need help with roth 401k and ira

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Topic Author
fivedots
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Joined: Fri Oct 04, 2019 7:52 pm

need help with roth 401k and ira

Post by fivedots » Fri Oct 04, 2019 9:08 pm

Hi everyone,

I am trying to educate myself about investing for retirement. There are many details that I find confusing and I can't seem to find a resource that answers the questions that I have. I make about 65k a year and I'm about 40 years old. Single.

Question 1:
First, my employer provides the option of contributing to either a traditional 401k or a Roth 401k. Also, I understand that there are traditional and Roth IRAs that are separate from a 401k, but function somewhat similarly. How much can I contribute in total across all the various accounts? For example, let's say I contribute $19k to the Roth 401k. Can I still contribute another 6k to a Roth ira? Is it 19k + 6k = 24k? Or is 19k total across both accounts combined? What about for a traditional 401k and ira in combination?

Question 2:
The funds in my 401k seem to have very high expense ratios. I would guess they average about 1.4%. The cheapest was 0.89%, an S&P 500 index. I think almost everything was over 1%. The company match seems fairly small, about a grand for my salary. Should the fees effect my tax advantage preference? For example, would it be a mistake for me to contribute in our Roth 401k versus the traditional 401k? I feel like the tax free growth is negated by the expense ratios. I'm not sure how this impacts the decision making process.

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FiveK
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Re: need help with roth 401k and ira

Post by FiveK » Fri Oct 04, 2019 10:57 pm

fivedots, welcome to the forum.

1. Limits for your 401k are completely separate from limits for your IRA. It's $19K for your own contributions to your 401k - an employer match doesn't count toward that limit. Then, it's $6K for your total contribution to IRAs.

2. See the linked article for how to evaluate Expensive or mediocre choices in a 401k.

For general "getting started" reading, see
- the 'Basic Terms' tab of the personal finance toolbox spreadsheet.
- Getting started - Bogleheads
- Investment Order
- Stock Series
- www.etf.com/docs/IfYouCan.pdf

Good luck!

Flyer24
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Re: need help with roth 401k and ira

Post by Flyer24 » Fri Oct 04, 2019 11:07 pm

I recommend following this guideline so we can give you the best answers.

Asking Portfolio Questions

Topic Author
fivedots
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Re: need help with roth 401k and ira

Post by fivedots » Sat Oct 05, 2019 3:44 pm

Thanks for replying guys. I'm slowly wading through the suggested links each of you posted.

In the mean time: I don't understand why the US worker tolerates 401ks. This seems like the greatest con in the history of civilization. There seems to be three common retirement vehicles: 401k, ira, and hsa. And with those comes the additional complication of Roth versus traditional. The total combined contribution across these accounts adds up to about $27.5k for a middle aged person who is single. Why is there not 1 retirement vehicle? Why must I endure being ripped off by a 401k? Why can't I put an additional 19k along with employer contributions into an ira? I would like something that allowed a yearly contribution equal to the $27.5k mentioned earlier. Perhaps contributions could be taxed at half the normal rate, and withdrawals at half the normal rate. Medical expense withdrawals would be taxed at 0% or some low number. And it would be nice if contributions could be pulled out without penalty. That would make planning fairly simple.

retiredjg
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Re: need help with roth 401k and ira

Post by retiredjg » Sat Oct 05, 2019 3:53 pm

fivedots wrote:
Fri Oct 04, 2019 9:08 pm
Question 1:
First, my employer provides the option of contributing to either a traditional 401k or a Roth 401k. Also, I understand that there are traditional and Roth IRAs that are separate from a 401k, but function somewhat similarly. How much can I contribute in total across all the various accounts? For example, let's say I contribute $19k to the Roth 401k. Can I still contribute another 6k to a Roth ira? Is it 19k + 6k = 24k? Or is 19k total across both accounts combined? What about for a traditional 401k and ira in combination?
The limits are separate.

Question 2:
The funds in my 401k seem to have very high expense ratios. I would guess they average about 1.4%. The cheapest was 0.89%, an S&P 500 index. I think almost everything was over 1%. The company match seems fairly small, about a grand for my salary. Should the fees effect my tax advantage preference? For example, would it be a mistake for me to contribute in our Roth 401k versus the traditional 401k? I feel like the tax free growth is negated by the expense ratios. I'm not sure how this impacts the decision making process.
The .89% ER is not great, but it is not high enough to prevent your using traditional 401k because you get a tax-deferral. However, you want to use Roth 401k and I'm not sure how to make that comparison.

If the decision is between Roth IRA and Roth 401k, use Roth IRA first. If the decision is between Roth 401k and taxable....I'm not real sure.

How long will you be with this employer? If "not very long", I'd go ahead and get that money into Roth status even if it means paying a little more for a few years.

retiredjg
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Re: need help with roth 401k and ira

Post by retiredjg » Sat Oct 05, 2019 3:57 pm

fivedots wrote:
Sat Oct 05, 2019 3:44 pm
Why is there not 1 retirement vehicle?
If someone were to start over with a blank slate, maybe there would be one retirement vehicle. But all these different account types were generated by different laws passed by different lawmakers over many decades. There is and never has been a "master plan". That's how tax law works.

It is what it is. Find a way to make it work best :happy for you.

KlangFool
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Re: need help with roth 401k and ira

Post by KlangFool » Sat Oct 05, 2019 4:06 pm

fivedots wrote:
Sat Oct 05, 2019 3:44 pm
Thanks for replying guys. I'm slowly wading through the suggested links each of you posted.

