Why Roth IRA when you have not maxed out 401k?

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retiredjg
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Re: Why Roth IRA when you have not maxed out 401k?

Post by retiredjg » Wed Dec 11, 2019 8:50 am

stingray777 wrote:
Wed Dec 11, 2019 12:23 am
Diversification is the key, right? Having 100% of Vanguard 500 is against that basic rule.
People have differing opinions on this. I think every portfolio needs a bit of bonds, especially at your age. I'd suggest 20%, maybe 25%.
Since I do not have Total Stock Market, what do I do? Do you see any that is close to it? Or Do I go with S&P500 (50%) and US small cap funds(25%)? Isn't that close enough? I assume that much of Mid-cap is included in S&P500.
500 and small cap is fine. There are some mid caps in the 500 index, but not a lot. You could use all three to make up your "total stock" or just use 500 and small cap to give you something like total index.


What about International? I don't see Vanguard Total International Stock Index (VTIAX), how do I resemble it? I want to do 25%.
Wait to see the cost of the international in the 401k. You might end up putting international into Roth IRA?

You are approaching this with a little too much worry. This is a good plan (so far) and you do not have to have exactly the funds you have in mind. Your job as a good investor is to find some good low cost funds that fit your stock to bond desires. They do not have to be Vanguard funds.

Relax. Good investing is more about saving money and not doing stupid stuff than doing some kind of portfolio magic with just the right funds. Save money and keep your costs low and it will all work out.

UnLearnYourself
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Re: Why Roth IRA when you have not maxed out 401k?

Post by UnLearnYourself » Wed Dec 11, 2019 9:46 am

Triple digit golfer wrote:
Sun Dec 08, 2019 4:17 pm
Here is a great thread for you.

viewtopic.php?f=10&t=61529

I tend to agree with you. If your 401k has good, low-cost plans and you plan on being in a lower bracket when you retire, there's a good case for maxing it out before investing in a Roth IRA.

Read the wiki, too. There are other considerations. You can theoretically use a Roth as an emergency fund and withdraw contributions tax and penalty-free, you can use a Roth to "tax diversity," etc.

https://www.bogleheads.org/wiki/Traditional_versus_Roth
How can you be so sure of your tax bracket, or the tax system 20, 30, 40 years out?

Personally I like this staggered approach in order to hedge what the future may hold.

The real answer is...max out both!

Triple digit golfer
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Re: Why Roth IRA when you have not maxed out 401k?

Post by Triple digit golfer » Wed Dec 11, 2019 10:14 am

UnLearnYourself wrote:
Wed Dec 11, 2019 9:46 am
Triple digit golfer wrote:
Sun Dec 08, 2019 4:17 pm
Here is a great thread for you.

viewtopic.php?f=10&t=61529

I tend to agree with you. If your 401k has good, low-cost plans and you plan on being in a lower bracket when you retire, there's a good case for maxing it out before investing in a Roth IRA.

Read the wiki, too. There are other considerations. You can theoretically use a Roth as an emergency fund and withdraw contributions tax and penalty-free, you can use a Roth to "tax diversity," etc.

https://www.bogleheads.org/wiki/Traditional_versus_Roth
How can you be so sure of your tax bracket, or the tax system 20, 30, 40 years out?

Personally I like this staggered approach in order to hedge what the future may hold.

The real answer is...max out both!
It's not that simple. My wife can contribute to Roth and traditional. We have to pick one or a mixture.

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ruralavalon
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Re: Why Roth IRA when you have not maxed out 401k?

Post by ruralavalon » Wed Dec 11, 2019 11:06 am

Contributions.
stingray777 wrote:
Tue Dec 10, 2019 10:09 pm
Planning to put $13000 next year before tax into 401k.
Being in the 22% tax bracket, with no pension, just starting in investing without a large traditional tax-advantaged account, I agree that traditional deductible contributions to your 401k plan are likely better than Roth contributions.

I suggest increasing contributions if practical. When just beginning at investing establishing a high contribution rate is the most important investing decision you can make. So contribute more if you can. The maximum annual employee contribution to a 401k is $19.5k.



Asset allocation.
At age 45, no debt or dependents, 20 years to retirement but just starting out with investing, I suggest about 20% in bonds or other fixed income investments (like CDs, savings accounts, money market fund). This is expected to substantially reduce portfolio volatility (risk). Graph, "An Efficient Frontier: the power of diversification". Please see:
1) Wiki article Bogleheads® investment philosophy, part 3 "Never bear too much or too little risk";
2) Wiki article, "Asset allocation"; and
3) Morningstar (8/10/2019), "The Best Diversifiers for Your Equity Portfolio".

I suggest around 20 - 30% of stocks in international stocks. Vanguard paper (March 2012), "Considerations for investing in non-U.S. equities". Historically, allocating 20% of an equity portfolio to non-U.S. stocks would have captured about 84% of the maximum possible diversification benefit, and allocating 30% of an equity portfolio to non-U.S. stocks would have captured about 99% of the maximum possible diversification benefit (p. 6). (You can find lots of debate here on international allocation, opinions ranging all the way from 00% to 50% of stocks in international stocks. If you want more viewpoints on international stocks please try the Google search box, upper right, this page).

Asset allocation is a very personal decision. You must decide on an allocation that is comfortable for you based on your own ability, willingness and need to take risk.



Fund selection.
stingray777 wrote:
Tue Dec 10, 2019 10:09 pm
I've got a list today. Very limited:
Aggressive
Conservative
Highly Aggressive
Moderate
Risk Averse
Vanguard Federal Money Market Fund Inves
DFA Inflation-Protected Securities Portf
Vanguard Short-Term Inflation-Protected
DFA Five-Year Global Fixed Income Portfo
DFA International Real Estate Securities
DFA U.S. Large Cap Growth Portfolio Inst
DFA U.S. Small Cap Growth Portfolio Inst
Vanguard 500 Index Fund Admiral Shares
DFA U.S. Large Cap Value III Portfolio
DFA Emerging Markets Core Equity Portfol
DFA Large Cap International Portfolio In
DFA International Small Company Portfoli
Vanguard Mid-Cap Growth Index Fund Admir
Vanguard Real Estate Index Fund Admiral
DFA U.S. Targeted Value Portfolio Instit

I see a few Vanguards, but none that I wanted. How does it look? I cannot find where the overhead cost is. I cannot find expense ratio through my 401k. All I find is a link to MorningStar page for each fund. This is bad, isn't it?
The list is not very limited, you don't need a lot of different funds to be very diversified.

This is not bad at all, it is pretty good. Vanguard funds are good funds with low expense ratios. DFA funds are generally good funds with fairly low expense ratios.

