Author Topic: 401k vs roth vs traditional (institutional mutual funds), etc  (Read 2502 times)

gene parmesan

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401k vs roth vs traditional (institutional mutual funds), etc
« on: August 17, 2014, 06:00:06 PM »
Quick question I have regarding investment vehicles. I have the opportunity to either max my 401k or an IRA (or partial to both). In the 401k, I have access to an institutional total stock market fund that has an expense ratio of 0.035% and an SP 500 index fund with a 0.02% expense ratio. I get a really nice match with my company and profit sharing. I am 23 right now and have put everything in the total market fund and am going to leave it there untouched for many years to come. A common idea is to put money into a roth IRA for the flexibility it allows (I also have access to the roth 401k as well). My only concern with that is in the roth IRA, I wouldn’t have access to the institutional index funds. I would have access, of course to itot (0.07% expense ratio and commission free) and total market mututal fund (0.10% for $2500+ and 0.05% for $10k+).

Do you think the flexibility of the roth IRA is worth the extra expense ratio? Would you stick with 401k until it's maxed or go to the match on the 401k then the rest into an IRA?

http://www.begintoinvest.com/expense-ratio-calculator/

I will be putting about $25k per year to the total market per year with the match, profit sharing, and maxed hsa. The below link makes me think traditional is probably more efficient but it's hard to know if tax rates will change in the next many years.

http://www.madfientist.com/traditional-ira-vs-roth-ira/

not_a_trex

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Re: 401k vs roth vs traditional (institutional mutual funds), etc
« Reply #1 on: August 17, 2014, 08:29:16 PM »
Honestly, I think those expense ratios are so low to begin with that at your age choosing to go out to eat only a few times this year will have a bigger impact on your financial situation. I wouldn't get hung up on the expense ratios. That being said, here are a few things you might want to know before making a choice.

- The 401K has ERISA protections*. So if you get sued for some reason, there are certain circumstances where the money in your 401K cannot be touched.
- You can still make your 2014 IRA contribution until April 15, 2015. 401K contributions must come from a paycheck during the same year of contribution.

The bigger question is which kind of 401K or IRA do you put your money into?

In the IRA case, is your AGI so high that you cannot make deductible contributions to a traditional IRA? If that is the case then you might consider making a backdoor roth contribution.

http://www.bogleheads.org/wiki/Backdoor_Roth_IRA

Out of curiosity, are you able to make after-tax (not to be confused with Roth) contributions to your 401K? Another option to consider is maxing your pretax/Roth 401K and then continuing to make after-tax contributions that could eventually be rolled over into a Roth 401k or Roth IRA.

*I am not a legal or financial professional. Please consult your lawyer or financial advisor for professional advice.

gene parmesan

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Re: 401k vs roth vs traditional (institutional mutual funds), etc
« Reply #2 on: August 18, 2014, 09:34:49 PM »
I still don't make enough money yet that I need to do the backdoor roth. I don't think I can make after tax contributions to my 401k, although I can make roth contributions to the 401k. I didn't really think about the april 15th rule for the IRA. I guess with the expenses, you're right. even on $10k i'm saved now, it's only 7 bucks a year at 7 bps. I think I'm going to focus more on the MMM articles revolving around making life less ridiculously expensive

matchewed

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Re: 401k vs roth vs traditional (institutional mutual funds), etc
« Reply #3 on: August 19, 2014, 06:25:00 AM »
You can only consider taxes as they are, not as they will be. You don't know the future.

I'd go with maxing tax deferred while at a young age. You may encounter income limits that put you out of getting the benefit of a traditional IRA and can then use a Roth IRA.

You can open an IRA or Roth IRA with any company. You are not limited by the funds with the account you have. Feel free to jump ship to another company that suits your desire for expense ratio and types of funds. That being said none of the fees you've mentioned are bad.

What is your current income? That will influence which types of accounts to use rather than future unknown taxation.

gene parmesan

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Re: 401k vs roth vs traditional (institutional mutual funds), etc
« Reply #4 on: August 19, 2014, 06:07:27 PM »
My salary is currently about $55k. I get a 7% match and 10% profit sharing each year. I think this puts me in the 15% tax bracket but I'm not really sure

matchewed

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Re: 401k vs roth vs traditional (institutional mutual funds), etc
« Reply #5 on: August 20, 2014, 08:33:22 AM »
My salary is currently about $55k. I get a 7% match and 10% profit sharing each year. I think this puts me in the 15% tax bracket but I'm not really sure

Depends on what you mean by profit sharing and what sort of deductions are available to you. Is it straight up cash or stocks or...

Given that salary I'd still go with max tax deferred. It just works out math wise to be superior for a FIRE attempt.