Savings into 403b and Roth IRA

[blueMD]

So I've been reading lots of threads regarding retirement/finance, 403b/401k and IRA/Roth IRAs. It's been very helpful to get all the input from everyone in this forum. I had a couple questions pertaining to my individual case and maybe others too are in the same boat...

i just graduated from med school and am starting residency now, i do not have loans or debts (tuition, car, home... no loans)... my hospital offers 403b but does not match. i am still very interested in maximizing my 403b but was wondering what questions i should ask the benefits/financial ppl before i commit to this. most importantly, i want to know what kind of fees there are associated with this and if there are things that arent written... what kind of fees are the typical "catches" that us naive/innocent residents need to be aware of? i'm interested in roth403bs more but my hospital does not offer this at the moment...

bottom line is... even if i dont know a whole lot about my 403b plan, should i still try to maximize the 15500 if i can? it is a "benefit" according to my hospital...

i also have enough to max on ira (~4000) and am also very interested in doing a roth ira. which roth iras have good reputations at the moment or word of mouth? ive heard vanguard is pretty decent and t rowe price etc.

anyway, i would appreciate feedback to my dilemma. im about to receive my first paycheck in my life (thank GOD) and want to have a good footing like all the other fresh residents.

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[etf]

the fees with a 403(b) are minimal; in fact, you get to use your hospital's clout to get access to institutional class funds, which usually sport super-low expense ratios. as for provider, 403(b)s are usually with fidelity, but vanguard and t-rowe are players as well - so i guess when you open your roth, open it at the same insititution that does the 403. go ahead and max it out - you'll never be sorry that you socked away too much in your retirement plan.

 

[Bobblehead]

If you have the means, max out your 403b for 2007 in the first 6 months of internship. This will require that you live off savings and funnel most of your "earned income" into the 403b. However it'll also get you further ahead. Compounding time is key and as a speciality we generally start further behind than a lot of other people. Most 403b plans are good enough that you don't need to calculate the exact amount required to max out the annual sum (i.e. their system will prevent you from contributing more than the annual max even if your designated contribution would put you over). This is not the case if you have 403b or equivalent plans at multiple institutions as they don't share information and would both go to the federal annual maximum.

Once 2008 comes split the maximum, whatever it'll be, into the number of paychecks you'll have for the year, round up slightly and max out that way. Since you'll never see the extra money you'll never feel that you're missing it out of your budget.

Without a match a lot of people generally recommend that you max a Roth before a 403b due to the tax advantaged status. You will not stay eligible for a Roth for long as your income will eventually exceed the AGI phase-out so while you're eligible, contribute. You will eventually need to take into consideration what to do with your traditional and rollover IRA accounts when 2010 comes around and the Roth IRA income cap is potentially lifted.

 

[jen734]

mistake

 

[blueMD]

my hospital has a 403b plan with american funds and they only offer about ~20 funds... Its quite limited (options include columbia acorn fund a, growth fund of america, seligman targetfund 2025 etc) i noticed the expense ratio for these funds to run around ~1% and I hear that most funds arent suppose to be that high, is this true? the 3 funds mentioned are slightly higher risk and mostly growth investments so maybe. another thing that worries me is i dont see whether or not there is a front-load, backload charge as well (i hate fees, im using the word hate... unless i feel i am getting professional help from them which im not). thanks for the feedback.

im deciding/leaning towards opening my roth ira into another institution (not american funds) and likely to be vanguard or t rowe price because they have known low expenses (growth of my fund is uncertain, but expenses are).

 

[Bobblehead]

Without seeing the full list, a 1% expense ratio can be "good" for a high risk, high return actively managed fund or "bad" for a passive indexing fund. Depending on your overall investment strategy you may wish to use your 403b as your core holding as a stock-based index fund or whatever else your risk tolerance allows.

You should be able to get the full prospectus of any of the investments offered in your 403b plan. Just ask your plan manager for a copy.

A 403b and Roth IRA are not completely interchangable. Roth is funded with after-tax money and has different tax consequences when it comes time to withdraw (or pass along to your children) vs. the 403 which grows tax-deferred but is taxed as income when you do begin to withdraw the funds.

