New Company, New 401K Plan

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Topic Author
GoatInvestor
Posts: 12
Joined: Mon Aug 27, 2018 8:10 pm

New Company, New 401K Plan

Post by GoatInvestor »

I'm 25 and switched companies, so now I have a new 401k plan to decide on. I'd like to keep an asset location of 90/10, but not sure which funds to choose. I've listed them at the bottom. I'll also be making the full match.

As far as rolling over goes, I heard I may be able to convert my pretax portion of my old 401k to roth and roll the whole thing into my personal Roth account. If possible, the tax hit would only be on the ~$25k pretax contributions.
Would this be advisable to do just to keep things simple? Otherwise I could create a traditional IRA to roll those contributions into, instead of rolling into my new companies plan where I'm sure the fees are high.

- Status -
Single
No state tax
Federal tax 22%, salary 68k
Contributed 5% to Pre-tax and 5% to Roth 401k (I had got 5% matching on both, so effectively 10% total)
Plan to max out Roth IRA each year after I complete my house (ETA end of the year)

- Current Assets -
Paid off house

Pretax & Roth 401k - (~$25K pretax & ~$25K Roth)
10% VBMPX - Vanguard Total Bond Market Idx InstlPls
55% VIIIX - Vanguard Institutional Index Instl Pl
35% VFWSX - Vanguard FTSE All-Wld ex-US Idx Instl

Roth IRA - $2500
VLXVX - Vanguard Target Retirement 2065 Fund

Taxable Brokerage - $4000
VSMGX - Vanguard LifeStrategy Moderate Growth Fund

- New 401k Funds Available -
Stock Investments
Large-Cap
MFS VALUE R6
PRMCP ODYSSEY GROWTH
SS S&P 500 INDEX II
Mid-Cap
AMG TS MID CAP GTH Z
SS RSL SMMDCP IDX II
International
DODGE & COX INTL STK
SS GACEQ EXUS IDX II
TRP GLOBAL GR STK I
WM BLAIR IS INTL GR
Specialty
DWS R REAL ESTATE IS
LD ABT DEV GRTH R6

Blended Funds
SS TRGT RET 2055 IV
SS TRGT RET 2065 IV

Bond Investments
DB STABLE VALUE FUND
PIMCO TOTAL RETURN
SS US BOND INDX XIV
livesoft
Posts: 73475
Joined: Thu Mar 01, 2007 8:00 pm

Re: New Company, New 401K Plan

Post by livesoft »

You didn't show expense ratios which I suppose someone will want to see. But at age 25 and until you have a big amount (more than $100,000) in the 401(k) just go with the target date fund.
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JBTX
Posts: 7093
Joined: Wed Jul 26, 2017 12:46 pm

Re: New Company, New 401K Plan

Post by JBTX »

Agree with above. If expense ratios are low go with target date. Otherwise pick a couple of index funds.

As to Roth conversion, I think conventional wisdom here would not be to covert. If you had extra liquidity, and could pay the taxes with liquid funds, partial Roth conversion could make sense if you expect your future income to increase. However with no apparent additional liquidity I probably wouldn't do it.

That is one problem with having paid off house at 25 years old. Liquidity may remain tight. If you find yourself long term unemployed your choices are limited.
lakpr
Posts: 6200
Joined: Fri Mar 18, 2011 9:59 am

Re: New Company, New 401K Plan

Post by lakpr »

1. At age 25, I would not bother with target date funds, I would roll the dice with 100% stocks. Even if you do pick a target date fund, it would be 90% stocks anyway. If we take Vanguard as an example, the expense ratio for VTSAX (Total Stock Market fund) is 0.04% vs. 0.15% for the Target Retirement series. Why would I want to pay an extra 10 basis points for basically the same risk exposure? If there is a downturn in the market, is the 10% bond allocation going to save my bacon?

2. We can start slicing and dicing into international / domestic / bonds etc. when you have a sizable sum in the 401k account. Personally I would put that threshold at $100k. Stating in other words, until your 401k balance reaches $100k, stick with the State Street S&P 500 Index fund available in your plan. One single fund, nothing else until your balance is $100k.

3. What is your outlook on your career? The reason I ask is that, if you foresee yourself growing in your career and crossing over into the 24% tax bracket (more than $87k in the near future), then conversion of the old 401k balance to Roth IRA may make sense.

