Value of a 401(a) qualified plan?

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bryaninDC
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Value of a 401(a) qualified plan?

Post by bryaninDC » Thu Jul 30, 2020 2:55 pm

Hi all,

We max out my TSP and our IRAs. Looking for the best options to invest extra cash. Recently discovered my job offers a 401(a) qualified plan. I can contribute up to 10% of my paycheck (subject to overall IRS contribution limits). The contributions are post tax, earning are tax deferred. There are various withdrawal options, but bottom line is anything before 55 gets 10% penalty. RMDs at 72, I believe. Upon withdrawal, contributions are free and clear while growth is taxable. No employer match. There are four fund options, ranging from guaranteed income to a Fidelity 500 index fund. The middle two are a mishmash of various funds and stocks/bonds, etc to theoretically achieve different levels of growth potential/risk. Fees are 0.44% of total assets.

I’m not sure what to do with this option. It offers the potential to invest above and beyond the tsp/iras with some tax benefit but the fees are higher than I’d like. Realistically, I’d only use the index fund option. Would I just be better off making regular contributions to a taxable brokerage account instead? Could I contribute to this 401a and then do an annual rollover to my IRA for better fund options and lower fees? Investing the extra in a HSA is not an option right now, unfortunately.

fabdog
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Re: Value of a 401(a) qualified plan?

Post by fabdog » Thu Jul 30, 2020 3:58 pm

I'd just go taxable... invest in low turnover funds, so you'll only hit dividend as ongoing tax burden. No RMD required, and any long term appreciation will be at cap gains rate, not ordinary income, which is how the 401(a) withdrawal will show up

Mike

bryanm
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Re: Value of a 401(a) qualified plan?

Post by bryanm » Thu Jul 30, 2020 4:08 pm

bryaninDC wrote:
Thu Jul 30, 2020 2:55 pm
The contributions are post tax, earning are tax deferred. ... Upon withdrawal, contributions are free and clear while growth is taxable. ...
It offers the potential to invest above and beyond the tsp/iras with some tax benefit.
What are the tax advantages here relative to a tax-efficient investment (e.g., one that doesn't throw dividends)?

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arcticpineapplecorp.
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Re: Value of a 401(a) qualified plan?

Post by arcticpineapplecorp. » Thu Jul 30, 2020 4:08 pm

.44% isn't terrible if the expense ratio of the index funds offered is low. if S&P500 is .03% that'd be .47% total (I've seen worse expenses than that in retirement plans).

celia has said, "A dollar put in a Roth account is more valuable than a dollar put in a tax deferred account. And a dollar put in tax deferred account is better than a dollar put in taxable".

seems to me your account is like both a Roth and tax deferred. contributions are after tax, so it's like a Roth (the contributions won't be taxed again), but then just the earnings will be taxed later so that's tax deferred.

better to pay taxes later than ongoing, every year. though I guess this depends on your age/how close you are to paying the tax.

also, it's better to pay tax later because of inflation (the after inflation value of the dollar owed will be less later than now).

What is your current tax bracket?

Are you planning on accessing this money before 55?

Whether you can roll it over to IRA is up to the plan administrator. Best to ask them.
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

123
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Re: Value of a 401(a) qualified plan?

Post by 123 » Thu Jul 30, 2020 4:13 pm

I'll vote for just going with taxable. The fees for the 401(a) just whittle at your balence year after year. You lose the advantage of capital gains taxation with the 401(a). Seems to me like you end up paying a high price for deferring current taxes.
The closest helping hand is at the end of your own arm.

lakpr
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Re: Value of a 401(a) qualified plan?

Post by lakpr » Thu Jul 30, 2020 5:20 pm

arcticpineapplecorp. wrote:
Thu Jul 30, 2020 4:08 pm
seems to me your account is like both a Roth and tax deferred. contributions are after tax, so it's like a Roth (the contributions won't be taxed again), but then just the earnings will be taxed later so that's tax deferred.
A more apt comparison is non-deductible Traditional IRA, but with no chance of ever converting to Roth IRA.

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bryaninDC
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Re: Value of a 401(a) qualified plan?

Post by bryaninDC » Fri Jul 31, 2020 12:37 am

fabdog wrote:
Thu Jul 30, 2020 3:58 pm
I'd just go taxable... invest in low turnover funds, so you'll only hit dividend as ongoing tax burden
Yeah, that’s what I was starting to think too. Thanks for sharing your thoughts.

