Late Start for Teacher Retirement Accounts
I am trying to help my wife get her retirement accounts set up but have some confusion about the best route to take. She is late 30s and works as a teacher in Illinois and her pension falls under the TRS. She has a 403(b) with next to nothing in there and her…
I am trying to help my wife get her retirement accounts set up but have some confusion about the best route to take. She is late 30s and works as a teacher in Illinois and her pension falls under the TRS. She has a 403(b) with next to nothing in there and her district does not offer any kind of match. She just changed districts this year and received a substantial pay raise and would like to use that money for retirement before we start seeing it hit the bank accounts and start any lifestyle creep. The question I have is what is the best savings vehicle for this situation? Should she contribute to her 403(b) or start a Roth IRA? If this is a fee dependent scenario, what is the tipping point that determines which path is better?
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Huh….a 403b is taxed at withdraw And federal tax is still a thing; especially in retirement
Yes. distributions are taxed at the federal level. Plus, like 401(k)s, there are more early withdrawal exceptions than IRAs.
The ideal answer here is both. That said if you can only do one one I'd tend to favor the Roth as, in addition to the tax free growth, you'll also have more flexibility and investment choice (and likely lower fees). If you only have 7,500 to spare (or less) make the Roth contributions, if you have more you can (and should) be investing in both a Roth and the 403b.
Both is good lol. I have a 401k and have follow the PF prime directive flow chart but wasn't sure how that applied to a retirement account with no employer match.
The lack of employer match makes the 403b less attractive but not altogether useless or bad, you both are on the right track !
a 403b is taxed at withdraw Not at the state level in Illinois. All retirement income is not subject to the state income tax.
403(b). Illinois is a bad state for Roths because you never pay state tax on retirement accounts. If you do a Roth, you're using taxed money to invest, whereas a 403(b) isn't taxed on the front end or back end.
To add to this: Because Roth conversions are also exempt from IL state tax, converting pre-tax amounts to Roth can be better than making direct contributions to Roth accounts. Of course, if your federal tax rate is higher now than in retirement, it's still better to prioritize pre-tax. Roth contributions are still more tax-efficient compared to a taxable account.
To clarify for op, you're still paying federal on the 403(b) back end no?
You need to understand the fees and investment choices with the 403(b) plan. If the plan is really awful then maybe investing in an IRA is a better choice.
403(b) has a higher contribution limit equivalent to the 401(k) limits. You can only put $7,500 away in an IRA (Traditional or Roth) in 2026. Whereas in a 403(b), you can contributed 24,500 for elective deferrals under the age of 50. And 403(b) like 401(k) can allow Roth contributions. If you wanted to a Roth 403(b). Just as a general matter, if your tax rate is going to be the same in retirement as it is today, then there is no difference in a Roth v. Traditional. Roth only ever makes sense if your tax rate will be higher in retirement. And this can be a situation someone faces with RMDs. But you can also manage it with withdrawals starting at 59 1/2.
Before you decide on Roth IRA or a 403b, you absolutely need to determine if she has a low fee 403b option available through her district. Most 403b options available to teachers have borderline predatory (sometimes even hidden) fees. 403b accounts are exempt from the ERISA act so they are allowed to get away with this. The New York Times did an exposé on this in 2019 but nothing has changed. The organization 403bwise.org will be super helpful to you. She needs to get a list of the approved 403b providers from her district (it may be on the website, if not, email HR or the central office), and then go to 403bwise.org to check to see if her options are any good. If the district offers Vanguard, Fidelity, or Schwab, then a 403b is a great idea. (There are a few other 403b providers that have low fees, some of them are only available in certain states, though). She should also check to see if she has the option of contributing to a state 457b plan instead of or in addition to the 403b. These plans are often excellent and the IRS actually has separate limits for them, so you could theoretically max out a 403b and a 457b both. Not every state allows teachers to contribute to 457bs, though. If she does not have access to a good 403b or 457, she definitely wants to go Roth IRA. I personally would recommend a Roth in addition to a good 403b or 457, because her pension is very likely to be taxed (although I am not sure about Illinois, do pensions count as retirement money and thus are tax exempt there?). There are 11 states where teachers do not pay into Social Security, and there have been some sad cases of teachers retiring and not realizing that they won’t have Social Security until it’s too late. Double check that she does contribute. The podcast “Teach and Retire Rich” and 403bwise.org are the best resources I know of for teachers saving for retirement. (I’m not affiliated with either, to be clear). But please whatever you do, please please check the 403b fees. Way too many teachers have gotten screwed by predatory providers.
Don’t forget to calculate the pension and social security benefits when looking at retirement. It’s likely she’ll be pretty good even with “low value” self managed accounts We go Roth IRA for our individual savings. With pension and social security our baseline retirement income is higher than most