Author Topic: Where is the cutoff point?  (Read 5217 times)

Zaga

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Where is the cutoff point?
« on: December 26, 2013, 08:31:39 PM »
DH just got the paperwork for a 401-K through his new job.  Trouble is that all of the funds are very high fee, around 1.5% per year.  Plus the paperwork didn't include any account fees, so still unsure of those.  We are in the 25% tax bracket, even if he maxed out we'd be in that bracket.

So, where is the cutoff point between the tax deduction now and the horrible expense ratios?  This is a choice between 401-K and Roth, we aren't at the point of being able to max out all tax advantaged yet.  If we were that would make the decision easier.

Oh yeah, it doesn't appear that there are any matching funds from the company either.  Just "profit sharing" that 1) may not happen, and 2) probably won't vest before he's changed jobs again.

And this job is through a contracting company and we have some hope he will eventually be hired on at the company he is at, so it's not likely to last a super long time, but we can't be sure of that.  He already has a rollover IRA, so it would be super easy to get this rolled over when he next changes positions.

So, anyone have any thoughts about this?  What's best, Roth with low fees or 401-K with high fees?

ender

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Re: Where is the cutoff point?
« Reply #1 on: December 26, 2013, 09:06:03 PM »
You mean roth 401k or traditional 401k?

Or Roth IRA vs traditional 401k?


Insanity

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Re: Where is the cutoff point?
« Reply #2 on: December 26, 2013, 09:09:31 PM »
So it is a contract to hire position?  What was the term of the contract?  I'm actually in this situation now.  I had signed a 3 month contract, but it looks like it is turning into a 6 month (no conversion).  I'm trying to figure out what is going on in order to know whether or not I should push to go to corporate to corporate instead.  Of course, there's some discussion over what is going to happen since apparently the contract with the contracting company expires the end of January.

EDIT:
I have taken no benefits through the contract company (401K - no match offered, health benefits - I'm still doing COBRA cause of expensive medicines and not wanting to deal with that twice).

msilenus

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Re: Where is the cutoff point?
« Reply #3 on: December 26, 2013, 09:54:16 PM »
You know the pre-tax 401(k) starts out ahead because you're getting "free money" from the tax treatment.  You can think of it as a 25% match.  The question is how long it takes for the fees to eat up that free money. 

I just ran a quick-and-dirty Excel simulation for this.  The simulation compared putting $1250 into the 401(k) account every year to putting $1000 into a Roth.  It decayed the balance of the pre-tax account by 1.5% each year, but didn't do that to the Roth.  It took 32 years for the Roth account to have more money in it than the 401(k).  To make things a bit more realistic, I added a 5% return rate for both.  Then the Roth starts outperforming after only 26 years.

This doesn't account for the tax-free withdrawal benefits of a Roth, but I suspect that with a 25% rate today, you'll wind up being best off deferring the taxes.  (You should figure that out, though.)  Whenever hubby switches jobs, you can roll over that 401(k) money into an IRA or his next (hopefully better) 401(k) plan, and hopefully improve the fee situation.

Zaga

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Re: Where is the cutoff point?
« Reply #4 on: December 27, 2013, 06:24:45 AM »
Enderland, I was debating between a Roth IRA and traditional 401-K. 

Insanity, it's a contract position with no stated end point.  He started there in April, and could easily be there for another year or 2.

Msilenus, that makes sense to me.  We will almost certainly be in a much lower tax situation in retirement than we are now, since we don't need very much to live on compared to our income.

We have decided to use the 401-K.  Not sure if we'll be able to max it out this year, but we'll get a lot in there!

Insanity

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Re: Where is the cutoff point?
« Reply #5 on: December 27, 2013, 08:19:44 AM »
Enderland, I was debating between a Roth IRA and traditional 401-K. 

Insanity, it's a contract position with no stated end point.  He started there in April, and could easily be there for another year or 2.

Msilenus, that makes sense to me.  We will almost certainly be in a much lower tax situation in retirement than we are now, since we don't need very much to live on compared to our income.

We have decided to use the 401-K.  Not sure if we'll be able to max it out this year, but we'll get a lot in there!