 

[etf]

american funds is one of the largest mutual fund companies, and in fact, i think "growth fund of america" is the largest mutual fund in the world. they should have some pretty decent offerings, although since they are probably actively managed you'll see expenses in the 1% range. I guess open your roth at fidelity or vanguard so that you can access cheaper funds if you need them. I'm sure American Funds has a target retirement fund - perhaps go with that?

 

[blueMD]

i really appreciate your replies and they make me less intimidated with the whole process.

so im wondering this, in general for incoming residents with salaries lower than ~$50,000 a year it would be best to pursue roth iras and roth 401k/403b than traditional iras and 401k/403b

am i figuring this out right? my belief is that most of us will have higher salaries post residency as attendings and therefore rather be taxed now in the lower bracket (roths) than to be taxed in the higher bracket when we withdraw (traditional).

 

[The White Coat Investor]

Yes, residents should use a Roth.

The general investing order should be as follows:

401K/403B up to the match
Roth IRA
401K/403B up to max
Taxable investing

Since you don't get a match, max out a personal Roth IRA and a spousal IRA (if you're married), then contribute what you can to the 403b.

And go with Vanguard. They're the only mutually owned mutual fund company (with the possible exception of TIAA-CREF) and so are less likely to hose you.

 

[blueMD]

thanks activedutyMD

okay, i have a follow up question now since you mentioned TIAA-CREF

i am currently starting out in a transitional residency where my hospital offers the 403b with American Funds (i called them today and they do not have front or back load ) and decided i will max out my 15500 403b in 2007 and 403b in 2008 as well as max out my 4000 Roth IRA (its okay, i dont mind living in a shack).

my advanced residency beginning in july 2008 i looked ahead offers tiaa-cref annuity... from the posts and articles ive read.. anything to do with variable annuity/annuity in general seems to be negative. my advanced residency spot offers only tiaa-cref and they take max 25% of my salary if I choose to go with their plan.. is tiaa-cref's plan like a 403b or something else? i'd like to know ahead what i'm going to save/plan financially for the next few years of residency

 

[Bobblehead]

my advanced residency beginning in july 2008 i looked ahead offers tiaa-cref annuity... from the posts and articles ive read.. anything to do with variable annuity/annuity in general seems to be negative. my advanced residency spot offers only tiaa-cref and they take max 25% of my salary if I choose to go with their plan.. is tiaa-cref's plan like a 403b or something else? i'd like to know ahead what i'm going to save/plan financially for the next few years of residency

Your TIAA-CREF plan is likely a 403b plan and not a true "annuity" in that regard. Keep in mind that once you've maxxed your 403b with American Funds for 2008 in your transitional program you're done for 2008. If you don't reach federal maximum in the first 6 months of the year with the American Funds plan and wish to contribute more to the TIAA-CREF plan in the last 6 months of the year realize that you will have to keep track of your contributions and tell them exactly when to stop to come in under the annual limit. If you don't you will overcontribute and potentially be subjected to penalties come tax time.

The income limit will be a serious problem because 25% of a resident's salary will not allow you to reach the federal maximum. So if your transitional program has no income limit you're probably best off on all accounts just living in the dirt for the first 6 months, then taking the last 6 months of 2008 off and resuming contributions in 2009.

 

[blueMD]

Excellent! (I was thinking along the same lines) This is one of the most informative threads ive had and i thank bobblehead, etf and activedutymd for your inputs.

You're right, I plan on maxing out 15500 for 2007 with my transitional program's 403b (American Funds) as well 15500 for 2008 as well. Plus 4000 with Vanguards' Roth IRA. When I move into my advanced residency I can chill for the rest of 2008 and restart again for 2009 with their TIAA-CREF. What a relief this makes sense!!!!

Soooo happy!

 

[etf]

And go with Vanguard. They're the only mutually owned mutual fund company (with the possible exception of TIAA-CREF) and so are less likely to hose you.

i'm a fidelity man myself - it seems to be a place where you can consolidate your entire financial picture.

 

[The White Coat Investor]

i'm a fidelity man myself - it seems to be a place where you can consolidate your entire financial picture.

Fidelity has a few advantages over Vanguard, however I feel Vanguard's lower costs (overall) and mutual structure outweigh them.

