Taxable instead of Maxing 401(k)

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neophyte1
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Taxable instead of Maxing 401(k)

Post by neophyte1 » Mon May 08, 2017 9:46 am

If one is contributing to a 401(k) up to employer match for both husband and wife, and also maxing husband and wife IRAs, is it the worst thing in the world financially to fund taxable thereafter as opposed to maxing 401(k)? I understand all the benefits of maxing tax advantaged space, but I like the liquidity of taxable. At a young age, you never know what the future holds and access to money can be helpful and important. (I know 401(k)s allow for some withdrawals for certain things but it's still very restrictive relative to taxable).

This article also kind of got me thinking from hedge fund manager James Altucher -> http://www.jamesaltucher.com/2015/08/401k-scam/

Thoughts? Do any Bogleheads NOT max 401(k) and instead invest in taxable?

ACM4297
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Re: Taxable instead of Maxing 401(k)

Post by ACM4297 » Mon May 08, 2017 9:59 am

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bloom2708
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Re: Taxable instead of Maxing 401(k)

Post by bloom2708 » Mon May 08, 2017 10:00 am

It is a challenge to mix "investing for retirement" and "savings for short to medium term spending".

Many do not make enough to do all the investing and saving they want to. Trade-offs must be made.

Having taxable money "easily accessible" is both a good and bad thing. Money/credit that is "easily accessible" is easy to spend. If you spend it, it won't be there for your retirement. Under-funding your retirement is an issue for many.

Saving 6% in your 401k to get your match is great, but 6% will not provide a comfortable retirement (in most cases). If an inheritance or pension is involved, then you have options.

Maxing your 401k is both investing enough for your retirement AND not paying tax on those dollars until "20, 30+ years from now".

Having a large HELOC available for "easy spending" or having 5 credit cards with a $10k limit available for "easy spending" would be other sources of funds. The best is to delay gratification (to a certain point) and intentionally save for short to mid-term spending.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

neophyte1
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Re: Taxable instead of Maxing 401(k)

Post by neophyte1 » Mon May 08, 2017 10:02 am

ACM4297 wrote:Have you looked at Roth IRAs/backdoor Roth? It seems that you'd benefit more from investing in there, as you can always pull out principal, but the earnings keep growing tax-deferred.
Thank you, and yes. The IRAs we max (11K per year) are both Roth. So perhaps this already provides enough liquidity.

KlangFool
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Re: Taxable instead of Maxing 401(k)

Post by KlangFool » Mon May 08, 2017 10:03 am

neophyte1 wrote:If one is contributing to a 401(k) up to employer match for both husband and wife, and also maxing husband and wife IRAs, is it the worst thing in the world financially to fund taxable thereafter as opposed to maxing 401(k)? I understand all the benefits of maxing tax advantaged space, but I like the liquidity of taxable. At a young age, you never know what the future holds and access to money can be helpful and important. (I know 401(k)s allow for some withdrawals for certain things but it's still very restrictive relative to taxable).

This article also kind of got me thinking from hedge fund manager James Altucher -> http://www.jamesaltucher.com/2015/08/401k-scam/

Thoughts? Do any Bogleheads NOT max 401(k) and instead invest in taxable?
neophyte1,

<< (I know 401(k)s allow for some withdrawals for certain things but it's still very restrictive relative to taxable).>>

1) You can withdraw money from 401K any time as long as you pay the 10% early withdrawal penalty. So, it is not restrictive. And, there are times when it is worthwhile to do that.

2) Let's assume that you are in 25% marginal tax rate. If you put money into the Trad. 401K, you save 25% tax. Then, you are unemployed for more than 1 year and you need to withdraw from the 401K. So, you withdraw from the Trad. 401K and pay the 10% penalty. But, your income is low enough (unemployed) that you are paying 10% or lower tax. So, the tax that you are paying = 10% penalty + 10% income tax = 20%. You save 25% - 20% = 5% tax.

In fact, if you are in such a bad shape that you need to withdraw from Trad. 401K, you probably are paying 0% income tax. So, your net tax = 10% penalty. You save 25% - 10% penalty =15% tax.

3) If you put this money into the taxable account, you pay 25% tax. You could never pay less tax than (2). You have less money in your pocket.