In the mean time: I don't understand why the US worker tolerates 401ks. This seems like the greatest con in the history of civilization. There seems to be three common retirement vehicles: 401k, ira, and hsa. And with those comes the additional complication of Roth versus traditional. The total combined contribution across these accounts adds up to about $27.5k for a middle aged person who is single. Why is there not 1 retirement vehicle? Why must I endure being ripped off by a 401k? Why can't I put an additional 19k along with employer contributions into an ira? I would like something that allowed a yearly contribution equal to the $27.5k mentioned earlier. Perhaps contributions could be taxed at half the normal rate, and withdrawals at half the normal rate. Medical expense withdrawals would be taxed at 0% or some low number. And it would be nice if contributions could be pulled out without penalty. That would make planning fairly simple.
fivedots,

<<In the mean time: I don't understand why the US worker tolerates 401ks. This seems like the greatest con in the history of civilization>>

It is not. It is a great tool for those that know how to use it.

<<There seems to be three common retirement vehicles: 401k, ira, and hsa. >>

No. There are additional tools like Solo 401K, Simple IRA, 403B, 457 and so on. You may or may not have access to those tools depending on your circumstances.


<<The total combined contribution across these accounts adds up to about $27.5k for a middle aged person who is single. >>

That is not true.

A) Employer contribution to the 401K is not included in that 19K.

B) For some 401K, the employee can contribute additional after-tax 401K beyond the 19K.

<<And it would be nice if contributions could be pulled out without penalty. >>

Roth IRA's contribution could be withdrawn at any time for any reason without penalty. 401K is a bit harder but it still can be done.

Please read the following URL.

https://www.madfientist.com/how-to-acce ... nds-early/

In summary, for those that want to learn, they are great tools. The complexity is a great thing. It benefits those that choose to spend the additional effort.

It is very simple. Those choose to learn will get a great deal. Meanwhile, the rest will get a normal deal. It is the same as in taxes and everything else in life.

<<Perhaps contributions could be taxed at half the normal rate, and withdrawals at half the normal rate. >>

Why not do better? Contribution tax at zero percent and withdrawal tax at zero percent.

Do you file your own taxes?

KlangFool

retired@50
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Re: need help with roth 401k and ira

Post by retired@50 » Sat Oct 05, 2019 4:54 pm

fivedots wrote:
Fri Oct 04, 2019 9:08 pm
Hi everyone,

I am trying to educate myself about investing for retirement. There are many details that I find confusing and I can't seem to find a resource that answers the questions that I have. I make about 65k a year and I'm about 40 years old. Single.

Question 1:
First, my employer provides the option of contributing to either a traditional 401k or a Roth 401k. Also, I understand that there are traditional and Roth IRAs that are separate from a 401k, but function somewhat similarly. How much can I contribute in total across all the various accounts? For example, let's say I contribute $19k to the Roth 401k. Can I still contribute another 6k to a Roth ira? Is it 19k + 6k = 24k? Or is 19k total across both accounts combined? What about for a traditional 401k and ira in combination?

Question 2:
The funds in my 401k seem to have very high expense ratios. I would guess they average about 1.4%. The cheapest was 0.89%, an S&P 500 index. I think almost everything was over 1%. The company match seems fairly small, about a grand for my salary. Should the fees effect my tax advantage preference? For example, would it be a mistake for me to contribute in our Roth 401k versus the traditional 401k? I feel like the tax free growth is negated by the expense ratios. I'm not sure how this impacts the decision making process.
With regard to high expense ratios mentioned in Q2. Use the least expensive option you have, which it sounds like you're already doing. Lousy options in a workplace 401k plan are nothing new... Small companies, or 401k plans with lower asset totals, routinely pay higher fees and have worse options available to the participants. If you have any ability to persuade your 401k Plan Administrator, CEO, CFO, teach them what a ripoff it is for ALL employees, then lobby for the inclusion of index funds with reasonable expense ratios, or switch 401k custodians to someone who treats you fair, like Vanguard. Best of luck.

Topic Author
fivedots
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Joined: Fri Oct 04, 2019 7:52 pm

Re: need help with roth 401k and ira

Post by fivedots » Sat Oct 05, 2019 5:39 pm

retiredjg wrote:
Sat Oct 05, 2019 3:53 pm
If the decision is between Roth IRA and Roth 401k, use Roth IRA first. If the decision is between Roth 401k and taxable....I'm not real sure.

How long will you be with this employer? If "not very long", I'd go ahead and get that money into Roth status even if it means paying a little more for a few years.
@retiredjg
Thanks for responding. I can probably save about 60% of my income. So I can max out the 401k and an ira and also save in a taxable account. But the Roth options make this very confusing for me. I always thought Roth was the way to go. Practically every source I've ever listened to is like Roth, Roth, Roth. But after digging into this issue a bit deeper, it seems like the typical early retirement strategy favors traditional pre-tax retirement plans during the accumulation phase, and then converts this money to a Roth at opportune times.

Topic Author
fivedots
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Joined: Fri Oct 04, 2019 7:52 pm

Re: need help with roth 401k and ira

Post by fivedots » Sat Oct 05, 2019 5:44 pm

@KlangFool

That's a great website you linked to, thanks.

I've been filing my own taxes for quite a few years. It's not a task I enjoy though. It takes me perhaps 10 or 12 hours even though they relatively simple. Why do you ask?

lakpr
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Re: need help with roth 401k and ira

Post by lakpr » Sat Oct 05, 2019 6:04 pm

fivedots,

If you are earning $65k, the optimum combination seems to me that you
- first contribute $2.5k to the HSA as it is triple tax efficient: no tax going in, payroll tax exempt, and no tax coming out. Just save all your medical expenses receipts and match against your withdrawals.
- next contribute $6k to Roth IRA. With the Roth IRA you get very low expense ratio at Vanguard or Fidelity, and this is to be preferred first before the 401k. The order would have been definitely reverse, if your 401k plan fees are at least half of what you indicated.
- thirdly, contribute $19k to your 401k plan, or as much as you can afford to. But, I suggest you split your contribution half to Traditional 401k, and the other half to Roth 401k. Not everything to Roth 401k.

Your plan expense ratio are the main drivers for my recommendation. By choosing to split half to Traditional 401k, you are essentially choosing to make the government share your misery.

