is IRR worth it for me

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cals400ex
Posts: 181
Joined: Wed Aug 01, 2012 8:38 pm

is IRR worth it for me

Post by cals400ex » Sat Aug 27, 2016 5:56 pm

My current 401K plan allows IRR, and I'm trying to determine if this is a better option than taxable investing. A few stats:
33 years old, 28% tax bracket, currently max out 401K and backdoor roth ira, I am NOT considered a highly compensated employee, have 6-month emergency fund and an additional $10K in a taxable account (incase extra cash would be needed for any unforeseen reason). Here is a list of funds available in 401K:
STOCK:
DFA Commodity Strategy Portfolio --(DCMSX)--ER: 0.33%
DFA Emerging Markets Value Portfolio--(DFEVX)--ER: 0.55%
DFA International Value Portfolio--(DFIVX)--ER: 0.43%
DFA Int. Small Cap Value Portfolio--(DISVX)--ER: 0.68%
DFA U.S. Large Cap Value Portfolio--(DFLVX)--ER: 0.27%
DFA U.S. Targeted Value Portfolio--(DFFVX)--ER: 0.37%
iShares Core MSCI Emerging Markets ETF--(IEMG)--ER: 0.18%
Vanguard FTSE All-Wld ex-US Sm Cap Idx ETF--(VSS)--ER: 0.19%
Vanguard Global ex-US Real Estate ETF--(VNQI)--ER: 0.24%
Vanguard REIT ETF--(VNQ)--ER: 0.12%
Vanguard 500 ETF--(VOO)--ER: 0.05%
Vanguard Small Cap ETF--(VB)--ER: 0.09%
BOND:
iShares Core US Aggregate Bond ETF--(AGG)--ER: 0.08%
Vanguard Short-term Bond Index ETF--(BSV)--ER: 0.10%
Vanguard Sh-Tm Inf.-Prot. Sec. Idx ETF--(VTIP)--ER: 0.10%
BLENDED:
DFA Global Allocation 60/40 Portfolio--(DGSIX)--ER: 0.29%
CASH/STABLE VALUE:
Vanguard Prime Money Market Fund (Inv)--(VMMXX)--ER: 0.16%

Mananagement fees are right at 1%. This plans allows for IRR, immediately, to avoid paying taxes on any gains, at no additional charge/fee. I MUST use the same funds in my pretax "traditional" 401k account as I use in my after tax 401k sub account.

As an added benefit, this plan allows me to roll all of the IRR money out of the plan into my roth IRA (which I currently hold at vanguard), without touching/affecting anything in my pretax sub account. However, any money put into the IRR sub account must be in this account for 5 years avoid a 10% penalty. Each time I roll money out of the IRR sub account into my roth IRA, there is a $90 fee (This can be done once a month, once a year, or whatever I choose....As long as I wait at least 5 years). All of this will be tracked closely (my paycheck stubs will show any money that I contributed into the pretax 401k and the after tax sub accounts, separately).

Being able to roll over the IRR money into my outside roth ira isn't something that I hear of much. It was verified that I can do this with my plan administrators and lawyers at ascensus. They said there is no current law that prohibits this, and it is kind of vague, but it may change in the future.

To me, it seems like this is the best way to go. I don't like 1% management fees, and I don't like paying $90 to roll money out of the after tax 401k to the roth ira. But, it still seems like this is a better idea than taxable investing. I'll be able to avoid RMD's after its rolled into the roth ira. And I won't be taxed upon withdrawal when I'm 59.5. Thoughts?

retiredjg
Posts: 37140
Joined: Thu Jan 10, 2008 12:56 pm

Re: is IRR worth it for me

Post by retiredjg » Sat Aug 27, 2016 6:52 pm

To me, IRR means "in-plan Roth Rollover". With an IRR, you would roll your after-tax contributions into Roth 401k, not out to Roth IRA. With plan fees that high, that does not look very attractive to me, especially if the money has to stay there for 5 years with high management fees and a $90 transaction fee to do the rollover.
Being able to roll over the IRR money into my outside roth ira isn't something that I hear of much.
Rolling an after tax account to Roth IRA is discussed here pretty regularly. Use the google box in the upper right and search for mega back door Roth IRA. You will find a considerable amount of information. I think this is what you are thinking about, not IRR.

I think there might be some confusion over the 5 years and 10%. That does not sound like any plan we've discussed before (in fact, I'm not sure they can even do that) but it is similar to some tax consequences that probably do not even apply to this situation. Try to learn more about this before going forward.

That $90 transaction fee is something to be wary of. At this point, taxable investing is sounding better than using the after-tax account.

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