<< At a young age, you never know what the future holds and access to money can be helpful and important.>>

4) Max up the Trad. 401K is a good idea. It let you keep more of your money in your own pocket instead of paying taxes. More money is always better to prepare for an uncertain future.

5) 401K is not a retirement account. It is a tax-deferred account. It shifted the time when you pay tax on the money. It is not a retirement account because you can withdraw money from that account anytime. And, there are times when it is worthwhile to withdraw the money earlier and pay the penalty. People mistakenly call the 401K as a retirement account.

KlangFool
Last edited by KlangFool on Mon May 08, 2017 10:07 am, edited 1 time in total.

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simplesimon
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Re: Taxable instead of Maxing 401(k)

Post by simplesimon » Mon May 08, 2017 10:06 am

401K is not an "industry", it's part of the tax code. It certainly does fall under "investing" and the investment industry is huge and some parts are very bad. To address some of this guy's "cons"...

1) "You can't predict your tax rate 30 years from now." Sure, but paying taxes now is also a prediction that tax rates will be lower now than in the future. Also, each dollar contributed into a 401K saves the marginal tax rate while withdrawing from the 401K might not necessarily be so. See TFB's article illustrating this point.

2) Employer match. Certainly many employers give a very small or no match. He refers to vesting period and yes, many employers have this, many also do not. It's a benefit provided by the employer...just like it's contribution to your health insurance premiums, commuter expenses, gym membership, or whatever.

3) Fees. This is what differentiates a good 401K plan from a bad 401K plan. It's not the 401K industry's high fees, its the mutual fund industry's.

Reading his article made me want to throw up a little.

neophyte1
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Re: Taxable instead of Maxing 401(k)

Post by neophyte1 » Mon May 08, 2017 10:08 am

KlangFool wrote:
neophyte1 wrote:If one is contributing to a 401(k) up to employer match for both husband and wife, and also maxing husband and wife IRAs, is it the worst thing in the world financially to fund taxable thereafter as opposed to maxing 401(k)? I understand all the benefits of maxing tax advantaged space, but I like the liquidity of taxable. At a young age, you never know what the future holds and access to money can be helpful and important. (I know 401(k)s allow for some withdrawals for certain things but it's still very restrictive relative to taxable).

This article also kind of got me thinking from hedge fund manager James Altucher -> http://www.jamesaltucher.com/2015/08/401k-scam/

Thoughts? Do any Bogleheads NOT max 401(k) and instead invest in taxable?
neophyte1,

<< (I know 401(k)s allow for some withdrawals for certain things but it's still very restrictive relative to taxable).>>

1) You can withdraw money from 401K any time as long as you pay the 10% early withdrawal penalty. So, it is not restrictive. And, there are times when it is worthwhile to do that.

2) Let's assume that you are in 25% marginal tax rate. If you put money into the Trad. 401K, you save 25% tax. Then, you are unemployed for more than 1 year and you need to withdraw from the 401K. So, you withdraw from the Trad. 401K and pay the 10% penalty. But, your income is low enough (unemployed) that you are paying 10% or lower tax. So, the tax that you are paying = 10% penalty + 10% income tax = 20%. You save 25% - 20% = 5% tax.

In fact, if you are in such a bad shape that you need to withdraw from Trad. 401K, you probably are paying 0% income tax. So, your net tax = 10% penalty. You save 25% - 10% penalty =15% tax.

3) If you put this money into the taxable account, you pay 25% tax. You could never pay less tax than (2). You have less money in your pocket.

<< At a young age, you never know what the future holds and access to money can be helpful and important.>>

4) Max up the Trad. 401K is a good idea. It let you keep more of your money in your own pocket instead of paying taxes. More money is always better to prepare for an uncertain future.

5) 401K is not a retirement account. It is a tax-deferred account. It shifted the time when you pay tax on the money. It is not a retirement account because you can withdraw money from that account anytime. And, there are times when it is worthwhile to withdraw the money earlier and pay the penalty. People mistakenly call the 401K as a retirement account.

KlangFool
Thank you, great points. Really appreciate it.

neophyte1
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Re: Taxable instead of Maxing 401(k)

Post by neophyte1 » Mon May 08, 2017 10:09 am

simplesimon wrote:401K is not an "industry", it's part of the tax code. It certainly does fall under "investing" and the investment industry is huge and some parts are very bad. To address some of this guy's "cons"...