In selecting funds strive for a combination of both broad diversification (to reduce risk) and low expense ratios (to increase your net return). To simply and easily achieve those two goals I suggest choosing funds to simulate the very well diversified, low expense ratio "three-fund portfolio". Please see:
1) Wiki article "Three-fund portfolio";
2) Forum discussion, "The Three-Fund Portfolio"; and
3) Taylor Larimore post, "Articles recommending the three-fund portfolio".

In my opinion in your 401k the funds to consider using include:
1) Vanguard 500 Index Fund Admiral Shares (82% of U.S. stock market) (VFIAX) ER 0.04%;
2) DFA Large Cap International Portfolio Institutional (developed markets only) (DFALX) ER 0.23%; and
3) Vanguard Federal Money Market Fund Investor Shares (VMFXX) ER 0.11%, current SEC Yield = 1.71%.

I prefer intermediate-term, investment-grade bond funds with low expense ratios. I don't see a bond fund that I would recommend in your 401k plan at 20 years until retirement, so I suggest using the money market fund instead of a bond fund at this time. As you get near to retirement you could consider using Vanguard Short-Term Inflation-Protected Securities Index Fund Admiral Shares (VTAPX) ER 0.06% for your bond fund.

For domestic stocks I suggest using a total stock market index fund where available. "In a 401(k) plan with limited choices one might very well opt for an S&P 500 index fund to serve as the domestic stock component of a three-fund portfolio." Wiki article, Three-fund portfolio, "Other considerations".

In my opinion in a plan that lacks a total stock market index fund, a S&P 500 index fund is good enough by itself for a domestic stock allocation. A S&P 500 index fund covers 82% of the U.S. stock market, investing in stocks of selected large-cap and mid-cap U.S. companies. In the 27 years since the creation of the first total stock market index fund the performance (total return with dividends reinvested) of the two types of funds has been almost identical. Morningstar, "growth of $10k" graph (1992 – 2019), VTSAX vs VFIAX. So it seems that adding a little in mid/small cap stocks trying to mimic the holdings of a total stock market fund has historically made little difference in performance.

See also:
1) Allan Roth, CBS Moneywatch (02/03/2010), "John C. Bogle on the S&P 500 vs. the Total Stock Market"; and
2) Wall Street Physician (01/17/2019), "Should You Invest in the S&P 500 or the Total Stock Market?".
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

lakpr
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Re: Why Roth IRA when you have not maxed out 401k?

Post by lakpr » Wed Dec 11, 2019 3:23 pm

I rarely disagree with @ruralavalon, but in my opinion adding bonds or even international funds at this time is just a distraction. The OP has nothing in any tax advantaged account. Simply contribute the max that the OP can, or the actual max of $19.5k for now, in just the S&P 500 index fund. When the portfolio size reaches six figures, then we can entertain thoughts if rebalancing, international stocks, small caps, value tilt, bonds, etc.

Just 1 fund until $100k balance. Simple, and Keep it simple.

dh
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Re: Why Roth IRA when you have not maxed out 401k?

Post by dh » Wed Dec 11, 2019 4:43 pm

nix4me wrote:
Sun Dec 08, 2019 10:13 pm
401k's turn into tax bombs
True. Yet, people leave money on the table if they don't invest enough in their 401K to get the company match. Free money shouldn't be passed up regardless of future tax rates. So my philosophy is to always put money into a 401K to get the company match, then put the next dollars into a Roth IRA.

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Wed Dec 11, 2019 7:36 pm

retiredjg wrote:
Wed Dec 11, 2019 8:34 am
stingray777 wrote:
Tue Dec 10, 2019 10:09 pm
I see a few Vanguards, but none that I wanted. How does it look? I cannot find where the overhead cost is. I cannot find expense ratio through my 401k. All I find is a link to MorningStar page for each fund. This is bad, isn't it?
Not necessarily. At this point they might just be showing you the funds and you'll find out the costs later. Or the cost shown on Morningstar may be your costs. Don't worry, this will be a fine plan and it is not "very limited".

Using the 500 index alone is fine.
Thank you for the encouragement.

I emailed our salesman, and his answer on overhead cost was, "In general, 401k costs 1.25%, but it depends on how you invest." It is not clear. 1.25% on employees? "In general" signifies within our company setup? It is still such a blackbox to me. He sounds to me like trying to avoid clear answers.
Now that I read again, I don't know if he means the total cost (expense ratio + administration cost) or just one... What is this admin cost anyway? What do they do for me? All I see is to have a web interface for our information.

I did not ask him about expense cost for each fund being the same as what morningstar says. I will need to ask him. Is there any other way to "find out the costs later?" like you say?

I am feeling why people lean toward Roth 401k to cut down all the unnecessary cost.

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Wed Dec 11, 2019 7:44 pm

retiredjg wrote:
Wed Dec 11, 2019 8:50 am
stingray777 wrote:
Wed Dec 11, 2019 12:23 am
Diversification is the key, right? Having 100% of Vanguard 500 is against that basic rule.
Wait to see the cost of the international in the 401k. You might end up putting international into Roth IRA?

You are approaching this with a little too much worry. This is a good plan (so far) and you do not have to have exactly the funds you have in mind. Your job as a good investor is to find some good low cost funds that fit your stock to bond desires. They do not have to be Vanguard funds.

Relax. Good investing is more about saving money and not doing stupid stuff than doing some kind of portfolio magic with just the right funds. Save money and keep your costs low and it will all work out.
Thanks for all the things you mentioned.
I do not know how I can see the cost of the international in 401k.
I am trying to set it up right, and forget it. I cannot squeeze any more savings than I am now, and I've read someone's comment: "Our job as a index fund investor is to do everything we can not to touch the funds in dark times." It sounds too simple, but it is not easy to achieve (I suppose as a beginner).
Last edited by stingray777 on Wed Dec 11, 2019 7:49 pm, edited 1 time in total.

02nz
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Re: Why Roth IRA when you have not maxed out 401k?

Post by 02nz » Wed Dec 11, 2019 7:44 pm

nix4me wrote:
Sun Dec 08, 2019 10:13 pm
401k's turn into tax bombs
I think you're taking the "keep it simple" principle of Bogleheads a little too far. :P

The impact of 401k's on one's taxes depends on a lot of factors. If you play it right, you can reduce your taxes now with traditional contributions, and then pay lower taxes on that money (with growth) when withdrawn in retirement. In a few edge cases, massive 401k balances can mean higher taxes in retirement. But that is a very nice problem to have.

I don't think statements like "401's turn into tax bombs" without further context are helpful to the OP or add to the discussion.

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ruralavalon
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Re: Why Roth IRA when you have not maxed out 401k?