IN GENERAL, it is a toss up on the advisability of making a Roth conversion or contributing to a Roth 401k, in the 22% tax bracket. It is very likely that a person who is in the 22% tax bracket now, and young, will also end up in the same tax bracket in retirement.

The impetus towards making a Roth-401k contribution now instead of pre-tax is that the 22% tax bracket will disappear at the end of 2025. So you have a 5-year period where you can make the contributions to Roth 401k at a low-ish 22% rate, and presumably have at least another 2 decades, or more, of career where you can make the Traditional 401k contributions in an environment where your marginal tax bracket is likely to be 25% or higher. Front loading of the Roth-401k contributions for 5 years (which will have at least 20 years to grow tax free), then switching to Trad-401k later may prove wise.

ON THE OTHER HAND, with a $68k income, you have a golden opportunity to drop into the 12% bracket, if you defer the full $19.5k to Traditional 401k. Then the Roth-IRA contribution you are making will have been made with the cheaper dollars, those that attracted a 12% tax rate instead of with those that attracted a 22% tax rate. With a paid off house, you are likely to have free cashflow (no rent or mortgage payment that usually hoovers up 25%+ of a paycheck), that you can afford to make the full $19.5k contribution to Trad-401k AND max out the Roth-IRA. Why pay an extra $600 to Uncle Sam (which is 10% of $6000 max contribution to Roth IRA, and the 10% is the difference in tax brackets between 22% and 12%) if you don't have to?
Topic Author
GoatInvestor
Posts: 12
Joined: Mon Aug 27, 2018 8:10 pm

Re: New Company, New 401K Plan

Post by GoatInvestor »

lakpr wrote: Sat Nov 21, 2020 7:56 am ON THE OTHER HAND, with a $68k income, you have a golden opportunity to drop into the 12% bracket, if you defer the full $19.5k to Traditional 401k. Then the Roth-IRA contribution you are making will have been made with the cheaper dollars, those that attracted a 12% tax rate instead of with those that attracted a 22% tax rate. With a paid off house, you are likely to have free cashflow (no rent or mortgage payment that usually hoovers up 25%+ of a paycheck), that you can afford to make the full $19.5k contribution to Trad-401k AND max out the Roth-IRA. Why pay an extra $600 to Uncle Sam (which is 10% of $6000 max contribution to Roth IRA, and the 10% is the difference in tax brackets between 22% and 12%) if you don't have to?
Thank you for the advice! Though, I'm not sure I'm following this part correctly.
If you subtract the $19.5k from $68k, you get $48.5k which is still within the 22% bracket. That leaves $8,374 taxed at 22%.
lakpr
Posts: 6200
Joined: Fri Mar 18, 2011 9:59 am

Re: New Company, New 401K Plan

Post by lakpr »

You forgot the standard deduction of $12,400 for tax filing status single. The $40,125 you see in the IRS tables is TAXABLE income.
Topic Author
GoatInvestor
Posts: 12
Joined: Mon Aug 27, 2018 8:10 pm

Re: New Company, New 401K Plan

Post by GoatInvestor »

lakpr wrote: Sat Nov 21, 2020 9:39 pm You forgot the standard deduction of $12,400 for tax filing status single. The $40,125 you see in the IRS tables is TAXABLE income.
Ah I see now, smart man. Now bonuses could throw this out of wack depending on how big they are. Just read up on bonuses more, seems they are only supplemental income and taxed separately, so they don't add to your total taxable income.
lakpr
Posts: 6200
Joined: Fri Mar 18, 2011 9:59 am

Re: New Company, New 401K Plan

Post by lakpr »

GoatInvestor wrote: Sat Nov 21, 2020 11:33 pm
lakpr wrote: Sat Nov 21, 2020 9:39 pm You forgot the standard deduction of $12,400 for tax filing status single. The $40,125 you see in the IRS tables is TAXABLE income.
Ah I see now, smart man. Now bonuses could throw this out of wack depending on how big they are. Just read up on bonuses more, seems they are only supplemental income and taxed separately, so they don't add to your total taxable income.
Bonuses are supplemental income and are tax-withheld at a separate rate, but they are added to earned income and taxed as such. So your strike through is actually correct. But then, it is a good problem to have, and also a more powerful incentive to max out the traditional 401k.
BigMoneyNoWhammies
Posts: 255
Joined: Tue Jul 11, 2017 11:58 am

