Should I participate in my 401k?

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Topic Author
Flelmo
Posts: 3
Joined: Mon May 18, 2015 1:28 pm

Should I participate in my 401k?

Post by Flelmo » Fri Jun 12, 2015 7:17 am

Emergency funds: Yes
Debt: Student loans @ 5.125%, Credit Card Consolidation @ 4.99%
Tax Filing Status: Single
Tax Rate: 25% Federal, 2.5% State
State of Residence: NJ
Age: 30
Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 50% of stocks

My current portfolio is in the mid 5 figure range. I haven't invested anything in about 5 years.

Current Accounts:

Roth IRA @ Fidelity: 54% Fidelity Four-in-One Index Fund - FFNOX (0.24% ER)
Rollover IRA @ Fidelity: 46% Fidelity Four-in-One Index Fund - FFNOX (0.24% ER)

My workplace has a 401k set up through Principal, with no match. I was planning on starting contributing approximately $1200/yr to start, and increase that slowly over the next while. However, I was reviewing the funds I have available and I'm not sure that's the best option. None of the options available have an expense ratio lower than 0.72%, and those are for index funds (NX033, Principal LargeCap S&P 500 Index Separate Account; NXS33, Principal SmallCap S&P 600 Index Separate Account; NXM33, Principal MidCap S&P 400 Index Separate Account).

My main question is: With no match, should I even bother investing in my 401k, or just keep putting money towards one of my IRAs?

heikejohn1
Posts: 73
Joined: Wed Apr 23, 2014 6:02 am

Re: Should I participate in my 401k?

Post by heikejohn1 » Fri Jun 12, 2015 8:28 am

My husbands 401K had horrible choices, too. We still contributed, even without the match.
He is changing employers now, so we can finally roll the account into a Trad IRA.
During the time he had the 401K, it reduced out taxable income.
We also put in the max into our Roth every year.
For us, the tax savings were worth the expenses.

In my opinion, save on taxes with the 401K, and when you switch emploers you have something to roll over.

rkhusky
Posts: 7892
Joined: Thu Aug 18, 2011 8:09 pm

Re: Should I participate in my 401k?

Post by rkhusky » Fri Jun 12, 2015 8:29 am

Investing in a 401K allows you to save on taxes now (25%) and save on taxes on earnings in the future. 0.72% is not great, but it is not horrible. If you forgo the 401K contribution, you can't get it back in later years.

Edit: if you are not maxing your IRA, you could do that first before using the 401K. You could use a Traditional IRA and take the tax deduction, if your modified AGI meets the IRS requirement (<$61K).

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Ged
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Location: Roke

Re: Should I participate in my 401k?

Post by Ged » Fri Jun 12, 2015 8:43 am

It depends on how long you think you will be with this employer. After a decade or so the tax benefits can start being overwhelmed by the expenses, depending on the expenses vs the rate of taxation. For shorter periods of time it is almost always worthwhile.

Topic Author
Flelmo
Posts: 3
Joined: Mon May 18, 2015 1:28 pm

Re: Should I participate in my 401k?

Post by Flelmo » Fri Jun 12, 2015 8:57 am

rkhusky wrote:Edit: if you are not maxing your IRA, you could do that first before using the 401K. You could use a Traditional IRA and take the tax deduction, if your modified AGI meets the IRS requirement (<$61K).
I am not currently investing anything towards my IRA. This would be my alternate option, rather than investing in the 401k, until I am able to max it out. I do meet the IRS requirement for AGI.

kazper
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Joined: Fri Aug 01, 2014 7:45 pm

Re: Should I participate in my 401k?

Post by kazper » Fri Jun 12, 2015 9:03 am

Edit: if you are not maxing your IRA, you could do that first before using the 401K. You could use a Traditional IRA and take the tax deduction, if your modified AGI meets the IRS requirement (<$61K).
I think this is good advice. Try maxing out your IRA (roth or traditional) and then go back for the 401k. If your income is above the limit where deductions are phased out if you use the IRA, then the 401k or roth IRA are probably the better options.

NightFall
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Joined: Wed Mar 12, 2014 4:38 pm

Re: Should I participate in my 401k?

Post by NightFall » Fri Jun 12, 2015 9:57 am

Note: this is only a back of the envelope calculation. Let's assume you never sell your 401K investments and they yield 2% in qualified dividends. Using long term capital gains, you pay .15*2%=.3% in taxes every year outside of a 401K. So the tax sheltered nature is immediately worth at least that amount, which brings your expense ratio down to 0.72-.3=.42%. That's .18% higher than your IRA and the calculation is even better with bonds since you don't get the favorable tax treatment of stock dividends. So your penalty, assuming you work until 67, is less than (1.0018)^37 = 1.069... so 6.9% and that's only if you do a lump sum of your entire retirement amount now (theoretically you would contribute each year until 67). In general, it's less for future contributions as they have less time to compound; so that's an upper bound. Given that you can then roll everything over to an IRA with access to good funds and continue the tax advantaged treatment without the additional expenses, I would say it's a net win. As several have mentioned... if you don't use it, you lose it. There's only so much tax advantaged space available each year. I lost a lot of space before I found this discussion board. Although contributing to your IRA first, is a good idea.

sawhorse
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Joined: Sun Mar 01, 2015 7:05 pm

Re: Should I participate in my 401k?

Post by sawhorse » Fri Jun 12, 2015 10:00 am

I would prioritize paying off the debt.

How much debt do you have? If it's a crippling amount that leads you to think you might need to declare bankruptcy, dump as much as you can into the 401k as they receive ironclad protection in bankruptcy. I assume it's not because you said you have an emergency fund, but it is something to think about.

Topic Author
Flelmo
Posts: 3
Joined: Mon May 18, 2015 1:28 pm

Re: Should I participate in my 401k?

Post by Flelmo » Fri Jun 12, 2015 10:49 am

sawhorse wrote:I would prioritize paying off the debt.

How much debt do you have? If it's a crippling amount that leads you to think you might need to declare bankruptcy, dump as much as you can into the 401k as they receive ironclad protection in bankruptcy. I assume it's not because you said you have an emergency fund, but it is something to think about.
10k in the credit cards, 20k in the student loans. Gross income of 50k. It's a burden but I would not consider bankruptcy. I plan to be free of the credit card debt in 3 years, then accelerate the student loans.

Thanks for all the advice otherwise folks.

sawhorse
Posts: 3487
Joined: Sun Mar 01, 2015 7:05 pm

Re: Should I participate in my 401k?

Post by sawhorse » Fri Jun 12, 2015 10:56 am

Flelmo wrote:10k in the credit cards, 20k in the student loans. Gross income of 50k. It's a burden but I would not consider bankruptcy. I plan to be free of the credit card debt in 3 years, then accelerate the student loans.
Since you're not in bankruptcy risk, I would prioritize paying off the debt. One strategy is to put what would have been your 401k contributions toward a Roth IRA with low risk investments. As you make the Roth contributions, take the same amount from your emergency fund and put that toward the debt. Since your Roth IRA can serve as a backup emergency fund, your emergency fund amount would be roughly the same as long as you have low risk investments. If you use myRA, you get the G fund rate without any risk of losing capital.

This strategy allows you to maximize your IRA allowance and also pay off debt without depleting the amount of money you can tap in an emergency.

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