Contributing $9.5k to Traditional 401k also drops your Wages to $51k or so, which, for a single, is the top of the 12% tax bracket. In other words, with that half of your 401k contribution, you are escaping 22% tax rate now. With the other half, you are paying only 12% tax rate now, and the future growth is completely tax free.

When you retire, the most likely tax rate on your 401k withdrawals is going to be 12% (if the current tax brackets get extended, they are scheduled to expire in 2025), or 15% (tax rate in 2026). So escaping 22% tax rate now, paying at most 15% tax rate on withdrawal.

Win win!

Topic Author
fivedots
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Joined: Fri Oct 04, 2019 7:52 pm

Re: need help with roth 401k and ira

Post by fivedots » Sat Oct 05, 2019 6:38 pm

lakpr wrote:
Sat Oct 05, 2019 6:04 pm
- first contribute $2.5k to the HSA as it is triple tax efficient: no tax going in, payroll tax exempt, and no tax coming out. Just save all your medical expenses receipts and match against your withdrawals.
@lakpr

Regarding the HSA, the plan I have at work doesn't qualify me for an HSA. Is it possible to drop out of an employer's plan and get your own high deductible plan with an HSA? Or am I disqualified for as long as I work for an employer that merely offers a low deductible plan?

KlangFool
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Re: need help with roth 401k and ira

Post by KlangFool » Sat Oct 05, 2019 7:55 pm

fivedots wrote:
Sat Oct 05, 2019 5:44 pm
@KlangFool

That's a great website you linked to, thanks.

I've been filing my own taxes for quite a few years. It's not a task I enjoy though. It takes me perhaps 10 or 12 hours even though they relatively simple. Why do you ask?
fivedots,

1) Do you use tax software?

2) Please observe the changes in

A) Earned Income Tax Credit

B) Saver's credit

depending on the amount of you contribute to Trad. 401K, Trad. IRA and/or Roth IRA.

https://www.irs.gov/credits-deductions/ ... tax-credit

https://www.bogleheads.org/wiki/Saver%27s_credit

KlangFool

lakpr
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Re: need help with roth 401k and ira

Post by lakpr » Sat Oct 05, 2019 7:59 pm

fivedots wrote:
Sat Oct 05, 2019 6:38 pm
@lakpr

Regarding the HSA, the plan I have at work doesn't qualify me for an HSA. Is it possible to drop out of an employer's plan and get your own high deductible plan with an HSA? Or am I disqualified for as long as I work for an employer that merely offers a low deductible plan?
You are not disqualified to reject employer coverage and seek your own. But.....

Problem with what you suggest is that the premiums for own medical insurance is not pre-tax. Only medical expenses that exceed 10% of your income are tax deductible. Even then, you need to itemize deductions on your tax return before you see any benefit, and the recent TCJA made itemizing deductions a moot point. 98% of taxpayers reportedly take the standard deduction now.

It is a losing proposition in multiple ways, to reject employer offered medical coverage and go with your own.

Topic Author
fivedots
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Joined: Fri Oct 04, 2019 7:52 pm

Re: need help with roth 401k and ira

Post by fivedots » Sat Oct 05, 2019 8:45 pm

KlangFool wrote:
Sat Oct 05, 2019 7:55 pm
fivedots,

1) Do you use tax software?

2) Please observe the changes in

A) Earned Income Tax Credit

B) Saver's credit

depending on the amount of you contribute to Trad. 401K, Trad. IRA and/or Roth IRA.
@KlangFool

I used an online service the last two years for taxes. I looked at the links you posted about the EIC and Saver's credit, but I'm single and don't have any dependents. The adjusted gross income limits were 15,270 and 19,250 respectively for someone without dependents. I don't see how I could qualify. Is there some deeper future strategy you are alluding to?

Topic Author
fivedots
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Re: need help with roth 401k and ira

Post by fivedots » Sat Oct 05, 2019 8:57 pm

lakpr wrote:
Sat Oct 05, 2019 7:59 pm
You are not disqualified to reject employer coverage and seek your own. But.....

Problem with what you suggest is that the premiums for own medical insurance is not pre-tax. Only medical expenses that exceed 10% of your income are tax deductible. Even then, you need to itemize deductions on your tax return before you see any benefit, and the recent TCJA made itemizing deductions a moot point. 98% of taxpayers reportedly take the standard deduction now.

It is a losing proposition in multiple ways, to reject employer offered medical coverage and go with your own.
See, is this another thing I just do not understand. Why is health insurance entangled with employment? So health insurance is always provided pre-tax via the employer, but not so if I purchase it myself, correct? Why am I forced to be dependent on my employer for this necessity? What does health insurance have to do with employment?

KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: need help with roth 401k and ira

Post by KlangFool » Sat Oct 05, 2019 9:04 pm

fivedots wrote:
Sat Oct 05, 2019 8:45 pm
KlangFool wrote:
Sat Oct 05, 2019 7:55 pm
fivedots,

1) Do you use tax software?

2) Please observe the changes in

A) Earned Income Tax Credit

B) Saver's credit

depending on the amount of you contribute to Trad. 401K, Trad. IRA and/or Roth IRA.
@KlangFool

I used an online service the last two years for taxes. I looked at the links you posted about the EIC and Saver's credit, but I'm single and don't have any dependents. The adjusted gross income limits were 15,270 and 19,250 respectively for someone without dependents. I don't see how I could qualify. Is there some deeper future strategy you are alluding to?
fivedots,

Then, you may not qualify if your gross income is 65K per year. But, you should be aware of those credits because if you do not have a full year of income for any reason, you may qualify.

