Author Topic: 401k That May Not Be Worth Investing  (Read 2761 times)

mistershankly

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401k That May Not Be Worth Investing
« on: August 09, 2015, 05:09:39 PM »
Hello All, I'm currently on track to be FI in 2020 at age 50.  I'm currently maxing out my 401k ($18k for this year) and am considering stopping my contributions to use the extra cash to increase my FI stash that will be accessible when I'm FI.  There are 2 significant reasons why my 401k isn't as advantageous as it should be and 2 reasons that it works well....

cons: 1) there is no company match... 2) with the way our 401k is set up in our small business, if the 401k plan does not pass a financial test at the end of the year (dependent on the amount of contribution by the majority of the employees and some other factors I'm not clear on), the people who max out there account get a partial refund (with taxes withheld) to balance things out. Due to the lack of employee participation in the 401k, I have received refunds for the past two years of roughly $7k each (yes, a nearly 40% refund). 

pros: 1) the funds in the 401k are primarily Vanguard and the expense ratios (even with plan administration fees) are very low... 2) the funds offered in the 401k complement my after-tax Vanguard account to allow for a nice balance between the two.

Would it be unwise to stop contributions to the 401k to increase the FI stash or is there some reasoning (despite no match and an almost certain refund at the end of the year) to continue contributing to it that I'm missing?

My adjusted income with the net $10k contribution to the 401k doesn't affect my tax bracket nor does it really move the needle much at this point in my 401k since the market returns considerably exceed any contributions that I make. 

Any advice would be greatly appreciated!

MDM

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Re: 401k That May Not Be Worth Investing
« Reply #1 on: August 09, 2015, 05:25:02 PM »
the funds in the 401k are primarily Vanguard and the expense ratios (even with plan administration fees) are very low

The line above seems the most important point.  Given that, put as much as you can into the 401k - and encourage others in the company to do so too!

As far as accessing funds if you retire at 50, you want as much as you need but no more.  See http://forum.mrmoneymustache.com/taxes/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-ag-39647/ if you haven't already.

forummm

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Re: 401k That May Not Be Worth Investing
« Reply #2 on: August 09, 2015, 05:46:22 PM »
Quote
2) with the way our 401k is set up in our small business, if the 401k plan does not pass a financial test at the end of the year (dependent on the amount of contribution by the majority of the employees and some other factors I'm not clear on), the people who max out there account get a partial refund (with taxes withheld) to balance things out. Due to the lack of employee participation in the 401k, I have received refunds for the past two years of roughly $7k each (yes, a nearly 40% refund). 

Weird. What is the financial test the plan has to pass? And why would they need to send back your money to meet that test?

Make sure you max out your IRA too. If you can get a deductible TIRA that would be one way to take advantage of the deduction that you're not being allowed by your 401k provider.

Gin1984

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Re: 401k That May Not Be Worth Investing
« Reply #3 on: August 09, 2015, 06:39:01 PM »
Yes, keep funding your 401k as much as you can. 

Joshua

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Re: 401k That May Not Be Worth Investing
« Reply #4 on: August 09, 2015, 06:43:02 PM »
I don't see why you wouldn't keep maxing it. Worse case scenario, you get the money back and invest it elsewhere. If you aren't maxing your IRA then you could consider putting the money into that at the end of the year if you get it back. There is no downside to maxing it.

theknitcycle

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Re: 401k That May Not Be Worth Investing
« Reply #5 on: August 09, 2015, 06:51:29 PM »

Weird. What is the financial test the plan has to pass? And why would they need to send back your money to meet that test?


Not OP here, but I'm going to guess this is about the ADP (Average Deferral Percentage) anti-discrimination test.  One of the tools that the DOL uses to make sure 401(k) plans don't benefit the folks at the top disproportionately more than the folks at the bottom.  Basically, employees are looked at in two groups: "highly compensated employees" and "non-highly compensated employees."  The rule is that the average deferral rate of the HCE group can't be more than 2% (it's slightly more complicated than that, but usually 2%) higher than the average deferral rate of the NHCE group.   So if a company has lots of lower-paid employees who are either not contributing or just barely contributing, it becomes pretty hard for the higher-paid employees to max out.

There are ways companies can either have the test requirements waived or make reparations without having to issue refunds, but they cost the company some significant money, so many choose to handle it like mistershankly's employer does.

MDM

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Re: 401k That May Not Be Worth Investing
« Reply #6 on: August 09, 2015, 07:03:44 PM »
if the 401k plan does not pass a financial test at the end of the year (dependent on the amount of contribution by the majority of the employees and some other factors I'm not clear on), the people who max out there account get a partial refund (with taxes withheld) to balance things out.

This post of Cathy's may be relevant: http://forum.mrmoneymustache.com/welcome-to-the-forum/my-employers-403b-contribution/msg597884/#msg597884