Author Topic: Vanguard tIRA or Fidelity 401k?  (Read 3557 times)

chaskavitch

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Vanguard tIRA or Fidelity 401k?
« on: March 24, 2016, 10:11:26 AM »
Reading through the Investor Alley posts over the last week or two has made me realize that my husband and I should be contributing to traditional IRAs instead of Roth IRAs.  in 2015, our MAGI was ~$95,000.  In 2016, we both got raises, totaling about $11500 extra gross income.  I increased my 401k contributions from 12% (employer matches 100% up to 6%, then 50% up to a total of 9%) to 13% to take advantage of my raise.  We are also having our first child in May - I'm going to be paying an additional $650 (pre-tax) to my employer for health care for baby, as well as contributing $5000 to a dependent-care FSA, so we should still end up below the MAGI limit for deductible tIRA contributions.  If nothing else, DH has no employer retirement options, so his entire IRA contribution should be deductible. 

My question is, if we are getting the tax benefits either way, does it make sense to contribute to a tIRA for me, or should I just increase my 401k contributions?  The tIRA rollover I have with Vanguard is currently in the LifeStrategy Growth fund at an ER of 0.15%.  My 401k is through Fidelity, and I actually have some good options.  Currently my balance at Fidelity is split:

84% Spartan 500 Index Advantage (FUSVX) @ 0.07%
14% in Spartan US Bond Index (FSITX) @ 0.07% net (0.17% gross)
2% in Spartan International Index (FSIVX) @ 0.12% net (0.17% gross)

Now, I'm not arguing that the Fidelity allocation set-up is the best.  I was trying to diversify a tiny bit without going completely insane - this used to be in a target date fund with Fidelity at 0.7% ER, so it is moving in the right direction.  But if I have access to funds with expense ratios this low, is there any reason to bother with a tIRA right now?  Our budget at the moment can't handle much more than the $5500 I had allocated toward my IRA, so I can't just ramp up the 401k by like $5000 AND max out a tIRA.  Does it matter which I choose?

chaskavitch

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Re: Vanguard tIRA or Fidelity 401k?
« Reply #1 on: March 24, 2016, 10:21:23 AM »
And yes, I realize that with that much income we should probably be able to put more into retirement savings.  I'm working on DH...  Since we're doing "so much better" with retirement/debt/general savings than most people he knows, he's reluctant to decrease the amount of money we're spending on things that make life "worth living", like taekwondo, snowboarding, a dog, etc.  I'm definitely to blame as well, but it's getting better every year on both our parts.

Jack

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Re: Vanguard tIRA or Fidelity 401k?
« Reply #2 on: March 24, 2016, 10:58:12 AM »
I got bored, so I wrote a novel.

First of all, if you're opening a new tIRA at Vanguard, most funds have a $3000 minimum initial buy-in so you won't be able to set up the same 84/14/2 three-fund allocation as your 401k until year 2. (The fund minimums are per-account, so the fact that you might already meet them in your Roth IRA is irrelevant.)

Second, in general your contribution priority should be as follows:
  • 401k up to the match
  • HSA
  • IRA up to the IRS limit, unless the choices in your 401k are at least equally good (e.g. equally low expense ratio, etc.)
  • 401k the rest of the way to the IRS limit
  • taxable

In the short term, your choice between a 401k and a tIRA is a choice between (e.g.) FUSVX @ 0.07%and VFINX at 0.17%. In the short term, contributing to the 401k is better. In the long term, the choice is between FUSVX @ 0.07%and VFIAX at 0.05%, so the Vanguard option eventually becomes better.

Of course, that's just talking about one of the three funds in your portfolio. Let's look at the costs across the board:

FidelityV. InvestorV. AdmiralV. ETF
S&P 5000.07%0.17%0.05%0.05%
Total Bond0.07%0.20%0.07%0.07%
International0.12%0.19%0.12%0.13%

As you can see, for bond and international Fidelity remains tied with Vanguard in the long run. Since it's also cheaper in the short run, that means Fidelity wins for those funds.