Post by ruralavalon » Wed Dec 11, 2019 7:54 pm

stingray777 wrote:
Wed Dec 11, 2019 7:36 pm
retiredjg wrote:
Wed Dec 11, 2019 8:34 am
stingray777 wrote:
Tue Dec 10, 2019 10:09 pm
I see a few Vanguards, but none that I wanted. How does it look? I cannot find where the overhead cost is. I cannot find expense ratio through my 401k. All I find is a link to MorningStar page for each fund. This is bad, isn't it?
Not necessarily. At this point they might just be showing you the funds and you'll find out the costs later. Or the cost shown on Morningstar may be your costs. Don't worry, this will be a fine plan and it is not "very limited".

Using the 500 index alone is fine.
Thank you for the encouragement.

I emailed our salesman, and his answer on overhead cost was, "In general, 401k costs 1.25%, but it depends on how you invest." It is not clear. 1.25% on employees? "In general" signifies within our company setup? It is still such a blackbox to me. He sounds to me like trying to avoid clear answers.
Now that I read again, I don't know if he means the total cost (expense ratio + administration cost) or just one... What is this admin cost anyway? What do they do for me? All I see is to have a web interface for our information.

I did not ask him about expense cost for each fund being the same as what morningstar says. I will need to ask him. Is there any other way to "find out the costs later?" like you say?

I am feeling why people lean toward Roth 401k to cut down all the unnecessary cost.
Keep trying to get clear answers on expenses.

Are the expense ratios charged in the plan the same as the expense ratios listed by Morningstar?

Is a plan participant (that's you) required to pay any fee or expense in addition to the expense ratios?

If so what extra fees, and the amount, are plan participants required to pay?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

lakpr
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Re: Why Roth IRA when you have not maxed out 401k?

Post by lakpr » Wed Dec 11, 2019 9:46 pm

stingray777 wrote:
Wed Dec 11, 2019 7:36 pm

I emailed our salesman, and his answer on overhead cost was, "In general, 401k costs 1.25%, but it depends on how you invest." It is not clear. 1.25% on employees? "In general" signifies within our company setup? It is still such a blackbox to me. He sounds to me like trying to avoid clear answers.
Now that I read again, I don't know if he means the total cost (expense ratio + administration cost) or just one... What is this admin cost anyway? What do they do for me? All I see is to have a web interface for our information.
As a plan participant, it is your right to have a copy of the 401k Summary Plan Document given to you when you ask. DEMAND it. If there are any administrative fees beyond what Vanguard charges, it should be specified in exquisite detail in the plan doc. If the fee is not specified in the plan doc, the plan administrator cannot charge it.

Wish washy answers from your plan salesman won't do. Costs matter! Before you make a decision to invest in the plan, you should have an exceedingly clear idea of what costs you are paying!

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Wed Dec 11, 2019 10:53 pm

ruralavalon wrote:
Wed Dec 11, 2019 7:54 pm
Keep trying to get clear answers on expenses.

Are the expense ratios charged in the plan the same as the expense ratios listed by Morningstar?

Is a plan participant (that's you) required to pay any fee or expense in addition to the expense ratios?

If so what extra fees, and the amount, are plan participants required to pay?
Thank you. These are the things I should have asked in the initial email. I will have a session with him, so I will ask him then.
It does not have to be in writing, is it?

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Wed Dec 11, 2019 10:56 pm

lakpr wrote:
Wed Dec 11, 2019 9:46 pm

As a plan participant, it is your right to have a copy of the 401k Summary Plan Document given to you when you ask. DEMAND it. If there are any administrative fees beyond what Vanguard charges, it should be specified in exquisite detail in the plan doc. If the fee is not specified in the plan doc, the plan administrator cannot charge it.
This is an excellent piece of advice. WIll do that. Thank you!

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FiveK
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Re: Why Roth IRA when you have not maxed out 401k?

Post by FiveK » Wed Dec 11, 2019 11:03 pm

stingray777 wrote:
Wed Dec 11, 2019 10:56 pm
lakpr wrote:
Wed Dec 11, 2019 9:46 pm

As a plan participant, it is your right to have a copy of the 401k Summary Plan Document given to you when you ask. DEMAND it. If there are any administrative fees beyond what Vanguard charges, it should be specified in exquisite detail in the plan doc. If the fee is not specified in the plan doc, the plan administrator cannot charge it.
This is an excellent piece of advice. WIll do that. Thank you!
See https://www.dol.gov/sites/dolgov/files/ ... n-fees.pdf for more.

Your employer does indeed have a legal obligation to give you all that fee information.

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Thu Dec 12, 2019 12:07 am

TO: ruralavalon,
Thank you for the deep analysis. It would be too much to quote what you put, so let me just say thank you here.

I wish I could do more than $13K/y, but that is my starting point. I don't even know how much take-home I will have. I started this thread, saying I cannot max out 401k, so I cannot increase.

I may or may not do bonds at all. Probably 10%, and international 25%.

Looking at my selection I only have two choices for international:
DFA Large Cap International Portfolio In ER0.23 (3 stars)
DFA International Small Company Portfoli ER0.53 (4 stars)

From the diversification point of view, I want both (50/50), right? People told me wait until I see the actual cost. What is acceptable? Even if it is not, I only have these two.

Dottie57
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Re: Why Roth IRA when you have not maxed out 401k?

Post by Dottie57 » Thu Dec 12, 2019 9:22 am

As a retiree, Ican truly say I wish I had more money in Roth. I wish I had striven to put more into Roth and taxable.

retiredjg
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Re: Why Roth IRA when you have not maxed out 401k?

Post by retiredjg » Thu Dec 12, 2019 9:48 am

stingray777 wrote:
Wed Dec 11, 2019 7:36 pm
I emailed our salesman, and his answer on overhead cost was, "In general, 401k costs 1.25%, but it depends on how you invest." It is not clear. 1.25% on employees? "In general" signifies within our company setup? It is still such a blackbox to me. He sounds to me like trying to avoid clear answers.

Now that I read again, I don't know if he means the total cost (expense ratio + administration cost) or just one... What is this admin cost anyway? What do they do for me? All I see is to have a web interface for our information.
It costs money to run a mutual fund. This is called the "expense ratio". Every fund has one. In general, you want to choose your funds by the lowest expense ratios.

It also costs money to run a retirement plan - these might be called "administrative costs" - the cost to administer the plan. Your employer may pay all of this, part of this, or none of this. That means you may none of it, part of it, or all of it. Administrative costs are independent from expense ratios. You have no control over administrative costs.

Chances are your salesman does not even know at this point if you will be paying some of the administrative costs or not.


I did not ask him about expense cost for each fund being the same as what morningstar says. I will need to ask him. Is there any other way to "find out the costs later?" like you say?
What you can do is be patient and wait until the plan is actually in operation. Read the summary plan description that you are given. Then ask the questions you still have. There is no rush in all this. There is plenty of time to get it set up later. Some patience on your part will go a long way.

I am feeling why people lean toward Roth 401k to cut down all the unnecessary cost.
This is some misunderstanding on your part. Using Roth 401k does not change the costs.

retiredjg
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Re: Why Roth IRA when you have not maxed out 401k?

