Author Topic: Max Out Roth 401K vs. Taxable Account  (Read 658 times)

banjolizard

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Max Out Roth 401K vs. Taxable Account
« on: August 26, 2018, 06:26:53 AM »
I currently live and work overseas where I make less than the Foreign Earned Income Exclusion (FEIE). I am paid in USD but pay no income taxes.

My company is offering a Roth 401K with access to American Funds. Most of the offered funds (including target date funds or build your own portfolio funds) have expense ratios of 1.3% to 1.8% depending on how aggressive the fund.

I already have ~$20,000 in VTSAX at Vanguard. (It's small, but hey, I'm new!) This is a taxable account, which is all I had access to prior to a new job.

My question is: does it make more sense to max out my Roth 401K to $18,500 or to only put in the minimum to get the employer match? The expense ratio is significantly higher on the Roth 401K, but it is tax-free for life? I plan on investing ~30K this year. The minimum I'd put into the 401K is around $1500, but I could put up to ~$12,000 plus the match.

Also, what happens after I leave this job? I'm only 28.

not_a_trex

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Re: Max Out Roth 401K vs. Taxable Account
« Reply #1 on: August 26, 2018, 07:46:27 AM »
I think the answer is going to depend on how long you are going to stay with your company. If you are going to transition to something else in a few years, it might be OK to bite the bullet now and take advantage of the space. You are correct, you will not pay income taxes again on contributions or gains held in a Roth account.

That brings us to your next question. After you leave you'll have the option to roll your 401k into an IRA, which hopefully have cheaper funds than the ones you have now. You may also be able to roll the money over into whatever retirement account your next employer offers. A third option, if your plan allows it, could be to leave the money where it is. I don't recommend this option given what you've said so far.

banjolizard

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Re: Max Out Roth 401K vs. Taxable Account
« Reply #2 on: August 26, 2018, 08:05:04 AM »
I will probably leave this job in the next 4-8 years. The next job may or may not have a qualified Roth 401K.

Can I roll into a 401K into an IRA if I don't pay income tax in the US? With the FEIE, I can't pay directly into an IRA at this point...

COEE

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Re: Max Out Roth 401K vs. Taxable Account
« Reply #3 on: August 26, 2018, 08:52:39 AM »
Those expense ratios are poor.

I'd put in enough to get the employer match (free money is always good) and then put the rest in an IRA (assuming your AGI is low enough to do so).  Then I'd load up taxable accounts after that.

not_a_trex

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Re: Max Out Roth 401K vs. Taxable Account
« Reply #4 on: August 26, 2018, 11:02:11 AM »
I will probably leave this job in the next 4-8 years. The next job may or may not have a qualified Roth 401K.

Can I roll into a 401K into an IRA if I don't pay income tax in the US? With the FEIE, I can't pay directly into an IRA at this point...

For 4 years I'd bite the bullet. For 8 years I could go either way.

I don't know how large your company is. Maybe you could petition to get a better 401k? Bogleheads has a page on how to ask HR at https://www.bogleheads.org/wiki/How_to_campaign_for_a_better_401(k)_plan