However, what we really care about is the weighted average of the expense ratio across all funds (and really, all accounts -- which I'll get to in a minute). In that case, the long-term comparison is:

Fidelity weighted ER = 84% * 0.07% + 14% * 0.07% + 2% * 0.12% = 0.071%
Vanguard (admiral) weighted ER = 84% * 0.05% + 14% * 0.07% + 2% * 0.12% = 0.0542%

However, you still need that $10K Admiral share minimum buy-in for the fund with the smallest allocation percentage in order to achieve those costs. Since you only have 2% allocated to international, that means your total tIRA portfolio value needs to be at least $10,000 / 2% = $500,000. You could approach it by going for the Admiral-class S&P 500 while staying investor-class for the other two, but the minimum to buy into the international fund at that asset allocation would still be $3000 / 2% = $150,000.

So that brings us to the real issue: either you're going to have to revisit your asset allocation, or you'll have to split things between accounts, or you're going to have to [be allowed to] rollover existing 401k assets into the IRA to meet the fund minimums, or you're going to have to use ETFs.

Option 1, changing your asset allocation: If you went with a 33/33/33 ratio, which I do not recommend, you'd only need $30,000 in the account to get Admiral shares for all funds. If you simplified to a two-fund portfolio, say, 80/20 S&P 500 and bond, you'd need $50,000 in the account.

Option 2, split things between accounts: You could make 84% of your intended contribution to your tIRA, putting 100% of it into VTSMX (or VTSAX starting in the third year). Then put the other 16% into your 401k to buy the other two funds. This is probably the best option.

Option 3, rollover the funds: If your 401k allows "in-service rollovers" and you already have enough in it to meet the Vanguard Admiral fund minimums for your asset allocation, then you can just move the money and enjoy the lower ER (on VTSAX, at least) now. Not many 401ks actually allow this, though.

Option 4, ETFs: IIRC, if you set up your Vanguard tIRA as a brokerage account, you can buy Vanguard ETFs (which usually have the same ER as Admiral-class funds) for, I think, a $3000 total account minimum. However, if you do that then you have to buy ETFs, which means you can't buy fractional shares (so some of your investment goes into the cash sweep account), you buy at intraday prices at the moment your order executes (instead of the NAV at the end of the day, like you get with an index fund), etc. I don't think Vanguard charges commissions when buying their own funds, but I'm not sure -- and there may be other fees associated with the account that you don't have to deal with in a non-brokerage account.

TL; DR:

Finally, there remains only one thing to consider: how much does all this matter anyway? At the end of the day, we're quibbling over a 0.02% (or less) difference in expense ratio. In the long run, when your account balance hits, say, $500K or more, it starts to matter. In the short run, it doesn't. Realistically, you could just stick with Fidelity and then roll it over to Vanguard after you either FIRE or change jobs, and it would be fine. (I think doing all this is valuable, not so much for your particular situation, but so other people can read this thread and use it to evaluate theirs. Most people's 401ks are with companies that aren't as good as Fidelity.)

Scandium

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Re: Vanguard tIRA or Fidelity 401k?
« Reply #3 on: March 24, 2016, 11:05:49 AM »
Your 401k options are good so I don't see much reason for a tIRA for you (though I suppose it could get worse in the future. Our plan changed to all new funds at one point, but for the better).

A tIRA will limit your options for back door Roth in the future.

ps: the "diversification" of 2% international is so inconsequential that IMO you might as well make it zero. Although I prefer more international myself; 20-40%
« Last Edit: March 24, 2016, 11:11:39 AM by Scandium »

ZiziPB

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Re: Vanguard tIRA or Fidelity 401k?
« Reply #4 on: March 24, 2016, 11:30:22 AM »
You have good fund choices in your 401k so keep it simple and just increase the 401k contributions.  No reason to make your life more complicated in order to save 0.02% in management fees.

chaskavitch

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Re: Vanguard tIRA or Fidelity 401k?
« Reply #5 on: March 24, 2016, 11:34:58 AM »
Jack:  Thanks for the novel, reading is fun :)

I currently have just over $4,000 in an account at Vanguard that was rolled over from a 403b from working in college (in the LifeStrategy Fund).  It is characterized on their website as a "rollover IRA", so I'm assuming that I can contribute to it as a tIRA, but I'm not positive.  I wrote and asked them a question, but it hasn't been answered yet. 

If I can contribute to that account instead of opening a whole new tIRA, I like your Option 2.  I would hit $10,000 in early 2017, and I could transfer to VTSAX instead of VTSMX.  It does seem a little silly to worry about that 0.02% ER, but I also feel like I'm doing something wrong if I'm not contributing to some sort of IRA.

