Max out 401K with Empower or open a separate IRA

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manedark
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Max out 401K with Empower or open a separate IRA

Post by manedark » Sun Apr 22, 2018 2:21 pm

I am a non-resident alien new to the United States (came in 2016) - and my current situation is that I there is a 50% chance that I may stay in the US when I retire at around 60. I don't yet have plans for investing in a house in the US, but nothing decided as of now.

1. Current tax bracket - 24%, state tax California 9.4%
2. Current income >150K and less than <180K.
3. Married filing jointly and I invested $5500 in my wife's Roth IRA from my own funds. (she is not currently employed).

Currently I am investing 9K in my company provided 401K plan. I think I can spare another 9.5K per year. What should I do with this money?
Should I max out the 18.5K limit with this account or open an individual Roth IRA account (I think IRA is not an option for me since I am earning mroe than 73K, right?). I have decent selection of funds in this Empower account and option to put that into regular 401K or Roth 401K.

The advise I got elsewhere was open a Roth IRA with $5500 and invest that in a Index Fund. And put the rest 4000 in a 401K. Is that a sound advise?
Will I get the tax benefits of the Roth IRA deductions even though I invested 5500 in my wife's Roth IRA too?

Thanks in advance!
Maned.

PFInterest
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Re: Max out 401K with Empower or open a separate IRA

Post by PFInterest » Sun Apr 22, 2018 5:48 pm

there are no deductions for roth.
given your tax bracket + CA tax i would max the 401k first.

manedark
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Re: Max out 401K with Empower or open a separate IRA

Post by manedark » Sun Apr 22, 2018 5:52 pm

Right. That is what the sense I got from this article as well :

https://thefinancebuff.com/case-against-roth-401k.html

I am in a high tax state - and I am not likely to stay here forever (I would like to - but given the crazy real estate prices might not be possible :-))
and also I dont think my income is going to increase crazily from where I am right now.

Thanks for the correct advise. Perhaps I got the wrong advise on reddit.com/r/personalfinance because I didnt write the full info there.

manedark
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Re: Max out 401K with Empower or open a separate IRA

Post by manedark » Sun Apr 22, 2018 6:30 pm

Could you advise on fund selection from the following choices available in my Empower account - I am 38 right now, so roughly 20 years to retirement - given a roughly 80-20 ratio for stocks to bonds).

Image

Also can you comment on the general quality of these funds?

I do want have an option to open a Schwab account and manage my own funds but I would rather not go that route right now and unless it is really warranted given the quality of the funds already available.

Thanks!

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fortfun
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Re: Max out 401K with Empower or open a separate IRA

Post by fortfun » Mon Apr 23, 2018 3:38 pm

What are the fees/ER on Empower? I think they are fairly high.

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whodidntante
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Re: Max out 401K with Empower or open a separate IRA

Post by whodidntante » Mon Apr 23, 2018 5:49 pm

fortfun wrote:
Mon Apr 23, 2018 3:38 pm
What are the fees/ER on Empower? I think they are fairly high.
That depends on the plan. I have a 401k at Empower with several low cost options.

manedark
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Re: Max out 401K with Empower or open a separate IRA

Post by manedark » Mon Apr 23, 2018 10:26 pm

fortfun wrote:
Mon Apr 23, 2018 3:38 pm
What are the fees/ER on Empower? I think they are fairly high.
Looking at my statement is is roughly 120$ per year - I checked with customer care and they said this is the flat administrative fee. The expense ratio of the funds themselves are factored into the purchase price and some of the funds (the ones I am currently holding) do not have any redemption fee.
What should I be asking them - the exact expense ratio percentage?

software
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Re: Max out 401K with Empower or open a separate IRA

Post by software » Tue Apr 24, 2018 9:19 am

manedark wrote:
Mon Apr 23, 2018 10:26 pm
fortfun wrote:
Mon Apr 23, 2018 3:38 pm
What are the fees/ER on Empower? I think they are fairly high.
Looking at my statement is is roughly 120$ per year - I checked with customer care and they said this is the flat administrative fee. The expense ratio of the funds themselves are factored into the purchase price and some of the funds (the ones I am currently holding) do not have any redemption fee.
What should I be asking them - the exact expense ratio percentage?
I think you are confusing front-end load and expense ratio. Expense ratio is the cost of ongoing fund maintenance. All funds have them and they will be expressed as a percentage.