Re: New Company, New 401K Plan

Post by BigMoneyNoWhammies »

lakpr wrote: Sat Nov 21, 2020 7:56 am 1. At age 25, I would not bother with target date funds, I would roll the dice with 100% stocks. Even if you do pick a target date fund, it would be 90% stocks anyway. If we take Vanguard as an example, the expense ratio for VTSAX (Total Stock Market fund) is 0.04% vs. 0.15% for the Target Retirement series. Why would I want to pay an extra 10 basis points for basically the same risk exposure? If there is a downturn in the market, is the 10% bond allocation going to save my bacon?

2. We can start slicing and dicing into international / domestic / bonds etc. when you have a sizable sum in the 401k account. Personally I would put that threshold at $100k. Stating in other words, until your 401k balance reaches $100k, stick with the State Street S&P 500 Index fund available in your plan. One single fund, nothing else until your balance is $100k.

3. What is your outlook on your career? The reason I ask is that, if you foresee yourself growing in your career and crossing over into the 24% tax bracket (more than $87k in the near future), then conversion of the old 401k balance to Roth IRA may make sense.

IN GENERAL, it is a toss up on the advisability of making a Roth conversion or contributing to a Roth 401k, in the 22% tax bracket. It is very likely that a person who is in the 22% tax bracket now, and young, will also end up in the same tax bracket in retirement.

The impetus towards making a Roth-401k contribution now instead of pre-tax is that the 22% tax bracket will disappear at the end of 2025. So you have a 5-year period where you can make the contributions to Roth 401k at a low-ish 22% rate, and presumably have at least another 2 decades, or more, of career where you can make the Traditional 401k contributions in an environment where your marginal tax bracket is likely to be 25% or higher. Front loading of the Roth-401k contributions for 5 years (which will have at least 20 years to grow tax free), then switching to Trad-401k later may prove wise.

ON THE OTHER HAND, with a $68k income, you have a golden opportunity to drop into the 12% bracket, if you defer the full $19.5k to Traditional 401k. Then the Roth-IRA contribution you are making will have been made with the cheaper dollars, those that attracted a 12% tax rate instead of with those that attracted a 22% tax rate. With a paid off house, you are likely to have free cashflow (no rent or mortgage payment that usually hoovers up 25%+ of a paycheck), that you can afford to make the full $19.5k contribution to Trad-401k AND max out the Roth-IRA. Why pay an extra $600 to Uncle Sam (which is 10% of $6000 max contribution to Roth IRA, and the 10% is the difference in tax brackets between 22% and 12%) if you don't have to?
I'd generally agree with the above. At 25 there really isn't much downside to going 100% equities vs the 90% you'll see in a target date fund, and lakpr gives some sound advice concerning taxes. Also, your VSMGX holding is more than quadruple the bond percentage (28% US bonds 12% international for 40% total) of the rest of your AA. Is there a reason for holding this fund? It tilts you above the 10% bonds you're currently targeting
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Brianmcg321
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Re: New Company, New 401K Plan

Post by Brianmcg321 »

At 25 I would put it all in the S&P 500 fund. Don’t bother with bonds until you hit 50.
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retired@50
Posts: 3617
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: New Company, New 401K Plan

Post by retired@50 »

GoatInvestor wrote: Fri Nov 20, 2020 5:10 pm
As far as rolling over goes, I heard I may be able to convert my pretax portion of my old 401k to roth and roll the whole thing into my personal Roth account. If possible, the tax hit would only be on the ~$25k pretax contributions.
Would this be advisable to do just to keep things simple? Otherwise I could create a traditional IRA to roll those contributions into, instead of rolling into my new companies plan where I'm sure the fees are high.
With regard to the old 401k plan at the prior job, unless you have less than $5,000 in the plan, you are probably allowed to keep it there if you want. My advice would be to read up on all the fees you'd face if you left it where it is, and/or if you transfer it to your new plan. Take your time to understand all your options and the associated costs and fees with each plan. Ask for and read the summary plan descriptions.

Regards,
This is one person's opinion. Nothing more.
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ruralavalon
Posts: 19687
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: New Company, New 401K Plan

Post by ruralavalon »

A little more information will help in answering your questions.

