Where do you put your money once you hit the 401K max. contribution limit?

[Ben E N]

So contributing to a 403b gets us no further tax deductions if we are already maxing out the 401k?

It can be, but no more so than an IRA, up to an IRA's limits of course.

 

[Ben E N]

A 401k or 403b is considered held by an individual when it comes to figuring IRS limits. So you can max out the one account type ($24,500 annually if over 55/$18500 if under), your spouse the other (another $24500 or $18500)

Right. I like your previous post. Max out contributions, then IRA, then go elsewhere.

 

[Jan8]

Avoid the 403(b). They come with high fees, at least typically, and do not company match like 401(k)'s. Max out either an IRA or Roth IRA with Vanguard. Easy to do and they have the lowest fees. Their age based index funds offer a good mix of stock and bond indexes.

Also, the limit on IRAs is based on your AGI, which with mortgage payments, education costs, property taxes, and charitable contributions, can keep you well away from that taxable line.

A lot of this advice is just wrong. AGI is not after mortgage payments, property taxes and charitable contributions. Others have already commented on the 403b generalization.

 

[Frwinkley]

Thank you. A 403(b) is clearly the best way to go since it offers us the biggest tax advantage (provided the fees are reasonable).

Any reason to NOT consider a 403(b)?

 

[Ben E N]

A lot of this advice is just wrong. AGI is not after mortgage payments, property taxes and charitable contributions. Others have already commented on the 403b generalization.

The interest in mortgage payments are deductable, as are charitable contributions and education expenses up to a limit. Those all act to lower your AGI. The point I was trying to make there is that AGI is not as simple as 2 salaries, and is typically much lower, meaning it is easier to stay below the limit for IRA contributions.
As for the 403b comment, Iwas shocked by how low some people were quoting their districts offer, but none of them came close to what a Vanguard IRA offers, so they are still high fees in comparison. Not sure how that can be considered factually wrong. I do think that educating yourself on what individual offerings you are being presented is a great option, but you will rarely find a better path than maximizing your matchable contributions if offered, then maximizing your IRAs, then looking elsewhere. If you find that advice to be wrong, I am curious to hear why.

 

[Allison]

Yeah, I agree now and am jealous of other educators! The employer match piece is correct, though, unless

No, it isn't correct for 403bs in general. A 403b isn't just for school districts and even if it is related to a school contribution rules vary by entity.

 

[Friendlyadvice2]

The interest in mortgage payments are deductable, as are charitable contributions and education expenses up to a limit. Those all act to lower your AGI. The point I was trying to make there is that AGI is not as simple as 2 salaries, and is typically much lower, meaning it is easier to stay below the limit for IRA contributions.

If you find that advice to be wrong, I am curious to hear why.

Whether or not you can contribute to a Roth IRA is based on your modified adjusted gross income. The mortgage interest, property taxes, and charitable contributions you mentioned have absolutely no affect on MAGI or AGI or if you can contribute. Those are potentially itemized deductions that are subtracted from AGI to reach your taxable income.

Any pre-tax items such as 401k contributions or health insurance could reduce your gross wages to ultimately give you a lower MAGI and keep you below the qualifying limits to contribute to the Roth.

 

[Ben E N]

Whether or not you can contribute to a Roth IRA is based on your modified adjusted gross income. The mortgage interest, property taxes, and charitable contributions you mentioned have absolutely no affect on MAGI or AGI or if you can contribute. Those are potentially itemized deductions that are subtracted from AGI to reach your taxable income.

Any pre-tax items such as 401k contributions or health insurance could reduce your gross wages to ultimately give you a lower MAGI and keep you below the qualifying limits to contribute to the Roth.

From everything I have ever seen, those itemized deductions that I included are also built into your MAGI. If anything, a MAGI is more forgiving than an AGI, with the exception that it takes into account more passive income.

The larger point without getting into the details of specified deductions is that a lot more people qualify for an IRA or Roth IRA account than think they do. The income limits seem almost low until you realize all the pieces that can removed from your income before it is considered. Your inclusion of a 401k contribution is probably the biggest chunk that people can take into account.

 

[Ben E N]

No, it isn't correct for 403bs in general. A 403b isn't just for school districts and even if it is related to a school contribution rules vary by entity.

403b's are specific to government entities and non-profits, the vast majority of which are school districts. I'm not saying they shouldn't include employer matching, as I tried to get my district to consider it, just that its not typically done due to my previous point.

 

[Allison]

403b's are specific to government entities and non-profits, the vast majority of which are school districts. I'm not saying they shouldn't include employer matching, as I tried to get my district to consider it, just that its not typically done due to my previous point.

Not done in your school. That does not mean it isn't typically done in 403b plans. It is a very popular tool in 403b plans.

Where are you getting your numbers to support your "vast majority" argument? There are over 1.5 million non-profits in the U.S. That dwarfs the number of school districts.

 

[Ben E N]

Not done in your school. That does not mean it isn't typically done in 403b plans. It is.

I will absolutely give you that I was incorrect in making the sweeping statement of "they do not match". It does appear that they can, and some do match. I apologize for making an incorrect statement, as it was based on the information available to me. As to say that most match, though, I don't know if that's true either.

I did a little more digging myself, curious if I was getting the short-short end of the stick in my district. I found that typical 403b fees run anywhere from .34% for very large bodies, up to around 1.5%. .5%-1.1% is most typical. (https://www.forusall.com/401k-blog/average-403b-fees/#url_2) About 25% of plans offer a match (https://www.psca.org/survey-higher-contributions-better-balances-among-403-b-plans-1).