1) "You can't predict your tax rate 30 years from now." Sure, but paying taxes now is also a prediction that tax rates will be lower now than in the future. Also, each dollar contributed into a 401K saves the marginal tax rate while withdrawing from the 401K might not necessarily be so. See TFB's article illustrating this point.

2) Employer match. Certainly many employers give a very small or no match. He refers to vesting period and yes, many employers have this, many also do not. It's a benefit provided by the employer...just like it's contribution to your health insurance premiums, commuter expenses, gym membership, or whatever.

3) Fees. This is what differentiates a good 401K plan from a bad 401K plan. It's not the 401K industry's high fees, its the mutual fund industry's.

Reading his article made me want to throw up a little.
Thanks. Altucher can't be as out of touch as he appears as he seems to be smart in ways. Makes me wonder if he has an agenda to intentionally put bad advice out there to get his blog traffic. Who knows.

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flamesabers
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Re: Taxable instead of Maxing 401(k)

Post by flamesabers » Mon May 08, 2017 10:12 am

I think it depends on a number of factors.

For example, how good (or bad) are the funds in your 401k? Does your 401k provide access to good funds you otherwise would not have access to?

What tax bracket are you currently in? What tax bracket do you anticipate to be in at the peak of your career?

What kind of funds do you have in your taxable account? If it's equity funds, I wouldn't consider those to be particularly liquid, unless you can afford the loss of liquidating when the market is in a downward trend.

Would funding an emergency fund to a certain amount give you peace of mind for the uncertainty of the future?

I'll address the cons the author in your article listed:

1. You can’t predict your tax rate 30 years from now.

You can now invest in Roth 401k accounts. When you invest in a Roth 401k, you're protecting yourself from the possibility you'll be in a higher tax bracket when you retire.

2. The Employer Match-Companies that don’t have an employer-match pay higher salaries

You could use the same argument for any fringe benefit an employer extends to its employees. I wonder if the author would make the same argument for employers who provide health insurance vs. employers who don't?

Also, unlike a higher salary, employer's matching contributions won't put you in a higher tax bracket.

3. Fees-People don’t manage 401k plans for free.

This hold true for taxable and tax-advantaged investments. It's nothing unique for 401k funds. Unless you're going to invest strictly in bank and treasury investments, fees are a necessary evil.

4. Assumption on market returns-The market has returned somewhere between 7-10% per year depending on what time period you look at, what index, etc. The average investor has returned 1.8% per year over the past 40 years.

Actually, this is an argument for 401k accounts over taxable accounts, as it's much harder to liquidate a 401k fund then a taxable fund.

5. Taxes-Yes, you save tiny amounts on taxes when you are young.

if you're in a low tax bracket, invest in a Roth 401k. As you get higher up in the tax brackets, the overall savings in taxes by investing in a traditional 401k can be substantial.
neophyte1 wrote:Altucher can't be as out of touch as he appears as he seems to be smart in ways. Makes me wonder if he has an agenda to intentionally put bad advice out there to get his blog traffic. Who knows.
Altucher strikes me as someone who doesn't like 401k accounts and is trying to find ways to justify his dislike of them. He doesn't seem to be aware of the Roth 401k or the variability in employers' 401k plans (not all plans have high-fees or require you to be employed for a long time before you get the employer's match).
Last edited by flamesabers on Mon May 08, 2017 10:22 am, edited 2 times in total.

NiceUnparticularMan
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Re: Taxable instead of Maxing 401(k)

Post by NiceUnparticularMan » Mon May 08, 2017 10:15 am

I think it is important to keep in mind that you can withdraw Roth contributions without penalty any time. Moreover, you can convert from traditional IRAs to a Roth, pay income tax, and then also withdraw that amount without penalty 5 years later. If you need to liquidate everything you have all at once, this may still not be enough for you. But it provides a handy way of getting out most of your traditional money without penalty within five years (minus the gains over those five years, which end up "stuck" in the Roth), if you really need/want to do that. And if you need to do it, you might well be "winning" the income tax rate game with traditional accounts.

Of course your 401K plan may not allow in-service rollovers to an IRA. On the other hand, you can start penalty-free withdrawals from 401Ks at 55. Plus there are 401K loans, and scenarios in which you come out ahead even paying the penalty . . . .

