Hack my retirement plans, please! 401k v Roth 401k.

[Tryndamere]

Hi guys,

I have some retirement questions.

Currently my company offers a 401k and a Roth 401k with a 50% match up to my first 6%. I am 28 years old, and have not started any retirement planning yet. I am currently in the 25% Federal Income (5% state) tax bracket.

I am having a hard time picking which one is better and I have a few questions.

1) Can I withdraw principal for free from my Roth 401k, like I can with a Roth IRA, if need be? I am getting mixed info on this and if I am interpreting correctly, it looks like you will be subject to the 10% early withdrawal only on the percentage that came from employer contributions (since they are tax free).

So for example, I contribute $600 into my Roth 401k and my employer contributes $400. I have a total of $1000. If I were to withdraw that principal for an emergency that was not a qualifying emergency, I would be able to take my $600 out free of charge but would be charged tax and the 10% penalty on the $400 that my employer contributed. Does this sound about right?

2) I can convert either one into a Roth IRA when I leave my employer, right? Do I lose any money for doing this? Is one “cheaper” than the other to convert?

3) Is this a situation where I should just choose the Roth 401k if my tax bracket is low, but the traditional 401k if my tax bracket is high?

4) My company has a 5 year vesting period for the contributions. But what about the earnings that accumulates over the 5 years on those contributions? If my employers $400 that they contribute makes $40 in gains in a year and then I quit, do they only take their $400 back or do they take all $440 back?

5) Should I create a Roth IRA immediately, even if I only deposit $.01? Logic being that there is a 5 year period that a Roth IRA must be open to qualify for qualified distributions, so when I rollover my Roth 401k, it immediately has fulfilled that requirement. This would be a benefit if I wanted to use it for a qualified distribution like a down payment for a home, right?

Can you guys hack my fund options as well? I am having a hard time choosing what is optimal. I don’t mind being risky at all, I am 28 (and a poker player, hehe). Anybody have experience with any of these funds? Like any company in particular?

EDIT: ADDED EXPENSE RATIOS - NUMBER AFTER TICKER

SSgA Cash Series U.S. Government Fund - Class L .84
Prudential Short-Term Corporate Bond Fund - Class R Ticker: JDTRX 1.27
JPMorgan Government Bond Fund - Class R2 Ticker: JGBZX 1.29
JPMorgan Core Bond Fund - Class R2 Ticker: JCBZX 1.24
T. Rowe Price Retirement Income Fund - Class R Ticker: RRTIX 1.07
T. Rowe Price Retirement 2010 Fund - Class R Ticker: RRTAX 1.11
T. Rowe Price Retirement 2015 Fund - Class R Ticker: RRTMX 1.16
T. Rowe Price Retirement 2020 Fund - Class R Ticker: RRTBX 1.2
T. Rowe Price Retirement 2025 Fund - Class R Ticker: RRTNX 1.23
T. Rowe Price Retirement 2030 Fund - Class R Ticker: RRTCX 1.25
T. Rowe Price Retirement 2035 Fund - Class R Ticker: RRTPX 1.27
T. Rowe Price Retirement 2040 Fund - Class R Ticker: RRTDX 1.28
T. Rowe Price Retirement 2045 Fund - Class R Ticker: RRTRX 1.28
T. Rowe Price Retirement 2050 Fund - Class R Ticker: RRTFX 1.28
T. Rowe Price Retirement 2055 Fund - Class R Ticker: RRTVX 1.28
Janus Balanced Fund - Class R Ticker: JDBRX 1.34
BlackRock Equity Dividend Fund - Class R Ticker: MRDVX 1.37
Alger Capital Appreciation Institutional Fund - Class R Ticker: ACARX 1.68
Janus Forty Fund - Class R Ticker: JDCRX 1.43
Neuberger Berman Socially Responsive Fund - Class R3 Ticker: NRARX 1.36
Nuveen Mid Cap Index Fund - Class R3 Ticker: FMCYX 1.01
Goldman Sachs Small Cap Value Fund - Class R Ticker: GSQRX 1.69
Fidelity Advisor Small Cap Fund - Class T Ticker: FSCTX 1.51
Janus Overseas Fund - Class R Ticker: JDIRX 1.44
Thornburg International Value Fund - Class R3 Ticker: TGVRX 1.45
Oppenheimer Developing Markets Fund - Class N Ticker: ODVNX 1.70
Prudential Jennison Natural Resources Fund - Class R Ticker: JNRRX 1.38
Columbia Seligman Communications and Information Fund - Class R Ticker: SCIRX 1.63

I appreciate all the help and please let me know I should be supplying more information.

