Author Topic: My 401K sucks, but it's still better than paying taxes right?  (Read 4247 times)

hucktard

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My 401K doesn't have good options for low fee index funds. The best I can seem to find is an SP500 index fund with a 0.6 expense ratio and a 3% front load sales fee. I hate that 3% fee, but it is still better than paying ~20% taxes right? So I am still better off investing in my 401K and paying a 3% fee rather than investing in a non tax advantaged account and not paying the fee but having to pay taxes, right? Am I thinking about this the right way?

ZiziPB

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Re: My 401K sucks, but it's still better than paying taxes right?
« Reply #1 on: May 15, 2016, 07:45:47 PM »
Are you sure about the front load fee?  Quite often these get waived for funds within 401k.  Are you looking at your plan info or just looking up the ticker of the fund? 

hucktard

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Re: My 401K sucks, but it's still better than paying taxes right?
« Reply #2 on: May 15, 2016, 07:50:26 PM »
I'm pretty sure I actually get charged that fee. I talked to the advisor that our company has and he confirmed it. So let's say I do get charged the 3% fee, that's still better than paying 20% in taxes right?

ZiziPB

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Re: My 401K sucks, but it's still better than paying taxes right?
« Reply #3 on: May 15, 2016, 08:09:24 PM »
Do you get any match?  Are you within limits to fund an IRA?

PhysicianOnFIRE

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Re: My 401K sucks, but it's still better than paying taxes right?
« Reply #4 on: May 15, 2016, 08:33:00 PM »
Ouch. Wow. I would talk a little more with HR and see if there's anything they can do to get some halfway decent options in there.

In the meantime, WCI had a post about what to do with a crummy 401(k).

The higher your marginal tax rate, the more important it is to invest in a tax deferred 401(k). Obviously, if there's a match, you'll want to put in enough to get the full match.

Best,
-PoF

hucktard

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Re: My 401K sucks, but it's still better than paying taxes right?
« Reply #5 on: May 15, 2016, 08:36:04 PM »
I don't get a match. I also don't think I can contribute anything to a traditional IRA. So, it's still better than paying taxes right!?

bogart

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Re: My 401K sucks, but it's still better than paying taxes right?
« Reply #6 on: May 15, 2016, 08:44:27 PM »
So I am still better off investing in my 401K and paying a 3% fee rather than investing in a non tax advantaged account and not paying the fee but having to pay taxes, right? Am I thinking about this the right way?

It depends.  Long-terms capital gains in non-tax-sheltered accounts are actually pretty tax-sheltered, so if you can come up with the whole $18,000 you're allowed to invest in an 401K in one year, put that amount in a regular (not 401K) investment account, buy a cheaper version of the fund -- you'll be better off in the long run.

OTOH, if you won't (otherwise) be able to invest the full $18K amount or close to it, you're quite possibly better off going with the 401K, since you'll be able to invest more up-front, though you'll also have to pay regular income tax rates (not capital gains rates) when you eventually take the money (and earnings) out.

Of course all this assumes tax rates stay the same going forward, which is unknown.

Having fun yet?

TL;DR:  If the up-front tax savings lets you invest a higher amount, go with the 401K, fees or no.  If you're rolling in dough and can invest the full $18K regardless, invest it outside the 401K in an index fund and hold the fund (at least) long enough to get the benefits of paying taxes on those funds only as a long-term capital gain.

hucktard

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Re: My 401K sucks, but it's still better than paying taxes right?
« Reply #7 on: May 15, 2016, 08:52:06 PM »
Thanks Bogart. It seems like investing in my 401K still makes sense over taxable accounts. Most of my retirement is in rental properties anyway. I just wanted to know if it made any sense at all to put anything in my 401K.

MDM

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Re: My 401K sucks, but it's still better than paying taxes right?
« Reply #8 on: May 16, 2016, 01:54:27 AM »
I hate that 3% fee, but it is still better than paying ~20% taxes right? So I am still better off investing in my 401K and paying a 3% fee rather than investing in a non tax advantaged account and not paying the fee but having to pay taxes, right? Am I thinking about this the right way?
See http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/ for similar discussion.

You could modify the case study spreadsheet by multiplying cells C104 and H104 in the '401k vs Taxable' tab by 0.97 to account for the 3% load. 

