Author Topic: MAX 401k or create a taxable account?  (Read 4034 times)

OneCoolCat

  • Bristles
  • ***
  • Posts: 439
  • Age: 33
  • Location: SoFla
MAX 401k or create a taxable account?
« on: January 10, 2015, 07:50:00 PM »
So my jobs 401k plan is terrible.  All super high expense ratio actively managed funds.  the lowest expense ratio is 1.98% and all the other options start out at 2.4%with an average of 2.5%.

I really rather invest in some index funds but that's not an option for my 401k.  I will at the minimum get my employers match of 5%, but what should I do about my remaining stash?  I was thinking of putting it into the crappy 401k funds and roll it over ASAP.  Can I roll it over into a fund of my choosing or do I actually have to roll it over into a fund my employer offers? 

The other option is to dump it into a taxable account (vanguard index fund), but I wouldn't be taking advantage of the tax deferment.  What do you think would be best?  IRA is already maxed.

rmendpara

  • Pencil Stache
  • ****
  • Posts: 602
Re: MAX 401k or create a taxable account?
« Reply #1 on: January 10, 2015, 08:08:36 PM »
Does your employer offer a match?

If so, I would contribute just enough to get the maximum match. The fund choices appear to not be very good.

I would invest the rest in a taxable account.

As a side note, you cannot roll over your funds in the 401k until you leave your employer.

Dodge

  • Pencil Stache
  • ****
  • Posts: 790
Re: MAX 401k or create a taxable account?
« Reply #2 on: January 10, 2015, 08:43:20 PM »
So my jobs 401k plan is terrible.  All super high expense ratio actively managed funds.  the lowest expense ratio is 1.98% and all the other options start out at 2.4%with an average of 2.5%.

I really rather invest in some index funds but that's not an option for my 401k.  I will at the minimum get my employers match of 5%, but what should I do about my remaining stash?  I was thinking of putting it into the crappy 401k funds and roll it over ASAP.  Can I roll it over into a fund of my choosing or do I actually have to roll it over into a fund my employer offers? 

The other option is to dump it into a taxable account (vanguard index fund), but I wouldn't be taking advantage of the tax deferment.  What do you think would be best?  IRA is already maxed.

You are eligible to contribute $18,000 this year into your 401k account.  Once this year is over, that $18,000 in tax deferred money will be permanently gone.  I recommend picking their cheapest index fund, and going in 100%.  You'll end up saving about $5,400 in tax deferment the first year.  If we assume the fund grows 9% a year, it will take 10 years for the 2% fee to catch up to the tax savings from that first year.  By then you could've left jobs and moved the funds over to an IRA at Vanguard, where you can get into cheaper funds. By then they might have added some cheaper funds to the 401k for you to choose.

10 years is a long time, I'd still max it out.

OneCoolCat

  • Bristles
  • ***
  • Posts: 439
  • Age: 33
  • Location: SoFla
Re: MAX 401k or create a taxable account?
« Reply #3 on: January 10, 2015, 08:48:09 PM »
So my jobs 401k plan is terrible.  All super high expense ratio actively managed funds.  the lowest expense ratio is 1.98% and all the other options start out at 2.4%with an average of 2.5%.

I really rather invest in some index funds but that's not an option for my 401k.  I will at the minimum get my employers match of 5%, but what should I do about my remaining stash?  I was thinking of putting it into the crappy 401k funds and roll it over ASAP.  Can I roll it over into a fund of my choosing or do I actually have to roll it over into a fund my employer offers? 

The other option is to dump it into a taxable account (vanguard index fund), but I wouldn't be taking advantage of the tax deferment.  What do you think would be best?  IRA is already maxed.

You are eligible to contribute $18,000 this year into your 401k account.  Once this year is over, that $18,000 in tax deferred money will be permanently gone.  I recommend picking their cheapest index fund, and going in 100%.  You'll end up saving about $5,400 in tax deferment the first year.  If we assume the fund grows 9% a year, it will take 10 years for the 2% fee to catch up to the tax savings from that first year.  By then you could've left jobs and moved the funds over to an IRA at Vanguard, where you can get into cheaper funds. By then they might have added some cheaper funds to the 401k for you to choose.

10 years is a long time, I'd still max it out.

That's what I was leaning towards, just for the tax benefits.  Its such a shame my office has such a terrible selection of funds.

Dodge

  • Pencil Stache
  • ****
  • Posts: 790
Re: MAX 401k or create a taxable account?
« Reply #4 on: January 10, 2015, 08:53:01 PM »
So my jobs 401k plan is terrible.  All super high expense ratio actively managed funds.  the lowest expense ratio is 1.98% and all the other options start out at 2.4%with an average of 2.5%.

I really rather invest in some index funds but that's not an option for my 401k.  I will at the minimum get my employers match of 5%, but what should I do about my remaining stash?  I was thinking of putting it into the crappy 401k funds and roll it over ASAP.  Can I roll it over into a fund of my choosing or do I actually have to roll it over into a fund my employer offers? 

The other option is to dump it into a taxable account (vanguard index fund), but I wouldn't be taking advantage of the tax deferment.  What do you think would be best?  IRA is already maxed.