The bottom line is these "penalty" rules are way more porous than some of the critics like to pretend.

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Re: Taxable instead of Maxing 401(k)

Post by ruralavalon » Mon May 08, 2017 10:26 am

neophyte1 wrote:If one is contributing to a 401(k) up to employer match for both husband and wife, and also maxing husband and wife IRAs, is it the worst thing in the world financially to fund taxable thereafter as opposed to maxing 401(k)? I understand all the benefits of maxing tax advantaged space, but I like the liquidity of taxable. At a young age, you never know what the future holds and access to money can be helpful and important. (I know 401(k)s allow for some withdrawals for certain things but it's still very restrictive relative to taxable).

This article also kind of got me thinking from hedge fund manager James Altucher -> http://www.jamesaltucher.com/2015/08/401k-scam/

Thoughts? Do any Bogleheads NOT max 401(k) and instead invest in taxable?
It depends.

First of all, how good are the fund choices, and how low are the expense ratios, offered in the 401k? If the fund choices are horrible and very high expense then using a taxable account for long-term/retirement investing may be reasonable.

Second, do you have something in mind that may require some liquidity and flexibility on withdrawals? Such as saving for a home down payment or funding a startup business? If so a taxable account for those purposes is reasonable.

Third, do you have an emergency fund for life's unpredictables like car repairs or layoffs? Many people suggest an emergency fund of about 3-6 months worth of basic living expenses.

By the way, I didn't think much of the linked article. I wasn't convinced. His only compelling point was that the plans and funds can be expensive (high fees). He is right about that, it's the prime criticism most people have about their 401ks. He didn't mention the major advantage of 401ks, they give you automatic disciplined investment every pay period via payroll deduction.

The 401k worked fine for me, even though I started fairly late (late 30s), never had an employer match, and the funds offered were poor to mediocre.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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bligh
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Re: Taxable instead of Maxing 401(k)

Post by bligh » Mon May 08, 2017 11:17 am

neophyte1 wrote:If one is contributing to a 401(k) up to employer match for both husband and wife, and also maxing husband and wife IRAs, is it the worst thing in the world financially to fund taxable thereafter as opposed to maxing 401(k)? I understand all the benefits of maxing tax advantaged space, but I like the liquidity of taxable. At a young age, you never know what the future holds and access to money can be helpful and important. (I know 401(k)s allow for some withdrawals for certain things but it's still very restrictive relative to taxable).

This article also kind of got me thinking from hedge fund manager James Altucher -> http://www.jamesaltucher.com/2015/08/401k-scam/

Thoughts? Do any Bogleheads NOT max 401(k) and instead invest in taxable?
My Thoughts:

If you are in a low tax bracket or have an absolutely horrible 401K plan, 401Ks make less sense. Does that apply to you?

I think it is prudent to maintain some level of liquidity via cash reserves and taxable investment accounts. Unfortunately if you are not a disciplined saver, it is too easy to tap these liquid savings on a whim for that shiny Tesla you've always wanted. When you see that cash jingling around in your pocket you have more of an itch and less of a barrier to spend it. Does that apply to you?

If you are a disciplined saver in a low tax bracket with a horrible 401K plan , go ahead and cap your 401K contributions to get the company match. Save the rest in taxable. Otherwise I would strongly consider saving more in the 401K plan (assuming you have decent cash reserves/emergency fund in place - if not, build up your cash reserves first).

neophyte1
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Re: Taxable instead of Maxing 401(k)

Post by neophyte1 » Mon May 08, 2017 11:34 am

bligh wrote:
neophyte1 wrote:If one is contributing to a 401(k) up to employer match for both husband and wife, and also maxing husband and wife IRAs, is it the worst thing in the world financially to fund taxable thereafter as opposed to maxing 401(k)? I understand all the benefits of maxing tax advantaged space, but I like the liquidity of taxable. At a young age, you never know what the future holds and access to money can be helpful and important. (I know 401(k)s allow for some withdrawals for certain things but it's still very restrictive relative to taxable).

This article also kind of got me thinking from hedge fund manager James Altucher -> http://www.jamesaltucher.com/2015/08/401k-scam/

Thoughts? Do any Bogleheads NOT max 401(k) and instead invest in taxable?
My Thoughts:

If you are in a low tax bracket or have an absolutely horrible 401K plan, 401Ks make less sense. Does that apply to you?