Post by retiredjg » Thu Dec 12, 2019 10:04 am

Try to keep in mind that it takes time to work out the details of a new retirement plan. Everything may not be ready to go just yet. It may not all be available on January 1st. Do not let this worry you - it will get taken care of in time.

Your plan summary description should answer most of your questions. Do you have that yet? If not, stop pushing for answers until you have gotten that and read it at least twice.

It also takes time to work out the details of transferring money from your old SIMPLE IRA to the new 401k. Again, this will all get done in good time.

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Re: Why Roth IRA when you have not maxed out 401k?

Post by rkhusky » Thu Dec 12, 2019 11:00 am

Dottie57 wrote:
Thu Dec 12, 2019 9:22 am
As a retiree, Ican truly say I wish I had more money in Roth. I wish I had striven to put more into Roth and taxable.
It costs money to put money into Roth and to keep money in taxable. Both then and now.

We all wish we could move money from Traditional to Roth with no cost.

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ruralavalon
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Re: Why Roth IRA when you have not maxed out 401k?

Post by ruralavalon » Thu Dec 12, 2019 12:03 pm

stingray777 wrote:
Thu Dec 12, 2019 12:07 am
TO: ruralavalon,
Thank you for the deep analysis. It would be too much to quote what you put, so let me just say thank you here.

I wish I could do more than $13K/y, but that is my starting point. I don't even know how much take-home I will have. I started this thread, saying I cannot max out 401k, so I cannot increase.

I may or may not do bonds at all. Probably 10%, and international 25%.

Looking at my selection I only have two choices for international:
DFA Large Cap International Portfolio In ER0.23 (3 stars)
DFA International Small Company Portfoli ER0.53 (4 stars)

From the diversification point of view, I want both (50/50), right? People told me wait until I see the actual cost. What is acceptable? Even if it is not, I only have these two.
in my opinion DFA Large cap Portfolio Institutional (developed markets only) (DFLAX) ER 0.23% by itself will be sufficient diversification in international stocks. Small-cap companies are a fairly small part (about 6%) of the international stock market.

If you want to use both funds, do not do 50/50.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Thu Dec 12, 2019 9:33 pm

Dottie57 wrote:
Thu Dec 12, 2019 9:22 am
As a retiree, Ican truly say I wish I had more money in Roth. I wish I had striven to put more into Roth and taxable.
Question - Was your situation like mine? You had none in any bag when you only had 20 years till retirement?

fyre4ce
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Re: Why Roth IRA when you have not maxed out 401k?

Post by fyre4ce » Thu Dec 12, 2019 9:41 pm

One other difference between an IRA and 401k: employer 401k's (not Solo 401k's) get federal protection from creditors under ERISA, but IRAs get state-level protection which may not be as good. Especially for those with some significant liability risks and/or in a state with poor IRA protection, the 401k has an advantage.

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Thu Dec 12, 2019 10:55 pm

I got answers from the salesman today. I've got 20-page summary plan document, but have not read it. Here is the disclosure of our fees by the salesman:
- Our Expense Ratio is the same as that of morningstar
- Our admin cost is 0.9%. So it is not the worst, but not great. Just average.

So roughly it costs 1%. Now, coming back to my initial question - do I want to use Roth IRA under my circumstance?
Let's say I get 7% return. WIth 401k, it will be 6% after fee. I plugged in the numbers in the calculators from Bankrate. I ignored expense ratio on Roth IRA. The result (with $13K contribution for 20 years) is:

401k with 6% and $13K contribution : $497K
Roth IRA with 7% and $5K contribution: $219K (no tax)
401k with 6% and $6.4K contribution: $250K

So full traditional 401k wins by $28K here. You still have to pay tax on 401k from 12% bracket, so the total will be:
$437K vs 219K + 220K

Of course, this is marginal, and assume it will be still 12% in the future, but I see the numbers being very close. Am I wrong?

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Thu Dec 12, 2019 11:17 pm

retiredjg wrote:
Thu Dec 12, 2019 9:48 am
I am feeling why people lean toward Roth 401k to cut down all the unnecessary cost.
This is some misunderstanding on your part. Using Roth 401k does not change the costs.
I am sorry. I meant Roth IRA. Vanguard's index funds' expense ratio is 0.1% or less. Vanguard does not charge for Roth IRA account if you choose digital document delivery.

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Thu Dec 12, 2019 11:24 pm

ruralavalon wrote:
Thu Dec 12, 2019 12:03 pm
stingray777 wrote:
Thu Dec 12, 2019 12:07 am
TO: ruralavalon,
Thank you for the deep analysis. It would be too much to quote what you put, so let me just say thank you here.

I wish I could do more than $13K/y, but that is my starting point. I don't even know how much take-home I will have. I started this thread, saying I cannot max out 401k, so I cannot increase.

I may or may not do bonds at all. Probably 10%, and international 25%.

Looking at my selection I only have two choices for international:
DFA Large Cap International Portfolio In ER0.23 (3 stars)
DFA International Small Company Portfoli ER0.53 (4 stars)

From the diversification point of view, I want both (50/50), right? People told me wait until I see the actual cost. What is acceptable? Even if it is not, I only have these two.
in my opinion DFA Large cap Portfolio Institutional (developed markets only) (DFLAX) ER 0.23% by itself will be sufficient diversification in international stocks. Small-cap companies are a fairly small part (about 6%) of the international stock market.

If you want to use both funds, do not do 50/50.
Thank you for the advice. I am now thinking of:
Vanguard 500: 70%
DFA Large Cap International Portfolio In ER0.23 (3 stars): 20%
Vanguard Federal Money Market Fund Inves: 10%

Rheuminator
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Re: Why Roth IRA when you have not maxed out 401k?

Post by Rheuminator » Thu Dec 12, 2019 11:42 pm

retiredjg wrote:
Wed Dec 11, 2019 8:50 am

You are approaching this with a little too much worry. This is a good plan (so far) and you do not have to have exactly the funds you have in mind. Your job as a good investor is to find some good low cost funds that fit your stock to bond desires. They do not have to be Vanguard funds.

Relax. Good investing is more about saving money and not doing stupid stuff than doing some kind of portfolio magic with just the right funds. Save money and keep your costs low and it will all work out.
retiredjg right on the money, per usual.

Dottie57
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Re: Why Roth IRA when you have not maxed out 401k?

Post by Dottie57 » Fri Dec 13, 2019 8:08 am

stingray777 wrote:
Thu Dec 12, 2019 9:33 pm
Dottie57 wrote:
Thu Dec 12, 2019 9:22 am
As a retiree, Ican truly say I wish I had more money in Roth. I wish I had striven to put more into Roth and taxable.
Question - Was your situation like mine? You had none in any bag when you only had 20 years till retirement?

