Author Topic: Vanguard Individual 401k - traditional or roth? Need some advice.  (Read 5317 times)

webguy

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I'm opening an individual 401k through Vanguard as I work as a freelancer on the side of my day job and am trying to capitalize on any tax-sheltered investment space I can - I've maxed out my IRA and my day job doesn't offer a 401k. Vanguard offers both a traditional and roth. I was leaning towards the roth but I know that with the traditional you can make contributions as both an "employer" and "employee", whereas a roth only allows you to contribute as an "employee". I'm currently only making about 12-15k a year as a freelancer but my goal is to up this significantly in a few years time - to closer to 50-60k a year.

I believe the contribution limit for the roth is 17.5k a year, whereas a traditional would allow up to 51k due to both employee and employer contributions. I was leaning towards the roth but as I'm aiming to invest 50k per year the traditional plan allows me to save more of my money in a tax-sheltered vehicle. If I made 50k for example, I could save about 30k in a traditional (17.5 + 25% of 50) versus 17.5k in a roth.  If this is the case then surely the traditional makes more sense if I'm making over 17.5k a year in self-employed income, right?

Or would it make sense to open a roth now while I'm making less than 17.5 a year and the convert it into a traditional later? (Can I do that??)

Just wondered if anyone has been in this same situation or has any advice for me?

Many thanks in advance!

Left

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Re: Vanguard Individual 401k - traditional or roth? Need some advice.
« Reply #1 on: February 17, 2013, 05:00:08 AM »
just wondering myself, can I buy into vanguard through scottrade? is there a minium investment for it?
https://personal.vanguard.com/us/whatweoffer/mutualfundinvesting/accounts
I didn't see anything about buying it through a stock broker as a ETF. But I looked it up on scottrade and it has a trade button so I assume I can buy into it. Just not sure how exactly. I'll stop by Tuesday morning or sometime next week when I have time and ask them if no one knows

TN_Steve

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Re: Vanguard Individual 401k - traditional or roth? Need some advice.
« Reply #2 on: February 17, 2013, 10:30:20 AM »
I'm opening an individual 401k through Vanguard as I work as a freelancer on the side of my day job and am trying to capitalize on any tax-sheltered investment space I can - I've maxed out my IRA and my day job doesn't offer a 401k. Vanguard offers both a traditional and roth. I was leaning towards the roth but I know that with the traditional you can make contributions as both an "employer" and "employee", whereas a roth only allows you to contribute as an "employee". I'm currently only making about 12-15k a year as a freelancer but my goal is to up this significantly in a few years time - to closer to 50-60k a year.

I believe the contribution limit for the roth is 17.5k a year, whereas a traditional would allow up to 51k due to both employee and employer contributions. I was leaning towards the roth but as I'm aiming to invest 50k per year the traditional plan allows me to save more of my money in a tax-sheltered vehicle. If I made 50k for example, I could save about 30k in a traditional (17.5 + 25% of 50) versus 17.5k in a roth.  If this is the case then surely the traditional makes more sense if I'm making over 17.5k a year in self-employed income, right?

Or would it make sense to open a roth now while I'm making less than 17.5 a year and the convert it into a traditional later? (Can I do that??)

Just wondered if anyone has been in this same situation or has any advice for me?

Many thanks in advance!

I haven't done the individual 401k, although we looked at it for my wife a few years ago (the consulting income ended up being routed through employer due to contract, so didn't follow through).

First, as a legal matter, you can have a Roth 401k with employer contributions--those contributions will always be before tax dollars and will be administratively separate from the Roth portion.  (Google's plan apparently works like this, and my employer did it as long as I kept my 401k as a Roth.  In fact, I now have three divisions in my 401k--my roth contributions, my employer's match, and my ongoing traditional contributions, all of which are in the same account/investment).  Is it a vanguard rule that prevents you from structuring in this manner?

Second, I don't think there is any IRC provision or regulation for a conversion from Roth to traditional.  Given that you can have a mixed 401k with employer match, it really doesn't come up.  If vanguard bars a mixed account, however, you could probably go with Roth for now, then close the plan in a few years when you are making big bucks and roll those funds over to a Roth IRA.  Once that is done, you then open a new plan?  I am not sure what time limits and other constraints would impinge upon this.  Probably in the "not worth it unless a parent or my best friend is an ERISA lawyer" category.

Third--if you have healthy income at main job, make sure that Roth makes sense with marginal rates now, versus average rates you pay in retirement.  State taxes can matter a lot here--my son and his GF are both under 25, but as silicon valley geeks, their tax rates now make Roths unattractive.

just wondering myself, can I buy into vanguard through scottrade? is there a minium investment for it?
https://personal.vanguard.com/us/whatweoffer/mutualfundinvesting/accounts
I didn't see anything about buying it through a stock broker as a ETF. But I looked it up on scottrade and it has a trade button so I assume I can buy into it. Just not sure how exactly. I'll stop by Tuesday morning or sometime next week when I have time and ask them if no one knows

You can buy Vanguard ETFs through any brokerage.  They duplicate many, but not all of the open ended mutual fund offerings.  Here is the gateway to a full listing:    https://personal.vanguard.com/us/funds/etf

webguy

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Re: Vanguard Individual 401k - traditional or roth? Need some advice.
« Reply #3 on: February 19, 2013, 12:24:50 PM »
Thanks Steve!  I really appreciate your reply!

I'm going to call Vanguard after work today to ask them some questions.  I'll also sit down and figure out which would benefit my wife and I more from a tax perspective.  The thing I was wondering though was even if a Roth makes more sense from a tax bracket perspective, if the traditional plan allows for a higher contribution then would the tax savings from that extra contribution offset the potential tax savings of using a roth.  I suppose that's something that I'm going to have to sit down and figure out based on my current situation.

If anyone else has any input then I'd love to hear it!