I think it is prudent to maintain some level of liquidity via cash reserves and taxable investment accounts. Unfortunately if you are not a disciplined saver, it is too easy to tap these liquid savings on a whim for that shiny Tesla you've always wanted. When you see that cash jingling around in your pocket you have more of an itch and less of a barrier to spend it. Does that apply to you?

If you are a disciplined saver in a low tax bracket with a horrible 401K plan , go ahead and cap your 401K contributions to get the company match. Save the rest in taxable. Otherwise I would strongly consider saving more in the 401K plan (assuming you have decent cash reserves/emergency fund in place - if not, build up your cash reserves first).
Tax bracket is 25%. Is this low? My 401(k) is actually excellent fund wise, it's through Vanguard.

I am a disciplined saver and wouldn't be likely to tap the taxable. I want it to grow and just like the liquidity for who knows what.

TX_Man
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Re: Taxable instead of Maxing 401(k)

Post by TX_Man » Mon May 08, 2017 11:43 am

My 401k has a 1.25% admin fee on top of the least expensive fund which is a 0.30% ER Russel 3000 index fund. The next least expensive is a 0.50% mid cap index fund. Everything else is over 80 basis points.

So yes I contribute to get the match and them some (to get my income out of the 25% bracket). However I find it more wise to save for next years Roth IRA and taxable contributions.

The admin fee is brutal.

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Re: Taxable instead of Maxing 401(k)

Post by KlangFool » Mon May 08, 2017 11:44 am

neophyte1 wrote:
bligh wrote:
neophyte1 wrote:If one is contributing to a 401(k) up to employer match for both husband and wife, and also maxing husband and wife IRAs, is it the worst thing in the world financially to fund taxable thereafter as opposed to maxing 401(k)? I understand all the benefits of maxing tax advantaged space, but I like the liquidity of taxable. At a young age, you never know what the future holds and access to money can be helpful and important. (I know 401(k)s allow for some withdrawals for certain things but it's still very restrictive relative to taxable).

This article also kind of got me thinking from hedge fund manager James Altucher -> http://www.jamesaltucher.com/2015/08/401k-scam/

Thoughts? Do any Bogleheads NOT max 401(k) and instead invest in taxable?
My Thoughts:

If you are in a low tax bracket or have an absolutely horrible 401K plan, 401Ks make less sense. Does that apply to you?

I think it is prudent to maintain some level of liquidity via cash reserves and taxable investment accounts. Unfortunately if you are not a disciplined saver, it is too easy to tap these liquid savings on a whim for that shiny Tesla you've always wanted. When you see that cash jingling around in your pocket you have more of an itch and less of a barrier to spend it. Does that apply to you?

If you are a disciplined saver in a low tax bracket with a horrible 401K plan , go ahead and cap your 401K contributions to get the company match. Save the rest in taxable. Otherwise I would strongly consider saving more in the 401K plan (assuming you have decent cash reserves/emergency fund in place - if not, build up your cash reserves first).
Tax bracket is 25%. Is this low? My 401(k) is actually excellent fund wise, it's through Vanguard.

I am a disciplined saver and wouldn't be likely to tap the taxable. I want it to grow and just like the liquidity for who knows what.
neophyte1,

Low mean 15% and below. At 25%, you should max out your Trad. 401K.

KlangFool

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flamesabers
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Re: Taxable instead of Maxing 401(k)

Post by flamesabers » Mon May 08, 2017 11:44 am

neophyte1 wrote:
bligh wrote:
neophyte1 wrote:If one is contributing to a 401(k) up to employer match for both husband and wife, and also maxing husband and wife IRAs, is it the worst thing in the world financially to fund taxable thereafter as opposed to maxing 401(k)? I understand all the benefits of maxing tax advantaged space, but I like the liquidity of taxable. At a young age, you never know what the future holds and access to money can be helpful and important. (I know 401(k)s allow for some withdrawals for certain things but it's still very restrictive relative to taxable).

This article also kind of got me thinking from hedge fund manager James Altucher -> http://www.jamesaltucher.com/2015/08/401k-scam/

Thoughts? Do any Bogleheads NOT max 401(k) and instead invest in taxable?
My Thoughts:

If you are in a low tax bracket or have an absolutely horrible 401K plan, 401Ks make less sense. Does that apply to you?