I would seriously look into doing a corp to corp contract if it is going to be that long term.  There are a lot more benefits that you can get that way.

Zaga

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Re: Where is the cutoff point?
« Reply #6 on: December 27, 2013, 12:11:09 PM »
I would seriously look into doing a corp to corp contract if it is going to be that long term.  There are a lot more benefits that you can get that way.
I'm not quite clear on what this means.  He is contracting through a company, so it looks like he's already in this sort of position.  They provide health insurance and 401-K, so it's not totally without benefits.  Am I understanding correctly?

Insanity

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Re: Where is the cutoff point?
« Reply #7 on: December 27, 2013, 01:01:19 PM »
I would seriously look into doing a corp to corp contract if it is going to be that long term.  There are a lot more benefits that you can get that way.
I'm not quite clear on what this means.  He is contracting through a company, so it looks like he's already in this sort of position.  They provide health insurance and 401-K, so it's not totally without benefits.  Am I understanding correctly?

Here's how that works --
I have my own business.  That business has a contract with a contract company to do work for a specific client of that contract company.  I am not an employee of that contract company, therefore I pay all taxes , take my salary, and provide benefits to myself however I want.  Also, in general, the rate is higher than the salary.  Sometimes much higher (my contract rate is about 1.5X as much as I was making as an employee).

Now, the other question is what industry is he in?  if it is software development or anything computer related he can generally go corp-to-corp and be better off.   you do have to be weary of how it works because the IRS can complain based on different rules as can the state.   also, some contract companies do not like doing corp-to-corp in some situations.

I hate being a W-2 contractor long term.  There is no advantage to me at all as the health benefits are usually still require me to pay a great deal. Career progression is usually nonexistent.  And no 401K match.


Cheddar Stacker

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Re: Where is the cutoff point?
« Reply #8 on: December 27, 2013, 02:09:37 PM »
Enderland, I was debating between a Roth IRA and traditional 401-K. 

Insanity, it's a contract position with no stated end point.  He started there in April, and could easily be there for another year or 2.

Msilenus, that makes sense to me.  We will almost certainly be in a much lower tax situation in retirement than we are now, since we don't need very much to live on compared to our income.

We have decided to use the 401-K.  Not sure if we'll be able to max it out this year, but we'll get a lot in there!

So I like what Msilenus did with the comparison and I don't have much to add regarding the breakeven point of fees.

However, I do have something to add related to the Roth IRA. For nearly all Mustachians, a Roth IRA is likely not the best option. I just posted something similar on another thread here (http://www.mrmoneymustache.com/forum/ask-a-mustachian/4-withdraw/?topicseen) and many people have written about this on other sites: http://www.gocurrycracker.com/never-pay-taxes-again/

Take the tax savings now by every means possible, when you stop working convert 401K's to IRAs, then slowly convert them to Roth IRAs. If you do it properly, you won't have to pay federal income taxes when you convert it, or when you withdraw it.

Zaga

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Re: Where is the cutoff point?
« Reply #9 on: December 27, 2013, 08:16:19 PM »
I would seriously look into doing a corp to corp contract if it is going to be that long term.  There are a lot more benefits that you can get that way.
I'm not quite clear on what this means.  He is contracting through a company, so it looks like he's already in this sort of position.  They provide health insurance and 401-K, so it's not totally without benefits.  Am I understanding correctly?

Here's how that works --
I have my own business.  That business has a contract with a contract company to do work for a specific client of that contract company.  I am not an employee of that contract company, therefore I pay all taxes , take my salary, and provide benefits to myself however I want.  Also, in general, the rate is higher than the salary.  Sometimes much higher (my contract rate is about 1.5X as much as I was making as an employee).

Now, the other question is what industry is he in?  if it is software development or anything computer related he can generally go corp-to-corp and be better off.   you do have to be weary of how it works because the IRS can complain based on different rules as can the state.   also, some contract companies do not like doing corp-to-corp in some situations.

