Author Topic: 401K or Vanguard taxable?  (Read 3728 times)

MVal

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401K or Vanguard taxable?
« on: June 03, 2015, 10:16:27 AM »
Okay, I have my Roth IRA and my 401K... I already contribute to my 401K up to my employer's match of 5% and I have the full $5500 for the Roth this year, but how should I invest beyond that? Should I just contribute more to my 401K since it is pre-tax? Anything I put in Vanguard taxable accounts would have to be done with after-tax income and then the dividends would be taxed upon withdrawal, right? However, if I dump all my assets in the 401K, I won't be able to use it until I'm old, so perhaps that's not the best idea. I'm so new to this stuff and very confused by all the information out there.

Also, if you contribute up to the maximum $17,500 in your 401K, does that INCLUDE your employer's match, or not?

mizzourah2006

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Re: 401K or Vanguard taxable?
« Reply #1 on: June 03, 2015, 10:22:27 AM »
Okay, I have my Roth IRA and my 401K... I already contribute to my 401K up to my employer's match of 5% and I have the full $5500 for the Roth this year, but how should I invest beyond that? Should I just contribute more to my 401K since it is pre-tax? Anything I put in Vanguard taxable accounts would have to be done with after-tax income and then the dividends would be taxed upon withdrawal, right? However, if I dump all my assets in the 401K, I won't be able to use it until I'm old, so perhaps that's not the best idea. I'm so new to this stuff and very confused by all the information out there.

Also, if you contribute up to the maximum $17,500 in your 401K, does that INCLUDE your employer's match, or not?

First, the 401k cap does not include employer match.

Also, I'm not sure the bolded is true. I'm sure others here know much more than me about this topic, but I believe you can withdraw early from an IRA tax free under a structured annuity type arrangement,w here you have to essentially agree to a specific withdrawal amount every year until you are 59.5. You can also do a Roth Conversion Ladder, which the Mad Fientist outlines here: http://www.madfientist.com/retire-even-earlier/

I provided the quote on the Roth Conversion Ladder below.

Quote
Early Withdrawal Penalties?
Since most of his money in the updated scenario is in tax-advantaged retirement accounts, you may wonder if he will be forced to pay early-withdrawal penalties when he withdraws money from these accounts before standard retirement age.

No again!

Roth IRA Conversion Ladder
To access the money in the retirement accounts prior to standard retirement age without paying any penalties on the distributions, he can create something called a Roth IRA conversion ladder.

Thanks to the way Traditional IRA to Roth IRA conversions work, you are able to withdraw converted money five years after the conversion date, tax and penalty free. So in this example, assume that he converts his entire 401(k) to a Traditional IRA when he achieves FI and then, every year after that, he moves $9,750 from his Traditional IRA into his Roth IRA. He would only need to do this for five years before he could then start withdrawing $9,750 per year, tax and penalty free!

Since his taxable accounts will provide enough income to sustain his first five years of early retirement and the Roth IRA conversion ladder distributions will help ensure that he has enough money to live off of until standard retirement age, there’s no reason he shouldn’t max out all of the available retirement accounts and retire over two years earlier!

dandarc

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Re: 401K or Vanguard taxable?
« Reply #2 on: June 03, 2015, 10:23:49 AM »
What's your tax bracket?  Unless you're pretty low on the income side, the 401K is probably not a bad choice when the alternative is a taxable account.  If you do go taxable, the dividends and capital gains distributions will be paid as received, even if you reinvest them.  The rate ranges from 0% to ordinary-income rates depending on whether these distributions are long-term / short-term , qualified / unqualified, and your income (marginal tax bracket).

The $18,000 (2015) does NOT include employer match - the $53K limit does.

And as far as getting the money out before 59.5, seattlecyclone's blog post is pretty clear on the options for doing that:

https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/

nereo

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Re: 401K or Vanguard taxable?
« Reply #3 on: June 03, 2015, 10:30:44 AM »
almost always invest more in your 401(k) before investing into taxable accounts.
The obvious exceptions are;
1) if your 401(k) options truly suck.
2) if you need more money in taxable accounts for anticipated expenses several years away (but before setting up SEPP, converstions, etc from that 401(k).

The tax advantages, coupled with a ROTH-ladder  or SEPP withdrawals are so favorable to contributing as much as you can to your 401(k) that it's rare to come across a RL situation were someone shouldn't do it.

MDM

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Re: 401K or Vanguard taxable?
« Reply #4 on: June 03, 2015, 02:27:26 PM »
almost always invest more in your 401(k) before investing into taxable accounts.
The obvious exceptions are;
1) if your 401(k) options truly suck.
2) if you need more money in taxable accounts for anticipated expenses several years away (but before setting up SEPP, converstions, etc from that 401(k).

The tax advantages, coupled with a ROTH-ladder  or SEPP withdrawals are so favorable to contributing as much as you can to your 401(k) that it's rare to come across a RL situation were someone shouldn't do it.

And even if 1) is true for you, if you will be in a lower marginal bracket at retirement than now the options would have to suck...incredibly much...for taxable to be better.

But there are some, albeit very few, cases in which taxable would be better.  What are your 401k fund fees?

MVal

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Re: 401K or Vanguard taxable?
« Reply #5 on: June 03, 2015, 03:26:17 PM »
Well, I am not sure what my fees are exactly, but I went to my online 401K access and it says my "Total Estimated Annual Porfolio expense" is 0.5% or about $92. Is that good or bad?

I am 32 years old and hoping to crack $20K in my 401K this year, so I'm not that far along yet.

nereo

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Re: 401K or Vanguard taxable?
« Reply #6 on: June 03, 2015, 03:49:08 PM »
Well, I am not sure what my fees are exactly, but I went to my online 401K access and it says my "Total Estimated Annual Porfolio expense" is 0.5% or about $92. Is that good or bad?

As 401(k) plans go, your fees aren't bad.  I've seen plans with 1.5% expense ratios, and even higher than that before they changed some of the rules.
Not sure why they would say $92 - is that based on some hypothetical balance (or perhaps your balance of ~$18,400)? 
Next step - find out what the fund options are for investing in.  Typically you have several choices, and you cna invest in everything from a straight SP500 index fund to a blended stock/bond portfolio.

MDM

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Re: 401K or Vanguard taxable?
« Reply #7 on: June 03, 2015, 04:02:15 PM »
Well, I am not sure what my fees are exactly, but I went to my online 401K access and it says my "Total Estimated Annual Porfolio expense" is 0.5% or about $92. Is that good or bad?
One the same web site (but perhaps a different page) should be the fees (aka "expense ratios") for the individual funds.  For the sake of discussion if they are all 0.5% then yes, the 401k is better than taxable.

MVal

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Re: 401K or Vanguard taxable?
« Reply #8 on: June 03, 2015, 04:04:18 PM »
At the moment, since I know next to nothing about investing and I've been so worried I'll screw it up, I'm signed for the "investing assistance" they offer for a small fee where they keep rebalancing the account for me based on my setting of "very aggressive" investing. So far since doing that, I've watched my return vary from 7% to 23% over the last 2 years or so.