Author Topic: Questions on my first (Roth) 401K  (Read 4841 times)

braingrenades

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Questions on my first (Roth) 401K
« on: April 24, 2016, 09:03:50 PM »
I've signed up for my first 401K and will start with taking around 20% of my paycheck with my employer matching 4%. Honestly that 20% will probably be between $100-$200. Details on the 401K: I can save between 1% and 90% of my per-pay-period pay into the plan and the company will match the first 3% plus 50% of the next 2% (so if I save 5% of my salary the company will contribute 4% - maximum contribution limit for me is $18,000 which probably will not happen given my tiny paychecks since I only work PT). I also chose the Roth style 401K where the money going in is already taxed.  Just looking for opinions on the following:

1) I picked the Roth style 401K because I imagine taxes will rise in the future but I've also heard an argument about being in a lower tax bracket when older. On do not own a home but plan to purchase one in the future if 401K can be borrowed against or used as any type of collateral.  Any preferences between the regular 401K and Roth 401K?

2) I've diversified into 5 difference funds. 10% goes to 4 of them and 50% goes to a Large Cap Growth Fund. Fees range from $5.90 to $10.30 per $1,000. There's not too much money going into all of these so is this too much diversification, too little, or just right? Do those fees seem high given the amount of money I'll be contributing?

3) Should I try to go even higher than 20% of my pay or any opinions about adjusting it depending on my financial needs?

4) Anything else I'm missing here?

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seattlecyclone

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Re: Questions on my first (Roth) 401K
« Reply #1 on: April 24, 2016, 09:17:39 PM »
1) I picked the Roth style 401K because I imagine taxes will rise in the future but I've also heard an argument about being in a lower tax bracket when older. On do not own a home but plan to purchase one in the future if 401K can be borrowed against or used as any type of collateral.  Any preferences between the regular 401K and Roth 401K?

The main thing to consider is whether your own personal tax bracket will be higher now or when you retire. If you expect your own personal tax rate to be higher in retirement, Roth accounts are better. If you expect your tax rate to go down, traditional accounts are better.

Keep in mind that if you retire with 100% of your savings in Roth accounts, none of that money will count as income when you withdraw it, so you'll pay 0% tax in retirement. If your tax bracket is higher than 0% right now, a traditional 401(k) would be a better idea in this situation.

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2) I've diversified into 5 difference funds. 10% goes to 4 of them and 50% goes to a Large Cap Growth Fund. Fees range from $5.90 to $10.30 per $1,000. There's not too much money going into all of these so is this too much diversification, too little, or just right? Do those fees seem high given the amount of money I'll be contributing?

What are the funds you're buying? Buying lots of different funds does not necessarily mean you'll be more diversified if the funds are invested in mostly the same thing (five different US stock funds, for example). Diversify across asset classes. Decide what percentage of your money you want in stocks, what percentage you want in bonds, and what percentage of each of these you want in US versus international assets. Once you have decided this, try to find one fund with low fees that invests in that type of assets.

These fees on your funds aren't completely outrageous, but they are on the high side. Do you have any funds available that charge less than 0.5% ($5.00 per $1,000)? What are they?

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3) Should I try to go even higher than 20% of my pay or any opinions about adjusting it depending on my financial needs?

Take a look at MDM's list (copied below) for a good basic priority for where you should put extra money beyond what you need to pay for basic expenses:

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WHAT
0. Establish an emergency fund to your satisfaction
1. Contribute to 401k up to any company match
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.
3. Max HSA
4. Max Roth or Traditional IRA based on income level
5. Max 401k (if 401k fees are lower than available in an IRA, swap #4 and #5)
6. Fund mega backdoor Roth if applicable
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.
8. Invest in a taxable account with any extra.

WHY
0. Give yourself at least enough buffer to avoid worries about bouncing checks
1. Company match rates are likely the highest percent return you can get on your money
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.
4. Rule of thumb: trad if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between
5. See #4 for choice of traditional or Roth for 401k
6. Applicability depends on the rules for the specific 401k
7. Again, take the risk-free return if high enough
8. Because earnings, even if taxed, are beneficial

Everyone's situation is different, but this is a good general guideline. Based on the high fees in your 401(k), you may want to start out with whatever contribution you need to get the maximum match, then contribute to an IRA where you can get some cheaper investments, and then if you still have money left to save you can increase your 401(k) contributions.