I started in 1987 at age 30, so I thought I had 35 years of work left but only had 30. Legislation created Roth IRA in 1997. I unfortunately did not start investing in a Roth until 2012 - a real mistake. Am now doing conversions of tIRA to Roth. Painful but think it is right thing to do.

Most studies say that it the rate of savings that will determine your success in investing. It is also advisable to have tax deferred, taxable and tax free accounts.

H-Town
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Re: Why Roth IRA when you have not maxed out 401k?

Post by H-Town » Fri Dec 13, 2019 8:48 am

rkhusky wrote:
Thu Dec 12, 2019 11:00 am
Dottie57 wrote:
Thu Dec 12, 2019 9:22 am
As a retiree, Ican truly say I wish I had more money in Roth. I wish I had striven to put more into Roth and taxable.
It costs money to put money into Roth and to keep money in taxable. Both then and now.

We all wish we could move money from Traditional to Roth with no cost.
Like we all wish that we don’t have to pay income tax.

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teen persuasion
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Re: Why Roth IRA when you have not maxed out 401k?

Post by teen persuasion » Fri Dec 13, 2019 9:27 am

OP, how far into the 22% bracket are you?

IOW, after subtracting the standard deduction and your proposed $13k contribution to traditional 401k, are you still in the 22% bracket? Or would your traditional 401k contribution drop you into the 12% bracket?

It might make sense to contribute enough to traditional 401k to reach the top of the 12% bracket, and then put the remainder in Roth at 12% (since that's probably a wash vs your expected future withdrawal rate). Depending on the number, that could be all Roth IRA, or max Roth IRA + some Roth 401k.

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Re: Why Roth IRA when you have not maxed out 401k?

Post by retiredjg » Fri Dec 13, 2019 10:18 am

stingray777 wrote:
Thu Dec 12, 2019 10:55 pm
I got answers from the salesman today. I've got 20-page summary plan document, but have not read it. Here is the disclosure of our fees by the salesman:
- Our Expense Ratio is the same as that of morningstar
- Our admin cost is 0.9%. So it is not the worst, but not great. Just average.

So roughly it costs 1%.
Did your salesman say that there is a .9% admin cost or that the employees will each pay a .9% admin cost? Again, read your summary plan document.

Now, coming back to my initial question - do I want to use Roth IRA under my circumstance?
Hard to say with the information provided. How much will you save? Is there a match? What do you have already? Are there accounts that belong to a spouse? Just where in your tax bracket are you?

So full traditional 401k wins by $28K here.

If you have to pay the .9% admin fee, you should not go "full traditional". That is clear. But it does not mean you should not use some traditional.

If you do not pay the admin fee, it may not matter much or it may be unknowable....but I think every investor should arrive at retirement with both tax-deferred money and after tax money (Roth and maybe taxable as well).

retiredjg
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Re: Why Roth IRA when you have not maxed out 401k?

Post by retiredjg » Fri Dec 13, 2019 10:23 am

Now that we are 80 posts into this, it would be good for you to actually post your situation in the format we use to help people with their portfolio questions. See the format in the link at the bottom of this message. The closer your follow the format, the easier it is to help you (which means you get more and better help).

Please read your SPD first (summary plan document).

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ruralavalon
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Re: Why Roth IRA when you have not maxed out 401k?

Post by ruralavalon » Fri Dec 13, 2019 1:14 pm

stingray777 wrote:
Thu Dec 12, 2019 10:55 pm
I got answers from the salesman today. I've got 20-page summary plan document, but have not read it. Here is the disclosure of our fees by the salesman:
- Our Expense Ratio is the same as that of morningstar
- Our admin cost is 0.9%. So it is not the worst, but not great. Just average.

So roughly it costs 1%. Now, coming back to my initial question - do I want to use Roth IRA under my circumstance?
Let's say I get 7% return. WIth 401k, it will be 6% after fee. I plugged in the numbers in the calculators from Bankrate. I ignored expense ratio on Roth IRA. The result (with $13K contribution for 20 years) is:

401k with 6% and $13K contribution : $497K
Roth IRA with 7% and $5K contribution: $219K (no tax)
401k with 6% and $6.4K contribution: $250K

So full traditional 401k wins by $28K here. You still have to pay tax on 401k from 12% bracket, so the total will be:
$437K vs 219K + 220K

Of course, this is marginal, and assume it will be still 12% in the future, but I see the numbers being very close. Am I wrong?
It's great to know that nothing is added to the expense ratios.

Please read your Summary Plan Description for details on who will pay the administrative fee.

More details are needed to address the traditional versus Roth issue.

Please post your details in a single post on this format: "Asking Portfolio Questions" .

Will you be eligible for a significant pension?

What is your profession or occupation?

How much do you currently have in traditional tax-deferred accounts?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Fri Dec 13, 2019 1:24 pm

teen persuasion wrote:
Fri Dec 13, 2019 9:27 am
OP, how far into the 22% bracket are you?

IOW, after subtracting the standard deduction and your proposed $13k contribution to traditional 401k, are you still in the 22% bracket? Or would your traditional 401k contribution drop you into the 12% bracket?

It might make sense to contribute enough to traditional 401k to reach the top of the 12% bracket, and then put the remainder in Roth at 12% (since that's probably a wash vs your expected future withdrawal rate). Depending on the number, that could be all Roth IRA, or max Roth IRA + some Roth 401k.
I see your point, but I still will be in 22% bracket after $13K contribution.

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Fri Dec 13, 2019 1:40 pm

retiredjg wrote:
Fri Dec 13, 2019 10:18 am
stingray777 wrote:
Thu Dec 12, 2019 10:55 pm
I got answers from the salesman today. I've got 20-page summary plan document, but have not read it. Here is the disclosure of our fees by the salesman:
- Our Expense Ratio is the same as that of morningstar
- Our admin cost is 0.9%. So it is not the worst, but not great. Just average.

So roughly it costs 1%.
Did your salesman say that there is a .9% admin cost or that the employees will each pay a .9% admin cost? Again, read your summary plan document.

Now, coming back to my initial question - do I want to use Roth IRA under my circumstance?
Hard to say with the information provided. How much will you save? Is there a match? What do you have already? Are there accounts that belong to a spouse? Just where in your tax bracket are you?

So full traditional 401k wins by $28K here.

If you have to pay the .9% admin fee, you should not go "full traditional". That is clear. But it does not mean you should not use some traditional.

If you do not pay the admin fee, it may not matter much or it may be unknowable....but I think every investor should arrive at retirement with both tax-deferred money and after tax money (Roth and maybe taxable as well).
The salesman said, if I put Vanguard 500, I would be paying 0.9 + 0.04, no other to his knowledge.
I read the SPD. There is no section for fees. Most of it goes on in the form of Q&A, and it says, if you need more info, contact Plan Administrator. The only other thing that I see is:
Q: What info will I receive?
A: (One of them) An explanation of all fees and transaction associated with the control and management of the investment option into which your account is invested... Requests for additional info can me made to the Plan Administrator.
So I don't have it in writing. What I have is an email response from the salesman.

