Simple Stock Question: Individual Account vs. 403(b)

[Mike Lowe]

I'm just getting started into this whole stock market thing and just want to weigh my options for the future. Basic background: I'm a 32 year old teacher working on my second masters.

I'll be filling my Roth IRA asap for 2013, but soon after that I'll either be starting up an individual account (to go above the $5,500 in Roth IRA) or enrolling in my school districts 403(b) with NO match.

Without any sort of match, is one better than the other? Obviously with the indy account I can pick and choose what I want and easily "take it with me" if I change jobs (might happen one day, might not). I'm sort of leaning the way of the indy account (plus I can keep it all with TDAmeritrade), but wanted to see if I was missing some obvious "duh" benefit to the 403(b).

I'm aware the 403(b) is tax sheltered, but it gets taxed anyway later on...is that a wash? Is the indy account taxed before my take home and THEN again once I go to take it out?

Thanks soooo much for the feedback! So far I've taken half of my first deposit into TDAmeritrade and put it in a large growth mutual fund index, and the other half I'm just sort of picking and choosing interesting stocks based on research. Eventually, I'll likely be going more of an 80/20 contribution split with the mutual index and indy stocks respectively.

I have a substantial amount of disposal income based on my salary as I have two roommates who are paying over 70% of my mortgage, and my portion of the mortgage comes out to 15.8% of my take home pay. Half of my lefover money (after bills, spending money, etc.) I'm putting into TDAmeritrade (or perhaps 403(b) eventually), the other into my normal money market savings account.

I feel a bit stupid for not getting into the market sooner, but at least I'm getting started late versus never!

[Desnudo]

Roth IRA is post-tax income and you do not need to pay ordinary income tax at withdrawal. The 403 sounds like a traditional IRA which is pre-tax and tax deferred. You pay ordinary income taxes at withdrawal.

Typically the Roth provides greater long term return than a traditional. There are online calcs that will tell you which would do better for your situation. Also you should check and see if the 403 has mgmt fees which would reduce your rate of return.

Fool.com: All About IRAs - Traditional vs. Roth

[Mike Lowe]

Thanks guys keep it coming!

[Desnudo]

Ah, rereading I thought you were opening a traditional Ira. If you are thinking about opening a regular brokerage account, the 403b is a no-brainer. The tax deferred savings would be substantial.

[Suburban Rhythm]

A couple thoughts

If you are funding the TD account from take home pay, then yes, you're missing the deferral benefits, assuming you're in a higher bracket today then you will be in 40 years.

As Desnudo mentioned, management fees will eat into your 403(b) return, but I can't imagine a substantial enough amount that you'll really notice.

If you do open a traditional IRA, while you would get the deferral benefits by being able to claim contributions on your 1040, there are income limits, so a portion of that could also end up being "double taxed"

[Mike Lowe]

So should I be funding this Roth IRA up to the max each year and then putting everything else into the no-match 403(b)? Ugh, I just don't like it being tied to my job and having to transfer it all if I move on.

I wasn't opening up a Traditional Roth in any of the scenarios--it would just be an individual account which TDA considers different from a TIRA apparently??????? (they have options for both)

[Desnudo]

yes. Max Roth, then remainder in 403b.

It's really not much of a pain to roll over retirement accounts into a personal IRA. alternatively you could simply leave it in the 403b even if you change jobs.

The tax benefit of deferral is substantial - say 25% of whatever income you stash in the 403b, based on your tax bracket.

[Mike Lowe]

Thanks so much.

So what are the reasons I should choose a 403(b) over my own individual fund once I max out Roth?

I'm a control freak (I play sport sims!) haha...I was looking forward to doing things myself!

[damnMikeBrown]

Originally Posted by Mike Lowe

Thanks so much.

So what are the reasons I should choose a 403(b) over my own individual fund once I max out Roth?

I'm a control freak (I play sport sims!) haha...I was looking forward to doing things myself!

FYI, I work in the industry. Compliance dictates that we do not disclose our affiliation or offer investing advice in an unmonitored manner.

The 403(b) is essentially a 401(k) for non-profits.
What does this mean? It is an account that you may contribute to at your discretion that is provided to you as a benefit of working where you do. The contribution comes out of your paycheck directly. The max contribution for 2012 was $16.5k I believe(if under 50).

Roth is most typically an IRA. IRA's are provided by an investment company, in your case, T.D. They have no relation to the work place account. The max for 2012 (if under 50) is $5k.

The difference in -most- cases is the tax treatment. The contribution to -most- 403(b)'s are TAX DEFERRED. The assets you put in to the 403b grow w/o being taxed until you take them out. The upshot is you get a current year tax break (the $ is right off the top of your paycheck) and the assets grow w/o taxes being taken out. The IRS supports this...but you have to pay taxes sooner or later...so when you turn 70.5, the IRS makes you take out assets every year until you die. This is called a Minimum Required Distribution (MRD). You are taxed on those distributions at what ever your income tax rate is when you have at that point. Normally, folks who are retired have a much lower tax rate then when they are working..but not always.

