Introduce myself and ask: more to 401(k) or invest?

[FerrumB5]

Hi All!

First time here (but have been reading occasionally). Let me introduce myself first - 34yo, married, daughter 1yr8mo. I work full time, wife is seeking her 2nd bachelors (total education cost $41k + books starting mid 2015 for 2 years). Mortgage starts Nov 1st for 20 years.
Currently, I put 5% of my paycheck to 401(k), far far from maxing out. Employer doesn't match anything.
With mortgage and all the expenses (not counting school yet), we are very tight on budget. But I have some cash just sitting in the bank at 0.02%, say 10k, that I can "play with". That doesn't count safety cash
What would you do in this situation? Put a bit more in 401(k) from paycheck and use this 10k on everyday life, or stay at 5% and invest all 10k into index, say VTSMX? Or may be even put towards principal? (mortgage rate is 3.625%)

Thanks in advance!

[nereo]

simple:  I would open and fully fund my IRA ($5500).  I'd also fund my SO's IRA.

You can get into whether a ROTH or tIRA is best for you - with your low income and child deductions you might actually be better off with the ROTH (this is fairly unusual).

[FerrumB5]

How opening an IRA is different from direct investing of "extra" cash? Both are subject to tax, aren't they?

[nereo]

How opening an IRA is different from direct investing of "extra" cash? Both are subject to tax, aren't they?

I think you need to read up on IRAs.  Basically, they come in two 'flavors' - the ROTH and the traditional.  Both are 'tax-advantaged' accounts.
For the ROTH you make post-tax contributions (i.e. you pay tax on the money the year you earn it) but once invested you never pay taxes on it again.
For the traditional IRA you can deduct contributions from you tax statement.  This means your tax burden will be less.  You pay taxes on the money when  you withdraw it later.

read these two articles to understand better:
https://www.bogleheads.org/wiki/Traditional_IRA
https://www.bogleheads.org/wiki/Roth_IRA

[FerrumB5]

Thanks! Good reading. May be it will be simpler to just increase my 401(k) contribution and use the cash for everyday stuff. After, 401(k) is pre-tax, so it is not even counted towards income and tax? Similar investment options to what I currently put money in 401(k): VIMAX and PABGX

[nereo]

Thanks! Good reading. May be it will be simpler to just increase my 401(k) contribution and use the cash for everyday stuff. After, 401(k) is pre-tax, so it is not even counted towards income and tax? Similar investment options to what I currently put money in 401(k): VIMAX and PABGX

a tIRA is pre-tax too, but gives you greater control over your investments, including the lowest fees possible (for example, Vanguard's admiral shares for their SP500 and total market index are 0.05%).  That's why it's superior to a 401(k) if you are not receiving a company match.

If you want to use the cash for 'everyday stuff' that's fine - but realize that you will be paying a lot more in taxes than you otherwise need to.

[Faraday]

What would you do in this situation? Put a bit more in 401(k) from paycheck and use this 10k on everyday life, or stay at 5% and invest all 10k into index, say VTSMX? Or may be even put towards principal? (mortgage rate is 3.625%)

MUCH more to the 401k, as much as you possibly can. You are getting nowhere fast at 5%. Plus, you'll get a nice tax break come this January when your AGI is much lower.

[FerrumB5]

One of big advantages of self-invest to Index using, e.g. E-Trade platform, is flexibility in withdrawal, if need be, whilst in 401(k) or tIRA withdrawals come with penalties until you are 59 1/2..
Probably I'll increase my 401(k), do some investments in taxable account (with Index, taxes should be rather bearable), and not put a lot extra in principal - calculations show that I am better off with Index than principal extra payments (given market performs ok in long run)

[nereo]

One of big advantages of self-invest to Index using, e.g. E-Trade platform, is flexibility in withdrawal, if need be, whilst in 401(k) or tIRA withdrawals come with penalties until you are 59 1/2..
Probably I'll increase my 401(k), do some investments in taxable account (with Index, taxes should be rather bearable), and not put a lot extra in principal - calculations show that I am better off with Index than principal extra payments (given market performs ok in long run)

I think you may still be slightly confused here, so hopefully this post will help you.  Your subject line alone is confusing, as putting money into your 401(k) is one bucket for investing.

