Author Topic: To 401k or Not?????  (Read 2661 times)

drwest

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To 401k or Not?????
« on: March 30, 2018, 06:37:59 PM »
I'm am curious what most think in terms of contributing to a 401k if there is no company match??? There is a catch however. My company gives an automatic direct contribution without any contribution from myself.  So.....should I participate in my company 401k or would it be more beneficial to use that money to invest on my own outside of the 401k?

David

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Re: To 401k or Not?????
« Reply #1 on: March 30, 2018, 06:47:05 PM »
The tax deferral makes it worthwhile unless the plan choices are just completely abysmal.

MDM

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Re: To 401k or Not?????
« Reply #2 on: March 30, 2018, 06:52:24 PM »
I'm am curious what most think in terms of contributing to a 401k if there is no company match???
How well does the generic advice in Investment Order apply to your situation?

drwest

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Re: To 401k or Not?????
« Reply #3 on: March 30, 2018, 06:56:54 PM »
I have followed the investment order pretty well I think. Only debt is my house (done in 6 years with that), emergency fund full, Ira full for the year, and currently investing into the 401k account, plus a brokerage account with vanguard.  I understand the tax "savings" advantages of participating, but was wondering if it's that much of an advantage overall when I could use that money in a vanguard brokerage account.

DreamFIRE

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Re: To 401k or Not?????
« Reply #4 on: March 30, 2018, 07:15:12 PM »
It depends.  I find that having both pre-tax and post-tax investments helps during the drawdown phase balancing my non-taxed, capital gains taxes, and ordinary income taxes.  For the pre-tax at the time I add it to my 457B, I don't have to pay my state tax or 22% federal tax rate, and when I drawdown, I won't have to pay state and just have to pay 12% federal tax rate (lower bracket during retirement.)  But having both will allow me more control of my taxes as well as MAGI in terms of ACA PTC & CSR.  The funds you can invest in and even the plan administration fee can be a factor.
« Last Edit: March 30, 2018, 07:17:30 PM by DreamFIRE »

Basenji

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Re: To 401k or Not?????
« Reply #5 on: March 30, 2018, 07:22:23 PM »
I'm am curious what most think in terms of contributing to a 401k if there is no company match??? There is a catch however. My company gives an automatic direct contribution without any contribution from myself.  So.....should I participate in my company 401k or would it be more beneficial to use that money to invest on my own outside of the 401k?

David

Are you saying you will automatically have a 401k because the company will do a separate contribution for you? That's free money, no? What plans are in the 401k? What are the fees?

MDM

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Re: To 401k or Not?????
« Reply #6 on: March 30, 2018, 07:34:18 PM »
...was wondering if it's that much of an advantage overall when I could use that money in a vanguard brokerage account.
It will depend on the specific tax rates and investment fees.  For one example,
- 22% tax at contribution, 12% ordinary income tax and 0% LTCG tax at withdrawal
- 7%/yr growth with 2% from dividends and 5% from growth in all accounts
- 15% tax on annual dividends
- $10K available pre-tax
- Investments held 30 years, then withdrawn for spending

Given the above, after 30 years the spendable amount from $10K pre-tax is
- $67K if invested in a traditional account
- $54.6K if invested in a taxable account

In other words, you get ~28% more growth ($57K vs. $44.6k) in traditional vs. taxable.

Of course, change the assumptions and the answer may also change.  See the case study spreadsheet if you would like to try other scenarios.

drwest

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Re: To 401k or Not?????
« Reply #7 on: March 30, 2018, 08:22:32 PM »
DreamFIRE, thank you for your input.

Basenji, that is a correct assumption about my company. I receive a 15% direct contribution into my 401k from the company and the account is with fidelity and has some pretty decent options as well as the ability to use the fidelity brokerage link in the 401k account (this opens up almost all fund options that fidelity offers)

MDM, thank you for the detailed example and the spreadsheet link. I will be playing with that over the next couple of days.  Seems to me that the tax advantages of a 401k definitely payoff and make the account worth while.

Steeze

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Re: To 401k or Not?????
« Reply #8 on: March 31, 2018, 07:25:53 AM »
If you have the cash flow available after maxing your IRA for the year, shoot for maxing the 401k with 18.5k on top of whatever your company is contributing. If you still have excess cashflow, start plugging cash into your taxable brokerage account.

drwest

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Re: To 401k or Not?????
« Reply #9 on: April 01, 2018, 02:33:29 PM »
Steeze,

That's what I am doing at the moment. The main reason I decided to post the question was in response to what a "financial advisor" stated.  I fully agree with what everyone else has responded with and am on track to have my 401k continuations maxed out. I just wanted to make sure I wasn't missing something with my current investment plan.

