Should I pay for a 401k?

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john0105
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Should I pay for a 401k?

Post by john0105 » Tue Aug 07, 2018 9:30 pm

I work for a small company that does not offer a 401k. The company would establish one if the participants covered the cost. Obviously, there would be no matching employer contribution. Vanguard's small business plan would cost us about $3500/year. We would have 5 employees participating. So that's $700/year per employee. I would max out my contribution each year. Is there any way to justify paying this high fee, or should I continue investing in a taxable account only?

Flyer24
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Re: Should I pay for a 401k?

Post by Flyer24 » Tue Aug 07, 2018 9:55 pm

Make sure you are contributing to an IRA (preferably Roth) before doing a taxable account.

BogleMelon
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Re: Should I pay for a 401k?

Post by BogleMelon » Tue Aug 07, 2018 10:10 pm

That is equivalent to a front load fee of 3.8% (unless your age allows you to shot for the $24500/yr contribution in that case it would be only 2.9%)! I would do IRA/Roth IRA then the rest goes to taxable.
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whodidntante
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Re: Should I pay for a 401k?

Post by whodidntante » Tue Aug 07, 2018 10:21 pm

SpiritRider has mentioned cheaper options before. I don't remember which company. Some employers foot 401k setup costs to keep their valued employees happy, or they adopt a high expense plan that makes you pay for it every day.

pkcrafter
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Re: Should I pay for a 401k?

Post by pkcrafter » Tue Aug 07, 2018 10:42 pm

Some of the small business plans require the company owner to contribute to employee funding. Sounds like your employer doesn't want to do that.

Here's another option, but again, your employer doesn't know what he doing. He has prohibited his own pre-tax retirement funding by not having a plan.

https://www.employeefiduciary.com/401k-plan-pricing


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gostars
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Re: Should I pay for a 401k?

Post by gostars » Wed Aug 08, 2018 12:29 am

I would also suggest looking at Guideline, https://www.guideline.com/. That's who my employer uses. For 15 or fewer employees, the base costs are lower than Employee Fiduciary, they don't charge an AUM fee, and they have better funds (Vanguard Admiral shares, vs. the investor shares the EF has).

MotoTrojan
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Re: Should I pay for a 401k?

Post by MotoTrojan » Wed Aug 08, 2018 12:34 am

gostars wrote:
Wed Aug 08, 2018 12:29 am
I would also suggest looking at Guideline, https://www.guideline.com/. That's who my employer uses. For 15 or fewer employees, the base costs are lower than Employee Fiduciary, they don't charge an AUM fee, and they have better funds (Vanguard Admiral shares, vs. the investor shares the EF has).
This.

Bfwolf
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Re: Should I pay for a 401k?

Post by Bfwolf » Wed Aug 08, 2018 12:53 am

The answer to your question is yes, I would pay $700 a year to have to access to a 401k I would max out, assuming I was under 50. Avoidance of dividend and capital gains taxes alone would certainly make it worth it. You don't mention your tax bracket, but assuming you project you'll be in a lower bracket in retirement, there's that benefit too.

As others mention, though, you can get a 401k even cheaper than that.

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teen persuasion
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Re: Should I pay for a 401k?

Post by teen persuasion » Wed Aug 08, 2018 7:15 am

Bfwolf wrote:
Wed Aug 08, 2018 12:53 am
The answer to your question is yes, I would pay $700 a year to have to access to a 401k I would max out, assuming I was under 50. Avoidance of dividend and capital gains taxes alone would certainly make it worth it. You don't mention your tax bracket, but assuming you project you'll be in a lower bracket in retirement, there's that benefit too.

As others mention, though, you can get a 401k even cheaper than that.
This!

I'm very sensitive to the lack of an employer 401k plan, my employer refuses to start one for our small number of employees. Luckily DH has access to one, and his contributions essentially have to work for both of us.

I just calculated that an $18,500 contribution saves us over $5k in refundable credits (and more in avoided fed and state taxes). $5000 > $700

JoeRetire
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Re: Should I pay for a 401k?

Post by JoeRetire » Wed Aug 08, 2018 7:20 am

john0105 wrote:
Tue Aug 07, 2018 9:30 pm
Is there any way to justify paying this high fee
No. Contribute to an IRA or find a lower-cost provider.

Decide if leaving this company and going to one which has a 401k would be worthwhile.

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StuyPHD
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Re: Should I pay for a 401k?