Scandium:  I figured 2% was pretty darn low, but I wanted to at least remind myself the option was there.  Our retirement assets, such as they are, are spread out among 4 accounts - DH's Roth IRA in a Vanguard target retirement fund (2055, I think?), my 401k as listed above, the $4000 rollover IRA in LifeStrategy Growth, and my Roth IRA that I just put into VTSAX.  The Target Retirement and LifeStragegy funds both have some international stock/bond allocations.  Even with only 4 accounts, though, it is driving me nuts trying to keep track of our allocations across US/International and Stock/Bonds.  I might take your advice and increase my 401k international allocation and replace some bonds.  I'm only 30, I've got some time before I need to be super conservative.

NoStacheOhio

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Re: Vanguard tIRA or Fidelity 401k?
« Reply #6 on: March 24, 2016, 12:12:15 PM »
Jack:  Thanks for the novel, reading is fun :)

I currently have just over $4,000 in an account at Vanguard that was rolled over from a 403b from working in college (in the LifeStrategy Fund).  It is characterized on their website as a "rollover IRA", so I'm assuming that I can contribute to it as a tIRA, but I'm not positive.  I wrote and asked them a question, but it hasn't been answered yet. 


Generally yes. This only causes trouble if you plan to roll it back into an employer-sponsored plan. Otherwise, it just behaves like a tIRA.

Jack

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Re: Vanguard tIRA or Fidelity 401k?
« Reply #7 on: March 24, 2016, 12:51:54 PM »
If I can contribute to that account instead of opening a whole new tIRA, I like your Option 2.  I would hit $10,000 in early 2017, and I could transfer to VTSAX instead of VTSMX.  It does seem a little silly to worry about that 0.02% ER, but I also feel like I'm doing something wrong if I'm not contributing to some sort of IRA.

Well, money is fungible: if contributing only/mostly to your 401k would cause you to feel like you're doing something wrong by not contributing to an IRA, then contributing only/mostly to your IRA should make you feel bad about not contributing to your 401k. Ideally, you'd be maxing out both. (I know you already know that; I'm just trying to motivate you.)

Jack:  Thanks for the novel, reading is fun :)

I currently have just over $4,000 in an account at Vanguard that was rolled over from a 403b from working in college (in the LifeStrategy Fund).  It is characterized on their website as a "rollover IRA", so I'm assuming that I can contribute to it as a tIRA, but I'm not positive.  I wrote and asked them a question, but it hasn't been answered yet. 

If I can contribute to that account instead of opening a whole new tIRA, I like your Option 2.  I would hit $10,000 in early 2017, and I could transfer to VTSAX instead of VTSMX.  It does seem a little silly to worry about that 0.02% ER, but I also feel like I'm doing something wrong if I'm not contributing to some sort of IRA.

Scandium:  I figured 2% was pretty darn low, but I wanted to at least remind myself the option was there.  Our retirement assets, such as they are, are spread out among 4 accounts - DH's Roth IRA in a Vanguard target retirement fund (2055, I think?), my 401k as listed above, the $4000 rollover IRA in LifeStrategy Growth, and my Roth IRA that I just put into VTSAX.  The Target Retirement and LifeStragegy funds both have some international stock/bond allocations.  Even with only 4 accounts, though, it is driving me nuts trying to keep track of our allocations across US/International and Stock/Bonds.  I might take your advice and increase my 401k international allocation and replace some bonds.  I'm only 30, I've got some time before I need to be super conservative.

Here's your real issue: you need to figure out what you actually want your asset allocation to be before you can make a good decision on what accounts to open or what funds to invest in. Combining target date or LifeStrategy funds with normal indexes usually doesn't make much sense; the whole point of those things is to have 100% of your money in them to keep it simple. Conversely, if you can't keep it simple because your money is spread between accounts, then the target date/LifeStrategy funds aren't useful and you should just buy the underlying indexes instead.

