Author Topic: Investment Priorities  (Read 2678 times)

Scommm

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Investment Priorities
« on: October 12, 2015, 12:32:53 AM »
I have read here and other places to fund your company plan first (to get the free match $), then fund IRA's (I would think HSA's are in here somewhere, then taxable accounts.

I have researched my company 457 program and it appears the fun is not that stellar due to high fees.  I also get 0 match from the company. 

My question for the MMM community is should I still invest in it due to the obvious tax savings or due to the high fees and 0 match am I better off to put these funds in a low fee taxable vehicle?  My gut says to still fund the 457.

BTW the program I have access to in the 457 is the "Principal LifeTime 2030 Separate Account-R6" which I can't find a lot of information on.  That is 1 of 2 options.  That is called the let us do it for you option, and another plan/program within the 457 will allow you to select from a list of funds.  I can post them if that would be helpful in making this analysis.



Another Reader

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Re: Investment Priorities
« Reply #1 on: October 12, 2015, 05:39:46 AM »
Sigh.  When are employers going to move to providers that benefit the employee?

In your shoes, I would likely use the "do it yourself" option.  Principal will likely offer mediocre funds with high fees.  Look for the lowest ER index funds or their equivalents.  Watch out for the annuity pitch, as Principal is an insurance company.

Since you said you work for a company, I assume your employer is not a government entity.  Private 457 plan assets are considered to be assets of the company and can be taken by creditors in a bankruptcy.  Once you leave the company, your account can be rolled over into an IRA and the assets are yours. 

457 plans do have one important benefit.  Since they are "deferred compensation," not qualified retirement plans, they can be accessed without penalty before age 59 1/2.  However, not all plans offer distributions over time.  You should read about the options for distribution upon retirement or leaving employment.  If you roll the assets into an IRA, you lose the ability to withdraw penalty-free.

I accrued a significant amount of money in a government 457 plan.  It was provided by Prudential, and offered lousy funds.  However, the tax benefits were well worth the feeling of being victimized by Prudential and their arrogant "advisers."  And in a 1 percent interest rate world, they offered a 3 percent stable value fund, where I left a lot of cash reserves when I retired. 

Scommm

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Re: Investment Priorities
« Reply #2 on: October 12, 2015, 09:57:47 AM »
I say "company" but I work for a government entity.  I will look for those "do it yourself" options.

I was wondering what you already stated. - If the tax benefits were worth the victimization. :)


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Retired To Win

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Re: Investment Priorities
« Reply #3 on: October 12, 2015, 10:14:49 AM »
I have read here and other places to fund your company plan first (to get the free match $), then fund IRA's (I would think HSA's are in here somewhere, then taxable accounts.

I have researched my company 457 program and it appears the fun is not that stellar due to high fees.  I also get 0 match from the company. 

My question for the MMM community is should I still invest in it due to the obvious tax savings or due to the high fees and 0 match am I better off to put these funds in a low fee taxable vehicle?  My gut says to still fund the 457...

Without the benefit of a company match, the only advantage I see to a company plan over doing your own IRA is that IRS rules will allow you to put more tax-deferred income into the company plan than in the IRA.  I also have had the experience of being able to put money into both vehicles in the same tax year because my company did not do a match either.

Taking all that into account, in your shoes I would probably max out my IRA and then, if I could or wanted to sock away more tax-deferred income, I would make contributions into the company plan within the allowable limits in the guidelines.

MDM

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Re: Investment Priorities
« Reply #4 on: October 12, 2015, 12:15:21 PM »
In the lists below, thinking "first your 457 (if you have one), then your 401k and/or 403b" wherever "401k" appears is likely correct.
Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).

WHAT
0. Establish an emergency fund to your satisfaction
1. Contribute to 401k up to any company match
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.
3. Max HSA
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)
6. Fund mega backdoor Roth if applicable
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.
8. Invest in a taxable account with any extra.

WHY
0. Give yourself at least enough buffer to avoid worries about bouncing checks   
1. Company match rates are likely the highest percent return you can get on your money   
2. When the guaranteed return is this high, take it.   
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.   
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see   
   http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
   if you want even more details on that topic.)
5. See #4 for choice of traditional or Roth for 401k   
6. Applicability depends on the rules for the specific 401k   
7. Again, take the risk-free return if high enough   
8. Because earnings, even if taxed, are beneficial   

If you are concerned about high 401k fees, see http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/ for evaluation options.

Scommm

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Re: Investment Priorities
« Reply #5 on: October 12, 2015, 05:00:52 PM »
ANALYSIS:

So, after reading up on advice offered it would appear even though I have no match, the tax savings of a fully funded 457 would be around $3600 for me on average. 

By doing this I am hoping to get my AGI low enough to deduct my contribution limit to my fund my traditional IRA (and as a bonus can fund it out of the tax savings from the 457 contribution).

HEALTH INSURANCE:

I also learned my HDHP is non HSA qualifying since it has a company HRA attached to it, and the optional health plan available is not even an HDHP health plan because of the lower deductibles.  I don't know yet if my employer will pay their portion of the premium contributions to any health plan I choose away from their offerings, but my portion of the premium is about $180 / month right now.  Any links or ideas you can share on privately purchasing an HDHP on the open market even though my employer offers insurance?

INVESTMENT OPTIONS @ PRINCIPAL FOR MY 457:

So, here are the options I can choose from at Principal.  From what I have read and learned these are poor quality funds due to the high costs.  So, from the tax savings alone I am figuring I am stuck with this plan while I am with this employer.  Any other thoughts are welcome, and thoughts about the funds available are welcome.  After reading MMM users links I assume I want to go 33% US Stocks, 33% International Stocks, and 33% bonds, generally.

FUNDS offered: (see PDF)