See also https://www.bogleheads.org/wiki/How_to_campaign_for_a_better_401%28k%29_plan.

kendallf

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Re: My 401K sucks, but it's still better than paying taxes right?
« Reply #9 on: May 16, 2016, 10:13:22 AM »
So I am still better off investing in my 401K and paying a 3% fee rather than investing in a non tax advantaged account and not paying the fee but having to pay taxes, right? Am I thinking about this the right way?

It depends.  Long-terms capital gains in non-tax-sheltered accounts are actually pretty tax-sheltered, so if you can come up with the whole $18,000 you're allowed to invest in an 401K in one year, put that amount in a regular (not 401K) investment account, buy a cheaper version of the fund -- you'll be better off in the long run.

OTOH, if you won't (otherwise) be able to invest the full $18K amount or close to it, you're quite possibly better off going with the 401K, since you'll be able to invest more up-front, though you'll also have to pay regular income tax rates (not capital gains rates) when you eventually take the money (and earnings) out.

Of course all this assumes tax rates stay the same going forward, which is unknown.

Having fun yet?

TL;DR:  If the up-front tax savings lets you invest a higher amount, go with the 401K, fees or no.  If you're rolling in dough and can invest the full $18K regardless, invest it outside the 401K in an index fund and hold the fund (at least) long enough to get the benefits of paying taxes on those funds only as a long-term capital gain.

I don't agree with the TL;DR here.  Regardless of whether you can invest the full amount or not, the immediate tax savings is real.  The question comes down, again, to whether you believe your tax rate after retirement + the effect of the fees will be worse than taking the immediate (25% bracket?) tax hit and paying 15% capital gains later. 

For more, read this, including Addendum 1 where the MadFientist puts example numbers to the test.

http://jlcollinsnh.com/2013/06/28/stocks-part-viii-b-should-you-avoid-your-companys-401k/

hucktard

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Re: My 401K sucks, but it's still better than paying taxes right?
« Reply #10 on: May 16, 2016, 03:32:35 PM »
Thanks for all the advice everybody. I am going to start contributing again to my 401K as I think it is worth it. I have also pushed my company to try to get a better 401K plan.

MrsWhipple: Is an EIN an employer identification number? I will look into the solo 401K a bit, thanks.

BrickByBrick

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Re: My 401K sucks, but it's still better than paying taxes right?
« Reply #11 on: May 16, 2016, 08:01:32 PM »
MrsWhipple: Is an EIN an employer identification number? I will look into the solo 401K a bit, thanks.

Just to answer, yes an EIN is an employer identification number.  My understanding is you can maintain both an employer 401k and a solo 401k.  If you can start a solo 401k you may be able to get much better options, and depending on your income, contribute much more (up to $53K I believe).

Highly recommend looking into it.

feelingroovy

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Re: My 401K sucks, but it's still better than paying taxes right?
« Reply #12 on: May 16, 2016, 08:33:40 PM »
MrsWhipple: Is an EIN an employer identification number? I will look into the solo 401K a bit, thanks.

Just to answer, yes an EIN is an employer identification number.  My understanding is you can maintain both an employer 401k and a solo 401k.  If you can start a solo 401k you may be able to get much better options, and depending on your income, contribute much more (up to $53K I believe).

Highly recommend looking into it.

I would check with your tax advisor before doing this.

Rental income goes on schedule E. It's not self employment income.

Self employment income (which allows a 401k and requires paying self employment tax) goes on schedule C.

That is my understanding as per my accountant. My husband is both self employed and we have rentals and the solo 401k is limited to the amount on the bottom line of schedule C, minus self employment taxes.

woopwoop

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Re: My 401K sucks, but it's still better than paying taxes right?
« Reply #13 on: May 16, 2016, 08:59:26 PM »
Rental income goes on schedule E. It's not self employment income.

Self employment income (which allows a 401k and requires paying self employment tax) goes on schedule C.
Ah, boo. Sorry to get your hopes up OP, I've never had rental income. In that case, what about a SEP or SIMPLE IRA? Same deal?

feelingroovy

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Re: My 401K sucks, but it's still better than paying taxes right?
« Reply #14 on: May 16, 2016, 09:13:32 PM »
Same deal. None of these work for schedule E income.

Silver lining: never having to pay the 15.3% self employment tax(aka, social security) on that income already makes it tax efficient.