KlangFool

lakpr
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Re: need help with roth 401k and ira

Post by lakpr » Sat Oct 05, 2019 9:05 pm

fivedots wrote:
Sat Oct 05, 2019 8:57 pm
See, this another thing I just do not understand. Why is health insurance entangled with employment? So health insurance is always provided pre-tax via the employer, but not so if I purchase it myself, correct? Why am I forced to be dependent on my employer for this necessity? What does health insurance have to do with employment?
That unfortunately is just the way it is. Blame all our past and current Congress critters for this outcome. Make your vote in the upcoming elections count, if you want change; more than one candidate is proposing Medicare for All .... pick one.

<< Let us not discuss further, it quickly slips into politics, prohibited by forum rules. My suggestion above is intended as an actionable takeaway >>

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arcticpineapplecorp.
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Re: need help with roth 401k and ira

Post by arcticpineapplecorp. » Sat Oct 05, 2019 9:05 pm

fivedots wrote:
Sat Oct 05, 2019 8:57 pm
lakpr wrote:
Sat Oct 05, 2019 7:59 pm
You are not disqualified to reject employer coverage and seek your own. But.....

Problem with what you suggest is that the premiums for own medical insurance is not pre-tax. Only medical expenses that exceed 10% of your income are tax deductible. Even then, you need to itemize deductions on your tax return before you see any benefit, and the recent TCJA made itemizing deductions a moot point. 98% of taxpayers reportedly take the standard deduction now.

It is a losing proposition in multiple ways, to reject employer offered medical coverage and go with your own.
See, is this another thing I just do not understand. Why is health insurance entangled with employment? So health insurance is always provided pre-tax via the employer, but not so if I purchase it myself, correct? Why am I forced to be dependent on my employer for this necessity? What does health insurance have to do with employment?
from https://en.wikipedia.org/wiki/Health_in ... ted_States:
The rise of employer-sponsored coverage

Employer-sponsored health insurance plans dramatically expanded as a direct result of wage controls imposed by the federal government during World War II.[20] The labor market was tight because of the increased demand for goods and decreased supply of workers during the war. Federally imposed wage and price controls prohibited manufacturers and other employers from raising wages enough to attract workers. When the War Labor Board declared that fringe benefits, such as sick leave and health insurance, did not count as wages for the purpose of wage controls, employers responded with significantly increased offers of fringe benefits, especially health care coverage, to attract workers.[20] The tax deduction was later codified in the Revenue Act of 1954.[25]

President Harry S. Truman proposed a system of public health insurance in his November 19, 1945, address. He envisioned a national system that would be open to all Americans, but would remain optional. Participants would pay monthly fees into the plan, which would cover the cost of any and all medical expenses that arose in a time of need. The government would pay for the cost of services rendered by any doctor who chose to join the program. In addition, the insurance plan would give cash to the policy holder to replace wages lost because of illness or injury. The proposal was quite popular with the public, but it was fiercely opposed by the Chamber of Commerce, the American Hospital Association, and the AMA, which denounced it as "socialism".[26]

Foreseeing a long and costly political battle, many labor unions chose to campaign for employer-sponsored coverage, which they saw as a less desirable but more achievable goal, and as coverage expanded the national insurance system lost political momentum and ultimately failed to pass. Using health care and other fringe benefits to attract the best employees, private sector, white-collar employers nationwide expanded the U.S. health care system. Public sector employers followed suit in an effort to compete. Between 1940 and 1960, the total number of people enrolled in health insurance plans grew seven-fold, from 20,662,000 to 142,334,000,[27] and by 1958, 75% of Americans had some form of health coverage.[28]
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

Topic Author
fivedots
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Re: need help with roth 401k and ira

Post by fivedots » Sat Oct 05, 2019 9:33 pm

@arcticpineapplecorp.

That is a really interesting post. I wish retirement and health insurance were not entangled with employment, I feel like it leads to more disadvantages than advantages. However, I wouldn't mind the option of car insurance via an employer.

retiredjg
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Re: need help with roth 401k and ira

Post by retiredjg » Sun Oct 06, 2019 6:50 am

fivedots wrote:
Sat Oct 05, 2019 8:57 pm
See, is this another thing I just do not understand. Why is health insurance entangled with employment? So health insurance is always provided pre-tax via the employer, but not so if I purchase it myself, correct? Why am I forced to be dependent on my employer for this necessity? What does health insurance have to do with employment?
Employer provided insurance is generally a benefit to employees because 1) the employer can get group rates and 2) people in groups can be insured without having to pass a medical screening. These things can be hugely beneficial to most people.

It sometimes happens that the employer actually provides insurance as part of a benefits package. Or pays part of the insurance premium and the employee pays less.

I do not know how paying your insurance through your employer became pre-tax for the employee, but that is also beneficial to most people.

I think it would be a rare situation where someone finds that buying health insurance as an individual is a better deal.

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Brianmcg321
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Re: need help with roth 401k and ira

Post by Brianmcg321 » Sun Oct 06, 2019 7:01 am

fivedots wrote:
Sat Oct 05, 2019 8:57 pm
lakpr wrote:
Sat Oct 05, 2019 7:59 pm
You are not disqualified to reject employer coverage and seek your own. But.....

Problem with what you suggest is that the premiums for own medical insurance is not pre-tax. Only medical expenses that exceed 10% of your income are tax deductible. Even then, you need to itemize deductions on your tax return before you see any benefit, and the recent TCJA made itemizing deductions a moot point. 98% of taxpayers reportedly take the standard deduction now.

It is a losing proposition in multiple ways, to reject employer offered medical coverage and go with your own.
See, is this another thing I just do not understand. Why is health insurance entangled with employment? So health insurance is always provided pre-tax via the employer, but not so if I purchase it myself, correct? Why am I forced to be dependent on my employer for this necessity? What does health insurance have to do with employment?