 

[etf]

Fidelity has a few advantages over Vanguard, however I feel Vanguard's lower costs (overall) and mutual structure outweigh them.

In my opinion, Fidelity's advantages over Vanguard are too numerous to name. The one thing that Vanguard is known for is index funds - however, if you have less than $10k invested, you get charged maintenance fees. And if you have $10k, you are eligible for Fidelity Spartan index funds, which all have lower expense ratios than their Vanguard equivalent. As for the mutual structure, the only thing that does is discourage smaller accounts; but if you have the money, you're better off somewhere else anyway.

At this point I'm probably sounding like Ned Johnson's son, but I just LOVE Fidelity; to me, they can't be touched. what exactly is it you like about Vanguard anyway?

 

[blueMD]

Good point etf... I was reading about Vanguard's fees and especially if I have less than $10000 they do indeed charge. However, those charges can be waived if I opt for the e-statement (paperless) method and then switch to paper form once I have over 10000.

 

[Bobblehead]

In my opinion, Fidelity's advantages over Vanguard are too numerous to name. The one thing that Vanguard is known for is index funds - however, if you have less than $10k invested, you get charged maintenance fees. And if you have $10k, you are eligible for Fidelity Spartan index funds, which all have lower expense ratios than their Vanguard equivalent.

I remember when Fidelity first dropped their expense ratios to compete directly/against Vanguard. I'm not sure what I make of this action. If the current expense ratios are sufficient to pay for fund management expenses it means they were overcharging previously. If this isn't sustainable and they're using it as a loss leader then things will change eventually.

Just as one example Vanguard's Total Stock Market Index Fund (VTSMX) has expense ratios of 0.19% and 0.09% for their investor and admiral shares ($100,000+ or $50,000 plus 10 years) respectively. Fidelity's Spartan Total Market Index Fund (FSTMX) is listed as 0.10% for their investor class shares and 0.07% for their advantage class shares with a similar $100,000 investment requirement.

I find it interesting that they didn't truly lower the expense ratios, but rather have this statement: "Effective March 1, 2005, FMR has contractually limited the fund's total annual fund operating expenses (except interest, taxes, brokerage commissions, securities lending fees, or extraordinary expenses), as a percentage of average net assets, to be 0.10%. This expense limit may not be increased without approval of the fund's shareholders and board of trustees."

 

[StrengthDoc]

Your TIAA-CREF plan is likely a 403b plan and not a true "annuity" in that regard.

Just a confirmation for those concerned. Originally, all 403b programs were TSA accounts (Tax Sheltered Annuities). Later, 403b 7 custodial accounts were added allowing mutual fund families to directly enter the 403b market.

http://www.ziegleronline.com/display/router.aspx?docid=2264


In any annuity situation, it is good to make sure there is not another layer of fees (m&e charge or other wrap fee) that is on top of the fund fees. This is what has given high cost annuities a bad wrap in the marketplace.

 

[The White Coat Investor]

At this point I'm probably sounding like Ned Johnson's son, but I just LOVE Fidelity; to me, they can't be touched. what exactly is it you like about Vanguard anyway?

Let's keep in mind that we're comparing two good companies; there are quite a few worse ones out there. That said, this what I like about Vanguard:

1) The mutual structure. At Fidelity, three groups of people need to make money, the shareholders, the fund advisors, and the investors. At Vanguard, only two groups of people need to make money, the fund advisors and the investors because the investors are the shareholders. Seems to me that whenever the pie is split, it is better to have it split two ways rather than three. It also eliminates some of the incentives to make money off the investors.

2) Jack Bogle has done more than any other single person to lower investor's costs. Fidelity in many ways seems to be in it for their bottom line. Witness the fact that Magellan never closed (when it clearly should have.) Witness how new funds are constantly coming out in hot new areas of the market. Witness how Spartan index funds didn't lower their ERs until they realized they were losing business to Vanguard (and still technically haven't lowered them, merely waived them.)

3) Very educational website

4) Lots of low-cost, low-turn-over active funds, for those who are interested in them. More low-cost index funds than Fidelity. (Fidelity only has 1 international index fund and 6 domestic equity index funds. Vanguard has 6 and 16 respectively.)

