Roth IRAs, 403b's and Dave Ramsey

[Soupermom]

Help! DH (45) is a principal and I(43) am a H.S. teacher for the same district. In the next few days we will be meeting with a investment person to discuss our options. We've been through Dave Ramsey so I know the Roth and 403 are good options. Given our age (DH can/will retire in 11 years, I have about 18) should we invest pre- or post- tax? DH thinks it should be post-tax due to us (him) nearing retirement, but from what I've re-read in Dave's book, it should be pre-tax. Can anyone offer any suggestions? I'd like to know/understand more before meeting with someone.

Not sure if it makes a difference or not, but we are debt-free other than the mortgage which we are currently paying more than double on. It will be paid off in 2 1/2 years, just after DD heads to college. I would like to have more in our general savings though. We also have our teachers retirement which will give us 75% of our last 3 years earnings, but again, I'd like to be safe and have more.

Thanks for any insight you can share!!

 

[QVCshopper]

I think a Roth IRA is the way to go. You and he can each put in $5K each year right now. Roth's are post-tax (meaning you can't deduct them from your income taxes). But, you won't owe taxes on the funds when you withdraw. Plus, you can take out your initial investment without penalties once you hold them for 5 years (or are 59.5 years old). Of course, removing the investment is not recommended, just in a worst case scenario.

 

[akcire]

The 403B from your school district is a very good option. You may even get a small match. You can put $16,500 each into a 403B this year. Any money you put into the 403B is pre tax and reduces the amount of money you pay in income tax.


With a Roth you pay taxes now, and it grows tax free. This is also a good option, but I would rather pay less in taxes today--since you know you income will be 75% of your current income in retirement.

 

[silmarg]

I would max both 403b's AND fund a ROTH (assuming your income permits you to fund a ROTH) before investing post-tax (unless you dont have an emergency fund... then fund that before the ROTH).

An investment advisor may say otherwise as he wont earn fees on your 403b investment and maybe wont earn anything on the ROTH either.

 

[bettymae1121]

Well, it depends on if you think you'll be in a higher tax bracket when you retire, or a lower one.

If you plan on increasing your standard of living in retirement (meaning it will take more money per year to live than it does now) you'd be better off with a Roth since you're paying taxes on a lower bracket now and be getting tax-free money when your in a higher bracket later. The reverse is true if you think you'll be in a higher bracket now and a lower bracket in retirement (you'll need less per year to live than you do now), you'll want the tax savings now and withdrawl and pay lower taxes in retirement, so a 401k/403b/traditional IRA is the way to go.

That said, many advisors say in general you should hedge your bets and have both types. So if you already have a bunch of money in a tax defered retirement account, you may want to go with a Roth. If you don't, you may want to contribute to your 403 plan upto the match (if any) and put the rest into a Roth. Or alternately, fund the Roth up to the max and if you have additional money over the max, put that into the 403. That way you can get some tax savings now and again in retirement (though 401/403/IRA's do have minimum withdrawl requirements after a certain age).

As you can see, there are a few different ways to skin this particular cat, and this is where the financial advisor can help you. He/she can help you figure out what you'll need in retirement to live the lifestyle you have in mind, and from there tell you the best way to reach those goals. That is, if they are a fee based independant advisor. If they are with your retirement plan or commision based, their advice may not be unbiased. You didn't say what kind of financial advisor you were seeing.

 

[janette]

Roth has more advantages when you are younger since the growth is tax free. Do you have enough for college? You can withdraw your contributions to a Roth at any time with no penatlies since it is post-tax. Makes the Roth a good option for a college/retirement fund.

 

[IDoDis]

DH and I both have 403b accounts. We wish we'd never signed up for one. We've lost more money than what we've put in. We really need to get out of it as it is not helping us at all and is actually sucking money away (has been for the past 2 years). When we were ahead it wasn't by much. The only advantage is we don't pay tax on that income, but since the accounts have less than what we put into it each pay period, what's the use right now with the market being so bad?

 

[lisaross]

perhaps u can invest in the 403 at work and ur husband can start funding a Roth...in a few years, when he retires, u can split ur investments..

 

[HHSTigerFan]

I just cringe when people mention Dave Ramsey in the same sentence they mention investing money, the guy is a clown in that area.

Would be interested in other peoples opinion of paying their mortgage off early (OP mentioned making double payments) when current mortgage rates are so low..

 

[hsmamato2]

sigh no matter what the tax breaks for a mortgage,no matter what "investment" opportunities your home may offer you, NOTHING builds personal financial security as fast as NO MONTHLY BILLS.
as in, if the 1000 per month doesn't go to a payment,then you put it somewhere else,as in retirement,living expenses,etc. no matter what, an interest rate is just that, money you have to pay for the convenience of installment payments. You can fiddle with 'this has x% interest,and that has y%'..but in the end,most people don't successfully play that game.
Roth IRA's are great for keeping your $$$$ somewhere safe and when you need it,you don't pay taxes on it. BTW, you can withdraw on your initial principle anytime,no restrictions. It's interest and growth you have to wait 5 years or age 59 1/2 for. just my .02

 

[HHSTigerFan]

Before you get huffy and sigh all the way to the bank, borrowing money at less than 4% and investing it at 8-12% over time might actually make sense to some..