The Roth IRA allows you to make a contribution (if you do not make too much $$) that has -no current year tax benefit-. The benefit of the Roth is that the growth is TAX FREE instead of TAX DEFERRED. When you take $ out of the Roth after the age of 59.5, you do so w/o any tax consequences. There are other things with a Roth, such as you are able to take out your contributions at any time w/o incurring a penalty, regardless of age. Again, the max here is $5k for 2012.

You can save a lot more in the workplace plan than through contributions to an IRA.

They are both the right answer. Which ones makes more sense depends on the benefit of the tax deduction from the 403b vs non-deductable contribution to the Roth. Tax rates, what ever they may be when you pull assets out have to be considered as well (or guesstimated).

You will likely have a limited option of mutual funds in the 403b to choose from. Plenty to make a well diversified portfolio and create a risk appropriate allocation, however not as many as are likely available in the Roth.

Look in to your workplace plan. It is more common to see Roth options available in those plans these days.

Answering your question above...any tax advantaged account, be it IRA or workplace plan is step 1 in saving for retirement before a taxable account is created for the same investment goal.

[DaddyTorgo]

well said dMB. I think you hit all the key points.

[Mike Lowe]

You guys are great thanks so much. Now it's time to buy up those Solecismic shares before they skyrocket haha
#fofx

[Mike Lowe]

Hey guys,

Revisiting this thread as I've had a blast this first month. I have one question though:

To start with, I've been putting 1/2 of my investment cash (15% of my take home) into an index/mutual fund, and the other half into individual stocks. I have no idea if this plan of action makes sense, as it seems most people either do mutual funds OR indy stocks...not both.

I see it as just another way to diversify; I get some protection/low risk in the index fund, but then also can take some chances with the indy stocks.

So I guess a) is this a decent approach and b) is a 50/50 split the best or should I go like 80/20 one direction or another?

[DaddyTorgo]

Individual stocks aren't for playing around with with your retirement money IMO. Shit...I deal with the markets everyday and our clients are smart money managers who have managed to outperform the markets, and I've learned some things from them over the last 6 years, and I STILL wouldn't put retirement money in individual stocks.

They're for playing around with with money that you're not afraid to lose 100% of.

[Mike Lowe]

Thanks DT.

Should I invest in multiple mutual funds then? The one I'm using is heavy in tech.

Fwiw, my indy stocks this first month outperformed the mutual fund by over 20%. Incredibly small sample size obviously.

Since my free trades run out in a month, I'm thinking of creating some trailing stops on those to dump them while it's still free.

Until I have more $ in the IRA, I'm thinking it's best to stay away from stocks. I'd rather wait until I can at least put $4000 into any one stock since TDA charges $10 per trade. Even at 5%, that $20 would be just 10% of the earnings.

Am I making ANY sense? Lol

[DaddyTorgo]

Originally Posted by Mike Lowe

Thanks DT.

Should I invest in multiple mutual funds then? The one I'm using is heavy in tech.

Fwiw, my indy stocks this first month outperformed the mutual fund by over 20%. Incredibly small sample size obviously.

Since my free trades run out in a month, I'm thinking of creating some trailing stops on those to dump them while it's still free.

Until I have more $ in the IRA, I'm thinking it's best to stay away from stocks. I'd rather wait until I can at least put $4000 into any one stock since TDA charges $10 per trade. Even at 5%, that $20 would be just 10% of the earnings.

Am I making ANY sense? Lol

Active mutual funds? The fees on those will likely eat significantly into your returns, and it's so difficult to pick an active manager that will consistently outperform (let alone avoid the "reversion to the mean" effect where a good manager will eventually begin to perform average, typically right after they accumulate a good track record and a bunch of $$).

I don't pretend to be a financial advisor or anything - I work in sales & marketing on the institutional side of the business, but everything I've been reading as I prepare to ramp up my own personal retirement investing leads me to think that a selection of Index Funds/ETFs/target date funds is the best mix for your long-term retirement investments.

Put the bulk into a target-date fund (or one of these new services that proposes to create an individualized, rebalancing target-date-fund for you), and augment that with index funds or etf's for asset classes that wouldn't be included in that that you want to add for risk/diversification (real estate, commodities, emerging markets). Don't add those index funds/etf's willy-nilly either...read up on them and/or use them as "juice" at the margins with money that you aren't afraid to see be volatile (if that makes any sense).

[Mike Lowe]

The one I'm using right now is indeed an index fund and has what seems to be very low fees: USNQX.

I liked the index funds more because I trust a computer far more than some dude who was out till 3am sleeping with his mistress then going into work in the morning haha

[DaddyTorgo]

Originally Posted by Mike Lowe

The one I'm using right now is indeed an index fund and has what seems to be very low fees: USNQX.