GoatInvestor wrote: Fri Nov 20, 2020 5:10 pm I'm 25 and switched companies, so now I have a new 401k plan to decide on. I'd like to keep an asset location of 90/10, but not sure which funds to choose. I've listed them at the bottom. I'll also be making the full match.

As far as rolling over goes, I heard I may be able to convert my pretax portion of my old 401k to roth and roll the whole thing into my personal Roth account. If possible, the tax hit would only be on the ~$25k pretax contributions.
Would this be advisable to do just to keep things simple? Otherwise I could create a traditional IRA to roll those contributions into, instead of rolling into my new companies plan where I'm sure the fees are high.

- Status -
Single
No state tax
Federal tax 22%, salary 68k
Contributed 5% to Pre-tax and 5% to Roth 401k (I had got 5% matching on both, so effectively 10% total)
Plan to max out Roth IRA each year after I complete my house (ETA end of the year)

- Current Assets -
Paid off house

Pretax & Roth 401k - (~$25K pretax & ~$25K Roth)
10% VBMPX - Vanguard Total Bond Market Idx InstlPls
55% VIIIX - Vanguard Institutional Index Instl Pl
35% VFWSX - Vanguard FTSE All-Wld ex-US Idx Instl

Roth IRA - $2500
VLXVX - Vanguard Target Retirement 2065 Fund

Taxable Brokerage - $4000
VSMGX - Vanguard LifeStrategy Moderate Growth Fund

- New 401k Funds Available -
Stock Investments
Large-Cap
MFS VALUE R6
PRMCP ODYSSEY GROWTH
SS S&P 500 INDEX II
Mid-Cap
AMG TS MID CAP GTH Z
SS RSL SMMDCP IDX II
International
DODGE & COX INTL STK
SS GACEQ EXUS IDX II
TRP GLOBAL GR STK I
WM BLAIR IS INTL GR
Specialty
DWS R REAL ESTATE IS
LD ABT DEV GRTH R6

Blended Funds
SS TRGT RET 2055 IV
SS TRGT RET 2065 IV

Bond Investments
DB STABLE VALUE FUND
PIMCO TOTAL RETURN
SS US BOND INDX XIV
I disagree with the idea of 100% stocks at age 25, or any age. Your present asset allocation (90/10) is reasonable in my opinion.

You could just use a target date fund to start, for the sake of simplicity. Otherwise in my opinion the best funds to use would be:
1) State Street Equity 500 Index II (SSEYX) ER 0.02%;
2) State Street Global All Cap Equity ex-US Index (SSGVX) ER 0.06%; and
3) State Street U.S. Bond Index XIV (?????) ER ???%.

You said " . . . my new companies plan where I'm sure the fees are high." In your new employer's plan are there any fees you have to pay other than the fund expense ratios?

What are the expense ratios charged in your current employer's 401k plan on the target date funds and the three funds I listed? (The plan may charge different expense ratios than are charged the general public.) What are the ticker symbols for the target date funds and the bond fund I listed?

If the expense ratios in your current employer's 401k plan are low then it's best to contribute more than just enough to get the employer match. In general contributions to tax-advantaged accounts are a priority ahead of investing in a taxable brokerage account. Also "If the company plan offers good, low-cost funds, it may be preferable to contribute to the company plan before contributing to an IRA." Wiki article, Prioritizing Investments.

When young the most important investing decision you can make is to establish a high rate of contributions. "Savings rate is the most important retirement savings decision, not only because of the math but because of the way it drives your financial mindset and habits. The basic raw stock/bond risk decision comes second. And the finer details--index or active, factors or total market, alts or no alts--are a distant third." Forum discussion on Jonathan Clements’ article "Show me the Money".

If the expense ratios in your current employer's 401k plan are low then I suggest rollover of your old 401k account into the your 401k account with your current employer. This makes portfolio management simple.

It may be best not to have everything in Roth accounts. Will you be eligible for a significant pension in addition to Social Security? What is your profession or occupation? (I note that you currently have just $25k in a traditional tax-deferred account.) Most people will likely be in a lower tax bracket in retirement, so for most people traditional tax-deferred accounts will likely be best.

It is an overstatement to say that the 22% tax bracket "will disappear" at the end of 2025. It is scheduled to disappear, but no one can predict what Congress will do or not do by 2025.

Please simply add any new information 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.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
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