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bryaninDC
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Re: Value of a 401(a) qualified plan?

Post by bryaninDC » Fri Jul 31, 2020 12:38 am

bryanm wrote:
Thu Jul 30, 2020 4:08 pm
What are the tax advantages here relative to a tax-efficient investment (e.g., one that doesn't throw dividends)?
Not a whole heck of a lot. Just deferring any taxes on the gains until withdrawal.

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bryaninDC
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Re: Value of a 401(a) qualified plan?

Post by bryaninDC » Fri Jul 31, 2020 12:42 am

arcticpineapplecorp. wrote:
Thu Jul 30, 2020 4:08 pm
better to pay taxes later than ongoing, every year. though I guess this depends on your age/how close you are to paying the tax.

also, it's better to pay tax later because of inflation (the after inflation value of the dollar owed will be less later than now).

What is your current tax bracket?

Are you planning on accessing this money before 55?

Whether you can roll it over to IRA is up to the plan administrator. Best to ask them.
The inflation point makes sense. Federal tax bracket is 22%. Not sure about withdrawal age. It’s a ways off in the future.

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bryaninDC
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Re: Value of a 401(a) qualified plan?

Post by bryaninDC » Fri Jul 31, 2020 12:44 am

123 wrote:
Thu Jul 30, 2020 4:13 pm
I'll vote for just going with taxable. The fees for the 401(a) just whittle at your balence year after year. You lose the advantage of capital gains taxation with the 401(a). Seems to me like you end up paying a high price for deferring current taxes.
And 0.44-0.47% is expensive for a total us stock index fund. That’s the biggest thing I’m getting tripped up on.

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bryaninDC
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Re: Value of a 401(a) qualified plan?

Post by bryaninDC » Fri Jul 31, 2020 3:33 am

Got some more information today. I can do a partial withdrawal once a year down to the account minimum required balance and do a direct rollover (no taxes or penalties) to (1) a Roth IRA for the contributions and tIRA for the profits; or (2) everything to a Roth IRA and just pay the taxes to convert the taxable earnings. So that being the case, if I invested in the 401(a), I'd just roll over the max every year to my Vanguard IRAs, so the higher 401(a) fee would only be temporary essentially.

lakpr
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Re: Value of a 401(a) qualified plan?

Post by lakpr » Fri Jul 31, 2020 6:17 am

That is the definition of Mega Backdoor Roth! Congratulations.

Now, stop all taxable contributions, every penny up to the max allowed should go into this account.

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arcticpineapplecorp.
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Re: Value of a 401(a) qualified plan?

Post by arcticpineapplecorp. » Fri Jul 31, 2020 9:40 am

bryaninDC wrote:
Fri Jul 31, 2020 12:44 am
123 wrote:
Thu Jul 30, 2020 4:13 pm
I'll vote for just going with taxable. The fees for the 401(a) just whittle at your balence year after year. You lose the advantage of capital gains taxation with the 401(a). Seems to me like you end up paying a high price for deferring current taxes.
And 0.44-0.47% is expensive for a total us stock index fund. That’s the biggest thing I’m getting tripped up on.
are you sure that's the expense ratio? Your original post said "Fees are 0.44% of total assets." That doesn't sound like an expense ratio but more like a plan administrative expense. I pay $25 a year for plan administrative fees but that's in addition to my 0.08% expense ratio for my target date fund.

So are you sure the .44% is the expense ratio or just the fee for the plan?...which again isn't outrageous if the expense ratio for the S&P500 is low (we don't know, you haven't said precisely). I've seen fees total more than this in 401k plans for the average worker.
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

lakpr
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Re: Value of a 401(a) qualified plan?

Post by lakpr » Fri Jul 31, 2020 10:18 am

arcticpineapplecorp. wrote:
Fri Jul 31, 2020 9:40 am
bryaninDC wrote:
Fri Jul 31, 2020 12:44 am
123 wrote:
Thu Jul 30, 2020 4:13 pm
I'll vote for just going with taxable. The fees for the 401(a) just whittle at your balence year after year. You lose the advantage of capital gains taxation with the 401(a). Seems to me like you end up paying a high price for deferring current taxes.
And 0.44-0.47% is expensive for a total us stock index fund. That’s the biggest thing I’m getting tripped up on.
are you sure that's the expense ratio? Your original post said "Fees are 0.44% of total assets." That doesn't sound like an expense ratio but more like a plan administrative expense. I pay $25 a year for plan administrative fees but that's in addition to my 0.08% expense ratio for my target date fund.