I think it is prudent to maintain some level of liquidity via cash reserves and taxable investment accounts. Unfortunately if you are not a disciplined saver, it is too easy to tap these liquid savings on a whim for that shiny Tesla you've always wanted. When you see that cash jingling around in your pocket you have more of an itch and less of a barrier to spend it. Does that apply to you?

If you are a disciplined saver in a low tax bracket with a horrible 401K plan , go ahead and cap your 401K contributions to get the company match. Save the rest in taxable. Otherwise I would strongly consider saving more in the 401K plan (assuming you have decent cash reserves/emergency fund in place - if not, build up your cash reserves first).
Tax bracket is 25%. Is this low? My 401(k) is actually excellent fund wise, it's through Vanguard.

I am a disciplined saver and wouldn't be likely to tap the taxable. I want it to grow and just like the liquidity for who knows what.
How much liquidity do you want to have?

At the 25% tax bracket, you could be potentially reducing your tax liability by up to $4.5k every year by contributing $18k to your traditional 401k. You could be doubling that if you and your spouse each contribute the full amount to your traditional 401k.
TX_Man wrote:My 401k has a 1.25% admin fee on top of the least expensive fund which is a 0.30% ER Russel 3000 index fund. The next least expensive is a 0.50% mid cap index fund. Everything else is over 80 basis points.

So yes I contribute to get the match and them some (to get my income out of the 25% bracket). However I find it more wise to save for next years Roth IRA and taxable contributions.

The admin fee is brutal.
You have my sympathies on the outrageous admin fee. :shock:

TX_Man
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Re: Taxable instead of Maxing 401(k)

Post by TX_Man » Mon May 08, 2017 11:56 am

flamesabers wrote:
TX_Man wrote:My 401k has a 1.25% admin fee on top of the least expensive fund which is a 0.30% ER Russel 3000 index fund. The next least expensive is a 0.50% mid cap index fund. Everything else is over 80 basis points.

So yes I contribute to get the match and them some (to get my income out of the 25% bracket). However I find it more wise to save for next years Roth IRA and taxable contributions.

The admin fee is brutal.
You have my sympathies on the outrageous admin fee. :shock:
Without the admin fee it would be pretty decent with that nice Russel 3000 index. 0.30% is nothing compared to some of the horrid plans out there. My 401k plan may fall into the category of getting getting the match and then looking for greener pastures. Although I have been contributing to the Roth I may consider splitting next years contributions between the Roth and Trad. IRAs. I haven't decided yet.

I make monthly taxable contributions to "compensate" for my lower than desired 401k contributions

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telemark
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Re: Taxable instead of Maxing 401(k)

Post by telemark » Mon May 08, 2017 12:01 pm

Assuming you have an employer who offers a 401K match, you have three choices:
  • Find a job at a different employer who will pay you a higher salary with no 401K match.
  • Keep your current job and contribute up to the match.
  • Accept the current, hypothetically lower salary without the match.
Not sure why anyone would go for that last one.

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Re: Taxable instead of Maxing 401(k)

Post by Church Lady » Mon May 08, 2017 12:13 pm

OP,
I am maxing out my Roth 401K contributions this year. I expect to be in a low bracket. Only about 6% of my savings are in Roth accounts, and I am trying to gain tax policy diversification.

Consider these possible futures:

tax rates drop: t401K accounts are the winner.

tax rates rise: Roth accounts are the winner.

income tax abolished in favor of a consumption tax (national sales tax, VAT, carbon tax, things of that nature): t401K accounts are the winner.

income tax AND consumption based tax: Ah, you knew Congress would find a way to stick it everyone, didn't you? :annoyed

Identifying the losers in the above scenarios is left as an exercise for the reader 8-)

We cannot know the optimal contribution strategy for the withdrawal phase because we can't know the future. I figure I can't know the future but I can hedge against different outcomes.

You might want to run a few contribution scenarios through this calculator: http://www.i-orp.com. On that page, click the 'full i-orp' icon before entering inputs. This will suggest an optimal contribution strategy based on current law.

