If I don’t get a match with my employer 403(b) yet, is it better to just max out my Roth IRA? I haven’t been able to do that yet, but now I have enough of a paycheck to do so.
Is it advantageous to contribute to a 403(b) if I don’t think I’ll be at a job for more than a few years? Are those easy or hard to roll over?
Also, is it better to max out my Roth this year or pay off my student loans ASAP? I have enough in the bank to do one or the other. My student loans come due soon at the shocking 6.8%! (Shocking because, uh, aren’t interest rates super low? I’m amazed that my student loan rate is higher than advertised mortgage rates right now.) I’ll be draining my efund to pay off the student loans in full; they’re subsidized, so this would mean I won’t pay any interest at all on them and essentially just floated that money for two years. I figure it’s worth draining the efund because my spouse also has an efund that is sufficient for us, and I am also in a job with earnings that will pay the efund back this year. And it is both penny and pound foolish to save money at 0.8% APR to create 6.8% interest on my loan.
If you get a match with your employer account, that’s generally the way to go. It is very difficult to beat a 100% immediate return on investment. (Or even a 50% return if they only match at that rate.) However, if the employer doesn’t match, there are a number of things you should be thinking about when deciding whether to go with the 403(b) or an IRA. (Note, below I am assuming you don’t want to do anything crazy like putting rental properties in your retirement account– something you can do with an IRA, but not with a 403(b).)
1. Do I qualify for an IRA? If you’re not making a decently large amount of money then chances are you qualify both for the Roth and to get the maximum deduction on the traditional IRA. Now, this is a bit less important because for the time being you can contribute to a traditional IRA and immediately roll it over into a ROTH, but that’s a little bit of a pain when you have a work retirement option already.
2. Do I want to take the deduction now (as with a traditional plan, so your tax bill is lower this year) or do I want the deduction in the future when I’m old and drawing from the Roth (as with the Roth option)? If you want the deduction in the future, does your 403(b) plan come with a Roth option? If not, then the IRA Roth is the thing to do. Otherwise the two are equivalent– you could either do a traditional 403(b) or a traditional IRA.
3. How sucky are the investment plans in my 403(b)? If Vanguard is one of your choices, then it doesn’t matter which you choose (after going through 1 and 2). If you’re stuck with a high cost annuity or Ing is your only retirement option… then go with the IRA. How do you know if your investment plan options are sucky? The main things you look for are Fees and Choice. It is hard to beat the fees at Vanguard. Even Fidelity and TIAA-Cref are a bit higher, although those are reasonable options. In terms of choice– you want to be able to buy low costs index funds and/or ETFs without having to pay a huge fee to do so. Even better is being able to buy a cheap Target Date fund that you can just set and forget.
As for how hard is it to roll over a 403(b)– it is pretty easy. You call up Vanguard, or whatever company you want to use, they ask you some questions, they fill out the forms, contact the company, and basically do everything for you. However, there is a problem that sometimes people forget to do anything with their 403(b) before a window has passed with them leaving employment and they end up taking a penalty and getting sent a check for the balance of their account. If you think that’s likely to happen to you, just go with the IRA.
Re: your loans. That interest rate is high enough that paying them off seems beneficial over saving for retirement (but save what you can anyway!) If they were 2% like #2’s loans are, we’d say to hold on to them because you can’t even get a mortgage at that rate. But they’re not. It also sounds like you’re covered in the event of a true emergency. (If you weren’t, we’d have to talk about what to do about float, and how much you can really afford to pay off.) So go for it!