401(k) with minimal match versus Roth IRA

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reneeh63
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401(k) with minimal match versus Roth IRA

Post by reneeh63 » Wed Dec 31, 2014 10:08 am

Hi everyone. I'm lucky enough to work for a company with a generous pension - the tradeoff is that they only match 401(k) contributions up to $1,000 annually. I'm 52 and hope to retire in 10 years. Right now, about 75% of my contributions are in my 401(k) and 25% in my Roth. Most of my contributions go to the 401(k) but I've been "hedging my bets" a bit and contributing a small amount to my Roth - I'm not maxed out on either yet.

My question is whether I should keep contributing to my Roth given I haven't maxed out my 401(k) - most advice says to only go to the matched amount and then switch to Roth contributions but I figured with such a low match I should go beyond it just for the tax benefits?

Any advice given my age and retirement timeframe? Please let me know if you need more information - thanks!

yosef
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Re: 401(k) with minimal match versus Roth IRA

Post by yosef » Wed Dec 31, 2014 11:54 am

Obviously take the free $1000 first, which it sounds like you are. Beyond that, it's a tough call that will come down in large part to your marginal tax rate now vs what you anticipate it being in retirement. I'd lean whichever way that calculation leads you but also hedge your bet by contributing some to both. Check out the wiki also http://www.bogleheads.org/wiki/Traditional_versus_Roth

reneeh63
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Re: 401(k) with minimal match versus Roth IRA

Post by reneeh63 » Wed Dec 31, 2014 1:16 pm

FYI - I may be creeping into the 28% federal tax bracket for 2014 and I contribute about 15% of my gross to the 401(k) and Roth total.

cherijoh
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Re: 401(k) with minimal match versus Roth IRA

Post by cherijoh » Wed Dec 31, 2014 2:04 pm

What are the offerings in your 401k and what are the expense ratios? If you have bad options, you might want to put more into the Roth just to have better fund choices.

Are you in the Social Security system? If you have a pension and SS, you could easily fill your lower marginal tax brackets in retirement. So these withdrawals could be taxed at the same marginal rate you would have deferred by making a contribution to your 401k. If the tax rates are the same then traditional vs. Roth is revenue neutral.

Also, will you need your RMDs from the 401k to live on or will they be in excess of your expenses? If not needed for living expenses, this would favor putting the money in your Roth IRA.

reneeh63
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Re: 401(k) with minimal match versus Roth IRA

Post by reneeh63 » Thu Jan 01, 2015 11:00 am

Thanks cherijoh....my employer recently expanded their 401(k) options to include the Vanguard Target date funds and their original choice are also very low cost. I think it does come down to the tax issues. Are there any shortcuts to making educated guesses on retirement income tax? Should I just run different scenarios through tax software, knowing of course that current tax law may change significantly over the next 10-20 years?

retiredjg
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Re: 401(k) with minimal match versus Roth IRA

Post by retiredjg » Thu Jan 01, 2015 11:22 am

reneeh63 wrote:...most advice says to only go to the matched amount and then switch to Roth contributions but I figured with such a low match I should go beyond it just for the tax benefits?
My understanding is that this very general advice is based on the assumption that most people can find better choices (lower expenses) outside the 401k than inside. This may or may not be true in your case. And it is not the only thing to consider especially since your match is so small.

There is certainly a valid argument to put more in the 401k if you are in the 25% tax bracket, especially if you are approaching the 28% tax bracket. In fact, it would be foolish to put money into Roth at 28% when you could lower your bracket by putting more money into the 401k.

There are many people here who support putting more into 401k in the 25% bracket. Roth is a great and wonderful thing but tax deferral is a great and wonderful thing too. You are right to question if you should continue to do what you have done in the past.

More specific information might help you get more specific responses. How good or how bad is your 401k? How much are you saving?

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ruralavalon
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Re: 401(k) with minimal match versus Roth IRA

Post by ruralavalon » Thu Jan 01, 2015 12:14 pm

Welcome to the forum :) .

What are the funds offered in your 401k (fund names, tickers & expense ratios)?

How much total dollars are you able to contribute toward investing annually?

Are you vested in a fairly large pension?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

reneeh63
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Re: 401(k) with minimal match versus Roth IRA

Post by reneeh63 » Thu Jan 01, 2015 5:10 pm

Thanks everyone for the helpful thoughts. For a little more information, I'm fully vested in my pension and it should provide an estimated 40% more than my Soc. Sec. PIA - so it makes a big difference in my retirement plans.

