Author Topic: American Funds Simple IRA advice  (Read 2106 times)

zack

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American Funds Simple IRA advice
« on: December 18, 2015, 03:04:06 PM »
First time poster hoping for some advice.  I'm sure I'll end up leaving out some information, so if you need any clarification please let me know.

My situation is as follows: I am currently in my mid 20's.  I have always been frugal, but only in the last couple of years have focused that on early retirement and having a defined savings goal.  I maxed my Vanguard Roth IRA in 2014 and 2015 and will max it for 2016.  Through my employer I have a Simple IRA plan with American Funds that matches up to 3% of my salary.  I have contributed 3% to this the whole time I've had it to get the employer match.  I have avoided adding additional money to it due to the fees with American Funds and have instead added that money to a taxable account at Vanguard.

I have 3 questions:

1. Is it worth contributing the IRS maximum of $12,500 to the Simple IRA in 2016?  Deducting $12,500 from my taxable income does not change what tax bracket I am in, but my gut feeling is that this would be beneficial even though I'm stuck with American Funds, but don't know how the math works out. I'm in the 25% tax bracket.

2. Do you have any recommendations on specific funds within American Funds?  I let the adviser choose the funds when I started the account, so it's currently in around 78% American Balanced and 22% Capital Income Builder.  I instructed him today to put all new contributions into the Amcap fund which seems like a better fit considering my age and time until retirement, but didn't instruct him to do anything with any already invested funds.  Is the Amcap fund good for somebody who is young and not risk averse?  Should I do anything with the already invested money?

3. If I do try to max out the Simple IRA is it possible that I will over contribute?  My adviser states that it will stop the contributions at $12,500, but I am not super confident in his knowledge.  Is there any advantage to trying to max this out as quickly as possible?  If I do max it early and am not contributing every payroll is there any chance that causes me to miss any employer contributions?

I really appreciate any insight that can be provided.  This forum has been very helpful in helping me streamline my life and am thankful for any responses I'll get.

dandarc

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Re: American Funds Simple IRA advice
« Reply #1 on: December 18, 2015, 03:16:09 PM »
If you're in the 25% bracket, you should consider doing a traditional IRA rather than Roth.

What are the fees for the funds your SIMPLE?  American Funds usually range from almost-acceptable to absolutely terrible on the fee-front, depending on which share class you're in.  Anyway, I'd max it out, as early as you can.  Because in the 25% bracket, you're saving over $3K in taxes.

Also - it appears that you can roll your SIMPLE money wherever you want once you are in it for 2 years, if this article is correct:

http://www.oregonlive.com/finance/index.ssf/2012/06/simple_ways_out_of_fee-heavy_w.html

If that's the case, I'd max out the SIMPLE, then roll ASAP over to a tIRA at Vanguard to get into the funds I really wanted.

Indexer

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Re: American Funds Simple IRA advice
« Reply #2 on: December 18, 2015, 03:52:24 PM »
As noted with American Funds the share class matters a LOT.  An "A" share can carry a 4-5% fee just to get in it and recurring annual fees in the 0.6-1% range. Certain R and F shares on the other hand can have no up front cost and recurring costs in the 0.4% range.

One thing to check on is whether this is a pooled SIMPLE or whether it is possible to set up your own account that the employer could contribute to. If it is possible to set up your own SIMPLE then you could set up a SIMPLE at Vanguard and roll the existing SIMPLE into it. I doubt this is the case, but it is worth looking into because of the potential savings. If it is a smaller company it can also be worth asking if they have ever shopped other providers. A lot of smaller companies don't spend a lot of time looking at this, and if you point out they can drastically cut costs it might peak their attention.

Funds:  What is your advisor doing?  Why would he put someone in their mid 20s into a portfolio so heavy in American Balanced fund? You have the portfolio of someone in their late 50s wanting to retire at 65. The portfolio is also really heavy in US large cap stocks and light in small cap and international.

Your feeling that Amcap is more suitable to you sounds like it is spot on. If you are open to risk, and young Amcap makes a lot more sense than the balanced fund. Now I would suggest adding some international stocks to help balance that Amcap is US heavy. Amcap is actually in pretty balanced for large VS small cap.
« Last Edit: December 18, 2015, 03:55:09 PM by Indexer »

zack

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Re: American Funds Simple IRA advice
« Reply #3 on: December 18, 2015, 05:21:13 PM »
I appreciate both replies!  I will definitely research a traditional IRA further to see if it makes more sense than a Roth in my situation.

It is a very small company(less than 30 employees), so I plan on suggesting looking into something with lower fees to the owner of our company.  Are there major reasons that a company would offer a Simple IRA with a high fee company like American Funds instead of offering a 401k through Fidelity or something similar?  If there are not huge downsides to the company I may be able to convince them to move in this direction.

As far as the funds go I never had any confidence in the adviser even in the beginning.  I specifically told him I was not risk averse at all and to be as aggressive as possible considering my age.  I never gave which fund a ton of thought because I was just doing enough to get the employer match and have had okay returns.  I finally decided to look into the details(should have much sooner) and noticed the return seemed low and that there was a much higher bond percentage than I would have expected being young and risk averse.

I feel I'm somewhat overexposed internationally in my other accounts, so being US heavy in Amcap seemed appealing as well.

dandarc

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Re: American Funds Simple IRA advice
« Reply #4 on: December 18, 2015, 05:31:32 PM »
Usually at a small company, the owner is very busy - s/he wants to do right by the employees and provide a retirement plan, but doesn't have the time or inclination to research all of the available options.  This might get mentioned in a meeting with the guy that set the owner up in some other funds a while back or sold the owner some life-insurance.  Boom, your company now has an American Funds SIMPLE.

Basically, the advisor (note the spelling - in a lot of states an 'adviser' has fiduciary duty and an 'advisor' does not) is a salesman and does a good job of selling.

Indexer

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Re: American Funds Simple IRA advice
« Reply #5 on: December 18, 2015, 06:52:45 PM »
Not so sure on adviser VS advisor and the fiduciary duty. Some just spell it different ways. Normally the fiduciary duty comes down to whether they are a broker/agent or investment advisor. I know advisors who spell it advisor who are fiduciaries and have clients in all 50 states.

Broker = commissions. They are salesmen. They sell products that pay them to sell them. Examples: Edward Jones, Raymond James. Now a broker could be a fiduciary, but that is highly unlikely since it is asking for a lawsuit.

Investment advisor= normally a % of assets fee. Since they get paid by the client directly based on the amount invested or sometimes the time worked(ex. $100/hr) they are normally fiduciaries. Examples:  Vanguard's new advice offering, most smaller independent wealth management companies.

Some of your Merrill Lynch/Morgan Stanley types will act as both.


The company probably has an expensive plan because the manager isn't an investment expert. They reached out to someone they thought was an expert. It was probably someone who reached out to them, or someone who was at a city chamber of commerce event. Your Edward Jones/Raymond James type brokers love to meet people that way. Vanguard doesn't do that, and they don't advertise very much. They don't need to. The product(low cost index funds) tend to sell themselves to people who have done the research or people hear about Vanguard from other people who already did the research(MMM).

Joel

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Re: American Funds Simple IRA advice
« Reply #6 on: December 19, 2015, 11:55:52 PM »
Some simple iras allow you to choose the custodian. I was able to open a simple ira at vanguard for my dad and now his contributions and his employee contributions all go into his low fee simple ira at vanguard.