If you read this title and immediately are not sure exactly what I am referring to I will explain. IPERS employees have a pension plan as many know. In addition, they have the opportunity to contribute to a retirement account known as RIC (Retirement Investors Club). Within the RIC you either have a 403(b) or 457/401a depending upon what type of employee you are. This is a voluntary retirement savings vehicle; which is set-up to supplement your pension and social security benefits upon retirement.
403(b) or 457/401a
A 403(b)/457 is a type of retirement vehicle similar to an IRA (Individual Retirement Account). You can contribute more to a 403(b) or 457/401a than you can an IRA. For example, within a 403(b)/457 in 2019 you can contribute up to $19,000 and if you are 50 and over add another $6,000 to that. Where an IRA in 2019 you can contribute up to $6,000 and if you are 50 and over add another $1,000 to that.
Inside the vehicle (403b/457/IRA) is where you put your investments like a mutual fund for example. Secondly, a mutual fund consists of multiple stocks and/or bonds. In addition, depending on where you work, you have the opportunity to contribute traditional (pre-tax) or roth (post-tax). Every employer will have the traditional, but not all will have the roth option.
This decision on which one to contribute is best summed up by weighing the pros/cons of paying tax now versus paying taxes when you start withdrawing funds. Traditional (pre-tax) you are delaying until withdrawal and roth (post-tax) you are paying now. When you withdraw from the roth it will be tax free. To conclude, to see if you have roth available education employees can go here, public employees here, and state employees here.
Education employees within Iowa: You are able to contribute to a 403(b).
Public employees within Iowa: You are able to contribute to a 457. The 401a plan allows you to roll funds into RIC from eligible former employer plans. However, you can also take past employer plans and transfer into an IRA outside of the RIC and to a place like Vanguard for example.
State employees within Iowa: You are able to contribute to a 457. All employees who contribute to the 457 also receive matching (FREE) money. The match is up to $75 per month.
For instance, the employees contribution goes into the 457 and the matching money goes into the 401a. In order to receive the full matching money you must contribute at least $75 per month. With free money on the line there is no reason not to. In addition, the 401a plan allows you to roll funds into RIC from eligible former employer plans. However, as mentioned previously you can take past employer plans and transfer into an IRA outside of the RIC and to a place like Vanguard for example.
The four main providers each employee has to pick from our Voya, Mass Mutual, Horace Mann, and AIG. Within all four of those providers you have 131 fund options to pick from. Now if your head is spinning yet on which one to pick, I wouldn’t blame you. That is way too many options to pick from and most of them are not very good. The fees range from 0.04 – 1.27.
In investing it is very important to pay attention to fees as they can eat away at your returns. The compounding effect of fees can be very detrimental. Among others are proper diversification and how much you should have in bonds/cash versus stock.
For example, a mutual fund that is charging 0.04 versus 1.27 for an expense ratio fee. If we compare those two saying they both receive the same rate of return of 8% and we contribute $500 ($6,000 annually) per month for 40 years. In other words, everything being equal besides the fees. The difference in the ending value of the two funds after 40 years is over $400,000! Before you get bummed out, this is something that you can control!
Now think about what other outside investments you may have with an IRA or your spouse’s investments. All those fees and potential ending numbers after decades can really add up. To see an illustration that is similar, go to the homepage of my website. Your total family fees may be somewhere around 1-2% depending on what your invested in.
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