Max out 401(k) or distribute to both 401(k) and taxable accounts?

[MillieLincoln]

Hey folks! :-) First post on here- nice to meet y'all.

I'm a 24yo just starting out on the FI path as of a few months ago, and looking for some advice- I make about 31k/yr after tax, and have about $1400 a month to invest or pay down debts (only debt is student loan debt at $300/mo, 4% interest, $16000 balance). I work at a company that provides a 401(k) but no company match. I currently have several thousand invested in both the 401(k) and in some taxable accounts (higher returns thus far).

It seems like many of you are maxing out your 401(k)s and then applying the leftovers to IRAs or taxable accounts. Since trying to max out my 401(k) would take 100% of my $1100/mo left after minimum student loan payments, I was wondering if it would be wiser to split it between multiple options, particularly if I want to retire in the next 10-12 years and need to be able to withdraw (in one way or another) $12-15k per year; like 60% towards the 401(k) and 40% towards Vanguard, just as an example.

Any thoughts/advice you have would be great to hear- thanks in advance!!

*Edited to clarify some of the language- thanks for the replies to correct this!

[Nothlit]

Welcome to the forum! These threads may provide some insight:

https://forum.mrmoneymustache.com/investor-alley/investment-order-65299/

https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

I assume when you wrote "index funds" you were intending to differentiate between your tax-sheltered 401k/IRA and a taxable account. Hopefully you are aware that you can (and should) invest in index funds inside of any of those kinds of accounts.

You should also not be focusing on "higher returns" as your criteria for what funds to invest in. Most everyone here will recommend you invest in "total market" index funds (e.g., Vanguard Total Stock Market Index Fund VTSMX/VTSAX). A mixture of stock index funds and bond index funds (e.g., 90% stock, 10% bond, or 80/20, or 70/30) is typically used to mitigate volatility. Check out this link more all you need to know about index investing & asset allocation: http://jlcollinsnh.com/stock-series/

Sounds like you are asking the right kinds of questions! Keep on asking! :)

[MillieLincoln]

Welcome to the forum! These threads may provide some insight:

https://forum.mrmoneymustache.com/investor-alley/investment-order-65299/

https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

I assume when you wrote "index funds" you were intending to differentiate between your tax-sheltered 401k/IRA and a taxable account. Hopefully you are aware that you can (and should) invest in index funds inside of any of those kinds of accounts.

You should also not be focusing on "higher returns" as your criteria for what funds to invest in. Most everyone here will recommend you invest in "total market" index funds (e.g., Vanguard Total Stock Market Index Fund VTSMX/VTSAX). A mixture of stock index funds and bond index funds (e.g., 90% stock, 10% bond, or 80/20, or 70/30) is typically used to mitigate volatility. Check out this link more all you need to know about index investing & asset allocation: http://jlcollinsnh.com/stock-series/

Sounds like you are asking the right kinds of questions! Keep on asking! :)

Ah! Yes, you're right- I was meaning to refer to tax-sheltered versus taxable. Thank you for correcting me!

I'll be sure to read through those forums! :-)

[Dezrah]

Note: My links are already redundant before I hit post.  Oh well.  I'm leaving them anyway.

Start with this link; it's the best piece of general advice anywhere on these forums:
https://forum.mrmoneymustache.com/investor-alley/investment-order-65299/msg1333153/#msg1333153

I currently have several thousand invested in both the 401(k) and in index funds (higher returns).

Some clarification (apologies if you already understand this):

A 401(k) is just a bucket for your money.  That money is then invested into a selection of available funds decided by your company and their 401(k) provider.  There will probably be bond funds, aggressive mutual funds, index funds, etc.  Sometimes those investment choices suck (high fees), but it's more common these days to find at least one low fee index fund option available.  If your returns in your 401(k) seem lackluster, double check that the money is actually invested.

Also, there are lots of ways to get your money out of a retirement account.  There are lots of little details, but don't worry about that for now.  Just put away as much as you can into tax-advantaged accounts now and learn all these little details as you go.  This is a good place to start for the broad strokes: http://www.madfientist.com/how-to-access-retirement-funds-early/

[MillieLincoln]

Note: My links are already redundant before I hit post.  Oh well.  I'm leaving them anyway.

Start with this link; it's the best piece of general advice anywhere on these forums:
https://forum.mrmoneymustache.com/investor-alley/investment-order-65299/msg1333153/#msg1333153

I currently have several thousand invested in both the 401(k) and in index funds (higher returns).

Some clarification (apologies if you already understand this):

A 401(k) is just a bucket for your money.  That money is then invested into a selection of available funds decided by your company and their 401(k) provider.  There will probably be bond funds, aggressive mutual funds, index funds, etc.  Sometimes those investment choices suck (high fees), but it's more common these days to find at least one low fee index fund option available.  If your returns in your 401(k) seem lackluster, double check that the money is actually invested.