It isn't. Feel free to go buy your own health insurance on the market. Your employer has decided to provide you this as a benefit. There is nothing stopping your from getting health insurance elsewhere.
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.

retiredjg
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Re: need help with roth 401k and ira

Post by retiredjg » Sun Oct 06, 2019 7:57 am

fivedots wrote:
Sat Oct 05, 2019 5:39 pm
I always thought Roth was the way to go. Practically every source I've ever listened to is like Roth, Roth, Roth. But after digging into this issue a bit deeper, it seems like the typical early retirement strategy favors traditional pre-tax retirement plans during the accumulation phase, and then converts this money to a Roth at opportune times.
It is a common misconception that Roth is better than traditional. Most of the general public believes this. They think that because Roth is never taxed again, that some kind of magical compounding goes in a Roth account. This is incorrect.

If the money is taxed at the same rate going into Roth IRA as it would be taxed coming out of traditional IRA (if you put the money in traditional IRA instead) you end up with the same amount of money. To the penny. There is no magical compounding because money is in Roth.

It appears that you are in the 22% tax bracket. My suggestion is to use traditional 401k enough to pull yourself into the 12% bracket and then put all the rest of your retirement savings into some kind of Roth account (Roth 401k and Roth IRA).

My quick calculations say that would be about $13,350 that needs to go into traditional 401k. You should verify that for yourself. And that number will be less if you are paying for your health care through your employer.


If you were eligible to get tax credits through the EIC or the saver's credit, I would encourage you to put all of the $19k into traditional 401k. But apparently that is not a good option for you.

retired@50
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Re: need help with roth 401k and ira

Post by retired@50 » Sun Oct 06, 2019 11:57 am

retiredjg wrote:
Sun Oct 06, 2019 7:57 am
fivedots wrote:
Sat Oct 05, 2019 5:39 pm
I always thought Roth was the way to go. Practically every source I've ever listened to is like Roth, Roth, Roth. But after digging into this issue a bit deeper, it seems like the typical early retirement strategy favors traditional pre-tax retirement plans during the accumulation phase, and then converts this money to a Roth at opportune times.
It is a common misconception that Roth is better than traditional. Most of the general public believes this. They think that because Roth is never taxed again, that some kind of magical compounding goes in a Roth account. This is incorrect.

If the money is taxed at the same rate going into Roth IRA as it would be taxed coming out of traditional IRA (if you put the money in traditional IRA instead) you end up with the same amount of money. To the penny. There is no magical compounding because money is in Roth.

It appears that you are in the 22% tax bracket. My suggestion is to use traditional 401k enough to pull yourself into the 12% bracket and then put all the rest of your retirement savings into some kind of Roth account (Roth 401k and Roth IRA).

My quick calculations say that would be about $13,350 that needs to go into traditional 401k. You should verify that for yourself. And that number will be less if you are paying for your health care through your employer.


If you were eligible to get tax credits through the EIC or the saver's credit, I would encourage you to put all of the $19k into traditional 401k. But apparently that is not a good option for you.
My motivation for using a Roth IRA is to create tax diversification. In other words, one never knows in advance what their future tax bracket will be since Congress can change this when they want. By having some money in a Roth IRA, and some in a traditional IRA, you've got some limited ability to shape or sculpt your future income stream(s). However, this of course rests on the premise that future withdrawals from a Roth IRA will remain tax-free. We can only hope Congress doesn't change it's mind on this important pillar of retirement tax planning. Best of luck.

retiredjg
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Re: need help with roth 401k and ira

Post by retiredjg » Sun Oct 06, 2019 12:36 pm

retired@50 wrote:
Sun Oct 06, 2019 11:57 am
My motivation for using a Roth IRA is to create tax diversification. In other words, one never knows in advance what their future tax bracket will be since Congress can change this when they want. By having some money in a Roth IRA, and some in a traditional IRA, you've got some limited ability to shape or sculpt your future income stream(s).
Yes, probably everyone should have a combination of traditional money and Roth money as they go into retirement.

Since the ability to deduct tIRA contributions can be limited or non-existent for people making "good" money, it is not uncommon for the IRA to be Roth instead of traditional.

The big question in this case is what to do with the $19k going into 401k. Some people think that Rothness is so magical that they should use Roth 401k because "Roth Roth Roth" is all they hear. In most cases that is not the best choice. As always, there are exceptions. :happy

retired@50
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Re: need help with roth 401k and ira

Post by retired@50 » Sun Oct 06, 2019 5:24 pm

retiredjg wrote:
Sun Oct 06, 2019 12:36 pm
retired@50 wrote:
Sun Oct 06, 2019 11:57 am
My motivation for using a Roth IRA is to create tax diversification. In other words, one never knows in advance what their future tax bracket will be since Congress can change this when they want. By having some money in a Roth IRA, and some in a traditional IRA, you've got some limited ability to shape or sculpt your future income stream(s).
Yes, probably everyone should have a combination of traditional money and Roth money as they go into retirement.

Since the ability to deduct tIRA contributions can be limited or non-existent for people making "good" money, it is not uncommon for the IRA to be Roth instead of traditional.

The big question in this case is what to do with the $19k going into 401k. Some people think that Rothness is so magical that they should use Roth 401k because "Roth Roth Roth" is all they hear. In most cases that is not the best choice. As always, there are exceptions. :happy
I think you raise a good point in your earlier remarks about if the tax rate is the same between working years, and withdrawing years, then the amount works out to be the same. The Roth money comes in handy when your tax rate is actually higher during retirement. Of course, as I stated earlier, one can never know with any certainty what tax rate they will pay in retirement. Kind regards.

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fivedots
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Re: need help with roth 401k and ira

Post by fivedots » Sat Oct 12, 2019 8:08 pm

Hi guys,

This post is about Roth 401k and high fees. See question 2 in the original post.

