The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: k_to_the_v on March 04, 2015, 05:38:15 PM
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Lets say you were maxing out your 401k, and you are not eligible for any additional pre-tax retirement accounts.
Let's also say even with the max 401k you are in a 25% tax bracket. You expect to be in a much lower tax bracket after retirement. Would you invest your after tax dollars in an index fund with a low expense ratio (such as VTSAX @ 0.05%) or in a Roth IRA with (slightly) higher expense ratio (.17).
This is one where the math has me stumped. I'm currently doing the former (non-retirement index fund), based on the low expense ratio and the ease of access. Just wondered what the great minds on the MMM forums have to say about this.
I realize I am leaving out plenty of details, such as age, expected ER age, etc. If that would make a difference, I'll fill in the blanks but wanted to start with a more hypothetical approach.
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You can't just do a Roth with VTSAX?
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You can own VTSAX in a Roth IRA. I don't understand the question.
ETA: I own VTSAX in my Roth IRA at Vanguard, and VTIAX in my general investing (taxable) account at Vanguard.
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Is the expense ratio the same if you set up a Roth vs. just investing directly? When I looked at their Roth options it seemed the expense ratio was higher.
That's the issue I'm having. If the expense ratio is the same regardless of investment method, then I agree its a complete no brainer.
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The ER is higher if you can't buy the Admiral shares right away, but once you pass the $10k mark, you'll be upgraded to Admiral shares and pay the lower ER. I personally wouldn't worry about paying more for a year or so until you reach that point.
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Even if you had to pick, the difference in expense is just 0.12%. If your effective tax rate is that low, you have one hell of a CPA!
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Well, then let me just say "duh". Move along, nothing to see here, lol.
I am currently investing in a Fidelity total market account that has a lower expense ratio than the Investor version of the Vanguard fund until I reach the 10,000 required for the Admiral fund. So I'm aware of those expense ratio differences.
Despite the fact that I feel supremely stupid (can we call it a blond moment), I'm glad I asked. Like I said, the decision is a no brainer if the expense ratios are the same with either investment method.
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Even at a higher expense ratio, I think Roth is the way to go. I mean, tax free growth? Move investments around without concern for capital gains? Ability to withdraw contribution in an emergency at no penalty? All seems like a no brainer for roth to me even if the expense ratio was higher.
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Even at a higher expense ratio, I think Roth is the way to go. I mean, tax free growth? Move investments around without concern for capital gains? Ability to withdraw contribution in an emergency at no penalty? All seems like a no brainer for roth to me even if the expense ratio was higher.
I dunno--if the hypothetical retirement income is in the 15% tax bracket, it doesn't matter from a tax perspective which vehicle you use. The traditional investment *does* have two advantages over the Roth: 1) unlimited contributions, and 2) you can withdraw both contributions and earnings without penalty before retirement age.