Author Topic: Requesting Help with my Retirement Elections / 2016 Plan  (Read 3826 times)

FrugalRubles

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Requesting Help with my Retirement Elections / 2016 Plan
« on: December 22, 2015, 07:04:35 AM »
Good Morning Mustachians,
I am reviewing my 2016 budget and was hoping to receive some feedback (negative or positive) that I am proceeding in the most efficient manner with my options.

I am currently in the 33% tax bracket. I expect to be in a lower tax bracket in FIRE (ideally, within 4-5 years).
I am single with no dependents (although I will be getting married in 2016).

For the first time, my company offers a 401k and a Roth 401k. Our investment options are not great either (attached). The lone Vanguard fund is not allowing any new contributions, but the Target Funds have reduced their Net Expense Ratio to 0.81% in the new year. I am currently enrolled 100% in the BlackRock Russell 3000 Index Fund (lowest expense ratio for equities at 0.28%).

401k - We do not receive any match or access to any after tax contributions.
I have also asked our CEO whether they could contribute some portion of the bonuses as a "match" but he said they cannot due to our filing as an S-corp (I don't know validity of this).
I also max out a backdoor Roth IRA.
I do not have access to any other commonly recommended retirement accounts (HSA, etc.)

Questions:
1) I plan to contribute the $18k max to the traditional 401k to lower my taxable income. Any issue here? It doesn't seem like the Roth 401k option changes anything.
2) Any other investment options worth considering? I usually allocated close to 90% of my holdings to low cost index funds (if you can consider .38% low).
3) My 401k is adding a self-directed option. Based on my reading of this in other areas of the forum, this may be a good option to access lower cost Vanguard funds, depending on the costs. Does anyone currently use this option to invest in lower cost index funds?
4) Outside of opening a IRA and converting to a Roth IRA with Vanguard, any other suggestions?
5) I live in NYC, so I can save a few hundred in taxes by opening a 529 account. As I mentioned, I do not have any kids right now, but do plan on having them (and assisting them with their future education expenses).
6) After maxing 401k and backdoor Roth, I have just been transferring all other funds into Vanguard. Any other suggestions / recommendations?

Thanks in advance. This community has made a huge difference in my life and I appreciate all of you who take the time to read.

« Last Edit: December 22, 2015, 08:26:01 AM by FrugalRubles »

NoStacheOhio

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Re: Requesting Help with my Retirement Elections / 2016 Plan
« Reply #1 on: December 22, 2015, 07:22:26 AM »
Self-directed can be a good option depending on the brokerage. We're with Fidelity, and they offer Spartan index funds with no transaction fee, so it's a good deal. If you don't have no-fee options, it may not be a good deal.

FrugalRubles

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Re: Requesting Help with my Retirement Elections / 2016 Plan
« Reply #2 on: December 22, 2015, 08:05:56 AM »
Self-directed can be a good option depending on the brokerage. We're with Fidelity, and they offer Spartan index funds with no transaction fee, so it's a good deal. If you don't have no-fee options, it may not be a good deal.

I just read the fine print. It is a $100 annual fee for holding a self-directed brokerage account plus what appear to be a host of other fees. TD Ameritrade is the provider.

NoStacheOhio

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Re: Requesting Help with my Retirement Elections / 2016 Plan
« Reply #3 on: December 22, 2015, 08:15:50 AM »
I just read the fine print. It is a $100 annual fee for holding a self-directed brokerage account plus what appear to be a host of other fees. TD Ameritrade is the provider.

Probably not worth it then

dandarc

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Re: Requesting Help with my Retirement Elections / 2016 Plan
« Reply #4 on: December 22, 2015, 08:16:26 AM »
How long do you plan to be there?  $100 of 18K is over .5% - ouch.  But the impact of that fee relative to your portfolio goes down as the account grows.  TD Ameritrade offers a host of commission-free ETFs - some from Vanguard even, so it might be worth a look if those are available in your self-directed account.  By year 5, you might come out ahead of the lowest-fee funds on the list, even with the extra $100 fee.

Is there a reason you're going international?  The Russell 3000 fund has a lower-yet expense ratio.  Roughly equivalent to VTSAX.

