Should I contribute to 403(b)?

[aworkingrachel]

I'm 27 and want to semi-retire very early. This year, after maxing out my Roth IRA, I'll have about $20,000 to invest. My company offers a 403(b) through TIAA-CREF, but I'm not eligible for the company match until late 2009.

Should I put the max into the 403(b), or should I put it all into a taxable account?

Reasons I'm reluctant:
- ties up my money for the next thirty years. I have a sizeable emergency fund, but I would also kind of like to have money on hand for a down payment if or when I decide to buy a place. And I'm not sure how realistic this worry is, but I don't want to end up in a situation where I technically have enough to retire but can't because it's all tied up in a 403(b). (I'm planning a very barebones semi-retirement for the first few years, so my "number" is pretty low.)
- the tax advantage of a 403(b)/401(k) doesn't really seem that great.
Sure, I don't pay taxes this year, but I have to pay taxes on all the appreciation.

 

[travelover]

By contributing to your 403(b) you'll be able to invest more, earlier because it is pretax dollars. Also you won't pay any taxes on it as it appreciates, though the right investments in a taxable account can minimize this tax drag. When you withdraw it and pay taxes on it, you may well be in a lower tax bracket.

Are the expense ratios in your 403(b) reasonable i.e. less than 1%?

Remember, also, you can withdraw your Roth contributions early without penalty, if you need to.

Having direct deposit into the 403(b) also makes it a lot easier to save because you never see the money before it is deposited.

If you haven't done so already, an online calculator can help you determine how much you need to contribute yearly to meet your goal. This can be sobering.

Good luck.

 

[FinanceDude]

I call a 403B or 401K the "first line of defense" as far as having a secure retirement.

Many folks fall into the trap of not participating because it takes time to get a match, etc. However, you really should be involved in the 403B. I would split it for now, take $10,000 and put it into the 403B, talke the other $10,000 and put it into a taxable account that used tax-efficient funds.

When you start getting the match, make sure to as LEAST contribute up to the amount they match, or you are throwing money away.......

 

[ats5g]

Rachel,

See Can I withdraw money from my IRA before age 59½? The guy that runs this website has been doing these SEPP withdrawals since his late 30's, IIRC.

From Limit on Elective Deferrals, in IRS Publication 571 (3/2008), Tax-Sheltered Annuity Plans (403(b) Plans), it looks like you can only contribute $15,500 per year to 403(b), not including employer match. So, you'll still be contributing about $4,500/year to a taxable account.

I created a rudimentary spreadsheet a while back,401kvsTaxable, to see which would be better. As usual, it depends on your particular circumstances, tax rates, expenses of 403(b) and taxable, etc. If you're making a pretty good salary now, saving a lot, and planning to be in a very low tax bracket it retirement, the 403(b) might be better.

- Alec

 

[aworkingrachel]

Yup, I've run the numbers. I know there will be tweaking to do as I go along but the numbers right now work out on FIRECALC using modest amounts of interest (3, 5, 7% returns).

I know about the SEPP option on IRAs--which is why I've been quick to invest in the IRA but have been holding back on the 403(b).

==By contributing to your 403(b) you'll be able to invest more, earlier because it is pretax dollars.==

Good point. The fact that it's pretax effectively increases my income.

==If you're making a pretty good salary now, saving a lot, and planning to be in a very low tax bracket it retirement, the 403(b) might be better.==

I'm really not sure what to expect as far as taxes go. I'm in the 25% bracket right now and saving about 70% of my income. I'll probably go up a tax bracket before quitting full-time employment. I'm planning modest expenses in semi-retirement, but I also plan to keep earning some amount of money through freelancing and have a trust fund I can access at age 35 (unclear so far how much that will be--could be 30k, could be 200k). So even though my initial assets and expenses will be low, it's possible my assets could grow significantly post-retirement and knock me back into a higher tax bracket (especially given the long time frame).

 

[ats5g]

Yup, I've run the numbers. I know there will be tweaking to do as I go along but the numbers right now work out on FIRECALC using modest amounts of interest (3, 5, 7% returns).

I know about the SEPP option on IRAs--which is why I've been quick to invest in the IRA but have been holding back on the 403(b).

You know that you can roll the 403(b) into an IRA after quitting your job and then do the SEPP from the IRA, right?

 

[FinanceDude]

You know that you can roll the 403(b) into an IRA after quitting your job and then do the SEPP from the IRA, right?

Good point.........

 

[yakers]

Check out 403(b)wise: The 403(b) Information Center .TIAA-Cref tends to have good funds, I wish my wife had them. A lot of 403b plans are terrible but it looks like yours may be a good one. I would want to put some money into tax deferred, taxable and tax free (Roth IRA) to have later withdrawal options.

 

[Caroline]

- ties up my money for the next thirty years.

At which point you will be 57. As far away as that seems to you now, it'll be here before you know it. And as old as that seems to you now, you'll still be relatively young and energetic (if you take reasonable care of yourself) and want to do a lot of things that money can help you with.

If you put it where you can't touch it now, you'll thank yourself later, IMHO.

 

[Tadpole]

I have some observations based on a 3 year stint in a job with TIAA-Cref RE 403b. I was almost your same age. My account was split equally between TIAA and Cref Stock. At the time TIAA had a big return compared to today (early 80's). I forgot about the account except throwing a yearly report in the file drawer without really looking or thinking about it. Eventually the measly 3 year deposits ended up as about 15% of my total savings because of the stock account's increased value. The increase outpaced the decrease in the yearly interest earned in the TIAA annuity account. Had I been as financially savvy as you at the same age, I would have faired even better.

A couple of years ago I thought I might find out if the account could be rolled to my TSP. This depended on the University I had worked for who really didn't care. But when I looked at the rules at TIAA, the portion in TIAA could only be withdrawn over 10 years and not as a lump sum. The stock accounts had no restrictions that I could find. I didn't roll over the account but still face it down the road or buying a tiny annuity from the TIAA portion. So if you are invested in whole or partially in TIAA (the annuity account not the real estate account), you will have even less control over the cash withdrawal than you described unless you plan the 10 year withdrawal.

I also discovered that over the years many employers had changed their plan to allow investing elsewhere. Then the latest pension bill set rules on this model. Now the employer has to make agreements with the alternate funds. You might check to see if your plan allows this and if your employer is open to making these separate agreements.

 

[hguyw]

According to info from my HR dept, TIAA-CREF withdrawals can start at 55 as long as you've "separated from service". No penalties or additional tax.

A bugaboo for me is that here in NY, current law excludes the first $20K of income per year from taxable income as long as the recipient is at least age 59-1/2. This varies from state to state however.

 

[USK Coastie]

Check with your HR dept. You may be able to withdraw the 403b money with out tax penalties if you have worked for your employer "x" years and are 55. EACH plan is different an can be changed as time goes by the employer. This happened to me and the change allowed me to retire 3 years earlier than my "original plan".

I had to go to corporate HR (healthcare org) to get the correct answers as my local HR did not know all of the details. It pays to be well informed about your 403b

 

[aworkingrachel]

Thanks for all the advice!

I think I'm going to do it. I'm still skeptical of how much tax advantage there really is, but it would give me a bit more initial capital to invest since it's pre-tax money, and as ats5g pointed out, it can always be rolled into an IRA after I leave.