SwitchActiveDWG

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Re: To 401k or Not?????
« Reply #10 on: April 01, 2018, 08:17:45 PM »
Steeze,

That's what I am doing at the moment. The main reason I decided to post the question was in response to what a "financial advisor" stated.  I fully agree with what everyone else has responded with and am on track to have my 401k continuations maxed out. I just wanted to make sure I wasn't missing something with my current investment plan.

Seems like you’re on the right track, the Investment order recommendation here is tried and true.. I’d be weary of your “financial advisor”. Since you put it in quotes..

drwest

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Re: To 401k or Not?????
« Reply #11 on: April 02, 2018, 02:41:50 PM »
SwitchactiveDWG,

This was a gentleman I just happen to be conversing with while on a business trip (during a flight) and he claimed he was a financial advisor. That was the reason for the quotes. Thank you for the encouragement to stay on my current course. I haven't changed anything in favor of what he suggested

MustacheAndaHalf

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Re: To 401k or Not?????
« Reply #12 on: April 02, 2018, 09:39:18 PM »
With Vanguard Total Stock Market (VTI) in taxable plus tax benefits, it might beat out some bad 401(k) plans.  VTI has about 1.8% yield, which is typically all in qualified dividends (15% tax rate).  To hold VTI in taxable, you might pay 0.27% per year in taxes.  Combined with it's expense ratio of 0.04%, VTI and IRS are eating 0.31% in fees.

The average mutual fund has a 1.00% expense ratio.  If your 401(k) is limited to 1% expense ratio choices, it might not be worth it.

MDM

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Re: To 401k or Not?????
« Reply #13 on: April 02, 2018, 09:46:52 PM »
With Vanguard Total Stock Market (VTI) in taxable plus tax benefits, it might beat out some bad 401(k) plans.  VTI has about 1.8% yield, which is typically all in qualified dividends (15% tax rate).  To hold VTI in taxable, you might pay 0.27% per year in taxes.  Combined with it's expense ratio of 0.04%, VTI and IRS are eating 0.31% in fees.

The average mutual fund has a 1.00% expense ratio.  If your 401(k) is limited to 1% expense ratio choices, it might not be worth it.
Correct - it might or might not.

See To 401k or not to 401k? That is the question. and links therein for more.

NoStacheOhio

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Re: To 401k or Not?????
« Reply #14 on: April 03, 2018, 06:30:59 AM »
DreamFIRE, thank you for your input.

Basenji, that is a correct assumption about my company. I receive a 15% direct contribution into my 401k from the company and the account is with fidelity and has some pretty decent options as well as the ability to use the fidelity brokerage link in the 401k account (this opens up almost all fund options that fidelity offers)

MDM, thank you for the detailed example and the spreadsheet link. I will be playing with that over the next couple of days.  Seems to me that the tax advantages of a 401k definitely payoff and make the account worth while.

If you have Brokeragelink access it's a no-brainer. Just dump it all into FSTVX unless one of the official plan funds is cheaper (for example, VIIIX).

Scandium

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Re: To 401k or Not?????
« Reply #15 on: April 03, 2018, 08:48:21 AM »
With Vanguard Total Stock Market (VTI) in taxable plus tax benefits, it might beat out some bad 401(k) plans.  VTI has about 1.8% yield, which is typically all in qualified dividends (15% tax rate).  To hold VTI in taxable, you might pay 0.27% per year in taxes.  Combined with it's expense ratio of 0.04%, VTI and IRS are eating 0.31% in fees.

The average mutual fund has a 1.00% expense ratio.  If your 401(k) is limited to 1% expense ratio choices, it might not be worth it.
For dividends sure, but I feel you're not accounting for the tax savings in the 401k? A dollar into 401k is just 75 cents into taxable. Compound over few decades that makes a difference.

Snowman99

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Re: To 401k or Not?????
« Reply #16 on: April 03, 2018, 01:02:00 PM »
My employer doesn't match, but I contribute anyway to the maximum because the tax savings are still beneficial.  Granted, I also max out the Roth.  If I didn't have enough to cover both, I would contribute to the IRA first and then to the 401k second.  If you can swing even more than that, then I would put the rest in a taxable account, maybe throw a little (but not too much) in the 529 if you have any kiddos.