FrugalRubles

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Re: Requesting Help with my Retirement Elections / 2016 Plan
« Reply #5 on: December 22, 2015, 08:25:12 AM »
How long do you plan to be there?  $100 of 18K is over .5% - ouch.  But the impact of that fee relative to your portfolio goes down as the account grows.  TD Ameritrade offers a host of commission-free ETFs - some from Vanguard even, so it might be worth a look if those are available in your self-directed account.  By year 5, you might come out ahead of the lowest-fee funds on the list, even with the extra $100 fee.

Is there a reason you're going international?  The Russell 3000 fund has a lower-yet expense ratio.  Roughly equivalent to VTSAX.

I currently have $100k invested in my 401k, with the understanding is I can transfer up to 50% of the account right now into the self-directed portion, so makes the fee look a lot better. I just got off the phone with a TD rep, they referenced the commission-free ETFs, so I will check their list. Worst case, I can purchase a vanguard fund for $25, but then avoid any future fees by reinvesting via their systematic mutual fund purchase plan.

**I misspoke on the 100% investment, that is actually in the Blackrock Russell 3000 Index.

With that expense ratio, still work dealing with self-directed?


FrugalRubles

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Re: Requesting Help with my Retirement Elections / 2016 Plan
« Reply #6 on: December 22, 2015, 08:45:59 AM »
I used to be much quicker with math.

With self-directed, I would reduce my expense ratio from 0.28% (Russell 3000) to 0.05% (VTI ETF), no commission.
At $50k, this reduction in expense ratio saves me $115 (from $140 to $25), but I must pay the additional $100 to open the Self Directed, so the net is $15 for start of 2016. This advantage should only go up, so it seems worth it?

dandarc

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Re: Requesting Help with my Retirement Elections / 2016 Plan
« Reply #7 on: December 22, 2015, 09:17:46 AM »
I used to be much quicker with math.

With self-directed, I would reduce my expense ratio from 0.28% (Russell 3000) to 0.05% (VTI ETF), no commission.
At $50k, this reduction in expense ratio saves me $115 (from $140 to $25), but I must pay the additional $100 to open the Self Directed, so the net is $15 for start of 2016. This advantage should only go up, so it seems worth it?
Absent other fees yeah.  Any 'roll-out' fees or similar?

FrugalRubles

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Re: Requesting Help with my Retirement Elections / 2016 Plan
« Reply #8 on: December 22, 2015, 09:20:01 AM »
I used to be much quicker with math.

With self-directed, I would reduce my expense ratio from 0.28% (Russell 3000) to 0.05% (VTI ETF), no commission.
At $50k, this reduction in expense ratio saves me $115 (from $140 to $25), but I must pay the additional $100 to open the Self Directed, so the net is $15 for start of 2016. This advantage should only go up, so it seems worth it?
Absent other fees yeah.  Any 'roll-out' fees or similar?

Not familiar with this term, would this be from plan admin or TD? TD assured me no fees from them other than their documented fees.

dandarc

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Re: Requesting Help with my Retirement Elections / 2016 Plan
« Reply #9 on: December 22, 2015, 09:25:07 AM »
I used to be much quicker with math.

With self-directed, I would reduce my expense ratio from 0.28% (Russell 3000) to 0.05% (VTI ETF), no commission.
At $50k, this reduction in expense ratio saves me $115 (from $140 to $25), but I must pay the additional $100 to open the Self Directed, so the net is $15 for start of 2016. This advantage should only go up, so it seems worth it?
Absent other fees yeah.  Any 'roll-out' fees or similar?

Not familiar with this term, would this be from plan admin or TD? TD assured me no fees from them other than their documented fees.
Some places charge you to transfer money out.  TD's is $75 for a regular brokerage account, but that could be different within a retirement plan.  Granted, they do offer partial transfer-outs for free.  Wonder if you did like 99% and left 1% if that would be free?

FrugalRubles

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Re: Requesting Help with my Retirement Elections / 2016 Plan
« Reply #10 on: December 22, 2015, 09:29:02 AM »
Interesting, I came across similar fees when I was looking into an ACAT transfer, like $75 to handle but $25 if it's not a full transfer. I will look further.

Have enjoyed your posts elsewhere DanDarc. Do you feel the rest of my situation is on track?

dandarc

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Re: Requesting Help with my Retirement Elections / 2016 Plan
« Reply #11 on: December 22, 2015, 10:23:54 AM »
Interesting, I came across similar fees when I was looking into an ACAT transfer, like $75 to handle but $25 if it's not a full transfer. I will look further.

