401K questions

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
James999
Posts: 6
Joined: Sat Mar 14, 2015 4:44 pm

401K questions

Post by James999 »

My employer recently started offering a 401K. The provider is Principal which has a bad rep meaning high fees transferred onto employees, concealing information, etc. My employer offers zero contribution matching.

I max out my IRA contribution annually. Even if I continue contributing the maximum allowed into an IRA, I can still make the maximum contribution to the 401K annually. So should I make the maximum contribution to my employer's 401K in order to get the tax deduction?

I am risk averse right now for various reasons. So should I choose a very conservative offering? If so, what mix would you suggest?

I am single and am currently in the 12% federal and 4% state tax brackets. I have plenty saved in an emergency fund and no debts of any kind. Thanks for any replies.
Last edited by James999 on Sat Dec 26, 2020 5:51 pm, edited 1 time in total.
Northern Flicker
Posts: 7242
Joined: Fri Apr 10, 2015 12:29 am

Re: 401K questions

Post by Northern Flicker »

You will get better replies if you post the investment choices in the plan with their expense ratios (fees).
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
lakpr
Posts: 7311
Joined: Fri Mar 18, 2011 9:59 am

Re: 401K questions

Post by lakpr »

If you are single and in the 12% bracket, it means you are earning less than $52k per year. In this situation, max out the Roth IRA which itself is at least 12% savings rate. If there is an employer match in the 401k plan, I would have suggested contributing enough to capture the max match; the lack of match renders that moot.

The 12% bracket also has the advantage of providing 0% long term capital gains tax rate, which is another advantage in favor of choosing taxable account over 401k.

If you are disciplined enough to save at least 15%, and preferably at least 20%, of your income between Roth IRA and taxable account, this Boglehead will get behind you and say yeah, skip the workplace plan, no big loss.

Where the workplace plan shines is, it shields you from tax effects in the future if your income rises and goes beyond the 12% tax bracket. So in your current situation you need to weigh the probability of your income increasing beyond $52k per year, how soon, and will you stick with the same employer even at that time. If the answers are high, soon enough and yes, THEN contribute to the workplace plan. If you would post the available choices in the plan along with their expense ratios, we can help you choose the best options.
Topic Author
James999
Posts: 6
Joined: Sat Mar 14, 2015 4:44 pm

Re: 401K questions

Post by James999 »

I max out the Roth IRA each year which has no tax deduction. I have always chosen the Roth over the Traditional because my tax bracket is low.

I am risk averse, so I want conservative investments. Do conservative investments produce high capital gains?

If my income goes above 52k per year, I will not be with the same employer.

If the 401k plan options offered by my current employer are good, wouldn't investing in them for at least the tax deduction be a wise choice?

These are the Principal 401k plan options offered by my current employer:
1. Guaranteed Option(life insurance guaranteed contract, 70% bonds, A1 Moody rating, 1.60% current crediting rate)

2. Hybrid Income CIT(current income and capital appreciation, Morningstar rating is 3 out of 5 stars, expense .29%, total return since inception is 6.18%)

3. There are twelve Principal Lifetime Hybrid plans from 2010 to 2065 in five year increments. Each one has an expense of .29%. All have a Morningstar rating of 4 out of 5 stars except the 2010, 2015, 2060, and 2065 have a Morningstar rating of 3 stars. The total return percentage since inception for each plan from the Lifetime Hybrid 2010 to the Lifetime Hybrid 2065 are:8.26, 9.13, 10.04, 10.78, 11.41, 11.96, 12.36, 12.72, 12.87, 12.98, 10.14, and 10.93.

4. Large Cap S&P 500(Morningstar 4 stars, 10.26% total return since inception, .05% expense)

5. Midcap Growth(Morningstar 4 stars, 9.58% total return since inception, .45% expense)

6. Real Estate Securities (Morningstar 5 stars, 11.18% total return since inception, .70% expense)

7. International Emerging Markets(Morningstar 3 stars, 8.79% total return since inception, .76% expense)

Thanks for any replies.
Last edited by James999 on Wed Apr 07, 2021 7:25 am, edited 1 time in total.
mr_brightside
Posts: 296
Joined: Sat Oct 17, 2020 3:23 pm

Re: 401K questions

Post by mr_brightside »

Does the plan offer a Roth 401k? If it does I'd go that route. Then if you change employers you could consolidate / roll it over into your personal Roth IRA.

