Author Topic: Should I contribute to the organization's 401k?  (Read 2736 times)

PARedbeard

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Should I contribute to the organization's 401k?
« on: June 09, 2015, 12:23:32 PM »
Hey All,
I've been lurking on the forums for quite some time and only recently started to contribute. Now, though, I have a question that requires a little Mustachian insight.

I have been at my current position for just about a year now. As such, I am now able to contribute to the company's 401k plan, but I am not sure I should...

A little general background: I work in a community non-profit office, and DW is a full-time graduate student. All told (between my salary and her stipend) we make just under $40,000 before taxes (we file jointly). Our expenses are around $25,000 (only debt is a mortgage), and we are 'stashing the rest in 2 Roths and a taxable account. DW is in the 2nd year of what will probably be a 5-6 year degree, depending on how smoothly a few key experiments run. Once DW is done (3-4 years out) we will move.

My employer's 401k is with American Funds (no Vanguard options, unfortunately), and the smallest expense ratio is .96% (Washington Mutual Fund). My company does match up to 5%, which is pretty nice for a non-profit. Here's my catch, though: After the first year of work, I would be vested 25% for each additional year until year 5, when I would be 100% vested. So, even if I contribute, and supposing that our move date doesn't change, I will never be able to get the full match AND I would be paying a higher fee than if I were to throw the money at Vanguard or invest in single, high-quality dividend stocks. It makes me think I should just forgo paying into the plan and invest the money I would be contributing elsewhere.

What am I missing? Is there a huge tax advantage I am overlooking? We're still in the 15% bracket. Any input or different opinion/perspective would be greatly appreciated!
« Last Edit: June 09, 2015, 12:31:52 PM by PARedbeard »

kpd905

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Re: Should I contribute to the organization's 401k?
« Reply #1 on: June 09, 2015, 12:31:49 PM »
I'd still take the match. Even if you are only 50% vested by the time you move, that is a bunch of free money that you'll be able to rollover to Vanguard into low cost funds.

High expense funds are really bad over the long term, but a 1% fee isn't going to hurt you much over 3-4 years.
« Last Edit: June 09, 2015, 12:34:14 PM by kpd905 »

nereo

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Re: Should I contribute to the organization's 401k?
« Reply #2 on: June 09, 2015, 12:37:56 PM »
As i understand what you are saying, you will be in your current location for at least 3-4 years, and your employer has a vesting schedule that will have you full-vested in 5 years (but 75% vested in four years).  If you do happen to stay for 5 years then you will be fully vested

The annual expenses are high but not extraordinarily so, and you will get a 15% tax break on every dollar you contribute into a 401(k) for that year.  That's $150 for each $1k invested.

From where I sit I definitely think that you should still participate in your 401(k) plan - at least enough to get the full match.  Once you leave your employer you can roll it over into Vanguard and get the much lower expense ratio.  Even if you are only vested 50% when you leave (which would be after 3 years, correct?) the company match offers you a great return.  It's also entirely possible you may wind up staying a full 5 years if your SO gets a project at the university flowing from her graduate studies - that's very common in my experience.

MDM

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Re: Should I contribute to the organization's 401k?
« Reply #3 on: June 09, 2015, 12:38:36 PM »
I'd still take the match. Even if you are only 50% vested by the time you move, that is a bunch of free money that you'll be able to rollover to Vanguard into low cost funds.

High expense funds are really bad over the long term, but a 1% fee isn't going to hurt you much over 3-4 years.
+1

kpd905 has hit most of the relevant points.  One additional thing you might consider is traditional (to get the full saver's credit) vs. Roth.

PARedbeard

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Re: Should I contribute to the organization's 401k?
« Reply #4 on: June 09, 2015, 01:00:02 PM »
Thanks for weighing in!

As i understand what you are saying, you will be in your current location for at least 3-4 years, and your employer has a vesting schedule that will have you full-vested in 5 years (but 75% vested in four years).  If you do happen to stay for 5 years then you will be fully vested

Yup--this is exactly right, and it is FAR more clear than what I had written above.

Another fly in the ointment (just for fun). What if I left my employer after only a year? I'm considering getting my Masters, and if I were to get a job at the local university, I could get a 75% reduction in the cost of the degree while still working FT.

nereo

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Re: Should I contribute to the organization's 401k?
« Reply #5 on: June 09, 2015, 04:52:09 PM »

Another fly in the ointment (just for fun). What if I left my employer after only a year? I'm considering getting my Masters, and if I were to get a job at the local university, I could get a 75% reduction in the cost of the degree while still working FT.

worst-case scenario, if you left after 1 year then you would still get the tax-break for contributing to your 401(k), and then you could roll that over into a vanguard t-IRA.  It would be a non-taxable event.  So you'd still be in good shape, even though you wouldn't get any employer match.
In fact, you could use that strategy to boost your IRA holdings. 

Note, if you convert from a 401(k) into a ROTH then you will be taxed on the conversion - but then it grows tax free and you will never be taxed on when you make withdrawals later in life.

MDM

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Re: Should I contribute to the organization's 401k?
« Reply #6 on: June 10, 2015, 02:30:19 AM »
Is there a huge tax advantage I am overlooking? We're still in the 15% bracket.
In short, yes - even in your current bracket.

Pretty much any amount of employer match you get will make it worthwhile.  Also, although a shorter employment time means less vesting it also means less time paying higher fees.

To quantify things, consider using the "401k vs Taxable" tab on the case study spreadsheet

There is a "rule of thumb" in the Bogleheads' 401k wiki entry: ''consider investing in a taxable account if the product of the extra costs and the number of years you will stay in the plan exceeds 30%."  Unfortunately the conditions under which that rule is appropriate aren't given, so caveat user

The Bogleheads wiki also links to http://thefinancebuff.com/alternatives-to-a-high-cost-401k-or-403b-plan.html, from which one can access an online evaluation tool.  The linked article was written in 2008, when things such as backdoor Roths weren't in use.  The online evaluation tool doesn't allow one to see calculation details, but it and the case study spreadsheet match exactly for traditional 401k and taxable account calculations over a variety of inputs.  Ease of use is in the eye of the beholder, so use whatever is easiest for you.

PARedbeard

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Re: Should I contribute to the organization's 401k?
« Reply #7 on: June 10, 2015, 07:51:37 AM »
Thanks so much kpd905, nereo and MDM! I've just sent HR an email, and hopefully I'll be in the system later today.

I really appreciate your thoughts on the tax advantages and the gains from the match vs. the expense of the plan. It may seem very basic, but I had just never considered that.

I'm really glad I asked! Thanks, again!