Have enjoyed your posts elsewhere DanDarc. Do you feel the rest of my situation is on track?
Looks fine.  You're high-enough income that your 401K is basically all you've got in terms of the usual shelters for current-year taxes.

Does your 401K accept after-tax contributions?  Not Roth, but after-tax.  Sounds unlikely, given your discussion with CEO.  But if it does, look into a MEGA-backdoor Roth.  You make non-deductible contributions to 401K, then roll those out to a Roth IRA.  You can take yourself up to the $53K 401K limit by doing this.  The best 401Ks for doing this allow in-service rollovers, but can be a boon even without that feature if your time-frame is relatively short.  Doesn't help you with this year's taxes, but you can avoid taxes on the earnings in the future.

Also noticed you're getting married next year.  First - congratulations!  Second - will your spouse be bringing similar income to the party?  Your tax situation can change in a big way when you get married, so best to be on top of what that will look like.

FrugalRubles

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Re: Requesting Help with my Retirement Elections / 2016 Plan
« Reply #12 on: December 22, 2015, 10:33:48 AM »
Interesting, I came across similar fees when I was looking into an ACAT transfer, like $75 to handle but $25 if it's not a full transfer. I will look further.

Have enjoyed your posts elsewhere DanDarc. Do you feel the rest of my situation is on track?
Looks fine.  You're high-enough income that your 401K is basically all you've got in terms of the usual shelters for current-year taxes.

Does your 401K accept after-tax contributions?  Not Roth, but after-tax.  Sounds unlikely, given your discussion with CEO.  But if it does, look into a MEGA-backdoor Roth.  You make non-deductible contributions to 401K, then roll those out to a Roth IRA.  You can take yourself up to the $53K 401K limit by doing this.  The best 401Ks for doing this allow in-service rollovers, but can be a boon even without that feature if your time-frame is relatively short.  Doesn't help you with this year's taxes, but you can avoid taxes on the earnings in the future.

Also noticed you're getting married next year.  First - congratulations!  Second - will your spouse be bringing similar income to the party?  Your tax situation can change in a big way when you get married, so best to be on top of what that will look like.

The 401k does not access after-tax contributions. I had asked (begged) for them to make this adjustment but when they signed onto our newest deal with our HR provider / 401k admin, but was unsuccessful.

Thanks! Excited but in trying to bring mustachism into the wedding planning has caused some headaches...haha. My spouse is not in the same bracket. She has just completed 1 full year at her job, so she is also eligible for her company 401k (also, no match and no after tax benefits). I set it up for her to max it out, as we both want to retire within the next few years.

Anything we need to know in advance?

dandarc

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Re: Requesting Help with my Retirement Elections / 2016 Plan
« Reply #13 on: December 22, 2015, 10:58:54 AM »
Interesting, I came across similar fees when I was looking into an ACAT transfer, like $75 to handle but $25 if it's not a full transfer. I will look further.

Have enjoyed your posts elsewhere DanDarc. Do you feel the rest of my situation is on track?
Looks fine.  You're high-enough income that your 401K is basically all you've got in terms of the usual shelters for current-year taxes.

Does your 401K accept after-tax contributions?  Not Roth, but after-tax.  Sounds unlikely, given your discussion with CEO.  But if it does, look into a MEGA-backdoor Roth.  You make non-deductible contributions to 401K, then roll those out to a Roth IRA.  You can take yourself up to the $53K 401K limit by doing this.  The best 401Ks for doing this allow in-service rollovers, but can be a boon even without that feature if your time-frame is relatively short.  Doesn't help you with this year's taxes, but you can avoid taxes on the earnings in the future.

Also noticed you're getting married next year.  First - congratulations!  Second - will your spouse be bringing similar income to the party?  Your tax situation can change in a big way when you get married, so best to be on top of what that will look like.

The 401k does not access after-tax contributions. I had asked (begged) for them to make this adjustment but when they signed onto our newest deal with our HR provider / 401k admin, but was unsuccessful.

Thanks! Excited but in trying to bring mustachism into the wedding planning has caused some headaches...haha. My spouse is not in the same bracket. She has just completed 1 full year at her job, so she is also eligible for her company 401k (also, no match and no after tax benefits). I set it up for her to max it out, as we both want to retire within the next few years.

Anything we need to know in advance?
Being married to the right person is awesome!  That dwarfs any tax considerations, but:

Usually with disparate incomes, you save on taxes compared to two people filing as singles.  Not always though.  I'd just fill out a joint return as an experiment to see what it looks like before and after, so you're prepared for whichever way it goes.