My investments are below -sorry - I can see none of the formatting is working this is pretty much illegible.
I'm in the middle of simplifying and getting costs down by selling some funds to increase by exposure to REITs and international:


401k: Expense Ratio % of All Investments Monthly Contribution
State Farm Growth (STFGX) - Large Blend 0.12% 54% $ 825
State Farm Balanced (STFBX) - Mod.Allocation 0.13% 17% $ 275
71% $ 1,100

Roth IRAs (currently contributing $225/month): Expense Ratio % Total
Broadview Opportunity Fund (BVAOX) - Small Blend 1.25% 7% (may sell this to purchase VGSLX (Vanguard REIT Index

Brown Cap Mgmt Small Company Fund (BCSIX) - Small Growth 1.25% 8% Undecided
Mairs & Power Growth Inv (MPGFX) - Large Blend 0.67% 5% Undecided

Royce Special Equity Invmt (RYSEX) - Small Blend 1.13% 3% (may sell this and others below for VFWAX(Vanguard FTSE all-Wld)
RS Diversified Growth A (RSDGX) - Small Growth 1.35% 5%
Matthews Asian Growth & Inc Investor (MACSX) - Pac/Asia 1.08% 1%
Fidelity Select Electronics (FSELX) - Tech 0.79% 1%

Laura
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Re: 401(k) with minimal match versus Roth IRA

Post by Laura » Thu Jan 01, 2015 5:38 pm

Do you have three roth IRAs? All of the funds in your roths are very expensive. I would consider moving all the money over to Vanguard. You can simplify and lower your costs at the same time.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.

reneeh63
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Re: 401(k) with minimal match versus Roth IRA

Post by reneeh63 » Thu Jan 01, 2015 5:43 pm

Yes Laura - I plan to sell/consolidate most of my Roths to Vanguard REIT (VGSLX) and Vanguard FTSE Wld (VFWAX) to lower expenses and better diversify)

Is there any other way to estimate future taxes than to merely run different scenarios of pension, soc.sec., and IRA distributions using current tax software, knowing that tax law can certainly change?
Last edited by reneeh63 on Thu Jan 01, 2015 5:56 pm, edited 1 time in total.

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ruralavalon
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Re: 401(k) with minimal match versus Roth IRA

Post by ruralavalon » Thu Jan 01, 2015 5:55 pm

Please see: "The Case Against Roth 401(k)". "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)" Also, wiki article, "Traditional versus Roth".

With low expense funds offered in your 401k, and being in the 25% tax bracket pushing 28%, I think it's fairly clear that you should stop or reduce contributions to the Roths and increase your contributions to the 401k up to the maximum $18k if possible.

What are the other funds (names, tickers & ERs) offered in your 401k, not just the ones you are invested in?

You should also consolidate the Roth IRAs at Vanguard, to buy whatever low expense funds are missing in your 401k.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

AviN
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Re: 401(k) with minimal match versus Roth IRA

Post by AviN » Thu Jan 01, 2015 6:11 pm

I don't think your particular 401(k) vs. Roth IRA decision is too important (as long as you contribute up to the 401(k) match). I'd recommend you focus more on your asset allocation and fund selection.
reneeh63 wrote: My investments are below -sorry - I can see none of the formatting is working this is pretty much illegible.
I'm in the middle of simplifying and getting costs down by selling some funds to increase by exposure to REITs and international:


401k: Expense Ratio % of All Investments Monthly Contribution
State Farm Growth (STFGX) - Large Blend 0.12% 54% $ 825
State Farm Balanced (STFBX) - Mod.Allocation 0.13% 17% $ 275
71% $ 1,100
Do you have any other low cost, diversified equity funds available in your 401(k)? Overall, these funds seem good but hold only 73-75 US large cap stocks and more diversification would be better.
Roth IRAs (currently contributing $225/month): Expense Ratio % Total
Broadview Opportunity Fund (BVAOX) - Small Blend 1.25% 7% (may sell this to purchase VGSLX (Vanguard REIT Index

Brown Cap Mgmt Small Company Fund (BCSIX) - Small Growth 1.25% 8% Undecided
Mairs & Power Growth Inv (MPGFX) - Large Blend 0.67% 5% Undecided

Royce Special Equity Invmt (RYSEX) - Small Blend 1.13% 3% (may sell this and others below for VFWAX(Vanguard FTSE all-Wld)
RS Diversified Growth A (RSDGX) - Small Growth 1.35% 5%
Matthews Asian Growth & Inc Investor (MACSX) - Pac/Asia 1.08% 1%
Fidelity Select Electronics (FSELX) - Tech 0.79% 1%
The expense ratios of all these funds are far too high. They appear to be actively managed funds too which have their own risks.

You should definitely avoid small growth, known as the "black hole of investing":

http://www.etf.com/sections/index-inves ... sting.html

I don't see any bonds (or other fixed income) here aside from the balanced fund. Did you decide to forgo bonds because of your pension?