Given those choices I would pick the S&P 500 Index.

----------------------------------------
remember Enron?? I do
LittleMaggieMae
Posts: 698
Joined: Mon Aug 12, 2019 9:06 pm

Re: 401K questions

Post by LittleMaggieMae »

James999 wrote: Thu Apr 01, 2021 4:48 pm I max out the Roth IRA each year which has no tax deduction. I have always chosen the Roth over the Traditional because I will probably be in a lower tax bracket in retirement.

I am risk averse, so I want conservative investments. Do conservative investments produce high capital gains?

If my income goes above 52k per year, I will not be with the same employer.

If the 401k plan options offered by my current employer are good, wouldn't investing in them for at least the tax deduction be a wise choice?
If your gross income is 52,000 (or so) - when you subtract the standard deduction (for 2021) of $12,550 - your taxable gross is 52,000 - 12,550 = $39450.00 The first $9,950 is taxed at 10%, and the remaining 29,499 of income is taxed at 12% (39,450 - 9951 = 29499). You are putting money taxed at 12% into your Roth (it's post tax) any gains on the money in the Roth will not be taxed as income when you withdraw (after you are 59.5 or in your retirement). The key point of a Roth is that you will be able to withdraw from it without paying taxes on the withdrawals.

If you also opt to put some money into your 401K - it would decrease the amount (that 29,499) that's taxed at 12%. The money you contribute to the 401K is pre tax money. But when you withdraw that money (in retirement) it will most likely be taxed as income.

Ok, the use of deduction bothers me.
Contributing to a 401K or traditional IRA isn't a "deduction" -- it's using pre tax money and it's deferring when you will pay income tax on the money in the account. You will owe income tax on the money in the 401K/IRA eventually.

When you've contributed to a Roth - you've already paid income taxes (post tax) on the money going into the account. You won't pay income taxes when you take money out (in retirement).
Topic Author
James999
Posts: 6
Joined: Sat Mar 14, 2015 4:44 pm

Re: 401K questions

Post by James999 »

I edited my previous post. I meant to say that I have always chosen the Roth iRA over the Traditional because my tax bracket is low. So the tax advantages from the Traditional are unlikely because my tax bracket in retirement may be even higher than now.

If I were in a high tax bracket and expected my tax bracket in retirement to be low, then contributing to the 401K would have tax advantages, correct?

Another factor to consider is the compounding of funds that would have been taxed away but instead are invested in a 401K or Traditional IRA and withdrawn in retirement at hopefully a lower tax bracket.
HomeStretch
Posts: 6041
Joined: Thu Dec 27, 2018 3:06 pm

Re: 401K questions

Post by HomeStretch »

This BH wiki page “Traditional v. Roth” may be helpful:
https://www.bogleheads.org/wiki/Traditional_versus_Roth

The evaluation of which is right for you starts with whether your marginal tax rate(s) when contributing are higher or lower than your projected rate(s) at distribution in retirement.

In your case, as you think your future rate may be higher, then contributing to Roth now is reasonable. If the opposite was true, then contributing to Traditional (pretax) makes sense. Even though you are not certain, if you think that your future rate will be the same or higher, it’s reasonable to contribute to Roth IRA/Roth 401k while in the 12% tax bracket (which is scheduled to revert to 15% in 2026).

Re-evaluate annually. Also re-assess if your current marginal tax rate(s) increase or you decide to move states now or in retirement (with an impact on your overall rate) or you begin to accumulate a large tax deferred balance or you have a job with a generous pension/retirement income stream.

In any case, assuming your 401k plan’s fund ERs/fees aren’t too high, contribute to the new 401k to build up your retirement portfolio.
User avatar
ruralavalon
Posts: 20886
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: 401K questions

Post by ruralavalon »

James999 wrote: Sat Dec 26, 2020 3:04 am My employer recently started offering a 401K. The provider is Principal which has a bad rep meaning high fees transferred onto employees, concealing information, etc. My employer offers zero contribution matching.