 

[hsmamato2]

...right.....I know that can be done... I'm not huffy,just speaking the reality that for most of us,and I include myself, SIMPLE IS BETTER. If simple wasn't better,I don't think we'd have a nation of people in over their heads,trying to be financial wizards when simplicity would have kept their heads above water.
That's why I agree with D.R. on stuff like this.
I also like the Geico commercial "is a bird in the hand REALLY worth 2 in the bush?" .... get it? the percentage of people who come out ahead of the game playing that game is pretty small compared to the # of people who just need sound,simple advice.

 

[silmarg]

Would be interested in other peoples opinion of paying their mortgage off early (OP mentioned making double payments) when current mortgage rates are so low..

I really dont know the tenants of Dave Ramsey, so I cant speak to whether I agreee with it or not, but there is theoretical merit to not pre-paying a low interest rate mortgage and instead using the funds you would pre-pay to invest on better yielding assets.

The key word in my statement is "theoretical". Lets face it, there are no riskless or low risk investment that will yield what you are paying on your mortgage.

Many like the psychological feeling of paying off the mortgage - even if they are paying it off on "cheap money".

I have a HELOC that carries an interest rate of 2.49%. While I used the HELOC to pay off the first mortgage (which was at 4.5%), I continue to make the same payments I was making on the old first mortgage.

When the rate on my HELOC first dropped to 2.49% (in Jan 2009) there were some bank CD's yeilding close to 3%. Even if I dumped my 200k HELOC into it, I would only be earning about $2000 ($1000 on the rate differential and around $1000 in tax savings on the increased mortgage deduction). But I would bear the risk of rates moving on the HELOC and I would have to deal with the cash flow issues (I have to pay the HELOC every month vs waiting till the end if the CD to cash out). I also thought about high yieldind stock (like a utility or a tobacco company). But then you are dealing with the cyclical nature of the stock market - and dividends are by no means guaranteed (I know, the company I work for cut theirs dramtically).

At the end of the day, there is no one right answer. For me, not having a mortgage will be great. It will free up cash flow for things like going to Disney World (and paying for the kids education).

 

[Soupermom]

Thanks to everyone for your input! Keep it coming (and keep it nice! )

 

[roadtripper]

Two teachers here! We have 403bs, Roths, and also 457s--which are like 403bs through our state, but you can invest in BOTH of these accounts up to the maximum--they don't assess them together. If that is a possibility (403bs and 457s) you can put yourself into a low tax bracket now because the $ is tax deferred. Plus, the hit to your paycheck is not as great as you might think--500 per pay period to a 403b is only about 350 less in take home pay, IIRC. Have the advisor run some numbers for you.

Our financial advisor said it's wise to have some accounts of each of the following, to hedge against tax changes:
1. Tax me now (savings interest)
2. Tax me later (403bs and 457s)
3. Tax me never again (Roth)

 

[silmarg]

Our financial advisor said it's wise to have some accounts of each of the following, to hedge against tax changes:
1. Tax me now (savings interest)
2. Tax me later (403bs and 457s)
3. Tax me never again (Roth)

I like this style. While I dont have that much of 1... I actively participate in 2 and 3. In fact my employer gave us the option of a Roth401k. So I can now contribute $16.5k to the equivalent of a Roth.

I also an considering doing an IRA conversion into a Roth as well.

I agree when you retire you will want a pot of income that is tax free and a pot that is taxable. It will make things most flexible by then.

GOD WILLING.

 

[morgan98]

DH and I both have 403b accounts. We wish we'd never signed up for one. We've lost more money than what we've put in. We really need to get out of it as it is not helping us at all and is actually sucking money away (has been for the past 2 years). When we were ahead it wasn't by much. The only advantage is we don't pay tax on that income, but since the accounts have less than what we put into it each pay period, what's the use right now with the market being so bad?

Just as aside, a 403(b) account is just referring to the section of the Internal Revenue Service Code that allows not-for-profit organizations to set up the equivalent of a 401(k).

No doubt, depending on the investments within the 403(b) account, it is very possible, highly probable even, that your account is worth less than the amount you have contributed. This is especially true withthe volatility of the market in the past two years.

However, you may want to review the investment options for your 403(b) plan as many plans have money market or bond fund investment options which are much less risky than other stock funds. This allows you to still have the benefit of tax free contributions, while not having as much market risk.

This is also true of IRA's (both traditional and Roth). Again, you can actually put the money in an account at a bank (very low risk) but still get the tax advantages.