5) BTW, Vanguard has changed their pesky fees for low balances. If you take your paperwork in electronic form, you can have less than 10K in the index funds without paying fees.

Fidelity probably has a better brokerage, and perhaps an easier to use website.

 

[blueMD]

ok, i have a follow up question for you

im considering:
when i am done with my transitional residency, i'd like to move ie/ roll over my 403b into an IRA like a Vanguard and then roll that IRA into a Roth. I primary objectives are to be taxed now then later hence the Roth and to use a fund with relatively lower ER.

i'd like your feedbacks if possible, thanks a million!

 

[blueMD]

okay, i wanted to add another question regarding 403b and roth ira

so i heard from someone today (unconfirmed) that my max contribution for retirement.. meaning 403b and roth IRA combined cannot exceed 15500. I was under the impression that I can max my 403b to 15500 and max my roth ira 4000 for 2007 separately (for total of 19500). Can someone clarify this? Thanks

 

[etf]

okay, i wanted to add another question regarding 403b and roth ira

so i heard from someone today (unconfirmed) that my max contribution for retirement.. meaning 403b and roth IRA combined cannot exceed 15500. I was under the impression that I can max my 403b to 15500 and max my roth ira 4000 for 2007 separately (for total of 19500). Can someone clarify this? Thanks

yeah, i think the combined limit is 15500.

 

[etf]

ok, i have a follow up question for you

im considering:
when i am done with my transitional residency, i'd like to move ie/ roll over my 403b into an IRA like a Vanguard and then roll that IRA into a Roth. I primary objectives are to be taxed now then later hence the Roth and to use a fund with relatively lower ER.

i'd like your feedbacks if possible, thanks a million!

sounds like a plan.

 

[Bobblehead]

okay, i wanted to add another question regarding 403b and roth ira

so i heard from someone today (unconfirmed) that my max contribution for retirement.. meaning 403b and roth IRA combined cannot exceed 15500. I was under the impression that I can max my 403b to 15500 and max my roth ira 4000 for 2007 separately (for total of 19500). Can someone clarify this? Thanks

403b limit is completely separate from the Roth IRA limit so you are indeed correct that for 2007 you can contribute 15,500 pre-tax to the 403b and 4,000 after-tax to the Roth (assuming you meet MAGI guidelines for Roth contributions.). Otherwise you can always just contribute to a non-deductible traditional IRA and hopefully roll everything over to a Roth in 2010 when it's possible to do so.

 

[The White Coat Investor]

yeah, i think the combined limit is 15500.

Not true. You can do both. $19500 total, $23500 if you have a spouse. (This all assumes you qualify for a Roth IRA.)

 

[blueMD]

thanks a million, im glad they allow us to invest separately...
I confirmed that today with our hospital's financial planner

it wouldn't be separate if it was a traditional ira and 403b, but because its a Roth so yea

 

[The White Coat Investor]

I confirmed that today with our hospital's financial planner

Out of curiosity, how does your hospital's financial planner make money? I suggest you find this out prior to taking any of his advice.

 

[Jocomama]

The time spent worrying about all this could have been spent making more money moonlighting than how to move around a very small percentage of what you will be making once out of residency.
Focus on what is cost-effective and time-efficient for today (like learning more about your specialty while you are still a resident)
Learn more about CPT codes, and how you will maximize your billing when you are out.
The replys have been great - very educational.

Blue - hold tight, and see what you have when you are out.
i.e.
1. Do you have a job?
2. Salary + bonus? or Independent Contractor?
3. Do you have a good contract lawyer to review everything?
4. Are you set for your board exam?

These may be more beneficial at this stage, rather than where to have a couple grand in your current retirement.

You will learn 10x more from your senior partners once you have left residency; including referrals for a couple decent financial planners, etc.

Good luck

thanks a million, im glad they allow us to invest separately...
I confirmed that today with our hospital's financial planner

it wouldn't be separate if it was a traditional ira and 403b, but because its a Roth so yea

 

[Non nominatus]

Hi everyone, I hope you all are out there and doing fine, I have a question, my hospital offers a 403(b) traditional or roth without matching to be open in fidelity or Metlife or in both. To begin with I know the best choice at this point should be to go for a roth 403(b) but do you have any suggestions as where to go for it?.
Thank you for the feedback