[hoppy08520]

Hi guys,

I have some retirement questions.

Currently my company offers a 401k and a Roth 401k with a 50% match up to my first 6%. I am 28 years old, and have not started any retirement planning yet. I am currently in the 25% Federal Income (5% state) tax bracket.

First, I can save you a lot of angst over this. In your tax bracket, I think it's much more advantageous for you to do traditional 401(k) over Roth 401(k). I think the consensus on this board would say the same (with some detractors).

See Traditional versus Roth for more.

I am having a hard time picking which one is better and I have a few questions.

1) Can I withdraw principal for free from my Roth 401k, like I can with a Roth IRA, if need be? I am getting mixed info on this and if I am interpreting correctly, it looks like you will be subject to the 10% early withdrawal only on the percentage that came from employer contributions (since they are tax free).

So for example, I contribute $600 into my Roth 401k and my employer contributes $400. I have a total of $1000. If I were to withdraw that principal for an emergency that was not a qualifying emergency, I would be able to take my $600 out free of charge but would be charged tax and the 10% penalty on the $400 that my employer contributed. Does this sound about right?

removed my wrong info...thanks for the correction below

2) I can convert either one into a Roth IRA when I leave my employer, right? Do I lose any money for doing this? Is one “cheaper” than the other to convert?

Upon leaving employment, a Roth 401(k) can be rolled over to a Roth IRA; no expense for doing so, and no taxable event. This is basically just changing custodians. Similarly, a traditional 401(k) can be rolled over to a traditional IRA. Again, if done correctly, then this is not a taxable event. This action is just the rollover. After the money gets to the new custodian, then you can choose different funds (typically, you'll have the money arrive in a money market fund, and then you can allocate as you wish).

Roth IRA conversion is a different action. Once you have money in a traditional IRA, then you may elect to convert all or a portion of it to a Roth IRA.

So, if you have a traditional 401(k) and you want to "convert" it to a Roth IRA, then that's technically a two-step process.

3) Is this a situation where I should just choose the Roth 401k if my tax bracket is low, but the traditional 401k if my tax bracket is high?

Generally, yes, but there can be other nuances. See Roth vs. Traditional link I added above. For the purposes of this question, I think most people would say your tax bracket is "high".

4) My company has a 5 year vesting period for the contributions. But what about the earnings that accumulates over the 5 years on those contributions? If my employers $400 that they contribute makes $40 in gains in a year and then I quit, do they only take their $400 back or do they take all $440 back?

I could be wrong, but I believe that the contributions and earnings from the employer vest on the same schedule. You might want to inquire with your plan.

5) Should I create a Roth IRA immediately, even if I only deposit $.01? Logic being that there is a 5 year period that a Roth IRA must be open to qualify for qualified distributions, so when I rollover my Roth 401k, it immediately has fulfilled that requirement. This would be a benefit if I wanted to use it for a qualified distribution like a down payment for a home, right?

Sorry, it doesn't work that way. They care about how long the money is in the account, not how long you've had the account. This is why people need to keep good records of their Roth IRA contributions and transfers, if they are anywhere near that 5-year window.

Can you guys hack my fund options as well? I am having a hard time choosing what is optimal. I don’t mind being risky at all, I am 28 (and a poker player, hehe). Anybody have experience with any of these funds? Like any company in particular?

