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

[mkarim]



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.

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.

 

[gettoasty]

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.

 

[mkarim]



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.

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.

 

[gettoasty]

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.

 

[mkarim]



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.

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?

 

[P. Bateman]

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!

 

[gettoasty]

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.

 

[otc]



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?
Thanks!

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.

 

[stevent]



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.

+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

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.

 

[P. Bateman]



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.

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?

 

[otc]



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?

Half roth/half regular would basically just be sort of a hedge. Since the limits on 401k stuff are usually based on pre-tax traditional contributions (and since they are a smaller hit to your paycheck due to their pre-tax nature) I was thinking you could get your full employer contribution in pre-tax funds and then throw an extra 5k into a Roth while you are still eligible.

Maybe I am not quite understanding your situation here but basically your priorities for investing should be:
1: 401k up to employer match limit (I suppose this can be roth or trad...as long as you are getting the max match)
2: Roth IRA if eligible (otherwise traditional) up to the 5K annual maximum.
3: 401k to the legal limit.
4: Regular taxable investments.

 

[gettoasty]



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!

Well to answer your edited question, out of curiousity, the internet yielded this:

If you know your bonus is imminent, you can shelter more of that income from taxes by raising your 401(k) contribution percentage before the paycheck containing the bonus is issued. Be sure to plan ahead, since it can take several pay periods for the new contribution percentage to take effect. You can plan by finding the date you received your bonus last year and raising your contribution percentage a month ahead of time. That will give your employer time to adjust their records and give you the chance to save even more money in your 401(k).

If you expect to get a bonus from your employer, it is a good idea to do some tax planning to determine how that bonus will impact your taxable income and your potential tax liability. If you already know the amount of your bonus for the current year, you can plug those hard numbers into a tax preparation software package. If you do not know how much you will get, you can use the bonus you received last year as a guide. Taking the time to plan ahead can help you shelter more of your bonus from taxes by directing more to your 401(k). Knowing how much you might owe also allows you to put money aside for taxes.

I also thought so as well so you can take it FWIW. Such deferrals is more in part to timing in when to elect so.

 

[gettoasty]

And I feel like a lot of the advice given is more so to the idea of maximizing your investment e.g. gains in the short term rather than actual tax benefits and long term gains.

I'm curious whether there is adequate education in terms of what options you actually have outside of your typical commercial bank. I guess my POV is a bit skewed coming from the producer side of things.

 

[mkarim]



And I feel like a lot of the advice given is more so to the idea of maximizing your investment e.g. gains in the short term rather than actual tax benefits and long term gains.

Yes the majority of the investment community is geared towards short-term benefits since it is commission-driven.

 

[gettoasty]

I thought we were looking at it from the perspective of the participants. In that case I am not sure why you would want to be rolling 401k so much and eating the fees.

From a producers viewpoint, sure "roll it over to me : )"