401(k) vs Taxable on a low income

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perihelion
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401(k) vs Taxable on a low income

Post by perihelion » Thu Jan 10, 2019 1:07 pm

Hi all! So far I have been able to answer all my questions by searching the forum, but this topic is complicated enough that I would like some confirmation. Most of the advice I have found on bad 401(k)'s is for those with high income. I am confident our taxable income will be below $77,200 when we want to access this money, which I think gives us a 0% LTCG tax. I don't get any company match, and I am already maxing out our IRA's. What is the benefit to a 401(k)?

My specifics:

On 7/6/2018 I invested $153.84 in GMRAX, with an expense ratio of 0.67% (the cheapest in my plan). My 9/28 statement showed a value of $154.26, and my 12/31 statement a value of $122.94. According to Yahoo Finance's adjusted closing numbers, my 12/31 value should have been $124.21, meaning a quarterly fee of $1.27, or 4.1% per year.

My statement also listed
Nationwide Administrative Expenses $0.00 and
Advisory/Service Provider Expenses $XX.XX, which works out to 0.6%/year of my total balance. This is the mandatory adviser fee which I knew about going in.

My questions at this point are:
1) Is my math correct?
2) Is the 0.6% fee included in the 4.1% or is it additional?

There remains the question of whether taxable is any better. I made a quick spreadsheet for my case, with these assumptions:
Withdrawal halfway between leaving the company and the start of taking social security.
401(k) fees = 1.27% (the minimum possible)
current marginal tax rate = 12% federal + 6.33% NY
retirement tax rate = 12% federal + 3.07% PA
cap. gains tax rate = 0% federal + 3.07% PA
Image
I found the result to vary strongly based on my amount of capital gains, so I made an Excel Data Table as a function of expected invest. return and time in 401k. The inner rectangle is my most likely scenario. It is slightly in favor of using a taxable account. If I use a 4.1% fee, taxable is overwhelmingly better.
Image
My questions here are:
1) Is the 0% LTCG tax correct?
2) If so, can I except it to be so when I retire? I know it used to be higher.
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perihelion
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Re: 401(k) vs Taxable on a low income

Post by perihelion » Fri Jan 11, 2019 5:10 pm

This is complicated by the $400 saver's credit I would get if I used the 401(k).
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grabiner
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Re: 401(k) vs Taxable on a low income

Post by grabiner » Fri Jan 11, 2019 10:10 pm

perihelion wrote:
Fri Jan 11, 2019 5:10 pm
This is complicated by the $400 saver's credit I would get if I used the 401(k).
You can get the Saver's Credit with an IRA as well, either traditional or Roth. If you don't get an employer match, max out your IRA in preference to contributing to the 401(k).

If you plan to retire in PA, you should prefer a traditional IRA, because contributions to the traditional IRA are deductible from NY tax, and PA doesn't tax withdrawals from an IRA.
Wiki David Grabiner

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perihelion
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Re: 401(k) vs Taxable on a low income

Post by perihelion » Thu Jan 17, 2019 3:40 pm

Thanks for your response. I added tax implications to my spreadsheet, and it is now a lot more complicated. I think it was too complicated to start out with, if my goal was get people to read my question. It is much easier to advise a noob who hasn't read the wiki. No, I don't get employer match, and yes, I'm already maxing out my IRA.

To close out this discussion, let me add this realization: if my returns are good, I can absorb the fees, whatever they are. I really have to pinch every penny when the returns are bad, which is when taxable investments are at their best. The same applies to fees - if you don't know what the fees are, it is safer to assume they are bad, and invest in taxable.
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mark1623
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Re: 401(k) vs Taxable on a low income

Post by mark1623 » Thu Jan 17, 2019 3:54 pm

Are Roth deferrals available in your 401(k) plan?

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perihelion
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Re: 401(k) vs Taxable on a low income

Post by perihelion » Thu Jan 17, 2019 4:34 pm

mark1623 wrote:
Thu Jan 17, 2019 3:54 pm
Are Roth deferrals available in your 401(k) plan?
Not as far as I can tell. Why? They seem like the opposite of what I want.
Tell everyone you know about Rekenthaler’s Rule - then maybe it will stop working!

MotoTrojan
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Re: 401(k) vs Taxable on a low income

Post by MotoTrojan » Thu Jan 17, 2019 4:47 pm

perihelion wrote:
Thu Jan 17, 2019 4:34 pm
mark1623 wrote:
Thu Jan 17, 2019 3:54 pm
Are Roth deferrals available in your 401(k) plan?
Not as far as I can tell. Why? They seem like the opposite of what I want.
Not sure what a Roth deferral is but a Roth contribution is best in a low tax bracket, and beats taxable no matter what bracket. Roth is after tax just like taxable and then grows tax-free (no dividend drag) and gets withdrawn tax-free. Unbeatable.

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