So I'm reading various resources on Bogleheads, and came across this taxable investing account example under the Tax-efficient fund placement section:
For example, suppose that you hold $10,000 in a stock index fund for 30 years, and it yields 2%, all qualified dividends taxed at 15%, while earning 6% in increased stock prices for a pre-tax return of 8%. Every year, you pay 0.30% tax on the dividend, and reinvest the other 1.7%. After 30 years, you have $92,570, with a basis of $28,240 including reinvested dividends. When you sell, you pay $9651 tax on the $64,340 capital gain, for a final value of $82,719, an annual return of 7.30%. Despite the 15% tax rate, your returns were only 9% less than the tax-free rate because you deferred taxes on the capital gains. If you harvested losses, donated some of the stock to charity, or left some to your heirs, your return would be be even higher.
What do you guys think of this example? In this case, the taxable account returned 7.3% per year versus 8% un-taxed. So taxes ate up 0.7%. The lowest cost fund in my 401k has an expense ratio of 0.9%. I can't see a compelling reason to direct a large percentage of retirement money into a high fee Roth 401k! Am I not understanding something here? In this example, the effective penalty from taxes is less than the penalty from fees in my 401k.

lakpr
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Re: need help with roth 401k and ira

Post by lakpr » Sat Oct 12, 2019 8:37 pm

This example that you cite is showing a simple case, of a one time investment if $10k and no subsequent contributions at all. I would like to do the math on recurring contributions of $10k every year and figure out what the final result is going to be.

Although, with the cheapest fund having a 0.9% expense ratio in the 401k plan quite likely tilts the equation in favor of taxable investing. Especially if, after contributing to a traditional 401k you are able to get your tax bracket down to 12%, where capital gains taxes are 0% ..

Not ready to do that math at this time, 9:30 pm in the night, but perhaps later tomorrow...

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fivedots
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Re: need help with roth 401k and ira

Post by fivedots » Sat Oct 12, 2019 9:09 pm

lakpr wrote:
Sat Oct 12, 2019 8:37 pm
This example that you cite is showing a simple case, of a one time investment if $10k and no subsequent contributions at all. I would like to do the math on recurring contributions of $10k every year and figure out what the final result is going to be.

Although, with the cheapest fund having a 0.9% expense ratio in the 401k plan quite likely tilts the equation in favor of taxable investing. Especially if, after contributing to a traditional 401k you are able to get your tax bracket down to 12%, where capital gains taxes are 0% ..

Not ready to do that math at this time, 9:30 pm in the night, but perhaps later tomorrow...
Let's say one's normal income is in the 12% bracket. If one makes a bunch of capital gains in a taxable account, does that count as income that can bump a person up a tax bracket. Would they still pay 0% tax on capital gains?

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Re: need help with roth 401k and ira

Post by lakpr » Sat Oct 12, 2019 9:43 pm

fivedots wrote:
Sat Oct 12, 2019 9:09 pm
Let's say one's normal income is in the 12% bracket. If one makes a bunch of capital gains in a taxable account, does that count as income that can bump a person up a tax bracket. Would they still pay 0% tax on capital gains?
No, they won't pay 0% tax on capital gains in the scenario you describe. The combined capital gains and normal income should keep the person in the 12% bracket for that 0% capital gains tax rate to apply.

In fact, there exists a shadow 27% tax bracket where the capital gains are taxed at both 15% rate and the 12% rate. There is a graph around here somewhere buried in past posts that I have seen it depicted visually.

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FiveK
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Re: need help with roth 401k and ira

Post by FiveK » Sat Oct 12, 2019 10:26 pm

fivedots wrote:
Sat Oct 12, 2019 8:08 pm
What do you guys think of this example? In this case, the taxable account returned 7.3% per year versus 8% un-taxed. So taxes ate up 0.7%. The lowest cost fund in my 401k has an expense ratio of 0.9%. I can't see a compelling reason to direct a large percentage of retirement money into a high fee Roth 401k! Am I not understanding something here? In this example, the effective penalty from taxes is less than the penalty from fees in my 401k.
The example is correct (although there appear to be some typos that don't have a material effect) as far as it goes. One then needs to estimate whether withdrawal of all funds would occur immediately, or whether there would be some time after separation from the 401k employer during which the funds could be rolled over to a tIRA with fees no higher than in taxable.

E.g., if the funds stayed in the poor 401k for 20 years, then rolled over to a good tIRA, and withdrawn 10 years later, even with a 0.9% higher fee for the first 20 years the 401k/tIRA combination would beat taxable $85,119 to $82,919.

See [Wiki suggestion] Invest in taxable or 401(k)? - Bogleheads.org for more details than given in 401k: expensive or mediocre choices.

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FiveK
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Re: need help with roth 401k and ira

Post by FiveK » Sat Oct 12, 2019 10:29 pm

lakpr wrote:
Sat Oct 12, 2019 8:37 pm
This example that you cite is showing a simple case, of a one time investment if $10k and no subsequent contributions at all. I would like to do the math on recurring contributions of $10k every year and figure out what the final result is going to be.

Although, with the cheapest fund having a 0.9% expense ratio in the 401k plan quite likely tilts the equation in favor of taxable investing. Especially if, after contributing to a traditional 401k you are able to get your tax bracket down to 12%, where capital gains taxes are 0% ..

Not ready to do that math at this time, 9:30 pm in the night, but perhaps later tomorrow...
See rows 129-148 in the 'Misc. calcs' tab of the personal finance toolbox spreadsheet for one time and/or recurring contributions in a taxable account.

See also the '401k vs Taxable' tab in that spreadsheet for the calculations referenced in the previous post and in the detailed thread behind the wiki.

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FiveK
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Re: need help with roth 401k and ira

Post by FiveK » Sat Oct 12, 2019 10:32 pm

lakpr wrote:
Sat Oct 12, 2019 9:43 pm
fivedots wrote:
Sat Oct 12, 2019 9:09 pm
Let's say one's normal income is in the 12% bracket. If one makes a bunch of capital gains in a taxable account, does that count as income that can bump a person up a tax bracket. Would they still pay 0% tax on capital gains?
No, they won't pay 0% tax on capital gains in the scenario you describe. The combined capital gains and normal income should keep the person in the 12% bracket for that 0% capital gains tax rate to apply.