Post by StuyPHD » Wed Aug 08, 2018 8:05 am

JoeRetire wrote:
Wed Aug 08, 2018 7:20 am
john0105 wrote:
Tue Aug 07, 2018 9:30 pm
Is there any way to justify paying this high fee
No. Contribute to an IRA or find a lower-cost provider.

Decide if leaving this company and going to one which has a 401k would be worthwhile.
+1

4% upfront fee each year is tremendous upside lost over the course of time. At BEST you might be marginally better off, and that's best case scenario, most likely you'll be spinning your wheels
if plan B was any good it would be plan A

Spirit Rider
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Re: Should I pay for a 401k?

Post by Spirit Rider » Wed Aug 08, 2018 9:05 am

Guideline pricing is $8/employee/month with a $40/month minimum. Since you have 5 employees that would be $40/month, $480/year + a $500 start-up fee. That would be $196/employee for the first year and $96/employee after that. Subject to any cost increases.

Are there any Highly Compensated Employees (HCE)? Without a safe harbor 401k plan (which would require employer contributions) the plan would be subject to Actual Deferral Percentage (ADP) testing.

HCEs would likely be limited to a deferral percentage no > 2% higher than the average deferral percentage of the Non-HCEs.

I seem to remember a Boglehead provided calcuations that showed tax-deferral was superior to taxable as long the total costs were roughly < 2.5% - 3%.

Taxable investment can still be a solid way to invest for retirement if there is room for tax inefficient investments in IRA accounts.

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vineviz
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Re: Should I pay for a 401k?

Post by vineviz » Wed Aug 08, 2018 9:24 am

MotoTrojan wrote:
Wed Aug 08, 2018 12:34 am
gostars wrote:
Wed Aug 08, 2018 12:29 am
I would also suggest looking at Guideline, https://www.guideline.com/. That's who my employer uses. For 15 or fewer employees, the base costs are lower than Employee Fiduciary, they don't charge an AUM fee, and they have better funds (Vanguard Admiral shares, vs. the investor shares the EF has).
This.
I agree.

The other aspect that I'd probably consider just a little (i.e. wouldn't be the dominant concern, but I'd balance it against the costs) is the good that the OP might be doing for the other 4 employees by advocating for a decent reasonably-priced 401(k) plan.

The OP might be the only employee who cares enough to make this happen, but there are four other families whose lives would arguably be better off if they can pull it together.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

foursix
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Re: Should I pay for a 401k?

Post by foursix » Wed Aug 08, 2018 9:26 am

We use Guideline for a 2 person company and are pretty happy with it. It's the only one I've ever been able to find that's affordable for just 2 employees.

Luke Duke
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Re: Should I pay for a 401k?

Post by Luke Duke » Wed Aug 08, 2018 1:36 pm

john0105 wrote:
Tue Aug 07, 2018 9:30 pm
I work for a small company that does not offer a 401k. The company would establish one if the participants covered the cost. Obviously, there would be no matching employer contribution. Vanguard's small business plan would cost us about $3500/year. We would have 5 employees participating. So that's $700/year per employee. I would max out my contribution each year. Is there any way to justify paying this high fee, or should I continue investing in a taxable account only?
You're making an assumption that the other 4 employees would be willing to pay $700/yr.

john0105
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Re: Should I pay for a 401k?

Post by john0105 » Wed Aug 08, 2018 8:12 pm

I'm the OP. Many thoughtful responses here. Thank you. I have forwarded info on Guideline to my fellow employees, and we are considering it. We understand there could be an issue with ADP/ACP tests.

Regarding the original question, I did the math. Perhaps somebody could double-check me.

My assumptions:
current marginal tax rate = 24%
future marginal tax rate = 22%
future cap gains rate = 15%
annual gain from investment = 5%
tax load = 0.5% (amount lost to taxes per year in a taxable account)
annual 401k fee = $700
years until distribution = 20

Let's say I have $10k pre-tax to invest (to keep it simple), and I leave the company after 1 year. So we're just looking at what happens to a single contribution of $10k.

401k analysis:
initial investment = $9300
value at distribution = $24676
tax at distribution = $5429
net distribution = $19247

taxable account analysis:
initial investment = $7600
value at distribution = $18329
cap gain tax at distribution = $1609
net distribution = $16720

I think this example highlights the power of tax-deferred growth. In fact, I could increase the 401k fee all the way to $1900 and still break even. If I'm maxing out the 401k each year, the spread is even better. So I think the answer is: yes, it's worthwhile to pay $700 front-loaded to gain access to a tax-deferred plan.