I posted most of my personal info, but probably for the clarity, I will use the format.
Thanks!

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Fri Dec 13, 2019 2:07 pm

My status is as follows:
Emergency fund: 20K in my money market bank account (1.7% interest)
Debt: None
Tax Filing Status: Single
Tax Rate: 22% Federal, 3% State. After retirement, expecting 12%
Age: 45
Desired Asset allocation: 70% in S&P500, 20% in International stock, 10% or 0% in bond
Current: None in tax-deferred account
Annual Income: 65K
Contribution: 13K (20% gross)
401k fee: 0.9% + expense ratio from morningstar
Company match: 4%

So I am a late starter with nothing in the bags.
Question 1: How do I distribute my contribution between t401k & Roth IRA, or t401k only? (my calculation is not much different after 1% 401k fee)
Question 2: Any other recommended asset allocation?
Question 3: Thinking of physical silver and gold coin in place of bonds. Bad idea?

lakpr
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Re: Why Roth IRA when you have not maxed out 401k?

Post by lakpr » Fri Dec 13, 2019 2:30 pm

@stingray777,

The top of the 12% bracket in 2020 is $40125 taxable income + $12,400 standard deduction = $52,625.
This can be your goal to reach, as it places you in the 12% bracket.

With a $65k income, you will need to sock away $65k - $52.6k = $12.4k into Traditional accounts.
I would suggest that

1. contribute $7k to Traditional 401k
2. contribute $5.4k to Traditional IRA (you are eligible to contribute AND deduct for tax purposes: https://www.irs.gov/retirement-plans/pl ... an-at-work)
3. Contribute $600 to Roth IRA

Step-1 lowers your AGI from $65k to $58k, which makes you eligible to contribute maximum to Traditional IRA (step 2).
But given that you have room for about $600 in the 12% bracket, you can choose that amount to go to Roth IRA and rest to Traditional IRA.
Step-2 is suggested so that you escape that 0.9% fees in your 401k
Last edited by lakpr on Fri Dec 13, 2019 2:34 pm, edited 2 times in total.

lakpr
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Re: Why Roth IRA when you have not maxed out 401k?

Post by lakpr » Fri Dec 13, 2019 2:31 pm

stingray777 wrote:
Fri Dec 13, 2019 2:07 pm
Question 3: Thinking of physical silver and gold coin in place of bonds. Bad idea?
Extremely bad idea. These are commodities, not bonds, and their prices swing too much (very high volatility).

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ruralavalon
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Re: Why Roth IRA when you have not maxed out 401k?

Post by ruralavalon » Fri Dec 13, 2019 3:09 pm

stingray777 wrote:
Fri Dec 13, 2019 2:07 pm
Tax Filing Status: Single
Tax Rate: 22% Federal, 3% State. After retirement, expecting 12%
. . . . .
So I am a late starter with nothing in the bags.
Question 1: How do I distribute my contribution between t401k & Roth IRA, or t401k only? (my calculation is not much different after 1% 401k fee)
Will you be eligible for a significant pension?

Since you have no pension coming, then I agree with lakpr's suggestion.

For most people traditional deductible 401k contributions will likely be better. You say "So I am a late starter with nothing in the bags." Currently you have nothing in traditional tax-deferred accounts.

The income tax code is progressive, with a lower tax rate for lower income. Retirement usually means that employment income has ended. Therefore, most people are in a lower tax bracket in retirement and for most people traditional deductible 401k contributions will probably be better.

In addition when you withdraw from your 401k in retirement, the income is not all taxed at the marginal tax rate specified for your tax bracket. TFB blog post, "The case against Roth 401k". "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)." "Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k). For people without a traditional defined benefit pension plan, it means the majority of the retirement savings should go to a Traditional 401(k), not Roth."

A pension changes that analysis, so that Roth contributions might be better if you have a large pension coming in addition to Social Security. TFB blog post, "Most TSP participants should switch to the Roth TSP". That post discussed the effect of a federal pension, but the analysis should hold for other pensions.



stingray777 wrote:
Fri Dec 13, 2019 2:07 pm
Age: 45
Desired Asset allocation: 70% in S&P500, 20% in International stock, 10% or 0% in bond
. . . . .
Question 2: Any other recommended asset allocation?
In my opinion it is unwise to use a higher-risk portfolio trying to play catch up to make up for a later start in investing. That can easily backfire and leave you worse off.

At age 45 and just starting out I suggest about 20 - 30 % in bonds or other fixed income investments (like CDs, savings accounts, money market fund). This is expected to substantially reduce portfolio volatility (risk). Graph, "An Efficient Frontier: the power of diversification". Please see:
1) Wiki article Bogleheads® investment philosophy, part 3 "Never bear too much or too little risk";
2) Wiki article, "Asset allocation"; and
3) Morningstar (8/10/2019), "The Best Diversifiers for Your Equity Portfolio".

I suggest around 20 - 30% of stocks in international stocks. Vanguard paper (March 2012), "Considerations for investing in non-U.S. equities". Historically, allocating 20% of an equity portfolio to non-U.S. stocks would have captured about 84% of the maximum possible diversification benefit, and allocating 30% of an equity portfolio to non-U.S. stocks would have captured about 99% of the maximum possible diversification benefit (p. 6). (You can find lots of debate here on international allocation, opinions ranging all the way from 00% to 50% of stocks in international stocks. If you want more viewpoints on international stocks please try the Google search box, upper right, this page).

Asset allocation is a very personal decision. You must decide on an allocation that is comfortable for you based on your own ability, willingness and need to take risk.



stingray777 wrote:
Fri Dec 13, 2019 2:07 pm
Question 3: Thinking of physical silver and gold coin in place of bonds. Bad idea?
That is a very bad idea in my opinion.

The primary purpose of a fixed income (bond) allocation is to reduce portfolio volatility. Commodity prices are extremely volatile. So that is exactly the opposite of what you want from a bond allocation, and commodities are not a substitute for bonds.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

retiredjg
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Re: Why Roth IRA when you have not maxed out 401k?

Post by retiredjg » Sat Dec 14, 2019 9:34 am

Thank you for putting the information in one place.

I like lakpr's suggestion with a caveat.

This plan only works well if your income stays under the limit to deduct contributions to traditional IRA. In order for this to work for you each year, you will have to understand more than you currently do about how taxes work...for example, how the tIRA MAGI is calculated. Or you will need to remember to ask here each year.

If you are in a position where you get minimal raises each year - such as a cost of living raise - there should be no problems. If you get a promotion or bring in other income, this plan could go a little off the rails and need an adjustment.