I max out my IRA contribution annually. Even if I continue contributing the maximum allowed into an IRA, I can still make the maximum contribution to the 401K annually. So should I make the maximum contribution to my employer's 401K in order to get the tax deduction?

I am risk averse right now for various reasons. So should I choose a very conservative offering? If so, what mix would you suggest?

I am single and am currently in the 12% federal and 4% state tax brackets. I have plenty saved in an emergency fund and no debts of any kind. Thanks for any replies.
James999 wrote: Thu Apr 01, 2021 4:48 pm I max out the Roth IRA each year which has no tax deduction. I have always chosen the Roth over the Traditional because my tax bracket is low.

I am risk averse, so I want conservative investments. Do conservative investments produce high capital gains?

If my income goes above 52k per year, I will not be with the same employer.

If the 401k plan options offered by my current employer are good, wouldn't investing in them for at least the tax deduction be a wise choice?

These are the Principal 401k plan options offered by my current employer:
1. Guaranteed Option(life insurance guaranteed contract, 70% bonds, A1 Moody rating, 1.60% current crediting rate)

2. Hybrid Income CIT(current income and capital appreciation, Morningstar rating is 3 out of 5 stars, expense .29%, total return since inception is 6.18%)

3. There are twelve Principal Lifetime Hybrid plans from 2010 to 2065 in five year increments. Each one has an expense of .29%. All have a Morningstar rating of 4 out of 5 stars except the 2010, 2015, 2060, and 2065 have a Morningstar rating of 3 stars. The total return percentage since inception for each plan from the Lifetime Hybrid 2010 to the Lifetime Hybrid 2065 are:8.26, 9.13, 10.04, 10.78, 11.41, 11.96, 12.36, 12.72, 12.87, 12.98, 10.14, and 10.93.

4. Large Cap S&P 500(Morningstar 4 stars, 10.26% total return since inception, .05% expense)

5. Midcap Growth(Morningstar 4 stars, 9.58% total return since inception, .45% expense)

6. Real Estate Securities (Morningstar 5 stars, 11.18% total return since inception, .70% expense)

7. International Emerging Markets(Morningstar 3 stars, 8.79% total return since inception, .76% expense)

Thanks for any replies.
Yes, you should make the maximum annual employee contribution to the 401k.

Since you are "risk averse" and "want conservative investments" in your employer's 401k plan I suggest using one of the "Principal Lifetime Hybrid plans from 2010 to 2065 in five year increments. Each one has an expense of .29%." The expense ratio is low, and the Funds will be very diversified.

Use of an allocation fund seems to insulate the investor from behavioral errors, and so give higher investor returns. Morningstar (8/25/2019), "Mind the Gap 2019" , link.

it's important to see what each fund invests in. Could you please amend your 4/1/2021 post to give the fund names and ticker symbols if any for the funds offered? For Commingled Investment Trusts (CITs) which have no ticker symbols, could you please post links to the fact sheets?

Please simply add this to your 4/1/2021 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.

For simplicity you could use a similar target date fund in your IRA. What fund firm or brokerage is you IRA with?

Most people are in a lower tax bracket in retirement. For most people traditional tax-deductible 401k contributions are likely better than Roth 401k contributions. Will you be eligible for a substantial pension and Social Security benefits? What is your profession or occupation? About how much do you currently have in traditional tax-deferred accounts?

How much in dollars do you contribute annually to each account? Establishing a high rate of contributions is the most important investing decision you can make. Forum discussion, link.
Last edited by ruralavalon on Wed Apr 07, 2021 9:20 am, edited 2 times in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
tiburblium
Posts: 233
Joined: Thu Apr 11, 2019 4:28 pm

Re: 401K questions

Post by tiburblium »

Personally, I like to max out all tax sheltered accounts that are avilable, if you can afford to do so.

Also, you didn’t mention this, but 401ks have rock solid protection against creditors. Look up ERISA protection. As it’s possible to be sued at anytime, for any reason, and for any amount, it gives me comfort in knowing atleast the funds in the 401k are safe from a random accident that exceeds my insurance limits
Post Reply