Which 401K to go with?

radroadkill · October 2016

I asked something similar many, many moons ago but looking back wasn't overly helpful and my SO is currently not accessible for discussion!

My employer has just recently set up a retirement plan for everyone and I'm trying to decide if the better fit is to go with a Roth IRA or a pre-tax one based on circumstance. I make a decent salary, I'm about to be 30, and both my husband and I work and don't anticipate a change in that status anytime soon. We also feel extremely confident is seeing our salaries grow at a steady rate. The company is offering 4% matching.

I'm excellent at business math but terrible at tax math and I'm not sure if it's better to pay the the taxes upfront now with a Roth IRA, or pay them in retirement with everything taken into consideration. I also have the option to split between both but I'd rather commit to just one or the other right now unless general consensus and fact speak otherwise.

Thoughts, logic, or feelings?

schuss · October 2016

401k until you max out the match - you're getting free money, as no tax benefit will ever be worth an immediate 100% return. After maxing out matching, it depends on anticipated salary growth.

Powerpuppies · October 2016

Opinions vary but I'd go for the Roth as long as quids doing standard

Heir · October 2016

Always up your 401k to the company match before you do anything else. It's literally free money.

Beyond that, it will come down whether you want to pay less taxes now or later.

Is the Roth a company sponsored Roth 401k or is it a traditional Roth IRA? I don't know about the roth 401ks but the Roth IRA has a annual contribution limit of 5500, where as the traditional, pre-tax 401k's annual limit is something like 18,000 currently. So just keep that in mind.

khain · October 2016

Is there some confusion between a 401k and an IRA? The title makes it seem like your asking about one but the post asks about the other. 401k, both pre-tax and Roth are employer sponsored, and share limits of 18k (personal contribution) and 53k (total contribution). The traditional (pre-tax) and Roth IRAs are personal accounts and have a seperate limit from a 401k of 5.5k that is shared between the accounts.

I would in general reccomend a Roth IRA over a traditional IRA if you have access to a 401k. The maximum amount you can contribute is effectively higher, it hedges between pre and post tax, leaves open the backdoor Roth IRA option, and Roth IRAs allow more options to withdrawal.

Simpsonia · October 2016

As everyone has already said, max out your 401k match. As for whether to go with a Roth or traditional, it really comes down to what you anticipate your yearly draw to be in retirement. Basically, if you think your combined incomes while working (and this includes in 10-15 years) will be larger (and thus taxed higher) than your retirement income, then go with a traditional for the tax breaks now. If you think your retirement income will be larger than your current income, then a Roth is the way to go. Almost everyone has a lower retirement income than when they were working (as expenses are lower, such as paid off housing, no kids, etc).

Remember, progressive tax brackets are a thing. Even if drawing from a traditional 401k(or IRA) in retirement that is taxable income, the first $18,450 is drawn tax free, and then up to $74,900 at the 15% bracket.

However, there are some other advantages of the Roth IRA that are helpful as well. Mainly that principal contributed (not earned equity) can be withdrawn penalty free at any time. To withdraw from a traditional 401 or IRA, before the age of 59.5, you would face a 10% penalty.

Jasconius · October 2016

some people think that post-tax retirement savings is good because they believe that taxes are likely to go up in the future

so by using a Roth IRA you avoid an indeterminate tax increase in the future. there are also other marginal tax situations where its a good idea to just take the hit now, etc

also there are some (mostly people trying to sell you alternatives) who contend that 401k's are so saturated with fees that your actual gains aren't so great

the general wisdom is just do your company match because its literally free money, and independently seek whatever other prime retirement solution is right for you

The Crowing One · October 2016

Under your mattress.

zepherin · October 2016

Universally everyone agrees with going for the match. It is free money, get that money.

I am a big fan of mixing retirement into different areas.

The standard advice is save between 10 percent and 15 percent. Personally I would put in 4% into 401k and 2%-3% in a Roth IRA. I'm a big fan of splitting retirement account money. I never like to have all my money in one savings pool. Diversification of companies helps you in case of a total collapse of one of the fund companies.

The Crowing One · October 2016

Just save as much as you can. In an account or just savings... it helps. You can always defacto put monies into accounts, and other people have great advice for where.

radroadkill · October 2016

@khain I think I just let the 8 day working streak delirium get to me in typing everything up.

I think I've made my decision! Thanks, everyone.

Simpsonia · October 2016

zepherin wrote: »

I never like to have all my money in one savings pool. Diversification of companies helps you in case of a total collapse of one of the fund companies.

Most people who are investing outside of their company's 401k use Vanguard. Mostly for the ultra-low fees, but also because it is one of the most customer focused and reliable investment companies out there. Whenever I see this, I go back to this explanation by one of the Bogleheads guys.

Mel Lindauer wrote:

What if Vanguard Went Broke?
This is a very serious and timely issue, so I'll address it to hopefully set everyone at ease.

First, The Vanguard Group Inc. (VGI) is actually a subsidiary of the various mutual funds, each of which is a separate legal entity. The best way to describe Vanguard's unique structure would be to think of General Motors turned upside down, with Chevrolet, Cadillac, Oldsmobile, Pontiac, etc. as the corporate parents, and General Motors as a subsidiary. If you think of Chevrolet, Cadillac, Oldsmobile, Pontiac, and the other GM divisions as mutual funds, and General Motors (the subsidiary, in this situation) as Vanguard Group Inc., you'll get the picture.

Since VGI is actually owned and funded by the various mutual funds, it technically couldn't go bankrupt unless all of the various mutual funds that support it went bankrupt. The only way that could happen would be for the value of all of the stocks and/or bonds held by each and every individual Vanguard mutual fund to go to zero. So, forget about Vanguard going bankrupt -- it just isn't going to happen.