Good luck!

braingrenades

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Re: Questions on my first (Roth) 401K
« Reply #2 on: April 24, 2016, 10:18:09 PM »
The main thing to consider is whether your own personal tax bracket will be higher now or when you retire. If you expect your own personal tax rate to be higher in retirement, Roth accounts are better. If you expect your tax rate to go down, traditional accounts are better.

Keep in mind that if you retire with 100% of your savings in Roth accounts, none of that money will count as income when you withdraw it, so you'll pay 0% tax in retirement. If your tax bracket is higher than 0% right now, a traditional 401(k) would be a better idea in this situation.

My dream scenario is that I'm in a higher tax bracket with passive income from some sort of income streams in addition to real estate (possibly income real estate).

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What are the funds you're buying? Buying lots of different funds does not necessarily mean you'll be more diversified if the funds are invested in mostly the same thing (five different US stock funds, for example). Diversify across asset classes. Decide what percentage of your money you want in stocks, what percentage you want in bonds, and what percentage of each of these you want in US versus international assets. Once you have decided this, try to find one fund with low fees that invests in that type of assets.

These fees on your funds aren't completely outrageous, but they are on the high side. Do you have any funds available that charge less than 0.5% ($5.00 per $1,000)? What are they?

Looks like $5.90 is one of the cheapest. My picks are:
JPMorgan Large Cap Growth Fund (R6) - 50% - $5.90 annual operating expense per $1,000
Oppenheimer Money Market Fund (A) - 10% - $6.50 annual operating expense per $1,000
Fidelity Advisor Health Care Fund (I) - 10% - $7.90 annual operating expense per $1,000
Fidelity Advisor Real Estate Fund (I) - 10% - $8.50 annual operating expense per $1,000
Wells Fargo Small Company Growth Fund (I) - 10% - $10.30 annual operating expense per $1,000

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Take a look at MDM's list (copied below) for a good basic priority for where you should put extra money beyond what you need to pay for basic expenses...
 

Good stuff.

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Everyone's situation is different, but this is a good general guideline. Based on the high fees in your 401(k), you may want to start out with whatever contribution you need to get the maximum match, then contribute to an IRA where you can get some cheaper investments, and then if you still have money left to save you can increase your 401(k) contributions.

Honestly the reason I've put off a 401K so long is because I prefer to pick stocks on my own vs. paying fees for someone else to pick what may or may not be winners/losers. I do have a Roth IRA which I've done fairly well with, although I haven't always contributed the max per year.  Another thing I was considering is to just put money in the Oppenheimer Money Market Fund to take advantage of the $ match and minimize risk on losing based on how the stocks performed.

MDM

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Re: Questions on my first (Roth) 401K
« Reply #3 on: April 24, 2016, 10:19:51 PM »
The main thing to consider is whether your own personal tax bracket will be higher now or when you retire. If you expect your own personal tax rate to be higher in retirement, Roth accounts are better. If you expect your tax rate to go down, traditional accounts are better.

Keep in mind that if you retire with 100% of your savings in Roth accounts, none of that money will count as income when you withdraw it, so you'll pay 0% tax in retirement. If your tax bracket is higher than 0% right now, a traditional 401(k) would be a better idea in this situation.
+1

Another reason to consider the traditional instead of Roth, even at lower income: how close are you to the various saver's credit tiers?  See form 8880 if unsure.  Both Roth and traditional contributions count, but using traditional may help them "count more" - see the form for details.  Ask if it isn't clear.

firelight

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Re: Questions on my first (Roth) 401K
« Reply #4 on: April 25, 2016, 12:35:59 AM »
+1 for traditional 401k. Also if you are putting in only $100-$200 per paycheck, I'd suggest just putting it into one fund (preferably life cycle fund) so you don't end up paying too much in fees. Also I'd suggest following the MDM list too - very useful :)

braingrenades

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Re: Questions on my first (Roth) 401K
« Reply #5 on: April 25, 2016, 08:11:47 AM »
Thanks again for all the feedback! I watched some videos on YT and this one kind of helped me put the 401K in perspective. I went ahead and updated my account. My payroll deduction will be 5% in order to get the full 4% match from my employer. I also changed the deduction to pretax vs. Roth and chose Vanguard 500 Index Fund (Adm) which only has an operating expense of $0.50 per $1,000.
« Last Edit: April 25, 2016, 08:14:34 AM by braingrenades »