Good luck!
Last edited by Church Lady on Mon May 08, 2017 2:18 pm, edited 1 time in total.
He that loveth silver shall not be satisfied with silver; nor he that loveth abundance with increase: this is also vanity. Ecclesiastes 1:8

goingup
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Re: Taxable instead of Maxing 401(k)

Post by goingup » Mon May 08, 2017 12:20 pm

neophyte1 wrote: Tax bracket is 25%. Is this low? My 401(k) is actually excellent fund wise, it's through Vanguard.

I am a disciplined saver and wouldn't be likely to tap the taxable. I want it to grow and just like the liquidity for who knows what.
I'd suggest you save at least 15% of your gross for retirement in your 401Ks/IRAs. Keep this locked away until then. Then save in taxable "for who knows what".

The automated payroll savings of a 401K is flat-out the easiest way for a working person to accrue wealth. If you could poll the BH's age 50+ you'd find many have saved the majority of their wealth through their work plans. The reason? It's not because of the stellar plan options. It's because of the automated nature of the savings, the tax-deferred growth, and the fact they couldn't (or didn't) take withdrawals.

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Re: Taxable instead of Maxing 401(k)

Post by wolf359 » Mon May 08, 2017 2:14 pm

TX_Man wrote:My 401k has a 1.25% admin fee on top of the least expensive fund which is a 0.30% ER Russel 3000 index fund. The next least expensive is a 0.50% mid cap index fund. Everything else is over 80 basis points.

So yes I contribute to get the match and them some (to get my income out of the 25% bracket). However I find it more wise to save for next years Roth IRA and taxable contributions.

The admin fee is brutal.
I can empathize. We have really good expense ratios in our funds, if you overlook the 1% admin fee. It's a matter of perspective, though. Last year, the admin fee was 2%. Our tiny company is lucky to even have a 401-k -- HR went through a lot to even get someone to return our calls when trying to find someone to administer the program.

I'm investing to grow the tax deferred space, and will roll out if I change jobs in the future. I'm not bothering with bonds in that plan -- it's just not worth the cost.

markcoop
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Re: Taxable instead of Maxing 401(k)

Post by markcoop » Mon May 08, 2017 2:38 pm

I find this question interesting. I'm 51 and have been maxing out my 401K and IRAs for many years (my wife's 401K has very high fees so we do skip that one). At this point, I kindda feel retirement rich and current money poor. Yes, I do have the option to pull money from my ROTH (I have always loved that flexibility), but am working hard not to do that. One benefit of this scenario, that I certainly did not plan, is that we are eligible to receive some financial aid for my children because we have very little savings outside our retirement money.
Mark

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ruralavalon
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Re: Taxable instead of Maxing 401(k)

Post by ruralavalon » Mon May 08, 2017 2:57 pm

neophyte1 wrote:Tax bracket is 25%. Is this low? My 401(k) is actually excellent fund wise, it's through Vanguard.

I am a disciplined saver and wouldn't be likely to tap the taxable. I want it to grow and just like the liquidity for who knows what.
The 25% tax bracket is not "low".

You are very fortunate to have low expense ratio Vanguard funds in your 401k. You should use this plan as much as you can in my opinion.
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House Blend
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Re: Taxable instead of Maxing 401(k)

Post by House Blend » Mon May 08, 2017 3:24 pm

neophyte1 wrote:This article also kind of got me thinking from hedge fund manager James Altucher -> http://www.jamesaltucher.com/2015/08/401k-scam/

Thoughts? Do any Bogleheads NOT max 401(k) and instead invest in taxable?
The article looks like a typical blogger rant, aimed to attract eyeballs.

Leaving aside the case of 401(k) plans that are so bad that they are worse than taxable, I would only advise forgoing tax-advantaged space if (a) your tax-advantaged savings rate would still be substantial without it, and (b) you have a shorter term goal in mind for the unsheltered money, something more specific than "you never know what the future holds."

Back in ye olden days before Roth IRAs existed, I probably could have maxed out tax-advantaged from Day 1, but did not do so until after after accumulating enough in taxable to put 20% down on a house.

I did always grab the employer match. With match included, I was always sheltering > 15% of gross.

Would not have made sense for me to pay a 10% penalty to build up the down payment inside tax-advantaged for a few years.