Like ruralavalon, I think your portfolio plan is too aggressive. Remember that the risk door swings both ways - you might make a little more money but you may also lose more money. I suggest that you dial it back and put in at least 20% bonds, probably 25% to 30% bonds. Playing "catch up" is best solved by saving more money, not by reaching for higher returns.

No, gold and silver are not replacements for bonds. :annoyed

I don't think it's necessarily wrong to invest a little in gold and silver, but I also don't think you have the leeway to dabble with things like gold and silver. You should concentrate on saving money in the basics.


You might want to use a target fund in the Roth IRA. If so, you'll need to put $1k in there the first year if you want to hold the Roth IRA at Vanguard.

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Sat Dec 14, 2019 11:09 am

1. OK, coins are bad idea.
2. I do not have any pension plan. I started to work here 1.5 years ago, and no pension was mentioned when started.

Still debating on the asset allocation, so I need a day or two more.

BIG THANKS TO ALL of you here for all the advise. What a great community here. and especially to lakpr laying out the steps and the numbers for me. In fact, I am speechless, so I type :)

I am also grateful to ruralavalon and retiredjg. Gracias!

I am wondering if it is the best to have Vanguard 500 in 401k, then the rest (international and bond) in traditional IRA on my own, seeing my selection is not the best in 401k? I can do Vanguard Total International, and Vanguard Total Bond under traditonal IRA.
Is it not that simple, since Vanguard 500 is the biggest money maker? Could you advise how to tackle that?

@lakpr,
I had a big misunderstanding on the tax bracket. I thought I needed to look at Adjusted Gross Income, but I should have looked at TAXABLE Income. This was an eye-opener. Step 3 can wait until the end of the year to see how much you actually will have made (bonus & raise). On the side note, Our company's health insurance premium is very high, and we now will have a HSA option. I am very healthy, and seldom go to doctors, but I am thinking of putting $25-30 from each paycheck into HSA. Co-pay plan will go up by 25% next year. Right now $120 off each paycheck. That will be $650-780/year, so Roth IRA will not be necessary, I think.
IRA website (the link you put) says $65K is the max for deduction, not $58K - Am I missing something? I think you are saying $65 down to $58, so I am under $65, so I am OK.


-Still have one more paycheck and a bonus, and I told HR to put ALL into Simple IRA (since we have not moved to 401k but it will, when the transition takes place in 2 weeks.)
-Was going to put 6000 in Roth IRA this week, but with my situation, it is better to put in traditional IRA? The only drawback is that you cannot withdraw before retirement.

Lastly, one of my biggest take is that it is always best to use both 401k and IRA, especially if 401k admin cost is 1% or higher. People do not even know how much they are paying for the overhead! It is bad to put all into 401k. Then next question is whether you want to use Roth IRA or traditional IRA. If you like Roth 401k, then that is an additional option.

CodeMaster
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Re: Why Roth IRA when you have not maxed out 401k?

Post by CodeMaster » Sat Dec 14, 2019 2:03 pm

In general based on all my own research, I would favor ROTH over Traditional. Its also too difficult to predict the future, you never know what may happen or needs that may suddenly come up. As one of the posters here also said given its ok to invest so much more in traditional then ROTH, should definitely tell you something as well. I would personally aim for max ROTH before Traditional personally. :beer

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ruralavalon
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Re: Why Roth IRA when you have not maxed out 401k?

Post by ruralavalon » Sat Dec 14, 2019 3:13 pm

CodeMaster wrote:
Sat Dec 14, 2019 2:03 pm
In general based on all my own research, I would favor ROTH over Traditional. Its also too difficult to predict the future, you never know what may happen or needs that may suddenly come up. As one of the posters here also said given its ok to invest so much more in traditional then ROTH, should definitely tell you something as well. I would personally aim for max ROTH before Traditional personally. :beer
(1) With a "Tax Rate: 22% Federal, 3% State", (2) because OP says "I do not have any pension plan" , and (3) OP is just starting out ("I am new to investment." "I have almost none in simple plan."), so OP has no large traditional tax-deferred accounts, I think it's pretty clear that traditional contributions are likely better for stingray777.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

retiredjg
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Re: Why Roth IRA when you have not maxed out 401k?

Post by retiredjg » Sat Dec 14, 2019 3:35 pm

ruralavalon wrote:
Sat Dec 14, 2019 3:13 pm
....I think it's pretty clear that traditional contributions are likely better for stingray777.
I agree up to the point that Roth contributions could be made at 12%. But it appears to me that some contributions can be made to Roth IRA at 12% and that's probably the lowest this poster will ever get.

Here are some estimated figures.

From a salary of $65k...

Subtract health insurance costs paid through employer (let's call that $700 a year)
Subtract the suggested $7k put into traditional 401k.
Subtract the suggested $5,400 put into traditional IRA.
Subtract the $12,200 standard deduction.

This brings taxable income to $39,700 which is mighty close to being in the 12% tax bracket (only $225 away).

Jiggling any of these numbers (which will happen on January 1) means that some money can go into Roth at only 12% and that is worth doing because this poster will probably never be in the 12% bracket again. Keep in mine that even if income drops low in retirement, the 12% bracket is scheduled to return to being the 15% bracket in a few years.

lakpr
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Re: Why Roth IRA when you have not maxed out 401k?

Post by lakpr » Sat Dec 14, 2019 4:09 pm

stingray777 wrote:
Sat Dec 14, 2019 11:09 am
@lakpr,
I had a big misunderstanding on the tax bracket. I thought I needed to look at Adjusted Gross Income, but I should have looked at TAXABLE Income. This was an eye-opener. Step 3 can wait until the end of the year to see how much you actually will have made (bonus & raise). On the side note, Our company's health insurance premium is very high, and we now will have a HSA option. I am very healthy, and seldom go to doctors, but I am thinking of putting $25-30 from each paycheck into HSA. Co-pay plan will go up by 25% next year. Right now $120 off each paycheck. That will be $650-780/year, so Roth IRA will not be necessary, I think.
IRA website (the link you put) says $65K is the max for deduction, not $58K - Am I missing something? I think you are saying $65 down to $58, so I am under $65, so I am OK.


-Still have one more paycheck and a bonus, and I told HR to put ALL into Simple IRA (since we have not moved to 401k but it will, when the transition takes place in 2 weeks.)
-Was going to put 6000 in Roth IRA this week, but with my situation, it is better to put in traditional IRA? The only drawback is that you cannot withdraw before retirement.