In fact, there exists a shadow 27% tax bracket where the capital gains are taxed at both 15% rate and the 12% rate. There is a graph around here somewhere buried in past posts that I have seen it depicted visually.
The 27% marginal tax rate exists on ordinary income when capital gains are also present and the total income is in a particular range. See that wiki for a graph that may be the one mentioned.

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Re: need help with roth 401k and ira

Post by LilyFleur » Sun Oct 13, 2019 1:43 am

fivedots wrote:
Sat Oct 12, 2019 8:08 pm
Hi guys,

This post is about Roth 401k and high fees. See question 2 in the original post.

So I'm reading various resources on Bogleheads, and came across this taxable investing account example under the Tax-efficient fund placement section:
For example, suppose that you hold $10,000 in a stock index fund for 30 years, and it yields 2%, all qualified dividends taxed at 15%, while earning 6% in increased stock prices for a pre-tax return of 8%. Every year, you pay 0.30% tax on the dividend, and reinvest the other 1.7%. After 30 years, you have $92,570, with a basis of $28,240 including reinvested dividends. When you sell, you pay $9651 tax on the $64,340 capital gain, for a final value of $82,719, an annual return of 7.30%. Despite the 15% tax rate, your returns were only 9% less than the tax-free rate because you deferred taxes on the capital gains. If you harvested losses, donated some of the stock to charity, or left some to your heirs, your return would be be even higher.
What do you guys think of this example? In this case, the taxable account returned 7.3% per year versus 8% un-taxed. So taxes ate up 0.7%. The lowest cost fund in my 401k has an expense ratio of 0.9%. I can't see a compelling reason to direct a large percentage of retirement money into a high fee Roth 401k! Am I not understanding something here? In this example, the effective penalty from taxes is less than the penalty from fees in my 401k.
I do not think taxable accounts give you any protection from creditors or from medical bankruptcy. 401ks have the most protection; the protection of IRAs varies according to the laws of your state. So a discussion of the high fees in a 401k needs to consider the protection it also gives, whether the fees are high or low.

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Re: need help with roth 401k and ira

Post by retiredjg » Sun Oct 13, 2019 7:00 am

My suggestion is to use traditional 401k enough to pull yourself into the 12% tax bracket and put the rest of your savings into Roth IRA and/or Roth 401k. It should take about $13k to $14k in traditional 401k to accomplish that.

If you can save 60% of your income, you might be able to fill both of those and still have money to save in a taxable account.

An ER of .9% is not high enough for you to bypass using traditional 401k unless you will be working there a very long time with no improvement in the work plan.

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fivedots
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Re: need help with roth 401k and ira

Post by fivedots » Sun Oct 13, 2019 12:59 pm

retiredjg wrote:
Sun Oct 13, 2019 7:00 am
My suggestion is to use traditional 401k enough to pull yourself into the 12% tax bracket and put the rest of your savings into Roth IRA and/or Roth 401k. It should take about $13k to $14k in traditional 401k to accomplish that.

If you can save 60% of your income, you might be able to fill both of those and still have money to save in a taxable account.

An ER of .9% is not high enough for you to bypass using traditional 401k unless you will be working there a very long time with no improvement in the work plan.
@retiredjg: Yeah, I will probably do something similar to what you propose. I think there's a maxed out Roth vs Traditional calculator spreadsheet that's available on this website. I will see what I can learn from that too.

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fivedots
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Re: need help with roth 401k and ira

Post by fivedots » Sun Oct 13, 2019 1:01 pm

LilyFleur wrote:
Sun Oct 13, 2019 1:43 am

I do not think taxable accounts give you any protection from creditors or from medical bankruptcy. 401ks have the most protection; the protection of IRAs varies according to the laws of your state. So a discussion of the high fees in a 401k needs to consider the protection it also gives, whether the fees are high or low.
Thanks for pointing that out!

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fivedots
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Re: need help with roth 401k and ira

Post by fivedots » Sun Oct 13, 2019 1:03 pm

FiveK wrote:
Sat Oct 12, 2019 10:26 pm
fivedots wrote:
Sat Oct 12, 2019 8:08 pm
What do you guys think of this example? In this case, the taxable account returned 7.3% per year versus 8% un-taxed. So taxes ate up 0.7%. The lowest cost fund in my 401k has an expense ratio of 0.9%. I can't see a compelling reason to direct a large percentage of retirement money into a high fee Roth 401k! Am I not understanding something here? In this example, the effective penalty from taxes is less than the penalty from fees in my 401k.
The example is correct (although there appear to be some typos that don't have a material effect) as far as it goes. One then needs to estimate whether withdrawal of all funds would occur immediately, or whether there would be some time after separation from the 401k employer during which the funds could be rolled over to a tIRA with fees no higher than in taxable.

E.g., if the funds stayed in the poor 401k for 20 years, then rolled over to a good tIRA, and withdrawn 10 years later, even with a 0.9% higher fee for the first 20 years the 401k/tIRA combination would beat taxable $85,119 to $82,919.

See [Wiki suggestion] Invest in taxable or 401(k)? - Bogleheads.org for more details than given in 401k: expensive or mediocre choices.
Can I roll over funds while I'm working at the company? Or is there some kind of restriction preventing this?

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FiveK
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Re: need help with roth 401k and ira

Post by FiveK » Sun Oct 13, 2019 1:04 pm

fivedots wrote:
Sun Oct 13, 2019 12:59 pm
I think there's a maxed out Roth vs Traditional calculator spreadsheet that's available on this website. I will see what I can learn from that too.
There are two mentioned in the More complicated situations section of the t vs. R wiki.

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FiveK
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Re: need help with roth 401k and ira

Post by FiveK » Sun Oct 13, 2019 1:08 pm

fivedots wrote:
Sun Oct 13, 2019 1:03 pm
Can I roll over funds while I'm working at the company?
In general, "no."

