Roth IRA & 403b Advice

[ddr10]

Hello everyone,

I'm looking for some help trying to figure out what to do with my Roth IRA & 403b. Although I started putting money into my Roth IRA back in 20's I didn't really know what I was doing. In the last few of years, I have started to invest more time in researching things out so I can make sure I am building wealth not just for retirement but to be able to pass along wealth to my children. I have made some changes that I'm hoping have set me in the right direction but have now reached a stuck point. Thanks in advance for your advice.

Emergency funds: Yes, 3 months of expenses in a HYSA through Ally Bank (3.40% APY)

Debt: Mortgage Loan Balance $295,410 the interest rate is 4.375%, conventional 30 year term

Tax Filing Status: Married Filing Jointly

Tax Rate: 22% Federal, 8% State

State of Residence: California

Age: 39

Desired Asset allocation: 80% stocks / 10% bonds
Desired International allocation: 10% of stocks

Approximate size of portfolio: 25K

Current retirement assets

Taxable
3% cash $700 in regular savings account

Vanguard
27% Vanguard Total Stock Market Index Admiral Cl (VTSAX) (expense ratio 0.04%)
13% Vanguard Total Intl Stock Index Admiral Cl (VTIAX) (expense ratio 0.11%)
12% Vanguard Total Bond Market Admiral Cl (VBTLX) (expense ratio 0.05%)

Her Roth IRA at Vanguard
26% Clearbridge All Cap Value Cl A (SHFVX) (1.16%) Sold as of 1/31/23 with intent to move to a different fund. Trying to figure out where to put this money.

Her 403b American Fidelity - AFAdvantage Variable Annuity - 403b (FVA04R)
Can’t find ticker symbols or expense ratios anywhere on the American Fidelity website. When I called customer serviceI was told the funds in these annuities are not publicly available funds that’s why there are not ticker symbols. I was able to pull expense ratio information from 403bcompare.com
12% VG05A1 - Vanguard Total Stock Market Index Portfolio (0.13% expense ratio)
Company match? No
8% AFGII1 Guaranteed Interest Account
Company match? No
Annual Fees:
Base Contract (as a percentage of average account value - only one contract class offered) - 1.51%
Investment Options (Portfolio Company fees and expenses as a percentage of net asset value) - 0.13% to 0.82%
I also pay into the California State Teachers Retirement System which is a defined benefit pension. I will be eligible to retire in 2044.

_______________________________________________________________
Note: Total percentage of all the above accounts together (not each account individually) should equal 100%.

Contributions

New annual Contributions
$0 her 403b no employer matching, not contributing until I figure some things out
$2,000 her Roth IRA
$0 taxable brokerage, looking at my budget to figure out a way to contribute regularly this

Available funds

Funds available in her 403(b)
Can’t find ticker symbols or expense ratios anywhere on the American Fidelity website. When I called customer serviceI was told the funds in these annuities are not publicly available funds that’s why there are not ticker symbols. I was able to pull expense ratio information from 403bcompare.com
AFGII1 Guaranteed Interest Account
VG01A1 Vanguard Total Bond Market Index Portfolio (0.14% expense ratio)
VG05A1 Vanguard Total Stock Market Index Portfolio (0.13% expense ratio)
AM02A1 American Funds IS Washington Mutual Investors Fund (0.27% expense ratio)
DR01A1 BNYMellon Stock Index Fund (0.26% expense ratio)
VG02A1 Vanguard Balanced Portfolio (0.20% expense ratio)
VG04A1 Vanguard Capital Growth Portfolio (0.34% expense ratio)
DR02A1 BNY Mellon Sustainable US Equity Portfolio, Inc. (0.67% expense ratio)
VG06A1 Vanguard Mid Cap Index Portfolio (0.17% expense ratio)
DR07A1 BNY Mellon VIF Opportunistic Small Cap Portfolio (0.82% expense ratio)
AM01A1 American Funds IS International Fund (0.54% expense ratio)
Annual Fees:
Base Contract (as a percentage of average account value - only one contract class offered) - 1.51%
Investment Options (Portfolio Company fees and expenses as a percentage of net asset value) - 0.13% to 0.82%

Questions:
1. I was going to buy VSTAX but read somewhere in this forum it was not a good idea to have the same fund in your Roth IRA and your taxable brokerage. I was looking at Vanguard 500 Index Fund Admiral Shares (VFIAX) (0.04 expense ratio). I have about $6,800 in my settlement fund ready to go. Am I on the right track with VFIAX or should I do some more research into other options?