Lastly, one of my biggest take is that it is always best to use both 401k and IRA, especially if 401k admin cost is 1% or higher. People do not even know how much they are paying for the overhead! It is bad to put all into 401k. Then next question is whether you want to use Roth IRA or traditional IRA. If you like Roth 401k, then that is an additional option.
Your last paragraph is spot on and what I wanted to convey in my post, so I think my mission is accomplished :)

The question in the first paragraph that you quoted:
- yes, $65k is the limit for your IRA contributions to be tax deductible, but you are on the cusp of that income
- the max IRA contribution(s) is only $6000
- but you need $12400 in pretax deductions to reach the top of 12% bracket
- you can do $6000 Traditional IRA and $6400 401k contributions, but this means you can't do Roth IRA
- so I flipped a bit, $7000 to 401k which will reduce your W2 income and make you eligible for tax deduction of IRA contributions
- with $7000 gone, you have still $5400 contributions to make to pretax IRA and this leaves a further $600 room for Roth IRA in 12% bracket

Regarding HSA: isn't it too late for it now? The enrollment for 2020 benefits usually begins in Oct and ends just before Thanksgiving every year. But in general, an HSA is to be preferred even over Roth IRA since it is triple tax efficient. Contributions made to HSA do not figure in your W2 income (which could make you eligible straightaway for IRA tax deduction without any further 403b contributions), growth is tax free also (and you can withdraw anytime for medical expenses) and also escapes payroll taxes that are easily 7.25% of the amount contributed.

Availability of HSA changes the math slightly, with it taking priority over everything else (except for the 403b contributions required to capture max employer match, if any)
Last edited by lakpr on Sat Dec 14, 2019 4:18 pm, edited 1 time in total.

retiredjg
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Re: Why Roth IRA when you have not maxed out 401k?

Post by retiredjg » Sat Dec 14, 2019 4:16 pm

lakpr wrote:
Sat Dec 14, 2019 4:09 pm
- yes, $65k is the limit for your IRA contributions to be tax deductible, but you are on the cusp of that income
With health insurance and 401k contributions (and maybe HSA contributions), there should be no problem. Quite a ways from "the cusp of that income".

1130Super
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Re: Why Roth IRA when you have not maxed out 401k?

Post by 1130Super » Sat Dec 14, 2019 5:37 pm

Well this is what I do, we have an HRA so don’t know anything about HSA’S
1. Always put in 401k up to match
2. Max out either a Roth or a Traditional Ira depending on your personal tax situation. (I’m in the 12% bracket so I prefer Roth.) Ira’s are better than 401k’s because you have total control of where you are investing funds unlike 401k.
3. This is where most boggleheads disagree. Id put 5% of my income in a taxable account so I have a highly liquid source of funds if I ever need or want it.(I know I’m giving up some long term benefits by doing this) I just sleep better at night doing this. I even put my ER fund in brokerage too because I earn typical money market rates on idle cash.
4. Max 401k if fees aren’t Ridiculous
6. Taxable or pay off house

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goingup
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Re: Why Roth IRA when you have not maxed out 401k?

Post by goingup » Sat Dec 14, 2019 6:03 pm

Put as much into your 401K as possible. I'd use Target Fund 2040.

Much discussion here about taxes. That's a minor point, IMO.

At this point you have to help yourself succeed. The best way to do that is set savings on auto-pilot through your employer's 401K plan. Once you automate savings you'll get on track with consistent wealth accrual. In twenty years you'll have a tidy sum.

Lots of folks want to save money in an IRA. The statistics are pretty dismal in terms of the percentage of the population that can actually get that done every year. A 401K is the easiest way to save. :beer

Motor
Posts: 25
Joined: Sun Nov 10, 2019 3:59 pm

Re: Why Roth IRA when you have not maxed out 401k?

Post by Motor » Sat Dec 14, 2019 6:20 pm

Short Answer: I would put some money(and do to the MAX)in a Roth even though the calculators have that me earning a bit less in the end....but I like the flexibility of the Roth before and after retirement. Withdrawals if needed/no RMDs/Inheritance rules. Note: Read the rules about your employee "ROTH" plan. Some have a separate match. Not all plans are created equal.

Topic Author
stingray777
Posts: 77
Joined: Sun Dec 08, 2019 2:57 pm

Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Sun Dec 15, 2019 5:07 pm

retiredjg wrote:
Sat Dec 14, 2019 3:35 pm
ruralavalon wrote:
Sat Dec 14, 2019 3:13 pm
....I think it's pretty clear that traditional contributions are likely better for stingray777.
I agree up to the point that Roth contributions could be made at 12%. But it appears to me that some contributions can be made to Roth IRA at 12% and that's probably the lowest this poster will ever get.

Here are some estimated figures.

From a salary of $65k...

Subtract health insurance costs paid through employer (let's call that $700 a year)
Subtract the suggested $7k put into traditional 401k.
Subtract the suggested $5,400 put into traditional IRA.
Subtract the $12,200 standard deduction.

This brings taxable income to $39,700 which is mighty close to being in the 12% tax bracket (only $225 away).

Jiggling any of these numbers (which will happen on January 1) means that some money can go into Roth at only 12% and that is worth doing because this poster will probably never be in the 12% bracket again. Keep in mine that even if income drops low in retirement, the 12% bracket is scheduled to return to being the 15% bracket in a few years.
I am sorry that I do not get your point. If you were me, What would you change from lakpr's suggestion to put (more) into Roth IRA? The calculation that you mentioned is the same as lakpr's. I am aware of the liquidity part of Roth IRA, and I like it.

Also, I do not understand about health insurance cost part. I pay $120 every other week. It adds up to $3100. It is pre-tax. My church contribution is about $7800, so Standard Deduction of $12200 is better. I did not think I can use heath insurance premium for lowering my taxable income.

retiredjg
Posts: 40423
Joined: Thu Jan 10, 2008 12:56 pm

Re: Why Roth IRA when you have not maxed out 401k?

Post by retiredjg » Sun Dec 15, 2019 5:24 pm

stingray777 wrote:
Sun Dec 15, 2019 5:07 pm
I did not think I can use heath insurance premium for lowering my taxable income.
I'll circle back to your other questions tomorrow.

About the insurance premiums.....If your employer sponsors a group health plan and you pay your portion of the cost through your paycheck, it does not get reported as part of your income on your W2. If it is not reported as taxable income on your W2, it is not part of your AGI.

Let's say you make $65,000 and pay $3,100 into a group health insurance plan and $10,000 into your 401k....your income subject to tax is reported as $51,900 on your W2. ($65k minus $3.1k minus $10k). [Made up numbers, different from your situation]

Check your pay stubs for last year and compare it to your W2 for last year. You'll see that it is less than your actual salary.


https://www.medmutual.com/For-Individua ... rance.aspx

  • Employer-Sponsored Health Insurance

    Employer-sponsored health insurance is a health policy selected and purchased by your employer and offered to eligible employees and their dependents. These are also called group plans. Your employer will typically share the cost of your premium with you.

    Advantages of an employer plan:

    Your employer often splits the cost of premiums with you.
    Your employer does all of the work choosing the plan options.
    Premium contributions from your employer are not subject to federal taxes, and your contributions can be made pre-tax, which lowers your taxable income.

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