So are you sure the .44% is the expense ratio or just the fee for the plan?...which again isn't outrageous if the expense ratio for the S&P500 is low (we don't know, you haven't said precisely). I've seen fees total more than this in 401k plans for the average worker.
If the balance in the 401a plan can be rolled over into a Roth IRA periodically, why is that 0.44% plan fee even a consideration? You are not going to keep assets long enough for that to be more than a nuisance charge every now and then.
[ @arcticpineapplecorp., that's a rhetorical question, not directed at you, but at @bryaninDC ]

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arcticpineapplecorp.
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Re: Value of a 401(a) qualified plan?

Post by arcticpineapplecorp. » Fri Jul 31, 2020 10:22 am

lakpr wrote:
Fri Jul 31, 2020 10:18 am
arcticpineapplecorp. wrote:
Fri Jul 31, 2020 9:40 am
bryaninDC wrote:
Fri Jul 31, 2020 12:44 am
123 wrote:
Thu Jul 30, 2020 4:13 pm
I'll vote for just going with taxable. The fees for the 401(a) just whittle at your balence year after year. You lose the advantage of capital gains taxation with the 401(a). Seems to me like you end up paying a high price for deferring current taxes.
And 0.44-0.47% is expensive for a total us stock index fund. That’s the biggest thing I’m getting tripped up on.
are you sure that's the expense ratio? Your original post said "Fees are 0.44% of total assets." That doesn't sound like an expense ratio but more like a plan administrative expense. I pay $25 a year for plan administrative fees but that's in addition to my 0.08% expense ratio for my target date fund.

So are you sure the .44% is the expense ratio or just the fee for the plan?...which again isn't outrageous if the expense ratio for the S&P500 is low (we don't know, you haven't said precisely). I've seen fees total more than this in 401k plans for the average worker.
If the balance in the 401a plan can be rolled over into a Roth IRA periodically, why is that 0.44% plan fee even a consideration? You are not going to keep assets long enough for that to be more than a nuisance charge every now and then.
[ @arcticpineapplecorp., that's a rhetorical question, not directed at you, but at @bryaninDC ]
great points! good way of thinking.
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

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bryaninDC
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Re: Value of a 401(a) qualified plan?

Post by bryaninDC » Fri Jul 31, 2020 11:18 am

arcticpineapplecorp. wrote:
Fri Jul 31, 2020 9:40 am
are you sure that's the expense ratio? Your original post said "Fees are 0.44% of total assets." That doesn't sound like an expense ratio but more like a plan administrative expense. I pay $25 a year for plan administrative fees but that's in addition to my 0.08% expense ratio for my target date fund.

So are you sure the .44% is the expense ratio or just the fee for the plan?...which again isn't outrageous if the expense ratio for the S&P500 is low (we don't know, you haven't said precisely). I've seen fees total more than this in 401k plans for the average worker.
I don’t know. Trying to find out more but getting info out of HR is like pulling teeth. They made it sound initially like this was the fee I pay (and it included the underlying expenses of the funds), but I’m not convinced. Will update when I find out more, hopefully.

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bryaninDC
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Re: Value of a 401(a) qualified plan?

Post by bryaninDC » Fri Jul 31, 2020 11:21 am

lakpr wrote:
Fri Jul 31, 2020 10:18 am

If the balance in the 401a plan can be rolled over into a Roth IRA periodically, why is that 0.44% plan fee even a consideration? You are not going to keep assets long enough for that to be more than a nuisance charge every now and then.
[ @arcticpineapplecorp., that's a rhetorical question, not directed at you, but at @bryaninDC ]
Good question. Because I didn’t know until this morning that I could roll it over regularly while still employed. That certainly alleviates the concern. The longest the fee on any given dollar invested would apply is one year, and wouldn’t be compounded.

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bryaninDC
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Re: Value of a 401(a) qualified plan?