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ruralavalon
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Re: Max out 401K with Empower or open a separate IRA

Post by ruralavalon » Tue Apr 24, 2018 9:54 am

Welcome to the forum :) .

manedark wrote:
Sun Apr 22, 2018 6:30 pm
Could you advise on fund selection from the following choices available in my Empower account - I am 38 right now, so roughly 20 years to retirement - given a roughly 80-20 ratio for stocks to bonds).

Image

Also can you comment on the general quality of these funds?

I do want have an option to open a Schwab account and manage my own funds but I would rather not go that route right now and unless it is really warranted given the quality of the funds already available.

Thanks!
The funds offered are high quality in my opinion.

The funds I suggest using are:
Vanguard Institutional Index Fund Institutional Plus (a S&P 500 index fund);
Vanguard Total International Index Fund Institutional; and
Vanguard Total Bond Market Index Fund Institutional.

I agree with the suggestion to make the maximum contributions to your 401k account.

In my opinion an 80/20 asset allocation is a little aggressive but still fairly reasonable at age 38.
Last edited by ruralavalon on Tue Apr 24, 2018 9:57 am, edited 1 time in total.
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centrifuge41
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Re: Max out 401K with Empower or open a separate IRA

Post by centrifuge41 » Tue Apr 24, 2018 9:56 am

Check out the interest rate of JP Morgan Prime Money Market - Capital.

Here are probably your best funds:
Bond: Vanguard Total Bond Market Index I. SEC yield is probably north of 3% on this one now.
Large blend: Vanguard Institutional Index-Inst Plus
Mid cap: Vanguard Extended Market Index-I
International Stock: Vanguard Total International Stock Index-Inst

You can build a three fund portfolio by using:
For domestic stock: both the large blend and the mid cap. Use this to figure out the proportion of these two.
For international stock: the Vanguard Total International Stock Index-Inst
For fixed income: either the money market (if rate is high) or bond fund

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fortfun
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Re: Max out 401K with Empower or open a separate IRA

Post by fortfun » Tue Apr 24, 2018 9:59 am

manedark wrote:
Mon Apr 23, 2018 10:26 pm
fortfun wrote:
Mon Apr 23, 2018 3:38 pm
What are the fees/ER on Empower? I think they are fairly high.
Looking at my statement is is roughly 120$ per year - I checked with customer care and they said this is the flat administrative fee. The expense ratio of the funds themselves are factored into the purchase price and some of the funds (the ones I am currently holding) do not have any redemption fee.
What should I be asking them - the exact expense ratio percentage?
Manedark.
You need to look for a percentage. Likely something between 2% and .5%. Plus, another smaller percentage that Empower charges to maintain the account. Probably another .15%, or something like that. If you total those two percentages together, and they go much over .75%, you might want to reconsider doing a lot of pre-tax savings with Empower (except for what your company matches). The lowest fee I can get from Empower is .75% and that's why I don't contribute to my 457 through them. It's just too high for me. I'd rather do after tax Admiral shares via Vanguard at .04%. However, I've got all of my other, pre-tax options and Roth maxed out.

manedark
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Re: Max out 401K with Empower or open a separate IRA

Post by manedark » Wed Apr 25, 2018 12:04 am

Thanks all. Very good info. Yes I will ask them the fund fee, 0.75% seems a bit steep, but then I can only get the tax advantage (cutting from high CA tax) through this option of going through 401K. I mean aside from opening a Schwab account those are the fund choices, and Schwab will have their own fee too.

manedark
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Re: Max out 401K with Empower or open a separate IRA

Post by manedark » Fri May 04, 2018 1:33 am

I have come back with a detailed list of Expense Ratio from Empower. It's so weird though that they dont just email me a PDF but have to send this document through post.