"Index" or "index funds" are just one kind of investment.  They are not 'buckets' like a 401(k), tIRA, ROTH or taxable account.  You can invest in an index fund using all of those buckets.  You can also invest in individual stocks, bonds, REITs, Gold, etc. with your IRA accounts or taxable accounts.  First you choose where you want your money to go (e.g. into an IRA) and then you decide what you want your money invested in (e.g. SP500 index fund, bonds, etc.)

Also - it is possible to access money in your 401(k) or tIRA accounts before you are 59.5 without paying penalties.  You can do SEPP payments, roll-overs and set up a pipeline.

Also - you can take out ROTH contributions at any time.  You can also use your ROTH account to fund things like down-payments on a house and higher education costs.

There is literally no reason that I can think of to dump money into a taxable account if you aren't taking advantage of your IRA accounts.  At the very least you could put money into a ROTH and still have access to that money down the road.  IF you leave it alone the tax savings down the road will be incredible, allowing you to pay little or no federal taxes upon retirement.

[FerrumB5]

Thank you, nereo!
By "Index" I meant investing in e.g. VTSMX or similar in any of the taxable platforms/accounts. I already have 401(k) with VIMAX and TRowe (higher fees, slightly better yield). But since tIRA or ROTH contributions are deductible during tax preparation period, I might seriously consider it as the first option and try to max it each year. Back to reading about IRA :)

(P.S. my current 401(k) has ~1% maintenance fee or whatever it is called)

[FerrumB5]

P.S. I'm very new to this forum, and possibly this question has been answered in detail - could someone recommend a low fee IRA/ROTH platform? (I have E-Trade regular Brokerage account and their branch is right across the street from my office, so I might talk to them tomorrow)

[nereo]

Thank you, nereo!
By "Index" I meant investing in e.g. VTSMX or similar in any of the taxable platforms/accounts. I already have 401(k) with VIMAX and TRowe (higher fees, slightly better yield). But since tIRA or ROTH contributions are deductible during tax preparation period, I might seriously consider it as the first option and try to max it each year. Back to reading about IRA :)

(P.S. my current 401(k) has ~1% maintenance fee or whatever it is called)

Just to be clear, a ROTH is NOT tax deductible.  You make ROTH contributions on post-tax earnings.  However, you never pay taxes on that money again, including on all capitol gains.  You can also take out contributions at any time without paying a penalty (since you have already paid taxes on that money).

...could someone recommend a low fee IRA/ROTH platform?

Vanguard.  They have the lowest fees on equity funds you will find anywhere, and it's a coop (the members own the company).  Other fine choices include Fidelity, C. Schwabb, etc. 

[Faraday]

...could someone recommend a low fee IRA/ROTH platform?

Vanguard.  They have the lowest fees on equity funds you will find anywhere, and it's a coop (the members own the company).  Other fine choices include Fidelity, C. Schwabb, etc.

I went with Vanguard, it's just too freakin' easy.

[teen persuasion]

I think the OP is still confused about the concepts.

Vanguard, etc. are places to hold your accounts.
TIRA, 401k (pre-tax, pay tax on withdrawal), Roth IRA, Roth 401k (post-tax, tax free withdrawal), taxable (post-tax, capital gains tax)  -- buckets held at the places like Vanguard.
Stocks, bonds, index funds, managed funds -- investments that are held in the buckets.

How low is your income?  Are you eligible for EITC?  What are your taxes like?

If you owe tax and want to reduce your AGI, either 401k or tIRA will reduce your taxable income.  Roth and taxable will not.  If you only have a small amount to invest, choose the more efficient one.  No match and high fees means tIRA at Vanguard could be more efficient for you.