Post by bryaninDC » Fri Aug 07, 2020 4:49 am

Got some more information on this. So the fee is about 0.44% total for me (all in). It fluctuates a bit year to year depending on the program's variable costs like payroll, etc. I can make annual in-service withdrawals, but it takes about two weeks to do a direct roll-over (via a paper check through the postal system). Post-tax contribution portion would roll into my Roth IRA and any pre-tax earnings would roll into my tIRA.

That all said, it still seems likes a good way to get more money into a Roth IRA above and beyond what I am already contributing to my other maxed-out retirement accounts. (The mega backdoor roth idea) I'll pull out as much money as I can from the 401(a) every year and put it into my much lower fee IRA(s), thus limiting the time those investments are exposed to the fees.

Now the thing that's tripping me up a bit is that it feels like I have to try to time the market by deciding when to do the annual withdrawal since it's not immediately reinvested. If I pull a bunch of money out of the 401(a) and then the market skyrockets over those two weeks before it is reinvested in the IRA, that sucks. There's no way to know when I should do the in-service withdrawal every year. Should I just pick a day (e.g. Dec 1) and stick with it no matter what? Just try to wait out any localized drop? What should I do if the 401(a) has losses for the year and not earnings? Still roll it over, or wait until there are earnings? Just trying to think through how to make sure I'm maximizing the chances of buying low and selling high.

I suppose the other thing I could do instead of investing in the 401(a) every paycheck would be to just dump the max lump sum for the year into the account in January and then roll it all over as fast as possible just to get as much as I can into my Roth as soon as possible.

lakpr
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Re: Value of a 401(a) qualified plan?

Post by lakpr » Fri Aug 07, 2020 5:16 am

bryaninDC wrote:
Fri Aug 07, 2020 4:49 am
I suppose the other thing I could do instead of investing in the 401(a) every paycheck would be to just dump the max lump sum for the year into the account in January and then roll it all over as fast as possible just to get as much as I can into my Roth as soon as possible.
This. If you know how much exactly you want to contribute to MBR, get to it as fast as you can and roll it over.

If you have any bonds in your other plans, shift those bonds to stocks while the check is in transit, and shift back to bonds once the check is deposited into Roth IRA. Basically treat the check as fixed income in transit.

Deblog
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Re: Value of a 401(a) qualified plan?

Post by Deblog » Fri Aug 07, 2020 5:27 am

Does the plan allow you to do a big one time deposit a year? Mine does not. Some cap what %of your check that can be deferred. Mine is high, 80% of my check. I too just found out my plan offered after tax 401k. I investigated after becoming a member here and reading posts. I max my pre tax and then put same amount to after tax. I can do multiple inservice rollovers per year but will just do 2 because of the paperwork. I wish I would have known sooner that they offered this as I did not qualify for Roth contributions. I am over 55 so easier access to the money if I would need it.

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bryaninDC
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Re: Value of a 401(a) qualified plan?

Post by bryaninDC » Fri Aug 07, 2020 6:24 am

lakpr wrote:
Fri Aug 07, 2020 5:16 am
bryaninDC wrote:
Fri Aug 07, 2020 4:49 am
I suppose the other thing I could do instead of investing in the 401(a) every paycheck would be to just dump the max lump sum for the year into the account in January and then roll it all over as fast as possible just to get as much as I can into my Roth as soon as possible.
This. If you know how much exactly you want to contribute to MBR, get to it as fast as you can and roll it over.

If you have any bonds in your other plans, shift those bonds to stocks while the check is in transit, and shift back to bonds once the check is deposited into Roth IRA. Basically treat the check as fixed income in transit.
That's an interesting idea to compensate for the temporary cash in check form. Would be tricky to do in my current portfolio though because my other retirement accounts (besides the one in question which will not have much money in it after each withdrawal) are in target date funds. I suppose I could temporarily shift into a TDF with a lower bond holding to compensate.
Last edited by bryaninDC on Fri Aug 07, 2020 6:28 am, edited 1 time in total.

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bryaninDC
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Re: Value of a 401(a) qualified plan?

Post by bryaninDC » Fri Aug 07, 2020 6:28 am

Deblog wrote:
Fri Aug 07, 2020 5:27 am
Does the plan allow you to do a big one time deposit a year? Mine does not. Some cap what %of your check that can be deferred. //
I believe so. The amount I can put in through the once annual lump sum contribution is limited by various things per IRS rules (how much you've already contributed, how much you plan to that year, how much you've and they've contributed to other tax deferred plans, etc). They calculate all that ahead of time.

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