Also, there are lots of ways to get your money out of a retirement account.  There are lots of little details, but don't worry about that for now.  Just put away as much as you can into tax-advantaged accounts now and learn all these little details as you go.  This is a good place to start for the broad strokes: http://www.madfientist.com/how-to-access-retirement-funds-early/

Hmm- I definitely need to get more info on my 401(k). Admittedly, back when I set it up the whole process I was still pretty intimidated by the whole thing and set it to the company's default. Hopefully it has some low-fee options available, fingers crossed!

Also intimidated by figuring out how to take funds out early, but I'm glad that the MMM community has info on that- thank you for sharing the links, even if some of the content is repeated! The more I can learn the better :-)

Thanks!!

[Proud Foot]

Since you don't get a match on your 401k I would look at the investment options and fees there.  If there are account fees or no low ER index funds then max out an IRA first and then contribute to your 401k.

[natb2347]

Following as I had the same question floating around in my head...

If a company only offers a safe harbor contribution each year of 3% of salary regardless of your contributions, should you just go with Vanguard stocks for the bulk of your investing (after maxing IRA)?  I have Fidelity 401K but I think Vanguard's fees are lower - but is there any downside to this?  Should I still take advantage of the tax benefits of the 401K with work even though the fees are higher or just invest after tax $ with Vanguard TMIF?  This is all so confusing :( 

The minute I think I have a grasp on it I discover all these new details that throw a wrench in my plans - and then I take no action.  Frustrating.  Thank you all for the wisdom. Truly.

[MillieLincoln]

Since you don't get a match on your 401k I would look at the investment options and fees there.  If there are account fees or no low ER index funds then max out an IRA first and then contribute to your 401k.

Ok, that makes sense! Thank you. :-D
I looked into it, and my 401(k) does have some options that I believe are good (fees at .1%), though I don't know if there are account fees. How can you tell if there are?

[Proud Foot]

Since you don't get a match on your 401k I would look at the investment options and fees there.  If there are account fees or no low ER index funds then max out an IRA first and then contribute to your 401k.

Ok, that makes sense! Thank you. :-D
I looked into it, and my 401(k) does have some options that I believe are good (fees at .1%), though I don't know if there are account fees. How can you tell if there are?

Ask your 401k administrator for the 404a-5 Plan & Investment Notice.  If you have online access to your account you should be able to find it there. There should be a section called "Administrative Expenses" which will outline the administrative charges that are applied to your account as well as the frequency the expenses are charged.

[FrugalFisherman10]

Following as I had the same question floating around in my head...

If a company only offers a safe harbor contribution each year of 3% of salary regardless of your contributions, should you just go with Vanguard stocks for the bulk of your investing (after maxing IRA)?  I have Fidelity 401K but I think Vanguard's fees are lower - but is there any downside to this?  Should I still take advantage of the tax benefits of the 401K with work even though the fees are higher or just invest after tax $ with Vanguard TMIF?  This is all so confusing :( 

The minute I think I have a grasp on it I discover all these new details that throw a wrench in my plans - and then I take no action.  Frustrating.  Thank you all for the wisdom. Truly.

If a company only offers a safe harbor contribution each year of 3% of salary regardless of your contributions, should you just go with Vanguard stocks for the bulk of your investing (after maxing IRA)?  this is not the question really, as you don't need an employer match for the Traditional 401k to be a great deal. (also, you effectively have just as good of a 'match' as anyone else by having this 3% put in by your employer. Example: my former employer match was 50% of the first 6% of my salary..i.e. the same as yours.) The question of whether or not to put money in the 401k more depends on the quality of the funds offered in the 401k. And by 'quality' I mean low-cost, index funds.

Should I still take advantage of the tax benefits of the 401K with work even though the fees are higher or just invest after tax $ with Vanguard This is the correct question to be asking

First, figure out if the Fidelity fees are actually higher - they may not be. Fidelity 401ks do have the potential of having very low Expense Ratios. Example: My 401k from my old employer is in a Vanguard Target Retirement fund (which has a slightly higher fee than a normal index fund) and the Expense Ratio (ER) is still lower than it would be even at Vanguard. Why? I think the ER is being subsidized by my former employer, or something like that - it's a measly 0.07%, which is amazing.

If the fees in your 401k are 'high', and you don't have access to low Expense ratio (ER) index funds, then you should consider investing 'after tax' in a taxable brokerage account instead.

[ooeei]

Personally my priority list at your income level (low tax bracket) would be:

• 401k up to match (not applicable to you)
• Low fee Roth IRA to max
• 401k to max or whatever you're comfortable with
• Taxable account

At your income level getting tax deductions isn't really a big deal.  What is a big deal is getting your earnings sheltered from capital gains in the future.  At your income level I'd prefer a Roth since you're already in a pretty low tax bracket, especially if you also contribute some to a 401k which will lower your tax liability further.