I liked the index funds more because I trust a computer far more than some dude who was out till 3am sleeping with his mistress then going into work in the morning haha

Aaaah - good on you. Just making sure.

[Desnudo]

Originally Posted by Mike Lowe

Thanks DT.

Should I invest in multiple mutual funds then? The one I'm using is heavy in tech.

Fwiw, my indy stocks this first month outperformed the mutual fund by over 20%. Incredibly small sample size obviously.

Since my free trades run out in a month, I'm thinking of creating some trailing stops on those to dump them while it's still free.

Until I have more $ in the IRA, I'm thinking it's best to stay away from stocks. I'd rather wait until I can at least put $4000 into any one stock since TDA charges $10 per trade. Even at 5%, that $20 would be just 10% of the earnings.

Am I making ANY sense? Lol

If you are willing to educate yourself, I would absolutely manage my own investments. The financial industry is constructed around extracting money from investors, not maximizing your return. If you don't want to invest the time, then find one s&p index fund with the lowest costs and stick your money in until you near retirement.

I honestly believe investing is very simple if you don't listen to all the FUD out in the media (and have the ability to be patient and ignore self doubt)


The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition): Benjamin Graham, Jason Zweig, Warren E. Buffett: 9780060555665: Amazon.com: Books

[DaddyTorgo]

Originally Posted by Desnudo

If you are willing to educate yourself, I would absolutely manage my own investments. The financial industry is constructed around extracting money from investors, not maximizing your return. If you don't want to invest the time, then find one s&p index fund with the lowest costs and stick your money in until you near retirement.

I honestly believe investing is very simple if you don't listen to all the FUD out in the media (and have the ability to be patient and ignore self doubt)


The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition): Benjamin Graham, Jason Zweig, Warren E. Buffett: 9780060555665: Amazon.com: Books

Depends on your personal risk tolerance and the amount of time that it takes to (a) educate yourself, and (b) manage your investments on an ongoing basis.

The market has changed a lot even since that 2003 release. To do it right you have to be really well-rounded and have more than one source. It's all about how much time you want to put into it and how much risk you're willing to assume for your retirement.

[Mike Lowe]

Guys thanks so much. I'm selling off (using trailing stops) some of the stocks I had in preparation of losing my free trades soon. Beacuse I was just dabbling, I didn't have enough riding in/out of these stocks to warrant a $10-20 transaction fee. I'll take my small earnings and run! haha

I'm taking that money and continuing in the index fund mentioned above (Large growth, above average risk, high return).

I guess now I'm thinking I might want to also get into another Index fund that's geared more towards small/medium cap...is that worthwhile?

I'm also thinking of taking 10-20% of my 15% contributions from take home pay and using it for individual stocks. I'd wait though until I had a higher dollar amount to make those transactions fees worthwhile.

Hopefully I'm in the ballpark...

[DaddyTorgo]

Well your first index fund is nasdaq, so it's going to be tech heavy...so if you do look for another fund more geared towards small/medium cap you'll want to look at the sector-tilt on that one and find one that isn't tech-heavy (or change your first one to a more broad-based one), since small/mid cap tend to be pretty tech-heavy and tech-correlated.

//the above is a general suggestion and is offered without knowledge of your particular situation and is not meant to represent investment advice

[Desnudo]

Originally Posted by DaddyTorgo

Depends on your personal risk tolerance and the amount of time that it takes to (a) educate yourself, and (b) manage your investments on an ongoing basis.

The market has changed a lot even since that 2003 release. To do it right you have to be really well-rounded and have more than one source. It's all about how much time you want to put into it and how much risk you're willing to assume for your retirement.

I would respectively disagree. The fundamental forces that drive business success or failure and growth haven't changed since the first beer or hooker was sold thousands of years ago.

If you block out the noise from people hawking financial products and the fear factor short term media stories, it's fairly straightforward to have a long term investing strategy. The longer your time horizon, the easier it is.

[DaddyTorgo]

Originally Posted by Desnudo

I would respectively disagree. The fundamental forces that drive business success or failure and growth haven't changed since the first beer or hooker was sold thousands of years ago.

If you block out the noise from people hawking financial products and the fear factor short term media stories, it's fairly straightforward to have a long term investing strategy. The longer your time horizon, the easier it is.

If we're talking "buy and hold" then yes, I agree - the longer your time horizon the easier it is. But not everyone is capable of blocking out the noise, or devoting the time to construct & maintain a properly diversified portfolio, let alone possessing of the intellect, or inclination, to do so.

As noted, I see nothing wrong with putting some money to work on individual stocks, but I wouldn't advise the average individual to hold a majority of their retirement account in individual stocks, unless they have a backup plan, or are willing to lose it all.

Bottom line is though - Mike has to do what he's comfortable with personally based on his own knowledge of himself and his families situation. At some level of assets it makes sense to consult a professional, or at least to educate yourself as if you were a professional, before going further.