Also, as many have pointed out, this approach only makes sense if spouse's 401k and both IRA's are already maxed out.

gostars
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Re: Should I pay for a 401k?

Post by gostars » Wed Aug 08, 2018 10:51 pm

Spirit Rider wrote:
Wed Aug 08, 2018 9:05 am
Are there any Highly Compensated Employees (HCE)? Without a safe harbor 401k plan (which would require employer contributions) the plan would be subject to Actual Deferral Percentage (ADP) testing.

HCEs would likely be limited to a deferral percentage no > 2% higher than the average deferral percentage of the Non-HCEs.
I'm guessing that in this particular case, the owner is probably the only person likely to hit this, unless there are relatives also working for the company. Perhaps someone can point out to the owner that spending a few extra (deductible) dollars in matching contributions to employees to create a safe-harbor plan will save the owner even more in the long run by allowing maximum contributions to his or her own 401k account. Assuming said owner is looking for the greatest financial advantage rather than just being cheap, that is.

gwrvmd
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Re: Should I pay for a 401k?

Post by gwrvmd » Wed Aug 08, 2018 11:43 pm

Two others to check are: Myubiguity.com and Lowcost401k.com.......Gordon
Disciple of John Neff

Nate79
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Re: Should I pay for a 401k?

Post by Nate79 » Wed Aug 08, 2018 11:52 pm

john0105 wrote:
Wed Aug 08, 2018 8:12 pm
I'm the OP. Many thoughtful responses here. Thank you. I have forwarded info on Guideline to my fellow employees, and we are considering it. We understand there could be an issue with ADP/ACP tests.

Regarding the original question, I did the math. Perhaps somebody could double-check me.

My assumptions:
current marginal tax rate = 24%
future marginal tax rate = 22%
future cap gains rate = 15%
annual gain from investment = 5%
tax load = 0.5% (amount lost to taxes per year in a taxable account)
annual 401k fee = $700
years until distribution = 20

Let's say I have $10k pre-tax to invest (to keep it simple), and I leave the company after 1 year. So we're just looking at what happens to a single contribution of $10k.

401k analysis:
initial investment = $9300
value at distribution = $24676
tax at distribution = $5429
net distribution = $19247

taxable account analysis:
initial investment = $7600
value at distribution = $18329
cap gain tax at distribution = $1609
net distribution = $16720

I think this example highlights the power of tax-deferred growth. In fact, I could increase the 401k fee all the way to $1900 and still break even. If I'm maxing out the 401k each year, the spread is even better. So I think the answer is: yes, it's worthwhile to pay $700 front-loaded to gain access to a tax-deferred plan.

Also, as many have pointed out, this approach only makes sense if spouse's 401k and both IRA's are already maxed out.
Where did you get a 0.5% tax load each year?

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MossySF
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Re: Should I pay for a 401k?

Post by MossySF » Wed Aug 08, 2018 11:55 pm

Ask your employer to consider a Vanguard SIMPLE IRA instead. The amounts you can contribute are less than a 401K but still much higher than a personal IRA -- and the fees are way less compared to a 401K.

Bfwolf
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Re: Should I pay for a 401k?

Post by Bfwolf » Thu Aug 09, 2018 12:34 am

john0105 wrote:
Wed Aug 08, 2018 8:12 pm
I'm the OP. Many thoughtful responses here. Thank you. I have forwarded info on Guideline to my fellow employees, and we are considering it. We understand there could be an issue with ADP/ACP tests.

Regarding the original question, I did the math. Perhaps somebody could double-check me.

My assumptions:
current marginal tax rate = 24%
future marginal tax rate = 22%
future cap gains rate = 15%
annual gain from investment = 5%
tax load = 0.5% (amount lost to taxes per year in a taxable account)
annual 401k fee = $700
years until distribution = 20

Let's say I have $10k pre-tax to invest (to keep it simple), and I leave the company after 1 year. So we're just looking at what happens to a single contribution of $10k.

401k analysis:
initial investment = $9300
value at distribution = $24676
tax at distribution = $5429
net distribution = $19247

taxable account analysis:
initial investment = $7600
value at distribution = $18329
cap gain tax at distribution = $1609
net distribution = $16720

I think this example highlights the power of tax-deferred growth. In fact, I could increase the 401k fee all the way to $1900 and still break even. If I'm maxing out the 401k each year, the spread is even better. So I think the answer is: yes, it's worthwhile to pay $700 front-loaded to gain access to a tax-deferred plan.