So, first pick an asset allocation (which is up to you, but IMO should include more than 2% international stock!) and write an investment policy statement to reflect your decision, then figure out how to allocate your funds between accounts (tax-efficiently, if you get to the point where you're saving enough to fill up your tax-deferred stuff).

chaskavitch

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Re: Vanguard tIRA or Fidelity 401k?
« Reply #8 on: March 28, 2016, 08:13:17 AM »
/sigh  I know I need to decide on a specific asset allocation plan/investment policy statement.  I just keep slacking because it is complicated (mostly because DH leaves most of this to me) and I'd rather go plant our garden or play with the dog or watch Star Trek :(  It would make things significantly easier over time, though. 

Thanks for all the feedback, everyone!  I definitely have plenty to think about.

johnny847

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Re: Vanguard tIRA or Fidelity 401k?
« Reply #9 on: March 28, 2016, 09:06:47 AM »
Star trek!

Two things :
Whatever international stock allocation you decide, don't use something as small as 2%. That won't make any noticeable difference in your log term returns and will just cause more administrative overhead on your side (rebalancing, wanting to meet fund minimums) than its worth. So either go with at least 20% of your stock allocation (vanguard recommends 20-40%) or none (which I don't recommend but this is a question that I feel like doesn't really have a right answer without a crystal ball).
Second, you should stop this mental accounting you've got going on with trying to maintain asset allocation in each account. That's pointless and only causes administrative overhead for you as Jack pointed out with trying to meet fund minimums. In the end all the money is fungible.

chaskavitch

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Re: Vanguard tIRA or Fidelity 401k?
« Reply #10 on: April 07, 2016, 12:41:37 PM »
So, I went through all of our accounts and did the math, just so I know right now what is going on. I know it was far more work than I needed to do or should have done, but I like knowing, so...

Current distribution of retirement monies:
DH's Roth IRA - Vanguard Target Retirement 2060
My tIRA - Vanguard Life Strategy Growth
 - Both of these funds are composed of Vanguard Total Stock Market, Vanguard Total International Stock, Vanguard Total Bond II, and Vanguard Total International Bond, just in slightly different percentages
My Roth IRA - Vanguard Total Stock Market Admiral shares
My 401k - Fidelity Spartan 500, Spartan US Bond, and Spartan Intl Index

So, realistically, I'm in 7 different actual funds, and only 4 if you are willing to count the Fidelity funds as semi-equivalent to the Vanguard funds.  When I checked it out, the expense ratios of the target fund and LifeStrategy fund are lower than what I'd be able to get if I bought the same funds individually, because we don't have enough to get to Admiral shares in more than one fund per account, and then the ratios would change dramatically. 

Proportionally, we are in:

75.8% US Stocks
13.29% International Stocks
9.89% US Bonds
1.45% International Bonds

- Total 89% Stocks / 11% bonds, or 85% US / 15% International


I'm still thinking about my asset allocation and IPS, but for now, I'm good with those ratios.  I'd hesitate to go higher than 10% bonds +/- 2% since we have so long until retirement, and 15% international exposure is far more reasonable than 2%.  Our yearly additions to these accounts will bring up the bond ratio a little too high, but that's easy to fix. 

I know I still have a lot of work to do to make it to where this doesn't require me to rearrange everything every year to keep the allocation right, but for now I'm willing to move on to just adding more money instead of agonizing over where it goes. To that end, I've decided to max my tIRA this year, as well as keeping the 1% increase to my 401k contributions.  Next year, maybe I'll be used to our massive childcare costs and willing to up that again :)

NoStacheOhio

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Re: Vanguard tIRA or Fidelity 401k?
« Reply #11 on: April 07, 2016, 05:24:24 PM »
You might be able to get around the not enough to buy admiral shares of each account problem by balancing across accounts, rather than each one individually.

GregO

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Re: Vanguard tIRA or Fidelity 401k?
« Reply #12 on: April 07, 2016, 07:02:10 PM »
You have good fund choices in your 401k so keep it simple and just increase the 401k contributions.  No reason to make your life more complicated in order to save 0.02% in management fees.
+1 to this
The amount of money you are talking about is so small (0.02% of $1000 is 20 cents!), and having a tIRA is more complicated, both now and in the future when you need to roll over accounts or do a backdoor Roth.  Just keep it simple and increase the contributions to your 401k until you max it out.  It may end up saving you a lot more money than 20 cents per $1000 in the long run anyway.  And how much is your time worth to add in all this confusion of contributing to a tIRA?