William DeShurko

The idea of a retirement account is to get a return on investment so that its value grows. By taking the 403(b) out in this case you are "investing" in your own future. Presumably, instead of counting on a companies growth through a stock investment, you are counting on your higher education equating to a better and higher paying career. If that is the case your lifetime increase in wages could far offset the likely gain in the 403(b).

The caveat, of course, is that your graduate education is being done for a more rewarding career, but it doesn't necessarily equate to higher income. In that case I would go the loan route. Even though you will have loan payments, you may appreciate that $30,000 investment more if you are on a tight budget. You can always liquidate the 403(b) account later to pay off the loans if cash flow is tight.

That is well above the industry norm. Also, consider that your mutual funds have their own management fees. Your advisor should be able to provide you with that information. Those fees are typically between 1/2% to 1.5%, so understanding those fees is very important too. 

I would expect your advisor fee to be no more than 1.5% and the mutual funds used to be low-cost no-load funds with no transaction fees to make changes. For comparison, our schedule would start you out at 1.25% with low-cost ETF's, individual stocks and lowest cost mutual funds.

 Maybe your CPA is charging you so much because he would really rather just work with larger accounts. 

Bonds pay interest that is taxed as ordinary income. Any withdraw from a pre-tax account is also taxed as ordinary income, so you are not changing how your interest is taxed by investing in bonds in a pre-tax account. The advantage is you can determine when you want your income, allowing some control over the taxation.

Some stocks pay dividends that are taxed at a lower rate than ordinary income. So by investing in dividend stocks in a pre-tax account, you are actually increasing the tax rate on those dividends.

Of course, the hope in investing in stocks is that they go up in value. As a stock's price increases, that gain is deferred until the stock is sold. So there is not an advantage to putting deferred taxation stocks into a pre-tax account. When the stock is sold, if it was held for over a year, you will pay a lower capital gains tax on any gain. While that gain would be tax-deferred in a pre-tax account, when you pull the money out it will be taxed as ordinary income.

Sometimes our stock purchases don't go up as planned. In this case, you can sell a stock and take a loss against income (with limits) recapturing a bit of the loss in tax savings. You cannot take losses in a pre-tax account as an income tax deduction.

If you have the option to buy ETF's in your pre-tax account I would suggest you educate yourself about bond ladders and look at defined maturity bond ETF's. They are a good way to invest in bonds in a rising rate environment. (Of course, you are welcome to contact me for more information too).

A good way to phrase your question, I like the use of "concepts". I would say "strategies" but the same thing really.

1. Dividend-paying stocks, specifically those that have a history of raising their dividends outperform the broad market over long periods of time. A narrow group of these stocks has paid and increased dividends for 25 years minimum. You can find out about these stocks by searching for "Dividend Aristocrats" on Investopedia. Dividends are taxed at a lower rate than ordinary income, investing in these stocks is also fairly tax efficient.

2. Look up "Bond Ladder". A bond ladder is a way to invest in bonds with maturities the become progressively longer, a percentage of your ladder matures each year, and you the reinvest those proceeds into a new long-term bond. Over time your yield ratchets up. This is really the only way to invest in bonds in a rising rate environment. You have enough money to buy some individual municipal bonds, but they can be illiquid in a rising rate environment. I would look at ETF's that offer Target Date Municipal (tax-free) bonds.

3. Avoid annuities. With that size of a nest egg, you are likely to be pitched a variable annuity. While an annuity defers current taxation, when you do make withdraws your income is taxed at the higher ordinary income tax rate. Dividends and tax-free income make more sense.