FrugalRubles

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Re: Requesting Help with my Retirement Elections / 2016 Plan
« Reply #14 on: December 22, 2015, 11:04:47 AM »
Interesting, I came across similar fees when I was looking into an ACAT transfer, like $75 to handle but $25 if it's not a full transfer. I will look further.

Have enjoyed your posts elsewhere DanDarc. Do you feel the rest of my situation is on track?
Looks fine.  You're high-enough income that your 401K is basically all you've got in terms of the usual shelters for current-year taxes.

Thanks, really appreciate that. I plan to take a few test runs once I finalize my 2015 returns, which I will hope to have done by the end of January!

Does your 401K accept after-tax contributions?  Not Roth, but after-tax.  Sounds unlikely, given your discussion with CEO.  But if it does, look into a MEGA-backdoor Roth.  You make non-deductible contributions to 401K, then roll those out to a Roth IRA.  You can take yourself up to the $53K 401K limit by doing this.  The best 401Ks for doing this allow in-service rollovers, but can be a boon even without that feature if your time-frame is relatively short.  Doesn't help you with this year's taxes, but you can avoid taxes on the earnings in the future.

Also noticed you're getting married next year.  First - congratulations!  Second - will your spouse be bringing similar income to the party?  Your tax situation can change in a big way when you get married, so best to be on top of what that will look like.

The 401k does not access after-tax contributions. I had asked (begged) for them to make this adjustment but when they signed onto our newest deal with our HR provider / 401k admin, but was unsuccessful.

Thanks! Excited but in trying to bring mustachism into the wedding planning has caused some headaches...haha. My spouse is not in the same bracket. She has just completed 1 full year at her job, so she is also eligible for her company 401k (also, no match and no after tax benefits). I set it up for her to max it out, as we both want to retire within the next few years.

Anything we need to know in advance?

WranglerBowman

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Re: Requesting Help with my Retirement Elections / 2016 Plan
« Reply #15 on: January 13, 2016, 08:54:45 AM »
I have a question about the after-tax 401k contributions.  From what I've read my traditional 401k and Roth 401k have a combined limit of $18000 but I can contribute up to an additional $35000 to an after-tax 401k, for a total of $53000 in 401k funds?  It appears that an advantage of the after-tax 401k is I pay taxes up front and then again on the interest earned when I withdraw, but if I rollover the after-tax 401k money into a Roth IRA I won't have to pay taxes on the interested earned?  Is this right?  This is my first year hitting the $18000 401k limit and I want to know what my best options are to continue to invest past that.

dandarc

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Re: Requesting Help with my Retirement Elections / 2016 Plan
« Reply #16 on: January 13, 2016, 09:16:23 AM »
I have a question about the after-tax 401k contributions.  From what I've read my traditional 401k and Roth 401k have a combined limit of $18000 but I can contribute up to an additional $35000 to an after-tax 401k, for a total of $53000 in 401k funds?  It appears that an advantage of the after-tax 401k is I pay taxes up front and then again on the interest earned when I withdraw, but if I rollover the after-tax 401k money into a Roth IRA I won't have to pay taxes on the interested earned?  Is this right?  This is my first year hitting the $18000 401k limit and I want to know what my best options are to continue to invest past that.
Yep.  With one big if - if your 401K allows it.  The amount you can contribute after-tax is reduced by any employer contributions you might receive as well - basically if your employer doesn't do it, the after-tax contribution allows you to hit the $53K limit.

http://www.madfientist.com/after-tax-contributions/

WranglerBowman

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Re: Requesting Help with my Retirement Elections / 2016 Plan
« Reply #17 on: January 13, 2016, 10:52:27 AM »
Awesome!  Thanks for the link dandarc.  My company uses Vanguard and I have the option to automatically roll money into an after-tax 401k once the traditional and roth 401k $18000 limit is reached. One thing I'm still a little fuzzy on though is at the end of each year do I need to convert the after-tax 401k to a traditional IRA annually or can I just let the money sit in the after-tax 401k until I leave the company or move it to a traditional IRA 5 years before my planned retirement?

dandarc

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Re: Requesting Help with my Retirement Elections / 2016 Plan
« Reply #18 on: January 13, 2016, 11:22:03 AM »
You roll it to a Roth IRA.  As early / often as possible to minimize the gains you'll have to pay taxes on.