Also, as many have pointed out, this approach only makes sense if spouse's 401k and both IRA's are already maxed out.
You missed a huge thing in your analysis: the $700 fee is annual, not one time. Under your scenario, the 401k would lose value every year as the $700 fee would outweigh the gains. I'd also argue your 0.5% tax load may be high. 2% dividends per year taxed at 15% rate would be a tax load of 0.3%.

However, contributing $18,500 per year over 20 years would absolutely be worth it given the lower tax bracket. Not to mention the likelihood that you will leave the company at some point and can move the $s somewhere where you can stop paying $700 a year.

None of this is to say you should pay the $700 per year when they are cheaper options available.

john0105
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Re: Should I pay for a 401k?

Post by john0105 » Thu Aug 09, 2018 5:25 am

Bfwolf wrote:
Thu Aug 09, 2018 12:34 am
You missed a huge thing in your analysis: the $700 fee is annual, not one time. Under your scenario, the 401k would lose value every year as the $700 fee would outweigh the gains. I'd also argue your 0.5% tax load may be high. 2% dividends per year taxed at 15% rate would be a tax load of 0.3%.

However, contributing $18,500 per year over 20 years would absolutely be worth it given the lower tax bracket. Not to mention the likelihood that you will leave the company at some point and can move the $s somewhere where you can stop paying $700 a year.

None of this is to say you should pay the $700 per year when they are cheaper options available.
The analysis was for a single year. Every year that I'm a participant, I'll contribute. So it's a $700 front-load fee on my contribution each year. When I leave the company, I'll roll over my 401k to somewhere else and stop paying the $700 fee.

john0105
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Re: Should I pay for a 401k?

Post by john0105 » Thu Aug 09, 2018 5:26 am

Nate79 wrote:
Wed Aug 08, 2018 11:52 pm
Where did you get a 0.5% tax load each year?
The 0.5% tax load comes from my interpretation of Morningstar's "tax cost ratio". Do I have this right?
http://performance.morningstar.com/fund ... ture=en_US

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Smorgasbord
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Re: Should I pay for a 401k?

Post by Smorgasbord » Thu Aug 09, 2018 5:39 am

john0105 wrote:
Tue Aug 07, 2018 9:30 pm
I work for a small company that does not offer a 401k. The company would establish one if the participants covered the cost. Obviously, there would be no matching employer contribution. Vanguard's small business plan would cost us about $3500/year. We would have 5 employees participating. So that's $700/year per employee. I would max out my contribution each year. Is there any way to justify paying this high fee, or should I continue investing in a taxable account only?
The fees paid by the plan are a business expense, so there are no payroll / income taxes associated with it. While your gross income may be reduced by close to $700, the impact on your net should be far less. Don't forget to have your employers account for the decreased payroll taxes THEY will be paying as a result of your decreased compensation.

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MossySF
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Re: Should I pay for a 401k?

Post by MossySF » Thu Aug 09, 2018 5:59 am

john0105 wrote:
Wed Aug 08, 2018 8:12 pm
I think this example highlights the power of tax-deferred growth. In fact, I could increase the 401k fee all the way to $1900 and still break even. If I'm maxing out the 401k each year, the spread is even better. So I think the answer is: yes, it's worthwhile to pay $700 front-loaded to gain access to a tax-deferred plan.
This analysis is only if you compare against a personal IRA.

Instead, compare against a SIMPLE-IRA where the employer pays no fees and the participant pays $25/fund at Vanguard (until they reach Voyager status).
* https://investor.vanguard.com/what-we-o ... Link=facet

Now re-do all the numbers for a gap of just an extra $5500 in deductible contributions instead of $12500.

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Shackleton
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Re: Should I pay for a 401k?

Post by Shackleton » Thu Aug 09, 2018 6:12 am

Or just skip Vanguard and do the math for Guideline
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Spirit Rider
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Re: Should I pay for a 401k?

Post by Spirit Rider » Thu Aug 09, 2018 7:39 am

MossySF wrote:
Thu Aug 09, 2018 5:59 am
john0105 wrote:
Wed Aug 08, 2018 8:12 pm
I think this example highlights the power of tax-deferred growth. In fact, I could increase the 401k fee all the way to $1900 and still break even. If I'm maxing out the 401k each year, the spread is even better. So I think the answer is: yes, it's worthwhile to pay $700 front-loaded to gain access to a tax-deferred plan.
This analysis is only if you compare against a personal IRA.

