IRA instead of 401k with high expenses and no match

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Topic Author
steffiwags
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Joined: Sat Oct 26, 2019 7:53 am

IRA instead of 401k with high expenses and no match

Post by steffiwags » Wed Nov 06, 2019 5:09 pm

Hi everyone,

the company I work at offers a 401k without a match. On top of that all the investment options are expensive and very limited.
Now I’m wondering whether I should stop putting my money into the 401k and open an IRA I stead? Are there any disadvantages to this?
And where would I go to set one up?

Thank you for your help!
Last edited by steffiwags on Wed Nov 06, 2019 5:20 pm, edited 1 time in total.

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: IRA instead of 401k with high expenses and no match

Post by retiredjg » Wed Nov 06, 2019 5:13 pm

Rollover what money?

If you mean the money already in the 401k, you cannot do that.

Topic Author
steffiwags
Posts: 9
Joined: Sat Oct 26, 2019 7:53 am

Re: IRA instead of 401k with high expenses and no match

Post by steffiwags » Wed Nov 06, 2019 5:20 pm

Sorry, you’re right. I used the wrong wording and changed it

Topic Author
steffiwags
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Joined: Sat Oct 26, 2019 7:53 am

Re: IRA instead of 401k with high expenses and no match

Post by steffiwags » Wed Nov 06, 2019 5:21 pm

Sorry, you’re right. I used the wrong wording and changed it

mhalley
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Re: IRA instead of 401k with high expenses and no match

Post by mhalley » Wed Nov 06, 2019 5:26 pm

A couple of rules of thumb. Order of investments

1.401k to match
2. Roth IRA
3. Max 401k
4. Taxable investing.
HSA might be 1a or 2a.
401k is better than taxable until fees exceed 1.7%
Fidelity, vanguard and Schwab are all great.
Read the wiki, particularly getting started, asset allocation, and 3 find portfolio. Post the funds available in 401k and we can help pick the best ones.

lakpr
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Joined: Fri Mar 18, 2011 9:59 am

Re: IRA instead of 401k with high expenses and no match

Post by lakpr » Wed Nov 06, 2019 5:32 pm

Based on your post in this thread: viewtopic.php?f=1&t=293475&p=4815471#p4810108
where you did post your portfolio according to the format requested by this forum:

My advice is to max out the Nationwide S&P 500 index (GRMRX) in the 401k.
0.76% expense ratio is high, but not egregiously so. The other funds are crap, including the bond funds, so I'd not touch them with a barge pole.
But this one is *decent*. Not great, but decent.

You can max out this fund for full $19k, and you will get a tax deduction of at least $4200 for taxes, which you can drop into Roth IRA.

If you drop the 401k contributions, then your tax-advantaged space is just IRA, which is $6k per person. I'd rather see that IRA space be Roth, and the 401k space be traditional 401k, with a much higher limit of $19k.

But, if it's the case that your husband can only keep aside $6k and no more for the year, ONLY THEN go for a Traditional IRA. But be aware that if he made even a $1 contribution to the 401k plan within a calendar year, or a contribution is made for him by the employer { which can happen if the employer suddenly decides to do a safe-harbor plan and contribute non-elective contributions on your husband's behalf }, then the tax-deductibility of the Traditional IRA could vanish as well. Why take that risk at all? Simply compartmentalize .... 401k = tax-deferred; IRA = Roth. Done. Simple..

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ruralavalon
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Re: IRA instead of 401k with high expenses and no match

Post by ruralavalon » Wed Nov 06, 2019 5:34 pm

steffiwags wrote:
Wed Nov 06, 2019 5:09 pm
Hi everyone,

the company I work at offers a 401k without a match. On top of that all the investment options are expensive and very limited.
Now I’m wondering whether I should stop putting my money into the 401k and open an IRA I stead? Are there any disadvantages to this?
And where would I go to set one up?

Thank you for your help!
How "expensive" are the funds offered in your employer's 401k plan?

About how long do you believe that you may stay with this employer?

About how much (in dollars) do you feel that you may be able to contribute annually to investing (total, all accounts)?

You can simply add this to your original post using the edit button (the pencil icon near the upper right corner of your post), it helps a lot if all of your information is in one place.

You could open an IRA at a low cost fund provider like Vanguard or Fidelity, and contribute the annual maximum.

The disadvantage to an IRA is that the annual contribution limit is much lower than for the 401k. It may be best to contribute the annual maximum to an IRA (at age 33, the annual employee maximum is $6k), and also make some contributions to your 401k. I agree with the suggestion that you use Nationwide S&P 500 Index Fund - Class R (GRMRX) (expense 0.76%) for any contributions to 401k.
Last edited by ruralavalon on Wed Nov 06, 2019 5:40 pm, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

lakpr
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Re: IRA instead of 401k with high expenses and no match

Post by lakpr » Wed Nov 06, 2019 5:39 pm

ruralavalon wrote:
Wed Nov 06, 2019 5:34 pm

How "expensive" are the funds offered in your employer's 401k plan?

About how long do you believe that you may stay with this employer?

About how (in dollars) do you feel that you may be able to contribute annually to investing (total, all accounts)?

You can simply add this to your original post using the edit button (the pencil icon near the upper right corner of your post), it helps a lot if all of your information is in one place.

You could open an IRA at a low cost fund provider like Vanguard or Fidelity, and contribute the annual maximum.

The disadvantage to an IRA is that the annual contribution limit is much lower than for the 401k. It may be best to contribute the annual maximum to an IRA, and also make some contributions to your 401k.
@ ruralavalon, please see the OP's other thread, the link is in my post.

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grabiner
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Re: IRA instead of 401k with high expenses and no match

Post by grabiner » Wed Nov 06, 2019 8:42 pm

mhalley wrote:
Wed Nov 06, 2019 5:26 pm
A couple of rules of thumb. Order of investments

1.401k to match
2. Roth IRA
3. Max 401k
4. Taxable investing.
HSA might be 1a or 2a.
401k is better than taxable until fees exceed 1.7%
Usually, even such a high-cost 401(k) is better than a taxable account.

My rule of thumb is that the product of the extra cost on the 401(k) and the number of years you will be stuck with the plan needs to exceed twice your tax rate on qualified dividends before taxable investing becomes worthwhile. When you leave your employer, you can roll the high-cost 401(k) into a low-cost IRA, while keeping the tax deferral.

Thus, if you pay the usual 15% tax on qualified dividends with no state tax, the break-even point for 1.7% expenses on a 401(k) versus 0.1% on a taxable account is 19 years. Unless you are a tenured teacher paying 1.7% on a 403(b) (unfortunately, a common situation), it isn't likely that you will stay with the same employer for 19 years.
Wiki David Grabiner

Topic Author
steffiwags
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Joined: Sat Oct 26, 2019 7:53 am

Re: IRA instead of 401k with high expenses and no match

Post by steffiwags » Wed Nov 06, 2019 9:26 pm

Thank you again for all your help and sorry for not linking to my whole portfolio post.
I see the advantages in tax deductions and being able to invest more money. So I will keep using my 401k and max out the Nationwide S&P 500 index (GRMRX). We'll keep more bonds in my husbands account.

logiclife
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Re: IRA instead of 401k with high expenses and no match

Post by logiclife » Thu Nov 07, 2019 10:53 am

Agreed with most. My belief is you csnt beat tax deferred investments in most cases even with high expenses although I don't recall seeing how expensive yours are. But I think it's going to be ok in the long run even if your 401k expenses are bit high. I was in the same situation as yours many years ago but I didn't blink to put money in tax deferred 401k haven. Good luck to you.

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