Author Topic: Are my 401k fees high enough to invest in a non-tax advantaged account instead?  (Read 2928 times)

ihasamoney

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Next year we plan to increase our savings amount by $7,500.  At first I was going to increase my 401k by 7,500 to reduce taxable income, but when I looked at the 401k fees I am now second guessing this.  I would consider paying down the mortgage with this money as an option, though I'm not against keeping my mortgage for the full term if it is more beneficial to put my money elsewhere. 

General Info
- Household income: 145k
- Mortgage: 128k left for 15 years at 3.25%
- No other debt
- Emergency fund of 50k, too much for us which is why we will increase automatic savings next year

Retirement Info
- Spouse's 401k: maxed out - in vanguard target funds with max $300 annual admin fee; 13,000 traditional 401k and 5,000 Roth 401k per year
- Spouse's Roth IRA: maxed out
- My Roth IRA: maxed out
- My 401k: ~6,600/yr - just to get the match (my company's match amount varies each year, last year I received ~500). In vanguard funds with low expense ratios but a management fee of .9% with no max amount of fees paid is attached to my balance - maybe this is normal but it is much higher than my spouse's 401k
- Currently do not have any other investment accounts, all investments are in retirement accounts, so it may make sense to open one
- Total retirement savings currently ~200k
-Current goal of $2m for FI, though I'm fairly new to that concept so this could change as I learn more.

What do I do with the $7,500/year savings increase?
- my 401k despite the higher fees
- open investment account
- pay down mortgage
- something amazing I don't know about yet

Looking at this it seems like I should consider switching my husband's 5k Roth 401k portion back to traditional 401k as well??

Thanks in advance!

wtjbatman

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Even with .9% account fees tacked on to Vanguard's low index fund fees, it's still worth it to max out the 401k. Especially with that household income and tax bracket you must be in.

MDM

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What do I do with the $7,500/year savings increase?
- my 401k despite the higher fees
- open investment account
- pay down mortgage
- something amazing I don't know about yet

Looking at this it seems like I should consider switching my husband's 5k Roth 401k portion back to traditional 401k as well??

ihasamoney, welcome to the forums.

Regarding investments, a good rule of thumb is "tax-advantaged beats taxable."  In other words, why not avoid the incremental 25% you are paying now by adding more to a traditional 401k?  Or, why not avoid X% (whatever X>0 is) later by adding more to a Roth 401k?

Your mortgage is at a relatively low rate so, statistically, you are better off to keep paying the minimum on it.

The only "amazing" thing that comes to mind is an HSA, if you will have a HDHP in 2015.

Answering the Roth vs. traditional question well requires an estimate of the post-retirement tax rate for 401k withdrawals vs. your current (25%?) marginal tax rate.

dandarc

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.9% puts your expense ratios at what, 1.5% at most?  Not good, but not nearly bad enough to outweigh the tax savings (25% bracket?), particularly if you're not on a "work for the next 30-40 years" plan.  Once you separate, you can roll it over to an IRA and escape that admin fee.  Some plans even allow in-service rollovers, so check into that.

ihasamoney

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Thanks for the responses! I really appreciate your perspectives. I have been saving for retirement for several years without really having and end goal in mind.  I never even thought it could be possible to stop working before 65, but a friend turned me on to this community and now I'm trying to figure out our path forward.

I looked at my 2013 taxes and I am definitely in the 25% bracket, and that was with me taking three months of unpaid maternity leave, so our tax burden will be quite a bit higher moving forward.

My husband is a teacher so we have great insurance with no CDHP option.

For some reason giving up .9% to the plan admin feels wrong, but when you weigh it against the taxes I would pay on that money it makes sense. 

I will see if my plan allows in-service rollovers.

Thanks again for responding to a first-time poster!!

Heckler

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Do Americans not have the option to open an independant non taxable account?

MDM

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Do Americans not have the option to open an independant non taxable account?
Yes, that option exists and is called an Individual Retirement Account (IRA).  The problem is the maximum contribution to an IRA is only $5,500/yr, while an employer-sponsored plan (called a 401k due to the paragraph identifier in the law that allows these) allows $17,500/yr.

The above isn't strictly true for everyone, but close enough....

Heckler

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Huh, go figure.  That explains all the taxable account talk. Thanks.