Instead, compare against a SIMPLE-IRA where the employer pays no fees and the participant pays $25/fund at Vanguard (until they reach Voyager status).
* https://investor.vanguard.com/what-we-o ... Link=facet

Now re-do all the numbers for a gap of just an extra $5500 in deductible contributions instead of $12500.
A SIMPLE IRA requires employer contributions. Either a 3% match or 2% non-elective contribution. Although, the match can be reduced to as low as 1% in two out of five years including the first two. This would appear to be a non-starter based on the OP.

If not, Fidelity has removed their SIMPLE IRA administrative fees,

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Re: Should I pay for a 401k?

Post by niceguy7376 » Thu Aug 09, 2018 7:44 am

gwrvmd wrote:
Wed Aug 08, 2018 11:43 pm
Two others to check are: Myubiguity.com and Lowcost401k.com.......Gordon
there is a spelling mistake. It is myubiQuity.com - https://www.myubiquity.com/

Nate79
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Re: Should I pay for a 401k?

Post by Nate79 » Thu Aug 09, 2018 9:43 am

john0105 wrote:
Thu Aug 09, 2018 5:26 am
Nate79 wrote:
Wed Aug 08, 2018 11:52 pm
Where did you get a 0.5% tax load each year?
The 0.5% tax load comes from my interpretation of Morningstar's "tax cost ratio". Do I have this right?
http://performance.morningstar.com/fund ... ture=en_US
I believe M* uses only top tax rate so not very useful in this case.
The fund will distribute about 2% dividends each year. You will pay taxes on those dividends at the dividend tax rate however as they are going to be reinvested your tax basis increases. So in effect you are just pre-paying taxes and basis increases. So, 2% * 0.15 = 0.3% per year but you need to increase the cost basis 2% every year to account for reinvested dividends. Thus the actual tax drag is pretty small.

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Re: Should I pay for a 401k?

Post by Bfwolf » Thu Aug 09, 2018 12:39 pm

john0105 wrote:
Thu Aug 09, 2018 5:25 am
Bfwolf wrote:
Thu Aug 09, 2018 12:34 am
You missed a huge thing in your analysis: the $700 fee is annual, not one time. Under your scenario, the 401k would lose value every year as the $700 fee would outweigh the gains. I'd also argue your 0.5% tax load may be high. 2% dividends per year taxed at 15% rate would be a tax load of 0.3%.

However, contributing $18,500 per year over 20 years would absolutely be worth it given the lower tax bracket. Not to mention the likelihood that you will leave the company at some point and can move the $s somewhere where you can stop paying $700 a year.

None of this is to say you should pay the $700 per year when they are cheaper options available.
The analysis was for a single year. Every year that I'm a participant, I'll contribute. So it's a $700 front-load fee on my contribution each year. When I leave the company, I'll roll over my 401k to somewhere else and stop paying the $700 fee.
Yes, but if your time horizon is 20 years during year 1, it goes down to 19 years in year 2, 18 years in year 3, etc. In the later years, it becomes unprofitable.

In any event:

1) Yes, you are right, with a long time horizon this is better than a taxable account.

2) You still shouldn't pay $3500 a year for a plan.

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Re: Should I pay for a 401k?

Post by megabad » Thu Aug 09, 2018 1:58 pm

MossySF wrote:
Wed Aug 08, 2018 11:55 pm
Ask your employer to consider a Vanguard SIMPLE IRA instead. The amounts you can contribute are less than a 401K but still much higher than a personal IRA -- and the fees are way less compared to a 401K.
+1

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Re: Should I pay for a 401k?

Post by MossySF » Fri Aug 10, 2018 3:47 am

Spirit Rider wrote:
Thu Aug 09, 2018 7:39 am
A SIMPLE IRA requires employer contributions. Either a 3% match or 2% non-elective contribution. Although, the match can be reduced to as low as 1% in two out of five years including the first two. This would appear to be a non-starter based on the OP.

If not, Fidelity has removed their SIMPLE IRA administrative fees,
Considering the puny amounts Americans save up, odds are nobody will contribute anything significant to the SIMPLE IRA other than the OP ... so any employer who can't pony up like $500/yr in matching for employee benefits is not worth working for.

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Re: Should I pay for a 401k?

Post by basspond » Fri Aug 10, 2018 7:26 am

I would not if it depended on the other employees to pay. What if one or more decides not to partipate?

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