I'd suggest you start with something like a three fund portfolio and view all the funds intended for retirement (regardless of the account they're in) as part of that unified portfolio:

http://www.bogleheads.org/wiki/Three-fund_portfolio

I'd recommend you do not tilt away from that unless you understand and have carefully considered whether benefits outweigh the costs.

Avi

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ruralavalon
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Re: 401(k) with minimal match versus Roth IRA

Post by ruralavalon » Thu Jan 01, 2015 6:23 pm

reneeh63 wrote: Is there any other way to estimate future taxes than to merely run different scenarios of pension, soc.sec., and IRA distributions using current tax software, knowing that tax law can certainly change?
I am not aware of any shortcut, or specialised software for this. Try estimating using current tax software, and recognize that gives only a speculative answer.

I am not a tax expert, I don't even do my own taxes. My CPA generally counsels me to prefer a current tax break over a future tax break.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

reneeh63
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Re: 401(k) with minimal match versus Roth IRA

Post by reneeh63 » Thu Jan 01, 2015 6:51 pm

The Roth funds are actively managed - I'd selected them years ago at which time they had relatively low expense ratios - index funds were not nearly as numerous or popular at that time. So I plan to remedy that by selling most of them and getting into the Vanguard REIT and International FTSE all-Wld funds.

As for my 401(k) the only other options are the Vanguard Target funds which I am not comfortable with. Since my current 401(k) funds have very low expense ratios of about 0.12% the real issue is how to diversify what I have now (STFGX and STFBX) via the Roths. Even if I don't expand on them I can at least use them to diversify.

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ruralavalon
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Re: 401(k) with minimal match versus Roth IRA

Post by ruralavalon » Thu Jan 01, 2015 7:48 pm

reneeh63 wrote: . . . . . the real issue is how to diversify what I have now (STFGX and STFBX) via the Roths. Even if I don't expand on them I can at least use them to diversify.
Do you have a target asset allocation that you want to aim for (stock/bond mix; domestic/international mix)?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

retiredjg
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Re: 401(k) with minimal match versus Roth IRA

Post by retiredjg » Fri Jan 02, 2015 7:26 am

Your asset allocation (stock to bond ratio) seems to be about 94% stock and 6% bonds unless I missed something. That is extremely aggressive and you have no need for that kind of risk. I would encourage you to increase that to at least 30% bonds which is still plenty aggressive for a person who is 52 years old and 10 years away from retirement.

I would move all of the Roth accounts to Vanguard. REIT and international are good, but suggest that you use Vanguard's Total International Index which is more complete than the FTSE fund you are considering (which does not contain small caps).

About the best you can do is add up the income you know you will have/need in retirement, do your best guess at deductions and exemptions and see where that lies on the current tax bracket chart. With a generous pension you are less likely to be in the 15% bracket in retirement than without a pension.

As for your contributions, my suggestion is to contribute enough to traditional 401k to stay in the 25% bracket (as opposed to creeping up) and put the rest in Roth. Your pension weighs the argument in favor of using Roth IRA and Roth 401k, but maybe not to the point that it pushes you into the 28% bracket.

TomTX
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Re: 401(k) with minimal match versus Roth IRA

Post by TomTX » Fri Jan 02, 2015 7:42 am

ruralavalon wrote:Please see: "The Case Against Roth 401(k)". "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)" Also, wiki article, "Traditional versus Roth".

With low expense funds offered in your 401k, and being in the 25% tax bracket pushing 28%, I think it's fairly clear that you should stop or reduce contributions to the Roths and increase your contributions to the 401k up to the maximum $18k if possible.
Your article ignores two important things:

1) Expected tax rate in Retirement. There's some hand-waving about expecting lower taxes in retirement anchored with "MABYE you retire to a state with less income tax" - and completely ignoring the flip side: The Social Security taxation trap which pushes a LOT of people drawing from a Traditional IRA/401(k) in to an (effective) higher marginal tax rate. Past a pretty low bar, every dollar you pull out of a Traditional not only will be taxed at your marginal rate, it will make more of your Social Security payout taxable, increasing the effective marginal rate significantly.

For this poster, given the good pension, they will already be in the Social Security taxation region before pulling a dollar out of Traditional.

http://www.investopedia.com/articles/pf ... ty-tax.asp (Ignore the Annuity shilling, this is just a random article with some examples)

2) Even if #1 can be avoided, "Put it all in Traditional" ignores where the next lower bracket is. For example, if $5k/year is enough to eliminate the 25% bracket, I think it's very shortsighted to NOT do a Roth with the rest. Prepaying at 15% makes sense, especially with Item 1 above.

Sure, if the OP is paying California income taxes now and intends on retiring in Texas with zero income tax - that shifts the balance to Traditional. However, that article is dangerously incomplete.

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