Author Topic: New Job Terrible Investment Options  (Read 459 times)

Scommm

  • 5 O'Clock Shadow
  • *
  • Posts: 43
New Job Terrible Investment Options
« on: August 04, 2017, 04:27:53 PM »
So I started a new job, and can contribute to a 401 after 6 month waiting period.  This year I contributed for the first 4 months to a 457 & 401 with my former employer, so I "participated" in a plan this year.  I only contributed 6k to the 401 and 6k to the 457 during those 4 months.

My questions are:

1. For the rest of this year are there any options to sock away monies pre-tax since I can't really contribute to the new 401k yet?  I can do a HSA so that's a little bit but not near enough.  My AGI will allow for after tax / Roth IRA.

2. Next year, when I can contribute; I was told by an investment rep that I could contribute funds up to ~ 53k (maybe it was 58, I don't have my notes here) total to the 401k program if the program allows it.  Essentially he said after the personal limit of 18k and the employer matches, forfeitures etc, the difference up to the 53k cap can be contributed after tax.  Then, if the plan allows it, it can be converted to Roth 401 investment monies.  The problem with this is the company 401 program through Principal has terrible fund options, with investment expenses varying between 2-2.5%!  The company will match up to 4% of my contributions, but of course everything would be in high cost investments.

- He mentioned I could become a 1099 "employee" if the company allows it, which I think they might.  The thought from the investment side is I could start my own self employed 401 and contribute to it, with obviously better funds.

- Has anyone gone though the W2 vs. 1099 analysis and can provide a spreadsheet or at least items that need to be taken into consideration to see if it's worth it?  For example I am assuming insurance, self employment tax, etc need to be factored in.

Thanks in advance.
« Last Edit: August 05, 2017, 12:52:44 PM by Scommm »

TomTX

  • Handlebar Stache
  • *****
  • Posts: 2497
  • Location: Texas
Re: New Job Terrible Investment Options
« Reply #1 on: August 05, 2017, 07:55:02 AM »
Do a bit of research on what running a 401k via Vanguard (or another low cost provider) would cost.

I would go into HR (or whoever is responsible for the plan) with an informed opinion, requesting they switch to a low-cost provider.  Show them what the cost difference would be to a plan participant. I would make it clear that it's just an example, there are many low cost providers.

You could also follow up with their legal responsibility as a fiduciary to find responsible choices for employees:

https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/publications/meeting-your-fiduciary-responsibilities.pdf

I did this for the State of Texas (ERS) maybe 6-8 months ago (I'd have to go look it up) - while they tried to discount it in their response, I just saw an announcement this week that they are dumping a dozen funds and replacing them with MUCH lower cost options (expenses less than a third of the old funds)

Less than a year is a REALLY fast response for something as big as ERS.
Credit card signup bonuses:

$150 bonus on $500 spend for Chase Freedom:
https://www.referyourchasecard.com/2/MU4TDQ1N3K

$50 bonus (no min spend, just use it once) plus double all cash back at the end of 1 year for Discover, including the initial $50:
https://refer.discover.com/s/37e3u

$500 bonus on $4,000 spend for Chase Sapphire Preferred:
https://www.referyourchasecard.com/6/Z8JIP66H7G

With This Herring

  • Pencil Stache
  • ****
  • Posts: 993
  • Location: New York STATE, not city
  • TANSTAAFL!
Re: New Job Terrible Investment Options
« Reply #2 on: August 05, 2017, 08:41:18 AM »
1. For the rest of this year are there any options to sock away monies pre-tax since I can't really contribute to the new 401k yet?  I can do a FSA so that's a little bit but not near enough.  My AGI will allow for after tax / Roth IRA.

TomTX gives good advice.

Just be sure that you are good on the differences between FSA and HSA.  An FSA only lets you roll a small amount of money from year to year.  An FSA isn't the beautiful medley of tax-avoidance/deferral + investing long-term that an HSA provides.  So, if you only have an FSA, make sure you don't put more in it than you can spend this year.  You may know all this, but it will also serve as a warning for others who stumble on this thread.

Did you want to sock away some money this year for kids' educations?  That would at least save you some state taxes this year (assuming you live in a state with income tax that lets you deduct 529 contributions), and the earnings would be tax-free on federal.

