Roth IRA or 401K with No Match

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jmchambo
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Roth IRA or 401K with No Match

Post by jmchambo » Fri Jul 14, 2017 2:34 pm

Here's my edited post with the additional information requested. Please offer me your insights.

My 24-yr old daughter lives in northern VA and just started a new job. She's in 25% fed tax bracket with an effective rate about 20%. She currently has both a Roth IRA (15K) and a Rollover 401K (10K) from her previous employer invested with Vangaurd, and also has an emergency fund. Her Roth and Rollover are in Vangaurd's Target Retirement 2055 fund.

Her new employer offers a 401K plan thru TIAA with no match. Previously I indicated the average fees were about 2%, but after further questioning and reviewing the website myself, now find out that there are actually some Vangaurd funds offered with extremely low expense ratios (The list of funds was alphabetical and the Vangaurd funds were listed at the end on a page she didn't notice). These funds include:

VG Growth Index - VIGAX - 0.08%
VG Mid-Cap Value Index - VMVAX - 0.08%
VG Small-Cap Growth Index - VSGIX - 0.07%
VG Value Index - VIVIX - 0.07%
VG Balanced Index - VBAIX - 0.07%

TIAA charges a 0.32% admin service fee which is deducted on a quarterly basis. So with that and the VG expenses, guess she's looking at 0.4% fees, not the 2% I originally posted.

After living expenses she has about 7K to invest annually. My question is should she invest the 7K into the 401K plan with no match and high fees, or split the 7K by investing in both her Roth IRA and the new 401K plan?

Your thoughts would be appreciated. Thank you.
Last edited by jmchambo on Sat Jul 15, 2017 12:47 pm, edited 1 time in total.

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TheAlaskan
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Re: Roth IRA or 401K with No Match

Post by TheAlaskan » Fri Jul 14, 2017 2:59 pm

Seems there is no advantage to investing through her work's 401k if there is no match, especially with those high fees. The advice around here is typically invest in your work 401k until you hit the match and then take the rest to a Roth or Traditional IRA since the fees are much lower and you have more fund options.

retiredjg
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Re: Roth IRA or 401K with No Match

Post by retiredjg » Fri Jul 14, 2017 3:03 pm

The first $5,500 should go into IRA. She might, depending on salary, be able to deduct contributions to tIRA if she wants. If not, Roth IRA is always a good idea. I'd put the other $1,500 into the lowest cost fund in the 401k unless she plans to stay at that employer for 20 or 30 years.

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flamesabers
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Re: Roth IRA or 401K with No Match

Post by flamesabers » Fri Jul 14, 2017 3:05 pm

I also agree with funding the IRA first.

What's the lowest ER available in your daughter's 401k plan?

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House Blend
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Re: Roth IRA or 401K with No Match

Post by House Blend » Fri Jul 14, 2017 3:08 pm

Even if tax-deferral would be better than Roth with all else equal, it wouldn't take many years of 2% fees to kill that advantage.

Go with the Roth IRA.

I have run across some high cost TIAA plans, but this sounds even worse than those. Is the 2% a combination of plan fees plus expense ratios? What is the absolute lowest ER fund it offers?

If she expects to stay in this job only for a couple of years, it could make sense to use the 401(k) and then roll it out to an IRA after leaving.

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ruralavalon
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Re: Roth IRA or 401K with No Match

Post by ruralavalon » Fri Jul 14, 2017 3:10 pm

She shouldn't care about the "average fee of about 2%."

What are the 2-3 funds with the lowest fees? Please give fund names, tickers and expense ratios as well as any extra added fees.

About how long does she expect that she might stay with this employer?

You can simply add this to your original post using the edit button, it helps a lot if all of your information is in one place.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

jmchambo
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Re: Roth IRA or 401K with No Match

Post by jmchambo » Sat Jul 15, 2017 8:53 am

Thanks for all the replies. I'll get more specific info from daughter on the funds available and expenses and report back later in weekend. I do know that the TIAA admin fees alone were 0.32%.

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House Blend
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Re: Roth IRA or 401K with No Match

Post by House Blend » Sat Jul 15, 2017 1:20 pm

Regarding the update on costs and funds available....

Lacking a crystal ball regarding her life path, career earnings/savings, and tax rates in retirement, I'd suggest that if she expects to stay with the current employer for the next 30 years, I'd prioritize the Roth IRA first, then the 401(k). For < 10 years, I'd reverse that. In between, take your pick. YMMV.

Best to have an overall AA plan, but given the puzzle pieces provided here, you could simply use Balanced Index in the 401(k) and continue with the TR funds held at Vanguard. Fewer moving parts that way and no maintenance required.
jmchambo wrote:After living expenses she has about 7K to invest annually. My question is should she invest the 7K into the 401K plan with no match and high fees, or split the 7K by investing in both her Roth IRA and the new 401K plan?
But I think a much more important point to make is that you shouldn't fall into the behavioral trap of ignoring the difference between pre-tax and post-tax dollars. Setting VA state taxes aside, if she's in the 25% bracket and has the ability to save $7,000 after tax, then she also has the ability to save $9,333 before tax, because $2,333 is how much Federal tax you would save by tax-deferring $9,333 of salary into a 401(k).

So the choice should really be framed as

$9,333 into 401(k), $0 into Roth IRA,

or $2,000 into 401(k), $5500 into Roth IRA,

or something in between. Both cost $7,000 after (Federal) tax.

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ruralavalon
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Re: Roth IRA or 401K with No Match

Post by ruralavalon » Sat Jul 15, 2017 2:04 pm

With the new information on 401k fees ("VG Balanced Index - VBAIX - 0.07%" + "0.32% admin service fee") and no employer match, in my opinion her better choice is probably $5.5k to her IRA, and the rest to her 401k.

Here is a general account funding priority that often works well for many people (when there is no high interest debt or HSA use):
1) Contribute to the work-based plans (401k, 403b, 457, TSP) enough to get the full employer match (the match is like free money, your best possible investment);
2) Contribute the maximum to an IRA for each spouse, traditional or Roth, depending on eligibility and personal circumstances;
3) Contribute the remainder of the maximum employee contribution to the 401ks; and
4) Contribute to a taxable investing account.
Please see the wiki article "Prioritizing investments".
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

jmchambo
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Re: Roth IRA or 401K with No Match

Post by jmchambo » Mon Jul 17, 2017 9:34 am

Thanks again for the original and follow up replies. Hard to say how long she'll stay at the new job, so we'll go for the Roth first then put remainder in VG Balanced Index fund in 401K.

House Blend - Understand the difference between the pre- and post-tax money and she probably could invest more than 7K annually, but it's difficult to convince a 24-yr old that adding another 1-2K now is more important than having extra spending money for entertainment. I'm just happy that she's doing as much as she is at this point, and as she earns more I expect that she'll increase her contributions.

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