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What is a good reason to NOT max out a 401k?

Discussion in 'Business, Careers & Education' started by Troll2, May 26, 2012.

  1. SkinnyGoomba

    SkinnyGoomba Senior member

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    Mind you there are a lot of fees assciated with 401k plans that really kill the return. Doesn't stop me frm contributing, but they rarely calculate that into your return. I use mine mostly for corp. bond funds.
     
    Last edited: May 29, 2012
  2. stevent

    stevent Senior member

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    I'm with asdf on this, my Roth IRA is maxed out, haven't really had 401k yet so depending on what my options are I would probably contribute if there was a good amount of matching
     
  3. mkarim

    mkarim Senior member

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    Agreed. I put most of mine in money market funds and when I leave the employer, roll over into a Roth and invest in stocks I want. That way, I get the benefits of company match and not have to pay high 401K management fees.
     
  4. SkinnyGoomba

    SkinnyGoomba Senior member

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    I just looked at my YTD return today for my 401k, it shows 3.7%. However after you deduct the fees it is about 1.07%. The funds I've selected don't charge more then 1%. Great investment right?
     
  5. GreenFrog

    GreenFrog Senior member

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    I wouldn't invest in money market funds.. the returns on those are ridiculous.. they're like 1 BP.. laughable.
     
  6. Nereis

    Nereis Senior member

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    If you're investing into corporate fixed income, surely it'd return higher than a savings account?
     
  7. SkinnyGoomba

    SkinnyGoomba Senior member

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    It does, prior to the fees.
     
  8. chogall

    chogall Senior member

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    time to quit ur job or somehow roll ur 401k into ira.
     
  9. otc

    otc Senior member

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    Yeah, not sure I get this.

    Where are you finding these fees? Are these in addition to the fees paid on the funds?
    I spent some time looking through mine and I am finding nothing like this (but maybe you have a nasty 401k administrator)
     
  10. gettoasty

    gettoasty Senior member

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    You should see the fees soon enough post - July 1.

    403(2)(b) :smarmy:
     
  11. mkarim

    mkarim Senior member

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    Yes my contributions go into a money market fund until its time to roll them over into a Roth where I can put them to much better use.
     
  12. gettoasty

    gettoasty Senior member

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    So, putting it into MM funds or something more liquid than your fund allocation options offered within your 401(k) is a mere personal choice so that you can access your money easier if needed?

    Or the fund options offered under your company 401(k) does not have the returns you seek thus rolling it over into a traditional or Roth IRA that has better returns?

    I can understand the latter. The former just seems like, IMO, you don't like your companies retirement plan and thus is not a great in retaining its employees.
     
  13. mkarim

    mkarim Senior member

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    Its the latter. Our 401K funds have high fees, in my opinion, and most of my coworkers are not well-informed to say anything. They're under the impression that all 401K plans are created equal.
     
  14. gettoasty

    gettoasty Senior member

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    I see. Thanks for the clarification. I actually work for a CFP and taking care of the retirement plans we have setup for other small businesses. You are right in regards to most participants not being well-informed. They'll just look at the cost and fund under performance and then seek how to better make the gains by reallocation. FWIW if you are young you still have time and the working ability versus the participants closer to retirement.

    For the most part, yes, if you don't like your current plan you cannot change it as it is really up to plan sponsor/trustee. Not sure how it would be though if enough employees rallied for change. I think then cost and efficiency in plan change will come into question. Also, size i.e. # of employees.
     
    Last edited: Sep 16, 2012
  15. mkarim

    mkarim Senior member

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    Yes we are a small company (less than 20 employees). Also, people don't know about the hidden 401K fees. They just think the disclosed fees are the only fees charged. That was most likely the original intention wasn't it? :satisfied:
     
    Last edited: Sep 16, 2012
  16. P. Bateman

    P. Bateman Senior member

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    Quick "what should I do" question:

    I'm 25. My company matches $0.50 on the dollar all the way up to $8,500, so if I max out my 401k at $17,000, the company provides a match of $8,500.

    I currently contribute from each paycheck into a Roth 401k. I chose roth because I'm young and in a relatively low tax bracket at ~25%. Once a year I get a bonus which is usually taxed at 35-40% because my company uses the aggregate method for bonus taxes.

    Question: To avoid the 10-15% higher bonus tax rate, should I put 100% of my bonus into a standard pre-tax 401k and not the roth IRA I use for my regular contributions throughout the year?

    Thanks!
     
    Last edited: Sep 17, 2012
  17. gettoasty

    gettoasty Senior member

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    Actually you should be seeing more fee disclosures into the 4th quarter.

    DOL put out some new guidelines and rules to better disclose all the fee's TPA's, investment carriers, financial adviser, and anyone else who has their fingers in the cookie jar. Though I have discovered that some can circumvent the new disclosure by still offering a general fee disclosure. New material is coming out though so keep an eye out. Refer to my original post re: 403(2)(b) etc.

    P. Bateman: To answer your question, yes, you should maximize your company 401(k) as it is pre-tax. To my understanding in doing so you will essentially lower your tax bracket in the sense that your remainder paycheck will be taxed at a lower income bracket. In terms of financing and retirement goes, this will save you taxes in the long run if you consider the time value of money and how the 401(k) is a qualified plan.
     
    Last edited: Sep 17, 2012
  18. otc

    otc Senior member

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    Doesn't matter.

    Your taxes are calculated at the end of the year based on what you actually earned. The bonus is taxed at a higher rate simply because they assume the estimated withholding on salary is going to be too low (they calculate it expecting basically zero discretionary bonus I would think) and so the marginal tax bracket is actually much higher than the average tax rate that they take out of most paychecks.

    All that matters come tax time with regards to W2 income is how much you earned and how much of it went into pre-tax expenses.

    edit: but yes, you should max the company match if you are able since it is free money. If you are eligible, it might make sense to contribute to a *regular* 401k up to the match and then max out a Roth IRA if you are eligible instead of using the Roth 401k option.
     
    Last edited: Sep 17, 2012
  19. stevent

    stevent Senior member

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    +1, it would depend on whether he thinks he can make more trading his roth than the $17k contribution / $8.5k match, which frankly is quite hard unless you are pretty active. Though QE3 has been paying off pretty well :lol:

    I'm gonna max my tiny 401k so I get the free money for not too much, will then roll it over once I finish working at current job most likely. Roth IRA is always maxed no matter what for me.
     
    Last edited: Sep 17, 2012
  20. P. Bateman

    P. Bateman Senior member

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    Thanks, otc.

    To the bolded bit, why is that? I've always thought that since I'm young and in a relatively low income/tax bracket that it makes sense to use a roth 401k so I pay the lower tax now and not the higher tax when I'm older and withdrawing. Is that not the case?
     
    Last edited: Sep 17, 2012

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