2. What should I do, if anything with my annuity through American Fidelity? I’m thinking about transferring funds within the annuity but not sure what to do. I talked with my school district and found that they also use Schools First Federal Credit Union for 403b plans and National Benefit Service for 457 retirement plans but trying to find information online has been difficult. I’m leaning towards transferring money between the funds to maximize the money already there and just focusing on contributing to my Roth IRA.

[lakpr]

The only thing I wanted to add is that 1.5% fees on top of fund fees makes the 403(b) absolutely not worth contributing to. So what you are doing is really the best that you can be!

If you do get more information about the 457(b) plan, post back. Hoping that you will have better luck there.

Regarding the Roth IRA, you did hear correctly that you should not have the same funds in both Roth IRA and taxable. But there is a very easy work around.

According to this wiki entry: Approximating Total Stock Market, a 82:18 split between S&P 500 Index fund and Extended Market Index fund would replicate both the risk and return of a total stock market index.

A 80:20 (or 4:1) split also will do the same thing.

But given that the Extended Market Index fund also requires $3000 minimum, until you reach a corpus of $20k, I would not bother splitting the contributions. Simply invest in VFIAX (so different than VTSAX that's already in your taxable), and revisit about 3 to 4 years later when you exceed $20k in the Roth IRA.

Make sure you max out the Roth IRA contributions annually. I mean, that's $6,000 for 2022 and $6,500 for 2023 -- so if you can gather $12,500 put that entire money into Roth IRA. Sell your taxable account if you need to (the 2022 contribution deadline is April 15th, once you miss it you will not get the opportunity, it is lost forever).

[krow36]

Have you checked to see if your district has a list of 403b vendors that includes a lower-cost vendor? Or is American Fidelity the only 403b vendor? I agree that contributing to your Roth IRA and a taxable brokerage account is your best option now if there are no low-cost 403b vendor on the list. Your American Fidelity variable annuity has a surrender fee doesn't it? 8 or 10 years?

[ddr10]

Thank you for the advice.

I'm trying to revise my budget to make sure I can max out my annual Roth IRA contributions.

As far as the 403b, I did see something about a surrender date. I believe it's 8 years but even if it's 10. I would be at 10 years at the end of this school year. My district doesn't really offer low-cost vendors so I think it's best to just withdraw the money and put it in my Roth IRA.

[mamster]

Can you share the list of vendors, just in case?

It's excellent that you figured out how terrible this 403(b) is and came here. Are you already familiar with http://403bwise.org/ for understanding your 403(b) choices and advocating for better ones? Convincing your district to offer better vendors is not a lost cause and could save you tons of money if you stay with the district for years.

[lakpr]

I'm trying to revise my budget to make sure I can max out my annual Roth IRA contributions.

Per your original post, you have 52% of $25k in taxable account. Sell them all, which should net you $12.5k, exactly equal to the Roth contributions for 2022 and 2023.

Yes, tweak the budget to make annual contributions to Roth, but for 2024 and beyond ....

You already have emergency fund. You don't need the taxable account

[krow36]

As far as the 403b, I did see something about a surrender date. I believe it's 8 years but even if it's 10. I would be at 10 years at the end of this school year. My district doesn't really offer low-cost vendors so I think it's best to just withdraw the money and put it in my Roth IRA.

That's great that you will be able to avoid the surrender fee. The IRS regulations don't allow you to move your 403b balance to an IRA unless the 403b is with a former employer, or you are 59.5. The regs DO allow you to do a Contract Exchange and move the balance to another 403b account with a vendor on the district's vendor list. If you post the list, hopefully we can help you spot a lower-cost vendor. If there is none on the list, then you and your colleagues need to organize and make it happen. The only reason a district has a low-cost 403b vendor is that the employees pushed for it.