It's also important to point out that even if VGI were to somehow go broke, VGI has no recourse to the assets of the funds. Rather, each fund's custodian holds that fund's assets. Even the fund managers do not have custody of their fund's holdings. They simply decide which stocks/bonds to sell, and the custodian actually delivers (in the case of a sale) or takes delivery (in the case of a purchase) of the actual asset.

Another huge and very important difference between Vanguard's mutual funds and the Enrons and WorldComs of the world is that Vanguard is required to "mark to market" (value each fund share based on the value of all of the fund's holdings) each day the market is open. That keeps the fund's books current. This "marking to market" pricing is subject to both routine and spot audits by both the SEC and the Pennsylvania Department of Banking.

One major reason for the lack of problems with mutual funds comes from the fact that they're regulated by the Investment Company Act of 1940, which spells out the legal responsibilities of the mutual funds to their investors. In addition to the provisions of the Investment Company Act of 1940, the SEC also directly regulates mutual funds. While the SEC can investigate fraud allegations against investors at public companies like Enron and WorldCom, where the accounting is much more complex than at mutual funds, it has no authority to set corporate governance rules for these public companies. These are huge differences.

Keep in mind, too, that, despite all of this, if something were to happen to the Vanguard Group (the entity that provides the fund with the administrative services they need to exist), the funds would continue to operate and would simply replace VGI with another entity to provide these same services.

Some have expressed concerns about putting "all their eggs in one basket" by consolidating their investments at Vanguard. There's simply no need to worry about that. Each fund is a separate investment company (and part owner of the Vanguard Group, rather than the other way around). Thus, having all of your investments in several Vanguard funds is tantamount to having your investments spread among a variety of baskets, each independent of the other. So, put your fears to rest; your investments are safe at Vanguard.

For what it's worth, other than my Savings Bonds, all of my investments are at Vanguard, and I sleep like a baby!

Best regards,

Mel

zepherin · October 2016

Simpsonia wrote: »

zepherin wrote: »

I never like to have all my money in one savings pool. Diversification of companies helps you in case of a total collapse of one of the fund companies.

Most people who are investing outside of their company's 401k use Vanguard. Mostly for the ultra-low fees, but also because it is one of the most customer focused and reliable investment companies out there. Whenever I see this, I go back to this explanation by one of the Bogleheads guys.

Mel Lindauer wrote:

What if Vanguard Went Broke?
This is a very serious and timely issue, so I'll address it to hopefully set everyone at ease.

First, The Vanguard Group Inc. (VGI) is actually a subsidiary of the various mutual funds, each of which is a separate legal entity. The best way to describe Vanguard's unique structure would be to think of General Motors turned upside down, with Chevrolet, Cadillac, Oldsmobile, Pontiac, etc. as the corporate parents, and General Motors as a subsidiary. If you think of Chevrolet, Cadillac, Oldsmobile, Pontiac, and the other GM divisions as mutual funds, and General Motors (the subsidiary, in this situation) as Vanguard Group Inc., you'll get the picture.

Since VGI is actually owned and funded by the various mutual funds, it technically couldn't go bankrupt unless all of the various mutual funds that support it went bankrupt. The only way that could happen would be for the value of all of the stocks and/or bonds held by each and every individual Vanguard mutual fund to go to zero. So, forget about Vanguard going bankrupt -- it just isn't going to happen.

It's also important to point out that even if VGI were to somehow go broke, VGI has no recourse to the assets of the funds. Rather, each fund's custodian holds that fund's assets. Even the fund managers do not have custody of their fund's holdings. They simply decide which stocks/bonds to sell, and the custodian actually delivers (in the case of a sale) or takes delivery (in the case of a purchase) of the actual asset.

Another huge and very important difference between Vanguard's mutual funds and the Enrons and WorldComs of the world is that Vanguard is required to "mark to market" (value each fund share based on the value of all of the fund's holdings) each day the market is open. That keeps the fund's books current. This "marking to market" pricing is subject to both routine and spot audits by both the SEC and the Pennsylvania Department of Banking.

One major reason for the lack of problems with mutual funds comes from the fact that they're regulated by the Investment Company Act of 1940, which spells out the legal responsibilities of the mutual funds to their investors. In addition to the provisions of the Investment Company Act of 1940, the SEC also directly regulates mutual funds. While the SEC can investigate fraud allegations against investors at public companies like Enron and WorldCom, where the accounting is much more complex than at mutual funds, it has no authority to set corporate governance rules for these public companies. These are huge differences.

Keep in mind, too, that, despite all of this, if something were to happen to the Vanguard Group (the entity that provides the fund with the administrative services they need to exist), the funds would continue to operate and would simply replace VGI with another entity to provide these same services.

Some have expressed concerns about putting "all their eggs in one basket" by consolidating their investments at Vanguard. There's simply no need to worry about that. Each fund is a separate investment company (and part owner of the Vanguard Group, rather than the other way around). Thus, having all of your investments in several Vanguard funds is tantamount to having your investments spread among a variety of baskets, each independent of the other. So, put your fears to rest; your investments are safe at Vanguard.

For what it's worth, other than my Savings Bonds, all of my investments are at Vanguard, and I sleep like a baby!

Best regards,

Mel

Honestly what I meant was putting money in Vanguard in addition to the 401k. And your investments are as safe in Vanguard as they can be, but I still don't believe in putting all money there. I've seen multi billion dollar companies walk away from a legal entity (which is what Vanguard is) if it looks bad. However I think Vanguard is a solid investment.

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