As it seems the investment advisor is not really sure on your company's plan ("if the program allows it"), you should really nail down these details before you make a decision.  If the plans allows in-service distributions, my understanding is that you can immediately roll contributions into your own IRA accounts.  This big rollover thing the adviser mentioned is sometimes called a Mega-Backdoor Roth, so use that term to start your research.
Bogleheads Wiki - After-tax 401(k) (see also links at bottom of page)
Bogleheads Forum - The Mega Backdoor Roth IRA
If you make your contributions, have them set to go to the settlement account/money market, and roll them out to an IRA the same day or next day, the expense ratios in the 401(k) won't matter because you won't be investing in those funds.

If you are currently a "highly-compensated employee" for 401(k) purposes, you may need to factor that into your considerations, as you will be limited in your contributions by the actions of less-compensated employees at your company, which may require contribution clawbacks.

Again, before you make any decisions, look into the costs (and paperwork!) for each option.  If you go the contractor route, you will have to factor in payroll taxes as well as all the benefits your company currently covers (health ins, life ins, disability ins, unemployment ins, etc) before setting your rate.
Because your toaster got hacked because you tried to watch porn on your blender.

6-year CPA currently on hiatus.  Botched this.  Working again. 
Go soak your beans.  You know you keep forgetting.

Scommm

  • 5 O'Clock Shadow
  • *
  • Posts: 43
Re: New Job Terrible Investment Options
« Reply #3 on: August 05, 2017, 12:57:51 PM »
1. For the rest of this year are there any options to sock away monies pre-tax since I can't really contribute to the new 401k yet?  I can do a FSA so that's a little bit but not near enough.  My AGI will allow for after tax / Roth IRA.

TomTX gives good advice.

Just be sure that you are good on the differences between FSA and HSA.  An FSA only lets you roll a small amount of money from year to year.  An FSA isn't the beautiful medley of tax-avoidance/deferral + investing long-term that an HSA provides.  So, if you only have an FSA, make sure you don't put more in it than you can spend this year.  You may know all this, but it will also serve as a warning for others who stumble on this thread.

Did you want to sock away some money this year for kids' educations?  That would at least save you some state taxes this year (assuming you live in a state with income tax that lets you deduct 529 contributions), and the earnings would be tax-free on federal.

As it seems the investment advisor is not really sure on your company's plan ("if the program allows it"), you should really nail down these details before you make a decision.  If the plans allows in-service distributions, my understanding is that you can immediately roll contributions into your own IRA accounts.  This big rollover thing the adviser mentioned is sometimes called a Mega-Backdoor Roth, so use that term to start your research.
Bogleheads Wiki - After-tax 401(k) (see also links at bottom of page)
Bogleheads Forum - The Mega Backdoor Roth IRA
If you make your contributions, have them set to go to the settlement account/money market, and roll them out to an IRA the same day or next day, the expense ratios in the 401(k) won't matter because you won't be investing in those funds.

If you are currently a "highly-compensated employee" for 401(k) purposes, you may need to factor that into your considerations, as you will be limited in your contributions by the actions of less-compensated employees at your company, which may require contribution clawbacks.

Again, before you make any decisions, look into the costs (and paperwork!) for each option.  If you go the contractor route, you will have to factor in payroll taxes as well as all the benefits your company currently covers (health ins, life ins, disability ins, unemployment ins, etc) before setting your rate.

- My mistake, and corrected, I meant HSA.
- No kids
- I should clarify the investment advisor is a member of a travel hacking group I am in; the company investment rep didn't have answers and seemed ill prepared to carry on such a discussion.  So the advisor I spoke to was giving suggestions for me to check up on in reference to the specific options the company plan MAY offer.  I am still attempting to research his ideas.
- I mentioned the mega backdoor Roth and he seemed to say this wouldn't benefit me.  However, from my understanding of the discussion he was saying to put the extra contributions in a Roth WITHIN the company plan.  However, if I understand your response you are saying I could take the contributions out of the company plan and put them in my own Roth (IRA) which I have at Betterment? Or am I misunderstanding you?

