403B or Roth IRA – Reader question
Here is a question from a reader Stella
These days I’m struggling with our retirement investment. we got the spot of Roth IRA for 2014-2015 at fidelity then we are thinking put the money at the 2045 fidelity free hand or something. will it be the best option for us? we have to another 403b with the same investment plan. Do you have any comment about it?
Here is my response
Hi Stella,
403 B is employer sponsored tax sheltered investment for nonprofit organizations. I know it is a lot of fancy words. But let me break it down for you. If you want to save on tax money 403B is the best investment route. The maximum contribution limit is $18,000 for a year. So if your annual salary is $100,000 and you contribute $18000 , $18000 will be subtracted from $100,000 and the rest will be taxed. If your tax rate, for example, is 30%, you will save around $5400(18,000*0.3) in taxes if you invest in 403B. When you start drawing out your pension after 60, you have to pay taxes. The good news is you may be at a lower tax slab reducing the tax you pay.
Roth IRA contribution is done after you pay taxes. It does not have any impact directly on reducing your taxes. However, your investment gains are not taxed. The advantage is, if you invest $100 in a stock and it gives you $20 in returns, it won’t be taxed. However, you could be penalized if you draw your Roth IRA prior to your retirement. In contrast, if you had a stock brokerage account, the returns that you make will be taxed however you can draw on it whenever you want.
As far as which funds to invest you want to look at 2 things 1. Expense ratio 2. Historic returns. Expense ratios are the amount of money you spend to manage your portfolio. So it needs to be really less for it to make sense for you. Historically mutual funds haven’t outperformed the markets and very expensive. Lifecycle funds pick investments based on computer programming and have low expense ratio. You can pick a lifecycle fund based on which year you will retire. For example, if you retire in 2045, you pick lifecycle funds 2045. The funds allocate the right amount of stocks, bonds and ETFs based on your age and how close you are to retirement.
Hope that helps! Let me know if you have more questions
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