See 401(k) Distribution Rules – Frequently Asked Questions and similar for some exceptions.

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Re: need help with roth 401k and ira

Post by rkhusky » Sun Oct 13, 2019 1:23 pm

Regarding the costs in the 401k, someone has to pay for the web site, booklets, record keeping, mailings, and tax compliance. Some companies subsidize their employees and offer low cost funds. Other companies don’t (perhaps they give other forms of compensation), and the employees have to foot the whole bill through higher cost funds. Or perhaps whoever chose the funds was clueless. If the latter, sometimes the company will be open to adding low cost funds.

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Re: need help with roth 401k and ira

Post by rkhusky » Sun Oct 13, 2019 1:32 pm

lakpr wrote:
Sat Oct 05, 2019 9:05 pm
fivedots wrote:
Sat Oct 05, 2019 8:57 pm
See, this another thing I just do not understand. Why is health insurance entangled with employment? So health insurance is always provided pre-tax via the employer, but not so if I purchase it myself, correct? Why am I forced to be dependent on my employer for this necessity? What does health insurance have to do with employment?
That unfortunately is just the way it is. Blame all our past and current Congress critters for this outcome. Make your vote in the upcoming elections count, if you want change; more than one candidate is proposing Medicare for All .... pick one.

<< Let us not discuss further, it quickly slips into politics, prohibited by forum rules. My suggestion above is intended as an actionable takeaway >>
Or vote for someone who will get rid of the employer tax break, such that more companies will discontinue offering subsidized health insurance. Eventually health insurance would be more like auto insurance, with everyone buying individual plans. Would make plans more competitive without the distortion and job constraints that subsidization brings.

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fivedots
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Re: need help with roth 401k and ira

Post by fivedots » Sun Oct 13, 2019 1:41 pm

How does one navigate to the Traditional vs Roth wiki from the Boggleheads main wiki homepage?

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fivedots
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Re: need help with roth 401k and ira

Post by fivedots » Sun Oct 13, 2019 1:48 pm

rkhusky wrote:
Sun Oct 13, 2019 1:23 pm
Regarding the costs in the 401k, someone has to pay for the web site, booklets, record keeping, mailings, and tax compliance. Some companies subsidize their employees and offer low cost funds. Other companies don’t (perhaps they give other forms of compensation), and the employees have to foot the whole bill through higher cost funds. Or perhaps whoever chose the funds was clueless. If the latter, sometimes the company will be open to adding low cost funds.
I would think the fees should be less than what one would experience with an IRA though. Here's a whole company signing up in mass for retirement plans, if anything, there should be some kind of preferential treatment or discount vs an IRA. Don't IRA's have to keep records and comply with taxes, etc?

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FiveK
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Re: need help with roth 401k and ira

Post by FiveK » Sun Oct 13, 2019 1:55 pm

fivedots wrote:
Sun Oct 13, 2019 1:41 pm
How does one navigate to the Traditional vs Roth wiki from the Boggleheads main wiki homepage?
Perhaps the easiest way was to click on the link provided (that's the underlined words with blue instead of black text) in
FiveK wrote:
Sun Oct 13, 2019 1:04 pm
There are two mentioned in the More complicated situations section of the t vs. R wiki.
;)

In general, start typing in the search box in the upper right of the wiki home page. The letters "trad" should suffice to display links to the t vs. R page.

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FiveK
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Re: need help with roth 401k and ira

Post by FiveK » Sun Oct 13, 2019 1:59 pm

fivedots wrote:
Sun Oct 13, 2019 1:48 pm
I would think the fees should be less than what one would experience with an IRA though. Here's a whole company signing up in mass for retirement plans, if anything, there should be some kind of preferential treatment or discount vs an IRA. Don't IRA's have to keep records and comply with taxes, etc?
Indeed there are some 401k plans that provide access to institutional grade funds that have fees less than those available to most IRA investors (except those choosing zero fee funds such as some of Fidelity's), but in general there is more work per person needed to administer a 401k (payroll interface, ability to take loans, etc.) than an IRA.

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fivedots
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Re: need help with roth 401k and ira

Post by fivedots » Sun Oct 13, 2019 2:13 pm

@FiveK

I see the search box and also the following categories:
Academics
Asset classes
Employer provided retirement plans
ETFs and mutual funds
Financial planning
Indexing
Investing
Non-US domiciles
Personal retirement plans
Retirement planning
Tax considerations
Complete list...

Is there a more finely grained resource list that I am not seeing? I am just trying to understand how people discover the various pages that have been linked to in their replys. It seems like a lot of information is buried quite deeply in the above mentioned sections and I wouldn't necessarily know what to search for.

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FiveK
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Re: need help with roth 401k and ira

Post by FiveK » Sun Oct 13, 2019 2:33 pm

fivedots wrote:
Sun Oct 13, 2019 2:13 pm
I am just trying to understand how people discover the various pages that have been linked to in their replys. It seems like a lot of information is buried quite deeply in the above mentioned sections and I wouldn't necessarily know what to search for.
That's a great question.

There may be as much art as science both in populating a wiki Table of Contents and choosing search terms. And, once people have figured out how to find what they need, there may be little incentive to go back and make the finding easier for others. If you are so inclined, below are a couple of avenues you might consider

The forum administrators can add "redirect" pages (e.g., Traditional vs. Roth - Bogleheads will take one to Traditional versus Roth - Bogleheads. If you couldn't find something under a reasonable variant of the actual article title, you could suggest a redirect page name.

If you find an article that you think should have been linked within a higher level category/outline, you could suggest that it be linked there.

Meanwhile, use of the search box might be the most expeditious option. Good luck!

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Re: need help with roth 401k and ira

Post by rkhusky » Sun Oct 13, 2019 6:06 pm

I just use the main page search box. First hit on "traditional roth" is the page in question.

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