If you are eligible for the EITC, 401k may be better than tIRA, makes you eligible for a larger credit.  A large taxable account can make you ineligible altogether.

If your AGI is low enough that your taxable income = 0 (after deductions and exemptions), Roth accounts would be better - no need for the tax break, tax free forever.

Only once you have run out of tax advantaged space would you move on to taxable accounts.  So only after maxing 401k AND IRAs for both of you.

[lackofstache]

I agree with most of this and want to add that in your situation, I wouldn't contribute to the 401(k) AT ALL until my & my spouse's IRA's were maxed out. That 401(k) money is incurring higher fees than needed and will also have to be rolled over at some point, which means more fees. Put that 5% into a tIRA; you should be able to set this up w/ your HR so it comes pre-tax just like the 401(k), but you'd have control & pay fewer fees. Once you're maxing two IRA's & putting money in an HSA (can also be done pre-tax w/ HR dept.) then revisit the 401(k). If you were getting a match, I'd advise you to get the match, then max IRA's & HSA & then come back to 401(k), fwiw.

[FerrumB5]

So many replies, and some are almost opposite :) I guess I'll have to sit down with a pen and paper and online calculators and do math taking into account a lot of factors, biggest of which is wife's tuition of $41+k in the next 2 years.
Thanks to all responders! More advice - bring it in!

[nereo]

So many replies, and some are almost opposite :) I guess I'll have to sit down with a pen and paper and online calculators and do math taking into account a lot of factors, biggest of which is wife's tuition of $41+k in the next 2 years.
Thanks to all responders! More advice - bring it in!

Reading over all the responses I think the advice is fairly consistent, but coming from slightly different angles.

Since you don't get a match on your 401(k) it makes sense to first fully fund both you and your wife's IRAs.  You will have lower fees and greater control over your money.
IF you have a HSA fund that as well
IF you have money after funding your IRAs and your HSA I would put additional funds into your 401(k)... but make sure you still have enough to cover upcoming tuition bills.

You'll have to decide whether a ROTH or tIRA makes the most sense for you, but that's a different thread. 
Make sense?  Anyone disagree with the synopsis?

[zephyr911]

So many replies, and some are almost opposite :) I guess I'll have to sit down with a pen and paper and online calculators and do math taking into account a lot of factors, biggest of which is wife's tuition of $41+k in the next 2 years.
Thanks to all responders! More advice - bring it in!

There nothing like crunching the numbers yourself! Take your time!

I do a lot of that in meetings. Long division and multiplication, even, because I can't whip my phone out for a calculator while I'm flipping slides....

[teen persuasion]

I agree with most of this and want to add that in your situation, I wouldn't contribute to the 401(k) AT ALL until my & my spouse's IRA's were maxed out. That 401(k) money is incurring higher fees than needed and will also have to be rolled over at some point, which means more fees. Put that 5% into a tIRA; you should be able to set this up w/ your HR so it comes pre-tax just like the 401(k), but you'd have control & pay fewer fees. Once you're maxing two IRA's & putting money in an HSA (can also be done pre-tax w/ HR dept.) then revisit the 401(k). If you were getting a match, I'd advise you to get the match, then max IRA's & HSA & then come back to 401(k), fwiw.

I've never heard of an employer directly funding your tIRA thru payroll pre-tax.  How does that work?

[MrMoogle]

So many replies, and some are almost opposite :) I guess I'll have to sit down with a pen and paper and online calculators and do math taking into account a lot of factors, biggest of which is wife's tuition of $41+k in the next 2 years.
Thanks to all responders! More advice - bring it in!

So there's a lot of variables here.  I agree with what Nereo has said, as I think his assumptions are correct for you.  BUT, we are making assumptions.  I'd suggest a case study, look at this to make one:
http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-'case-study'-topic/