What to do with my money?

October 29, 2008 6:28 AM

New to 403(b)s... should I do an IRA instead?

I just switched to a nonprofit job and was given the option of opening a 403(b) account with a financial institution of my choice. I'm fairly young (27), so would be looking for moderately aggressive investments with low fees. TIAA-CREF seems to be well-regarded, but I'm wondering what people's experiences have been (good or bad). My last job was with a for-profit employer that handled my 401k, so I don't really have any experience with a financial institution.

I'm also wondering whether or not I should think about investing instead in a Roth IRA, which would allow me to make a withdrawal for a downpayment for a house later on. If I invested in a Roth IRA, I know I'd have to pay taxes now on the investment, but I'm wondering if it would be offset since I could invest in a house much earlier than if I invested only in a tax-deferred 403(b) account.

I know You Are Not My Financial Advisor, and my partner and I are planning to see one in the near future.

posted by atayah to work & money (5 comments total)

You should do both. My boyfriend is a nut over this kind of stuff. He heartily recommends putting into a variety of accounts in order to be a bit safer in terms of investment. Some of accounts did get bit by the recent mess, but others not as much.

You can always start adding more later to either account, but starting both now is the best thing. Just remember how you don't want to a be a greeter at Wal-Mart when you're 75 to make ends meet! Waiting a little longer for a house now will sure be that scenario later in life!

As an alternative to a Roth IRA if you're planning on a house very soon, a money market account would allow you to earn interest and you could keep your money there for downpayment.

And you are right...seeing a financial advisor is a super wonderful thing to do!!!
posted by sio42 at 6:48 AM on October 29, 2008

oh man - not enough coffee. "waiting a little longer for a house now will sure BEAT that scenario later in life!"
posted by sio42 at 6:49 AM on October 29, 2008

I'm not a big expert on the details of 403(b) plans, but here is some general advice about Roth versus Traditional:

Pros for Roth: As you said, there are some special ways for you to use the earnings before retirement in certain cases, such as a down payment on house. You can also withdraw any contributions (but not earnings) whenever you want for any reason. Depending on your situation, paying taxes now at your current tax bracket might save you more money than paying taxes later when you retire if you end up being in a higher tax bracket.

Pros for Traditional: Paying taxes later means that you have a higher starting amount, which through compound interest will add up to significant amounts by the time you retire. Your contributions will be subtracted from your taxable income, which may put you in a lower tax bracket. There are also usually higher limits for the amount you can contribute each year compared to a Roth IRA. Depending on where you work, a traditional retirement plan may save you money on account fees, and they might make matching contributions of some kind.

Also, a few nitpicks with sio42's advice: Having multiple types of accounts is not really diversification, you can easily invest in a variety of different things in one account. You should pick the investments that make the most sense for you and your situation, which may involve a single account or more than one. Also, you can easily invest in a money market fund in any kind of account. You could, for example, put money into a Roth IRA account, invest in a money market fund that pays 4% with a relatively low risk of losing money, and then withdraw the contributions (but not the 4% per year earnings) without penalty for any reason.
posted by burnmp3s at 7:06 AM on October 29, 2008

Does your employer match contributions to the 403(b)? If so, then you should definitely start by contributing whatever will maximize their contribution. It's free money!

After you are done with that, the maxing out IRA contributions is probably better in my opinion than making unmatched 403(b) contributions yourself.
posted by grouse at 7:16 AM on October 29, 2008

For all intents and purposes, a 403(b) functions the same way as a 401(k)... I'm not an accountant or tax lawyer, but my understanding is that the one is for employees of businesses and the other for employees of nonprofits or public institutions.

As a university employee, I have a 403(b) with TIAA-CREF and have been nothing but happy with them. I had a choice of a handful of financial institutions to have my 403(b) with and TIAA-CREF had, on average, the lowest management costs associated with their fund choices. This is an important an often overlooked issue when doing your asset allocation - it may all be well and good that a fund averages X% growth, but if one institution charges a 2% expense ratio, and the other 1%, that extra little bit can eat into your earnings in the long term.

Also, since you mentioned you previously had a 401(k), don't forget to roll it over to an account outside your old employer! Depending your circumstances, TIAA-CREF may allow you to roll over your existing 401(k) into your new 403(b).
posted by dicaxpuella at 7:21 AM on October 29, 2008