SSgA Cash Series U.S. Government Fund - Class L
Prudential Short-Term Corporate Bond Fund - Class R Ticker: JDTRX
JPMorgan Government Bond Fund - Class R2 Ticker: JGBZX
JPMorgan Core Bond Fund - Class R2 Ticker: JCBZX
T. Rowe Price Retirement Income Fund - Class R Ticker: RRTIX
T. Rowe Price Retirement 2010 Fund - Class R Ticker: RRTAX
T. Rowe Price Retirement 2015 Fund - Class R Ticker: RRTMX
T. Rowe Price Retirement 2020 Fund - Class R Ticker: RRTBX
T. Rowe Price Retirement 2025 Fund - Class R Ticker: RRTNX
T. Rowe Price Retirement 2030 Fund - Class R Ticker: RRTCX
T. Rowe Price Retirement 2035 Fund - Class R Ticker: RRTPX
T. Rowe Price Retirement 2040 Fund - Class R Ticker: RRTDX
T. Rowe Price Retirement 2045 Fund - Class R Ticker: RRTRX
T. Rowe Price Retirement 2050 Fund - Class R Ticker: RRTFX
T. Rowe Price Retirement 2055 Fund - Class R Ticker: RRTVX
Janus Balanced Fund - Class R Ticker: JDBRX
BlackRock Equity Dividend Fund - Class R Ticker: MRDVX
Alger Capital Appreciation Institutional Fund - Class R Ticker: ACARX
Janus Forty Fund - Class R Ticker: JDCRX
Neuberger Berman Socially Responsive Fund - Class R3 Ticker: NRARX
Nuveen Mid Cap Index Fund - Class R3 Ticker: FMCYX
Goldman Sachs Small Cap Value Fund - Class R Ticker: GSQRX
Fidelity Advisor Small Cap Fund - Class T Ticker: FSCTX
Janus Overseas Fund - Class R Ticker: JDIRX
Thornburg International Value Fund - Class R3 Ticker: TGVRX
Oppenheimer Developing Markets Fund - Class N Ticker: ODVNX
Prudential Jennison Natural Resources Fund - Class R Ticker: JNRRX
Columbia Seligman Communications and Information Fund - Class R Ticker: SCIRX

I appreciate all the help and please let me know I should be supplying more information.

Could edit your original post, and post the expense ratio for each of these funds? This will help. Otherwise it's like ordering from a menu but without the prices. Be sure to enter the expense ratios for the funds as they are in your company's specific plan; often the fund expense ratios in 401k/403b/457 plans are different from the "retail" expense ratios you will find for a fund when doing an internet search.

[Watty]

First, I can save you a lot of angst over this. In your tax bracket, I think it's much more advantageous for you to do traditional 401(k) over Roth 401(k). I think the consensus on this board would say the same (with some detractors).

+1 on Consensus

It is very likely you will be in a lower tax bracket sometime if you might get married, have kids, have a mortgage, have a few years with lower income, etc or after you retire. You can either make Roth contributions or do Roth conversions then.

You also have to keep in mind that the consequences of making a choice that turns out incorrect are very different. For example you might be able to choose to put $150 in a deductible 401K now and pay the taxes later or pay about $50 in taxes today and put $100 into a Roth. If you choose the deductible 401K and end up wealthy when you retire than you would get stuck paying extra taxes and you might have to take a shorter cruise or more likely just leaving the 401K money to your estate. On the other hand if you choose the lesser amount in the Roth and end up short of money in retirement then you could be in a lot of trouble that you could have avoided.

The Roth might be worth considering a bit more favorably if you are going to be maxing out all your tax advantaged retirement accounts since a dollar in Roth is worth more than a dollar in a 401K but they both count the same towards your annual limits

[haban01]

Good Evening,

First off, Congratulations on being able to save and have the discipline to do so! I have been in my company's Roth 401K since Inception back in about 2005. We can not take out Roth IRA contributions from our plan, period unless we meet the normal requirements. Additionally, The Roth has to be established for 5 years to qualify for the withdrawal at 59.5. I would talk to your employer and plan administrator about the withdrawal rules. Keep in mind that they can change going forward as well. I would not bank taking out Roth 401K money. Roth IRA money would be another much easier option (although not recommended). Happy Holidays!

[Default User BR]

When you say "principal", I think the more precise term is "contributions". Yes, you can withdraw your contributions from a Roth 401(k) early without penalty because you've already paid taxes on them, but not the earnings.

This is not true in general. Employee deferrals and designated Roth contributions can't be withdrawn without a qualifying event. See the IRS FAQs:

Since I make designated Roth contributions from after-tax income, can I make tax-free withdrawals from my designated Roth account at any time?