Anyways, the only sub 0.10% expense ratio funds are the following:
Vanguard Extended Market Idx Instl 0.06%
Vanguard Institutional Index Istl Pl 0.02%
Vanguard Total Bond Market Index 0.04%
Vanguard Total Intl Stock Stock Index Istl 0.09%

Should these form the bedrock of my 80-20 portfolio or should I be looking at paying more fee for funds that might give higher yield?
Eg. Metropolitan West Total Return Bond with ER of 0.38% but much higher yield that Vanguard fund?

manedark
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Re: Max out 401K with Empower or open a separate IRA

Post by manedark » Fri May 04, 2018 1:52 am

I went ahead with the following AA, and re balance annually, please review:
Image

Is this a good enough portfolio, given that I have atleast 20 years to not touch this money?

TwstdSista
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Re: Max out 401K with Empower or open a separate IRA

Post by TwstdSista » Fri May 04, 2018 2:22 am

I'd probably just go with the Institutional index and skip the Extended Market fund for simplicity. Or set them up at approximately 80/20 -- you're at 55/45 so there's also a large Mid Cap tilt.

20% bonds is good, unless retirement is next year -- I don't see your age anywhere.

How about a Roth IRA also?

manedark
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Re: Max out 401K with Empower or open a separate IRA

Post by manedark » Fri May 04, 2018 2:42 am

TwstdSista wrote:
Fri May 04, 2018 2:22 am
I'd probably just go with the Institutional index and skip the Extended Market fund for simplicity. Or set them up at approximately 80/20 -- you're at 55/45 so there's also a large Mid Cap tilt.

20% bonds is good, unless retirement is next year -- I don't see your age anywhere.

How about a Roth IRA also?
Why do you think mid cap tilt is bad? Too much risk? I am 38, so wi work atleast 20 more years.

I am not clear if Roth IRA would allow tax advantage if I move to home country.

Thanks.

TwstdSista
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Re: Max out 401K with Empower or open a separate IRA

Post by TwstdSista » Fri May 04, 2018 2:49 am

At 38, 20% bonds is a good choice. A Roth does not make sense if your home country will tax it -- good call.

As for the mid-cap tilt, I'm just not a fan. I like simple. And I'd rather tilt solely to small caps if I was inclined towards a tilt. If this plan work for you, that's perfectly fine.

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ruralavalon
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Re: Max out 401K with Empower or open a separate IRA

Post by ruralavalon » Fri May 04, 2018 9:57 am

In my opinion 20% in bonds at age 38 is within the range of what is reasonable.

I also suggest simply using Vanguard Institutional Index Fund (a S&P 500 index fund) by itself for investing in U.S. stocks.

If you want to use some Extended Market Index Fund, then an 80/20 mix of S&P 500 to extended market will mimic the content of a total stock market index fund.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

manedark
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Re: Max out 401K with Empower or open a separate IRA

Post by manedark » Fri May 04, 2018 4:08 pm

Thanks. I will do the 80-20 adjustment between large cap and mid cap.
Change Vanguard Institutional Index to 45% and Extended Market to 10%.\

manedark
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Re: Max out 401K with Empower or open a separate IRA

Post by manedark » Sun May 06, 2018 9:41 pm

Quick question. Removing Roth IRA from picture as I am currently in high tax bracket and above AGI atleast for this year and moreover there are international tax considerations.

How about plain old IRA, should I still consider contributing to it upto 5500 limit. Ofcourse that contribution is not deductible as my AGI is surely above limit for this year. What would be argument to do that instead of taxable account? I heard the phrase 'savings grow tax deferred' - what is meant by it - that if I sell some funds in tIRA and reinvest it into another fund innthe same tIRA, then I dont paty LTCG tax on that. Id that it? Any other advantage? Should I be doing that instead of maxing out my Employers provided 401K?

Thanks again.
Maned.

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