Opening an Optional 403(b)

Effective this month, I’ve enrolled in an optional 403(b) retirement plan through work. I’m contributing the max to my ’standard’ defined contribution retirement plan (5% of my salary). When combined with the matching funds (a bit over 8% of my salary), I’m stashing a little better than 13% of my annual salary in that account. On top of that, my wife and I have both been maxing out our Roth IRAs (we do this every year). So what’s the point of the optional 403(b)?

Well, we can afford more than the 5% + $8k that we’re currently saving, and the 403(b) let’s us do it in a tax-deferred fashion. Moreover, my employer’s 403(b) is pretty flexible in terms of vendors. In fact, we can even use Vanguard, which is unavailable to us through the standard defined contribution plan (we’re using Fidelity). For now, we’re pouring eveything into the Vanguard Target Retirement 2035 Fund which provides us with instant diversification at a low cost.

The only thing that I’m not crazy about is the fact that Vanguard charges an annual administrative fee of $15/year for 403(b) accounts. This fee is in place for all customers with less than $250k in total assets at Vanguard (this is where their so-called ‘Voyager’ service kicks in).

Right now, our only other retirement savings option is my SEP-IRA. Since we’re maxing out our Roth IRAs, we can’t make any ’standard’ employye contributions to that account (Roth, Traditional, and SEP contributions all count toward the same limit). However, I’ll be able to make 2006 employer contributions to that account on my own behalf (which I plan on doing). The limit here is 25% of my net self-employment income (which is a good bit less than 25% of my gross self-employment income).