I hate being a W-2 contractor long term.  There is no advantage to me at all as the health benefits are usually still require me to pay a great deal. Career progression is usually nonexistent.  And no 401K match.
Ah, gotcha.  That may be an option in the future, but in his current position all of the contractors are through the same contracting company.  It's very much like you describe, the healthcare is expensive, there is no 401-K match, and there will likely be no career progression.

He is in IT, in a specialty, but not software development.  I really don't understand much of what he does, it's all backend stuff on servers.

There are, however, benefits to this job beyond the obvious.  Most notably, it's 1 mile from my job which makes our commute together super convenient.  The salary is nothing to complain over either.  Our quality of life has improved greatly with this job, we have a lot more time for life since our commute is so much less now, well worth the trade off of no 401-K match and limited other benefits.

Zaga

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Re: Where is the cutoff point?
« Reply #10 on: December 27, 2013, 08:17:59 PM »
Enderland, I was debating between a Roth IRA and traditional 401-K. 

Insanity, it's a contract position with no stated end point.  He started there in April, and could easily be there for another year or 2.

Msilenus, that makes sense to me.  We will almost certainly be in a much lower tax situation in retirement than we are now, since we don't need very much to live on compared to our income.

We have decided to use the 401-K.  Not sure if we'll be able to max it out this year, but we'll get a lot in there!

So I like what Msilenus did with the comparison and I don't have much to add regarding the breakeven point of fees.

However, I do have something to add related to the Roth IRA. For nearly all Mustachians, a Roth IRA is likely not the best option. I just posted something similar on another thread here (http://www.mrmoneymustache.com/forum/ask-a-mustachian/4-withdraw/?topicseen) and many people have written about this on other sites: http://www.gocurrycracker.com/never-pay-taxes-again/

Take the tax savings now by every means possible, when you stop working convert 401K's to IRAs, then slowly convert them to Roth IRAs. If you do it properly, you won't have to pay federal income taxes when you convert it, or when you withdraw it.
Excellent reminder, thank you.  We won't need to withdraw very much in retirement compared to our current earnings, which will lead to much lower taxes even if we don't do the Roth rollever pipeline.  I suspect we won't need it as DH is 45 already and will probably work til 60.

Zaga

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Re: Where is the cutoff point?
« Reply #11 on: December 29, 2013, 06:14:21 PM »
Update:

The paperwork is being turned in tomorrow, he's all in the 401-K, aiming to max it out for the year.  This will be the first time we've managed that, so cool!  And the tax savings will be over $4K, also way cool!

Insanity

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Re: Where is the cutoff point?
« Reply #12 on: December 29, 2013, 07:49:12 PM »
He is in IT, in a specialty, but not software development.  I really don't understand much of what he does, it's all backend stuff on servers.

There are, however, benefits to this job beyond the obvious.  Most notably, it's 1 mile from my job which makes our commute together super convenient.  The salary is nothing to complain over either.  Our quality of life has improved greatly with this job, we have a lot more time for life since our commute is so much less now, well worth the trade off of no 401-K match and limited other benefits.

That sounds like similar to what a friend of mine does who is also on his own. 

It isn't bad to be part of a contract firm, it just has limitations.  It might be worth him to ask about the possibility if the it looks like he will be there very long term. Just a suggestion.

Zaga

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Re: Where is the cutoff point?
« Reply #13 on: December 29, 2013, 07:56:00 PM »
He is in IT, in a specialty, but not software development.  I really don't understand much of what he does, it's all backend stuff on servers.

There are, however, benefits to this job beyond the obvious.  Most notably, it's 1 mile from my job which makes our commute together super convenient.  The salary is nothing to complain over either.  Our quality of life has improved greatly with this job, we have a lot more time for life since our commute is so much less now, well worth the trade off of no 401-K match and limited other benefits.

That sounds like similar to what a friend of mine does who is also on his own. 

It isn't bad to be part of a contract firm, it just has limitations.  It might be worth him to ask about the possibility if the it looks like he will be there very long term. Just a suggestion.
I appreciate the suggestion, it is something I had not considered before.  If this looks like it's turning into something long term we may give that a shot.  Come to think of it, I think that what you are suggesting is what my brother does...

Also, thanks to everyone for their advice!