TomTX

  • Handlebar Stache
  • *****
  • Posts: 2497
  • Location: Texas
Re: New Job Terrible Investment Options
« Reply #4 on: August 05, 2017, 04:06:06 PM »
Max out the HSA. Immediately.
Credit card signup bonuses:

$150 bonus on $500 spend for Chase Freedom:
https://www.referyourchasecard.com/2/MU4TDQ1N3K

$50 bonus (no min spend, just use it once) plus double all cash back at the end of 1 year for Discover, including the initial $50:
https://refer.discover.com/s/37e3u

$500 bonus on $4,000 spend for Chase Sapphire Preferred:
https://www.referyourchasecard.com/6/Z8JIP66H7G

With This Herring

  • Pencil Stache
  • ****
  • Posts: 993
  • Location: New York STATE, not city
  • TANSTAAFL!
Re: New Job Terrible Investment Options
« Reply #5 on: August 07, 2017, 01:54:24 PM »
1. For the rest of this year are there any options to sock away monies pre-tax since I can't really contribute to the new 401k yet?  I can do a FSA so that's a little bit but not near enough.  My AGI will allow for after tax / Roth IRA.

TomTX gives good advice.

Just be sure that you are good on the differences between FSA and HSA.  An FSA only lets you roll a small amount of money from year to year.  An FSA isn't the beautiful medley of tax-avoidance/deferral + investing long-term that an HSA provides.  So, if you only have an FSA, make sure you don't put more in it than you can spend this year.  You may know all this, but it will also serve as a warning for others who stumble on this thread.

Did you want to sock away some money this year for kids' educations?  That would at least save you some state taxes this year (assuming you live in a state with income tax that lets you deduct 529 contributions), and the earnings would be tax-free on federal.

As it seems the investment advisor is not really sure on your company's plan ("if the program allows it"), you should really nail down these details before you make a decision.  If the plans allows in-service distributions, my understanding is that you can immediately roll contributions into your own IRA accounts.  This big rollover thing the adviser mentioned is sometimes called a Mega-Backdoor Roth, so use that term to start your research.
Bogleheads Wiki - After-tax 401(k) (see also links at bottom of page)
Bogleheads Forum - The Mega Backdoor Roth IRA
If you make your contributions, have them set to go to the settlement account/money market, and roll them out to an IRA the same day or next day, the expense ratios in the 401(k) won't matter because you won't be investing in those funds.

If you are currently a "highly-compensated employee" for 401(k) purposes, you may need to factor that into your considerations, as you will be limited in your contributions by the actions of less-compensated employees at your company, which may require contribution clawbacks.

Again, before you make any decisions, look into the costs (and paperwork!) for each option.  If you go the contractor route, you will have to factor in payroll taxes as well as all the benefits your company currently covers (health ins, life ins, disability ins, unemployment ins, etc) before setting your rate.

- My mistake, and corrected, I meant HSA.
- No kids
- I should clarify the investment advisor is a member of a travel hacking group I am in; the company investment rep didn't have answers and seemed ill prepared to carry on such a discussion.  So the advisor I spoke to was giving suggestions for me to check up on in reference to the specific options the company plan MAY offer.  I am still attempting to research his ideas.
- I mentioned the mega backdoor Roth and he seemed to say this wouldn't benefit me.  However, from my understanding of the discussion he was saying to put the extra contributions in a Roth WITHIN the company plan.  However, if I understand your response you are saying I could take the contributions out of the company plan and put them in my own Roth (IRA) which I have at Betterment? Or am I misunderstanding you?

Well, that explains it.  I was surprised that your company investment rep knew about making contributions past the deductible limit, haha.

If you accidentally left out the "mega" when you mentioned this to your travel hacking buddy, he would probably assume that you meant, for someone with income past even Roth IRA income limits, making non-deductible Traditional IRA contributions and then converting to a Roth - this is a normal backdoor Roth IRA.  It is a different animal from the mega involving a 401(k), but the names are similar enough to get them confused.

If the company plan allows it, you could take the non-deductible 401(k) contributions that you made and roll them immediately into your Roth IRA, possibly with intervening steps.  I have not had an employer that permitted that, so I haven't looked into the technical details of how to do it, but there are good forums on this site and Bogleheads to get you started on research.  (Here is a topic on this forum with many interesting links.)  But, this will all be dependent on what your company's 401(k) plan allows.
Because your toaster got hacked because you tried to watch porn on your blender.

6-year CPA currently on hiatus.  Botched this.  Working again. 
Go soak your beans.  You know you keep forgetting.