No, the same restrictions on withdrawals that apply to pre-tax elective contributions also apply to designated Roth contributions. If your plan permits distributions from accounts because of hardship, you may choose to receive a hardship distribution from your designated Roth account. The hardship distribution will consist of a pro-rata share of earnings and basis and the earnings portion will be included in gross income unless you have had the designated Roth account for 5 years and are either disabled or over age 59 ½.

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-on-Designated-Roth-Accounts#25


Brian

[Tryndamere]

Could edit your original post, and post the expense ratio for each of these funds? This will help. Otherwise it's like ordering from a menu but without the prices. Be sure to enter the expense ratios for the funds as they are in your company's specific plan; often the fund expense ratios in 401k/403b/457 plans are different from the "retail" expense ratios you will find for a fund when doing an internet search.

Thank you all so much for the information. I have edited the OP with the expense ratios. Anybody have any experience with these funds?

[Tryndamere]

First, I can save you a lot of angst over this. In your tax bracket, I think it's much more advantageous for you to do traditional 401(k) over Roth 401(k). I think the consensus on this board would say the same (with some detractors).

+1 on Consensus

It is very likely you will be in a lower tax bracket sometime if you might get married, have kids, have a mortgage, have a few years with lower income, etc or after you retire. You can either make Roth contributions or do Roth conversions then.

You also have to keep in mind that the consequences of making a choice that turns out incorrect are very different. For example you might be able to choose to put $150 in a deductible 401K now and pay the taxes later or pay about $50 in taxes today and put $100 into a Roth. If you choose the deductible 401K and end up wealthy when you retire than you would get stuck paying extra taxes and you might have to take a shorter cruise or more likely just leaving the 401K money to your estate. On the other hand if you choose the lesser amount in the Roth and end up short of money in retirement then you could be in a lot of trouble that you could have avoided.

The Roth might be worth considering a bit more favorably if you are going to be maxing out all your tax advantaged retirement accounts since a dollar in Roth is worth more than a dollar in a 401K but they both count the same towards your annual limits

This makes a lot of sense. Thank you!

[pingo]

The research suggests that the most sure way to be in the top 25% of funds is to be in the bottom 25% of costs. Determine your tolerance for risk (age-in-bonds might be a good place to start), and pick one of those T.Rowe Price Retirement funds based on its amount of bonds vs. stocks. Given your employer plan, they are a fine choice and they'll do the job. There is no advantage for you to pick any other funds. Just remember that T.Rowe Price target funds keep a pretty aggressive asset allocation (a high proportion of stocks over a longer period than most), which is why I suggest choosing the retirement fund based on what stock-bond ratio you'll be comfortable with.

If you won't be contributing the maximum to all accounts, save enough money in your 401k to receive the full employer match, then put the rest in an IRA, but you must determine whether Traditional or Roth is better. My *guess* is the Traditional would be a better option for you, and you can dump the money in a Vanguard Target Retirement fund or LifeStrategy fund with an appropriate/comfortable amount of bonds just like you'd do with a T.Rowe Price Retirement fund.

If any of the money you'll be putting away will be for a house purchase, I would keep it separate from money you want for retirement.

All of this assumes you are single, and that you are giving us your correct tax bracket, however I'll note that it seems (anecdotally) that new (married) posters get their tax bracket wrong about 50% of the time.

[Tryndamere]

How do you all feel about borrowing against your 401k in an emergency v taking out principal in a Roth IRA?

My gut tells me that in an emergency borrowing against your 401k is better because at least it gets "paid back" and you don't end up being unable to catch-up because of Roth IRA yearly contribution caps hamstringing you. I am also reading that a Roth 401k allows you to borrow against your account, but not withdraw the principal outright. So, for all intensive purposes it seems like a Roth 401k is treated exactly like a traditional 401k as far as borrowing/withdrawing distributions goes. Thoughts?

[hoppy08520]

Determine your tolerance for risk (age-in-bonds might be a good place to start), and pick one of those T.Rowe Price Retirement funds based its amount of bonds vs. stocks. Given your employer plan, they are a fine choice and they'll do the job. There is no advantage for you to pick any other funds.

I agree with this. I wasn't sure until you posted the expense ratios, but given those expenses, I think you best bet from an economic and easy-of-maintenance perspective is to go with one of the target date funds.