I apologize for jumping right to "they are not as good as an IRA", as there are obviously some good 403b's out there. I jumped to that response because I am presented with questions like that in real life and people who ask it automatically assume that a 403b is equal to a 401k because they sound so similar, without looking into the specifics of the plans.

Between potential matching and fees, it is of course important to know the unique plans being offered to each individual, and to compare them to what you can get in an IRA.

 

[Allison]

Between potential matching and fees, it is of course important to know the unique plans being offered to each individual, and to compare them to what you can get in an IRA.

Yes. Educating yourself on your options is always important.

 

[Jan8]

The interest in mortgage payments are deductable, as are charitable contributions and education expenses up to a limit. Those all act to lower your AGI. The point I was trying to make there is that AGI is not as simple as 2 salaries, and is typically much lower, meaning it is easier to stay below the limit for IRA contributions.
As for the 403b comment, Iwas shocked by how low some people were quoting their districts offer, but none of them came close to what a Vanguard IRA offers, so they are still high fees in comparison. Not sure how that can be considered factually wrong. I do think that educating yourself on what individual offerings you are being presented is a great option, but you will rarely find a better path than maximizing your matchable contributions if offered, then maximizing your IRAs, then looking elsewhere. If you find that advice to be wrong, I am curious to hear why.

No. Please educate yourself. Mortgage interest and charitable contributions do not lower AGI. That is just factually wrong. Things that lower AGI include but are not limited to student loan interest, health insurance cost through an employer taken pre-tax, a 403(b), 457 or 401k of the non-Roth type, etc. Mortgage interest payments and charitable contributions are below the line deductions. Below the line deductions do not lower your AGI. They can reduce your tax liability but they do not lower your AGI. It’s just not a correct statement to say they do.

 

[Ben E N]

No. Please educate yourself. Mortgage interest and charitable contributions do not lower AGI. That is just factually wrong. Things that lower AGI include but are not limited to student loan interest, health insurance cost through an employer taken pre-tax, a 403(b), 457 or 401k of the non-Roth type, etc. Mortgage interest payments and charitable contributions are below the line deductions. Below the line deductions do not lower your AGI. They can reduce your tax liability but they do not lower your AGI. It’s just not a correct statement to

That's good call there. There are other expenses that lower AGI, but it looks like I all but the most extreme of cases, mortgage interest does not . Something important when discussing 403b's is that education expenses are above the line deductions. Thanks for pointing that out to me, I will have to look at how close to that cutoff line I'm getting to now, and will eventually be stuck deciding between a junky 403b or nothing.

 

[Karenj2]

Thank you for all the replies. I am fortunate to have wonderful, extremely affordable health insurance through my school district, so the HSA is not an option.

I am about 6 years away from retirement. I may just start putting extra money away for big expenses like a car, etc., so that I too can pay cash for a vehicle when the time comes.

I'm one of those people who believes that every dollar should have a job and that it's not always about how much money you earn, but what you do with your earnings that matter.

May I recommend www.ynab.com (You Need A Budget is the name of the budgeting software.) I found out about it on this site years ago, and I love it! It helps you use a "virtual envelope" system to budget for the variety of expenses you have.

 

[clh2]

Avoid the 403(b). They come with high fees, at least typically, and do not company match like 401(k)'s. Max out either an IRA or Roth IRA with Vanguard. Easy to do and they have the lowest fees. Their age based index funds offer a good mix of stock and bond indexes.

Also, the limit on IRAs is based on your AGI, which with mortgage payments, education costs, property taxes, and charitable contributions, can keep you well away from that taxable line.

I worked for a large hospital system for almost 13 years, and there was a match on the 403(b).

Also, if you are at a point where you are potentially maxing out of IRA contributions from a tax perspective, you probably should be working with a Fee-only financial planner, instead of trying to figure this out from a board like this!

 

[Ben E N]

I worked for a large hospital system for almost 13 years, and there was a match on the 403(b).

Also, if you are at a point where you are potentially maxing out of IRA contributions from a tax perspective, you probably should be working with a Fee-only financial planner, instead of trying to figure this out from a board like this!

Yeah I learned a lot from this board and have enjoyed eating crow from my earlier comments..yum yum.
However, thanks so much to Allison and others for drawing attention to how good 403b's can be. I was not trying to be misleading in my comments, I'm apparently buried in "bad 403b land" and will be taking the new data I learned over the past couple of days to complain that our provider is even weaker than I first pointed out (not that it did any good when I fought for better coverage in the first place.) Also, thanks to Jan for getting me caught up on AGI. I ran to my previous tax returns and luckily I should be comfy cozy locked into IRA land because I actually do have enough above the line deductions, just not the ones I was citing.

I fully agree that if you're dealing with serious money, you should be taking it seriously. There are people who get paid to work with this sort of thing. And I would only go fee-based as well myself.

 

[bluehen]

Don't rule out the simple thing of buying stocks in your brokerage account. It does not help with taxes now, but it does lower your income (as opposed to interest bearing accounts) cumulatively in the future. When you sell in the future there are two benefits. The obvious is the lower capital gains tax treatment. The less obvious is you can sell when you want to take the income. Of course the risk needs to fit into your age and risk tolerance.

 

[blabadie]

We put the excess in a separate investment account. We like the idea of having a supplemental retirement account that is not affected by 401k withdrawal rules. DH plans to retire at 55 and it would be simpler to have some retirement $ not subject to special distribution rules.