You are eligible to contribute $18,000 this year into your 401k account.  Once this year is over, that $18,000 in tax deferred money will be permanently gone.  I recommend picking their cheapest index fund, and going in 100%.  You'll end up saving about $5,400 in tax deferment the first year.  If we assume the fund grows 9% a year, it will take 10 years for the 2% fee to catch up to the tax savings from that first year.  By then you could've left jobs and moved the funds over to an IRA at Vanguard, where you can get into cheaper funds. By then they might have added some cheaper funds to the 401k for you to choose.

10 years is a long time, I'd still max it out.

That's what I was leaning towards, just for the tax benefits.  Its such a shame my office has such a terrible selection of funds.

Yes, I've been there, definitely a shame.  But I've heard of people successfully getting HR to add some cheaper funds into their 401k, don't give up yet :)

By the way, to answer your question:

"Can I roll it over into a fund of my choosing or do I actually have to roll it over into a fund my employer offers?"

When you leave the job, you can roll it over anywhere you wish.  That's a big reason why it's important to max out this year's $18,000, so you can one day roll it over to an IRA at Vanguard :)

OneCoolCat

  • Bristles
  • ***
  • Posts: 439
  • Age: 33
  • Location: SoFla
Re: MAX 401k or create a taxable account?
« Reply #5 on: January 10, 2015, 09:18:33 PM »
Once I leave the job I can roll my 401k over into an IRA and still contribute my 5.5k for that year?  Interesting...  I never knew that.

OneCoolCat

  • Bristles
  • ***
  • Posts: 439
  • Age: 33
  • Location: SoFla
Re: MAX 401k or create a taxable account?
« Reply #6 on: January 11, 2015, 10:27:48 AM »
I have another question.  When I look up the funds offered to me in my 401k, I see a discrepancy in the expense ratios on different sites.  For instance, take the fund that I will most likely invest heavily in, Massachusetts Invetors Trust R2 Large Growth Fund (MITIX).  My handbook says it has an Expense Ratio of 0.98% (which is .50 lower than any of the offered funds) and a "program and administrative charge" of 1.0% for a grand total of 1.98% total gross expense ratio.  I'm used to looking at the espense ratios on fidelity and vanguard and this, while being significantly lower than the other options, still seems extremely high.  Is there a 1% program and administrative charge on top of the Vanguard and Fidelity funds that's just not listed on their website?

Morningstar says the expense on MITIX is 0.47%, way lower than the Mass Mutual ER of 1.98%.  Vanguard says .48, I don't understand why my 401k handbook says the "total gross annual expense ratio" is 1.98%.

Dodge

  • Pencil Stache
  • ****
  • Posts: 790
Re: MAX 401k or create a taxable account?
« Reply #7 on: January 11, 2015, 10:55:12 AM »
I have another question.  When I look up the funds offered to me in my 401k, I see a discrepancy in the expense ratios on different sites.  For instance, take the fund that I will most likely invest heavily in, Massachusetts Invetors Trust R2 Large Growth Fund (MITIX).  My handbook says it has an Expense Ratio of 0.98% (which is .50 lower than any of the offered funds) and a "program and administrative charge" of 1.0% for a grand total of 1.98% total gross expense ratio.  I'm used to looking at the espense ratios on fidelity and vanguard and this, while being significantly lower than the other options, still seems extremely high.  Is there a 1% program and administrative charge on top of the Vanguard and Fidelity funds that's just not listed on their website?

Morningstar says the expense on MITIX is 0.47%, way lower than the Mass Mutual ER of 1.98%.  Vanguard says .48, I don't understand why my 401k handbook says the "total gross annual expense ratio" is 1.98%.

Just yesterday I was looking at a 401k package that offers the Vanguard Total Stock Index Fund...at a 1.49% ER.  If you get this fund directly at Vanguard it's a 0.05% ER.  I own this same fund in a Vanguard account, and can confirm my ER is only 0.05%, there are no hidden fees that bring it up to 1.49%.  The 401k management company adds their own fees on top.

OneCoolCat

  • Bristles
  • ***
  • Posts: 439
  • Age: 33
  • Location: SoFla
Re: MAX 401k or create a taxable account?
« Reply #8 on: January 11, 2015, 11:11:35 AM »
This is absurd.  So if one to use VTSAX as their IRA they would only have a .05% ER, total.  But your 401k provider can charge you 1.49% for it?  How is that legal?

Maybe my 1.98% total annual ER isn't SO bad...
« Last Edit: January 11, 2015, 11:35:39 AM by OneCoolCat »

dividendman

  • Handlebar Stache
  • *****
  • Posts: 1262
  • Age: 38
Re: MAX 401k or create a taxable account?
« Reply #9 on: January 11, 2015, 01:02:53 PM »
This is absurd.  So if one to use VTSAX as their IRA they would only have a .05% ER, total.  But your 401k provider can charge you 1.49% for it?  How is that legal?

Maybe my 1.98% total annual ER isn't SO bad...

Yes it is absurd. But this is America! Those fees are usually excused as "administration" of the 401k plan.