[ddr10]

The additional vendors are Schools First Federal Credit Union for 403b plans and National Benefit Service for 457 retirement plans but trying to find information online has been difficult. I even tried looking in 403bcompare.com with no luck. Turns out I’m in my 7th year of my 403b through American Fidelity. The surrender fee is 2% plus a flat fee of $95.33. The 2% would end up being about $106. My thought wasn’t to move the money, just to suck it up and pay the taxes on it and then use it what’s left for my Roth IRA. The account currently only has $5295.

[dknightd]

Random thoughts.
Age 39. 22% tax bracket. Working for 7 years. Approximate size of portfolio: 25K
You should probably find a way to start saving more money unless you have a generous pension.
Too bad your 403b options do not look very good. That seems typical for small school districts. But I would not dismiss that as an option. I do not know the rules for a regular IRA - you may or may not qualify.
I'd be trying to save more money. I'd prefer to do it in a tax preferred account of some type.

[teen persuasion]

Random thoughts.
Age 39. 22% tax bracket. Working for 7 years. Approximate size of portfolio: 25K
You should probably find a way to start saving more money unless you have a generous pension.
Too bad your 403b options do not look very good. That seems typical for small school districts. But I would not dismiss that as an option. I do not know the rules for a regular IRA - you may or may not qualify.
I'd be trying to save more money. I'd prefer to do it in a tax preferred account of some type.

I was thinking similarly, but then noticed the OP contains info on only one spouse in a MFJ household. Separate accounting?

[ddr10]

Random thoughts.
Age 39. 22% tax bracket. Working for 7 years. Approximate size of portfolio: 25K
You should probably find a way to start saving more money unless you have a generous pension.
Too bad your 403b options do not look very good. That seems typical for small school districts. But I would not dismiss that as an option. I do not know the rules for a regular IRA - you may or may not qualify.
I'd be trying to save more money. I'd prefer to do it in a tax preferred account of some type.

This is my 14th year working in education and paying into the pension plan. Our pension benefits are calculated based on the last 3 years of income. My estimated month benefit is around $6,000/month. If I include my spouse, he gets $2,000 and I get $4,000. This is based on current income. My income will increase a few more times in my career based of the current salary schedule. If all goes well, I plan to work for until 2044.

[ddr10]

Random thoughts.
Age 39. 22% tax bracket. Working for 7 years. Approximate size of portfolio: 25K
You should probably find a way to start saving more money unless you have a generous pension.
Too bad your 403b options do not look very good. That seems typical for small school districts. But I would not dismiss that as an option. I do not know the rules for a regular IRA - you may or may not qualify.
I'd be trying to save more money. I'd prefer to do it in a tax preferred account of some type.

I was thinking similarly, but then noticed the OP contains info on only one spouse in a MFJ household. Separate accounting?

You are correct, although we file jointly we keep our money separate. My whole money strategy has been focused on being able to maintain my lifestyle for my 2 kids and myself on just my income. Life is crazy and one too many people I know have lost their spouses unexpectedly. So essentially, I’m planning for the worst and hoping for the best.

[mamster]

You probably won't be able to get your money out of the 403(b) until after you separate from service with the school district or turn 59.5, because 403(b)s don't offer in-service rollovers. And even if you're paying 1.5%+, you don't want to withdraw the money and pay a 10% penalty and 22% tax.

I would continue to research your 403(b) options and see if you can do a contract exchange to a lower-cost provider. If not, even though I'm sure you don't want to put another responsibility on your plate while working in public schools, pushing the district to adopt a low-cost provider is one of the best things you can do for yourself and your colleagues, and it's not pie-in-the-sky activism: people actually succeed at this, at least sometimes.

[ruralavalon]

Can you share the list of vendors, just in case?

+1

Which vendors are available in this 403b plan?

It's excellent that you figured out how terrible this 403(b) is and came here. Are you already familiar with http://403bwise.org/ for understanding your 403(b) choices and advocating for better ones? Convincing your district to offer better vendors is not a lost cause and could save you tons of money if you stay with the district for years.

+ 1.

Try to promote the addition of a low cost vendor in the 403b plan.