension projections that they give us aren't guaranteed/could change or will they just change for teachers who joined the system later?
     
  27. readingrules12

    readingrules12 Aficionado

    Joined:
    Jul 3, 2010
    Messages:
    3,013
    Likes Received:
    470

    Jul 19, 2018

    They mostly will just change for teachers who join later. As for us are they guaranteed? Kind of like a paycheck. A paycheck is "guaranteed", but like a school or district that gets in financial trouble, it could be a longer wait until payday.
     
    Ms.Holyoke likes this.

Share This Page

Members Online Now

  1. futuremathsprof
Total: 413 (members: 1, guests: 391, robots: 21)
test