403(b)/401(k) account
403(b)
403(b)'s are a provision in the IRS tax code for non-profit organizations, hospitals, ministries, churches and school districts. The 403(b) is traditionally nick-named "tax-deferred annuity" plans because these have traditionally been investments in insurance annuities. As stated before, annuities are an expensive and overly-conservative investment vehicle and were originally marketed by the insurance companies to the non-profit community as a profit-making machine. This is certainly a conflict of interest to the long-term investing teacher.
Now 403(b) vendors offer access to mutual funds and some even have open brokerage accounts to select from thousands of funds. 403(b)'s are still more expensive than IRAs since there must be some sort of vendor or Third Party company that houses your account or your school district's account.
Each school district has control over what funds or vendors are on their approved 403(b) list. In the district where I teach, we have a choice between several vendors for our 403(b) account. Some offer brokerage accounts, others offer a set list of (expensive) mutual funds, and most of them have an annuity account (stay away). Be careful to select a vendor that offers low-cost mutual funds (preferably index funds).
A 403(b) is contributed to through automatic payroll deduction which will reduce your taxable income (therefore reducing your State taxes as well). This virtually gives you the same tax benefit as a Traditional IRA since the Trad. IRA reduces you Adjusted Gross Income (AGI) thereby lowering both your Federal and State taxes. There is no income limit for contribution to a 403(b) and the 2016 contribution limit is $18,000 ($24,000 if over 50). Some districts may offer employer contributions or matches to a 403(b), mine does not.
<Big Rapids Public Schools 403(b) analysis under construction> The good news is that our new head of finance recognizes that we do not have a good list and we are going to have something added that includes low-cost index funds!
401(k)
The 401(k) is traditionally an individually-owned investment account for employees of a corporation. Those teachers in Michigan hired after 2012 have different pension rules and also have access to the Michigan State Public Employee 401(k) plan for retirement savings. Luckily, Michigan offers some good index funds and the costs are reasonable. The annual contribution limits are the same as the 403(b) and there is also no income limit. *WARNING* - without a pension, the young teacher is forced to save for retirement completely on their own, so start NOW!! I would suggest simply using one of the Target Retirement funds (discussed in the index fund page of this site). Your district may match your first dollars of contribution to a 401(k). Take advantage of this if you are on "baby step" 4.
403(b)'s are a provision in the IRS tax code for non-profit organizations, hospitals, ministries, churches and school districts. The 403(b) is traditionally nick-named "tax-deferred annuity" plans because these have traditionally been investments in insurance annuities. As stated before, annuities are an expensive and overly-conservative investment vehicle and were originally marketed by the insurance companies to the non-profit community as a profit-making machine. This is certainly a conflict of interest to the long-term investing teacher.
Now 403(b) vendors offer access to mutual funds and some even have open brokerage accounts to select from thousands of funds. 403(b)'s are still more expensive than IRAs since there must be some sort of vendor or Third Party company that houses your account or your school district's account.
Each school district has control over what funds or vendors are on their approved 403(b) list. In the district where I teach, we have a choice between several vendors for our 403(b) account. Some offer brokerage accounts, others offer a set list of (expensive) mutual funds, and most of them have an annuity account (stay away). Be careful to select a vendor that offers low-cost mutual funds (preferably index funds).
A 403(b) is contributed to through automatic payroll deduction which will reduce your taxable income (therefore reducing your State taxes as well). This virtually gives you the same tax benefit as a Traditional IRA since the Trad. IRA reduces you Adjusted Gross Income (AGI) thereby lowering both your Federal and State taxes. There is no income limit for contribution to a 403(b) and the 2016 contribution limit is $18,000 ($24,000 if over 50). Some districts may offer employer contributions or matches to a 403(b), mine does not.
<Big Rapids Public Schools 403(b) analysis under construction> The good news is that our new head of finance recognizes that we do not have a good list and we are going to have something added that includes low-cost index funds!
401(k)
The 401(k) is traditionally an individually-owned investment account for employees of a corporation. Those teachers in Michigan hired after 2012 have different pension rules and also have access to the Michigan State Public Employee 401(k) plan for retirement savings. Luckily, Michigan offers some good index funds and the costs are reasonable. The annual contribution limits are the same as the 403(b) and there is also no income limit. *WARNING* - without a pension, the young teacher is forced to save for retirement completely on their own, so start NOW!! I would suggest simply using one of the Target Retirement funds (discussed in the index fund page of this site). Your district may match your first dollars of contribution to a 401(k). Take advantage of this if you are on "baby step" 4.