Is our next step 401k with bad options or taxable?

[Physicsteacher]

This spring I managed to sell my husband on the importance of starting to invest for retirement in addition to saving for a house downpayment. Even with our current, admittedly unmustachian savings rates, next year we should be able to max out both Roths, finish off the house fund, and still have more money to invest.

Ideally, our next step would be to use other tax advantaged space for our investments, but the only remotely reasonable option in his 401(k) is a "LargeCap S&P 500 Index Separate Account" with an expense ratio of 0.72% and no employer match. I'm going to look into 403(b) options from my school district and investigate whether teachers in my state can participate in the state employee 457 plan, which is excellent, but if I can't do the 457 and it turns out the 403(b) options are all dreadful annuities, would it make sense to pay the ridiculous expense ratio to use my husband's 401(k) or should we just open a taxable account at Vanguard? We're in the 15% marginal federal tax bracket.

[seattlecyclone]

0.72% isn't great, but it also isn't all that terrible. Remember that you can roll that money into an IRA the next time your husband changes jobs, and invest it in VTSAX or whatever other low-fee fund you like. Unless he plans to remain with the same company for a couple of decades, the tax benefit you get from deferring that income will likely outweigh the high expense ratio he pays on that money while he's there.

[MDM]

...would it make sense to pay the ridiculous expense ratio to use my husband's 401(k) or should we just open a taxable account at Vanguard? We're in the 15% marginal federal tax bracket.

Great question.  See similar discussion at http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/.  There are links to a couple of evaluation tools in that thread you could use to evaluate your specific situation.

[Vilgan]

This spring I managed to sell my husband on the importance of starting to invest for retirement in addition to saving for a house downpayment. Even with our current, admittedly unmustachian savings rates, next year we should be able to max out both Roths, finish off the house fund, and still have more money to invest.

Ideally, our next step would be to use other tax advantaged space for our investments, but the only remotely reasonable option in his 401(k) is a "LargeCap S&P 500 Index Separate Account" with an expense ratio of 0.72% and no employer match. I'm going to look into 403(b) options from my school district and investigate whether teachers in my state can participate in the state employee 457 plan, which is excellent, but if I can't do the 457 and it turns out the 403(b) options are all dreadful annuities, would it make sense to pay the ridiculous expense ratio to use my husband's 401(k) or should we just open a taxable account at Vanguard? We're in the 15% marginal federal tax bracket.

Tax sheltered space is a huge advantage that you can't go back later and take advantage of if you pass it up now. Taxes on dividends and the LTCG when you sell is going to almost certainly outweigh the ER you would be paying in the 401k/403b.

I was slow to take advantage of tax sheltered space a few years ago which I now regret. Don't make the same mistake!

[JinBoston]

There is also the fact that 401k assets are sheltered from bankruptcy and lawsuits.

[Jeremy E.]

http://jlcollinsnh.com/2013/06/28/stocks-part-viii-b-should-you-avoid-your-companys-401k/