Expensive 401k, Want to Invest in Roth IRA

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Topic Author
NateW
Posts: 449
Joined: Tue Feb 23, 2010 10:44 am

Expensive 401k, Want to Invest in Roth IRA

Post by NateW »

My 401k fund fees are running at least 2% of plan assets and possibly more if I have a wrap fee (and I can not determine this). I have Transamerica "branded" (no ticker) Vanguard Target Date Retirement Funds (pay 2% on them :evil:). Last year I maxed out my 401k contribution at $22,000 per year (I turned 50 last year). In addition, my wife and I were fortunate enough to sock away enough for two Roth IRA contrubitions ($6,000 for both me and my wife). But this year I may not be able to contribute as much to a Roth (money is a little tighter).

My wife is also maxing out her 401k (at $22,000/year) and has lower fund costs (and a better match), so we want to continue to max her 401k out.

My company match is 2% of salary, or in my case, $1600/year.

My thoughts are to contribute the maximum to my 401k up until the end of June this year and then stop. The amount that my pay increases by for the rest of the year will then be put into savings and used to fund $12,000 for my wife's and my Roth IRA contributions (we'll have to use a little savings too).

Question: Will I get the full company match for the year, or will I only get six months of match ($800) since I will only participate in my 401k for six months (even though I will have $11,000 witheld for the year)? Would a better strategy be to participate in my company 401k for the entire year, but lower the amount witheld for my 401k to about 50% of present witholdings?

I do not want to change my (maximum) contribution amount to my 401k until June just in case I can actually save enough for our Roth IRAs with my maximum 401k contributions. But am I forgoing half of my (measly) company match by doing this?

Opinions?

Thanks.

--Nate
Carl53
Posts: 2687
Joined: Sun Mar 07, 2010 7:26 pm

Post by Carl53 »

My experience is that they will only match your current paychecks contributions so you will lose out if you stop contributions midway through the year.

Your 401k plan certainly is none to attractive.

I suspect that you and your wife will ultimately be recipients of a mid-to -upper level of Social Security benefits unless you are employed in the public sector, which I think not since you have 401ks. You might want to consider after tax contributions to your 401k, if allowed, or make that can be withdrawn as in-service withdrawals and transferred to rollover Roths or make nondeductible IRAs that can be rolled. (Both of these have been discussed recently in other threads). The reason being that your likely ultimate high levels of RMDs from the 401ks will cause your SS to become 85% taxable. This is the same as taxing your RMDs/retirement income at 185% of your marginal retirement income tax rate. (46.25% if you will be in the 25% bracket)
guitarguy
Posts: 2191
Joined: Mon Dec 20, 2010 3:10 pm

Post by guitarguy »

The true Bogleheds will correct me if I'm wrong here, but I'd continue to contribute to the 401k enough to get the full match even though it's expensive. It's still free $ right?

After contributing enough to get your full match, stick the rest of it in cheaper alternatives in your Roth or wherever makes the most sense based on your tax rate, which may be affected if you drastically cut your pre tax contributions yes?
Last edited by guitarguy on Tue Jan 11, 2011 7:32 am, edited 3 times in total.
Ed 2
Posts: 2692
Joined: Sat May 15, 2010 9:34 am

Post by Ed 2 »

I had the same problem. I stopped my 401k contributions. We have Roth IRA's and 401k for my wife with ~0.50-0.80 ER's . My advise- max out IRA's first , max out your wife's 401k the second.
Forget about your 401k,your 401k is a highway robbery. :evil:
Last edited by Ed 2 on Tue Jan 11, 2011 7:25 am, edited 1 time in total.
"The fund industry doesn't have a lot of heroes, but he (Bogle) is one of them," Russ Kinnel
Chin Strap
Posts: 182
Joined: Thu Jan 06, 2011 11:47 am

Post by Chin Strap »

darga19 wrote:The true Bogleheds will correct me if I'm wrong here, but I'd continue to contribute to the 401k enough to get the full match (free $) even though it's expensive.
There is never a reason to not do this. Even if you withdrew the money immediately after depositing it in the 401k (which you shouldn't do of course but I am just taking this to an extreme), you are talking about a 10% penalty vs. a 100% return. The math is obvious to never waste a full match even if you can't afford any retirement savings.
Topic Author
NateW
Posts: 449
Joined: Tue Feb 23, 2010 10:44 am

Post by NateW »

"You might want to consider after tax contributions to your 401k, if allowed, or make that can be withdrawn as in-service withdrawals and transferred to rollover Roths or make nondeductible IRAs that can be rolled."

Thank you for the responses so far.

I do know for a fact that in service withdrawals ARE NOT allowed before age 59-1/2 with my 401k. I checked the Plan Document. Before I knew any better I rolled my 401k balance from previous employer into my present plan. This was before I knew about Vanguard rollover IRAs. I will only make that mistake once!

I also wonder if I lower 401k contributions by $12,000 this year, if my increased taxes will negate any benifits of contributing $12,000 to Roth IRAs at Vanguard. I would imagine I would see about $8000 more in my yearly take home pay if I make this change.

I know the rule is when you have an expensive 401k is to first contribut to your 401k to get the employer match, then max out your IRAs and anything left should go to your 401k again. Anything over that could go into a taxable account. But I just can not seem to see this logic with the tax savings of maximum 401k participation. My wife and I make too much to qualify for a traditional (deductable) IRA, so any IRA would have to either be a Roth (and we are close to the income limit for a Roth) or a non-deductable IRA. Lowering my 401k contribution by very much could possibly disqualify us for the Roth. I need to check the numbers. We are close to the Roth limit on income.