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Re: Taxable instead of Maxing 401(k)

Post by TX_Man » Mon May 08, 2017 3:32 pm

wolf359 wrote:
TX_Man wrote:My 401k has a 1.25% admin fee on top of the least expensive fund which is a 0.30% ER Russel 3000 index fund. The next least expensive is a 0.50% mid cap index fund. Everything else is over 80 basis points.

So yes I contribute to get the match and them some (to get my income out of the 25% bracket). However I find it more wise to save for next years Roth IRA and taxable contributions.

The admin fee is brutal.
I can empathize. We have really good expense ratios in our funds, if you overlook the 1% admin fee. It's a matter of perspective, though. Last year, the admin fee was 2%. Our tiny company is lucky to even have a 401-k -- HR went through a lot to even get someone to return our calls when trying to find someone to administer the program.

I'm investing to grow the tax deferred space, and will roll out if I change jobs in the future. I'm not bothering with bonds in that plan -- it's just not worth the cost.
2% is insane. My strategy sounds similar to yours; not bothering with bonds.

wolf359
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Re: Taxable instead of Maxing 401(k)

Post by wolf359 » Tue May 09, 2017 6:47 pm

TX_Man wrote:
wolf359 wrote:
TX_Man wrote:My 401k has a 1.25% admin fee on top of the least expensive fund which is a 0.30% ER Russel 3000 index fund. The next least expensive is a 0.50% mid cap index fund. Everything else is over 80 basis points.

So yes I contribute to get the match and them some (to get my income out of the 25% bracket). However I find it more wise to save for next years Roth IRA and taxable contributions.

The admin fee is brutal.
I can empathize. We have really good expense ratios in our funds, if you overlook the 1% admin fee. It's a matter of perspective, though. Last year, the admin fee was 2%. Our tiny company is lucky to even have a 401-k -- HR went through a lot to even get someone to return our calls when trying to find someone to administer the program.

I'm investing to grow the tax deferred space, and will roll out if I change jobs in the future. I'm not bothering with bonds in that plan -- it's just not worth the cost.
2% is insane. My strategy sounds similar to yours; not bothering with bonds.
I couldn't figure out why my balance wasn't moving much even in 2013 when the market boomed and I was maxing out the 401k. The published ERs looked just fine.

When I went through the statements carefully, added up the fee withdrawals, and noticed they added up to exactly 2%, I had my culprit. Our plan only tells you the administrative fee if you ask to see the full plan documents. It's revealed to you otherwise if you pay attention to the statements. Our HR person knew about it and was actively working it, but had a hard time getting firms to respond when they found out our size. Not worth their time.

wolf359
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Re: Taxable instead of Maxing 401(k)

Post by wolf359 » Tue May 09, 2017 6:57 pm

neophyte1 wrote:If one is contributing to a 401(k) up to employer match for both husband and wife, and also maxing husband and wife IRAs, is it the worst thing in the world financially to fund taxable thereafter as opposed to maxing 401(k)? I understand all the benefits of maxing tax advantaged space, but I like the liquidity of taxable. At a young age, you never know what the future holds and access to money can be helpful and important. (I know 401(k)s allow for some withdrawals for certain things but it's still very restrictive relative to taxable).

This article also kind of got me thinking from hedge fund manager James Altucher -> http://www.jamesaltucher.com/2015/08/401k-scam/

Thoughts? Do any Bogleheads NOT max 401(k) and instead invest in taxable?
I like James Altucher, and he's a pretty smart guy. However, he made his money being a serial entrepreneur. He's no longer a hedge fund manager -- that's a previous job for him.

He's also somewhat of a bomb thrower. He likes tossing out controversial statements, puts arguments behind them that are designed to set people off, and lets them loose into the world to see how people react.

The fact that HE found it better to have a taxable account to keep starting companies (around 20 of them) doesn't mean other people won't find 401ks useful. He also has staked out positions like not bothering to go to college. At one point he sold his house and moved from his apartment and just bummed housing from his friends. It turns out that people will let you freeload off them for a while if you've made them millions. But it's not recommended for most folks.

He does have a very interesting way of looking at the world. His books are cheap, and are very well written.

That said, I do think you should keep some taxable savings around, for FU money. You may need a buffer during your working life. If you manage to build up a 5 year buffer, you can tap your traditional retirement accounts by using a Roth conversion ladder. At that point, just save up as much as you can and you've enabled early retirement.

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