--Nate
Last edited by NateW on Tue Jan 11, 2011 8:50 am, edited 3 times in total.
Bob's not my name
Posts: 7417
Joined: Sun Nov 15, 2009 8:24 am

Re: Expensive 401k, Want to Invest in Roth IRA

Post by Bob's not my name »

NateW wrote:Will I get the full company match for the year, or will I only get six months of match ($800) since I will only participate in my 401k for six months (even though I will have $11,000 witheld for the year)? Would a better strategy be to participate in my company 401k for the entire year, but lower the amount witheld for my 401k to about 50% of present witholdings?
I believe (based on prior threads) that this varies by plan, so nobody here can answer the question for you. You have to find the answer in your plan documents.
Chin Strap
Posts: 182
Joined: Thu Jan 06, 2011 11:47 am

Post by Chin Strap »

Do you have any other tax deferred traditional IRAs lying around? If not, it would be easy to do a backdoor Roth this year even if you go over the Roth requirements.

http://thefinancebuff.com/the-backdoor- ... ow-to.html
Bfwolf
Posts: 2108
Joined: Thu Oct 14, 2010 11:19 am

Post by Bfwolf »

Agree with other's thoughts:

1) You PROBABLY need to contribute every paycheck to get the full company match. But you'd have to check your company's plan to be sure.

2) If you don't have any money in a traditional IRA, you can do a back door Roth to skirt the Roth IRA income limits. A simple google search will give you all the info you need to know on that.
lawman3966
Posts: 1352
Joined: Sun Aug 10, 2008 12:09 pm
Location: Tacoma WA

Re: Expensive 401k, Want to Invest in Roth IRA

Post by lawman3966 »

NateW wrote:My 401k fund fees are running at least 2% of plan assets and possibly more if I have a wrap fee (and I can not determine this). I have Transamerica "branded" (no ticker) Vanguard Target Date Retirement Funds (pay 2% on them :evil:). Last year I maxed out my 401k contribution at $22,000 per year (I turned 50 last year). In addition, my wife and I were fortunate enough to sock away enough for two Roth IRA contrubitions ($6,000 for both me and my wife). But this year I may not be able to contribute as much to a Roth (money is a little tighter).

My wife is also maxing out her 401k (at $22,000/year) and has lower fund costs (and a better match), so we want to continue to max her 401k out.

My company match is 2% of salary, or in my case, $1600/year.

My thoughts are to contribute the maximum to my 401k up until the end of June this year and then stop. The amount that my pay increases by for the rest of the year will then be put into savings and used to fund $12,000 for my wife's and my Roth IRA contributions (we'll have to use a little savings too).

Question: Will I get the full company match for the year, or will I only get six months of match ($800) since I will only participate in my 401k for six months (even though I will have $11,000 witheld for the year)? Would a better strategy be to participate in my company 401k for the entire year, but lower the amount witheld for my 401k to about 50% of present witholdings?

I do not want to change my (maximum) contribution amount to my 401k until June just in case I can actually save enough for our Roth IRAs with my maximum 401k contributions. But am I forgoing half of my (measly) company match by doing this?

Opinions?

Thanks.

--Nate
I'm not clear on why you can't determine the existence or amount of your wrap fee. In my case, a colleague alerted me to monthly deductions being taken from our accounts by the provider. I estimated the annual percentage that the deductions corresponded to be 1%. Upon asking our financial advisor about this, I found out for the first time that we had a wrap fee of 0.93%.

Accordingly, you could pursue one or both of the approaches above. Presuming you have online access (paper statements could work as well), check all of your transactions within a given quarter or year, and see whether there are deductions that can't be explained by anything except a wrap fee. Failing that, you could call whoever is designated as your "financial advisor" and ask what your wrap fee is. My understanding is that they don't have to volunteer this information but must tell you about it, if you know to ask.

Another possibility is that the wrap fee is buried somewhere in the mutual fund NAV calculation so deeply that a forensic accountant would be needed to unearth it. If that's the case, I don't know how to get the information. But, you could at least try the approaches above.

In evaluating the benefit of participating in a high-fee 401K plan, beyond comparing the fees and the tax deduction, some additional considerations are the taxability of bond interest if the money were in a taxable account instead of the 401K, and the amount of "taxable space" you'll have upon leaving employment (and rolling the 401K into an IRA) in which to store your income investments.
Last edited by lawman3966 on Tue Jan 11, 2011 7:55 pm, edited 1 time in total.
cliffedelgado
Posts: 105
Joined: Fri Apr 16, 2010 1:52 am

Re: Expensive 401k, Want to Invest in Roth IRA

Post by cliffedelgado »

Bob's not my name wrote:
NateW wrote:Will I get the full company match for the year, or will I only get six months of match ($800) since I will only participate in my 401k for six months (even though I will have $11,000 witheld for the year)? Would a better strategy be to participate in my company 401k for the entire year, but lower the amount witheld for my 401k to about 50% of present witholdings?
I believe (based on prior threads) that this varies by plan, so nobody here can answer the question for you. You have to find the answer in your plan documents.
Not Bob is right. This is probably in the plan document. If not, ask HR/Benefits. It's usually referred to as a "true-up contribution".
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