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Should I skip the 401K?
Old 02-02-2015, 04:46 PM   #1
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Should I skip the 401K?

I am targeting retirement in 3 years. Barring a catastrophe, this should work out fine.

I will have a 4yr bridge to gap before 62, and(obviously) 9 years if I want to wait until 67 for SS. But only 2 years from that point till I am 59 1/2.

My company just started a 401K plan (was a Simple IRA prior).

I am very heavy in tax deferred accounts and quite light (less than 15%) in regular after tax brokerage funds.

The new 401K rules will allow me to put in $23K/yr including the catch-up. Should I go all in, go in partway or stay out and put the equivalent into after-tax investments to build that up? No matching - 3% goes in regardless from company.

I will not roll the simple into the 401K as the fees are way too high. But that brings up another variable on the decision - I'll be paying a ridiculous 1%(mgmt) + 1-1.5%(funds) fees for any funds in the 401K. ROBBERY!

What would you do?

Thanks,
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Old 02-02-2015, 04:49 PM   #2
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I was going to say the 4011K was still a no brainer until I saw the fees! No way to become a contractor and do a Simple IRA? Still better off with the 401K due to taxes but I would really see if there is any way to avoid some of those fees!
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Should I skip the 401K?
Old 02-02-2015, 04:55 PM   #3
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Should I skip the 401K?

Too short a time frame until potential withdrawal, and excessive fees. Personally, I'd put the money into a Vanguard low cost fund.


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Old 02-02-2015, 04:57 PM   #4
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If the taxes that you are paying now far exceed the taxes you expect to pay in retirement then it may still be worth it. Some of the benefit will be eaten up with the high fees but it is only for a short period (3 years. 1 1/2 years on average). However, if you are currently in a low tax bracket, then skip the 401k and look into after-tax savings or a Roth.
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Old 02-02-2015, 05:20 PM   #5
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Quote:
Originally Posted by pb4uski View Post
If the taxes that you are paying now far exceed the taxes you expect to pay in retirement then it may still be worth it. Some of the benefit will be eaten up with the high fees but it is only for a short period (3 years. 1 1/2 years on average). However, if you are currently in a low tax bracket, then skip the 401k and look into after-tax savings or a Roth.
I am in a high tax bracket now - thanks!
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Old 02-02-2015, 05:32 PM   #6
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Since you are getting the match anyway, there is no incentive to get ripped off in a high fee 401k.
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Old 02-02-2015, 05:49 PM   #7
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Since you are getting the match anyway, there is no incentive to get ripped off in a high fee 401k.
Isn't there a tax benefit?
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Old 02-02-2015, 09:00 PM   #8
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Since you are getting the match anyway, there is no incentive to get ripped off in a high fee 401k.
Wouldn't the incentive be the difference between today's high tax rate and tomorrow (when retired) lower tax rates?
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Old 02-03-2015, 08:34 AM   #9
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Wouldn't the incentive be the difference between today's high tax rate and tomorrow (when retired) lower tax rates?
I agree with this. While I hate the idea of the high fees not doing the 401K is like making a bad investment because you don't want to pay tax on the gains!

Of course, this is only true if the investments in the 401K+the tax breaks actually exceed what you can do with the money outside the plan.
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Old 02-03-2015, 08:55 AM   #10
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Most likely this is a no-brainer -- bite the bullet on the ridiculous fees and still max the 401(k). Since you are so close to retirement, the fees really won't have time to compound. So view them as paying a 2-2.5% expense to save the difference in marginal rate that could easily be 10% or more.
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Old 02-03-2015, 09:07 AM   #11
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Do a 53k contribution. 23k catch up, 30k after-tax. Some companies allow anything over the 23k to go in as after-tax funds. The when you leave roll the after-tax contributions to a Roth IRA, and the other funds to a Traditional IRA. This is possible due to IRS Notice 2014-54.
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Old 02-03-2015, 09:13 AM   #12
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If you do the 401K you get 3% free money from the company. Even for 3 years that alone makes it worth it. Not to mention $23K each year less on your MAGI.


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Old 02-03-2015, 09:16 AM   #13
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Even if you are very heavy on pre-tax retirement accounts, I would bite the bullet and max out the 401k (deferring taxes at your high rate), but plan on starting to do a Roth conversion in 3 years as soon as you retire. You don't want to get caught with very high MRD's on your pre-tax accounts when you turn 70.5.
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Old 02-03-2015, 09:45 AM   #14
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I was in a similar situation except my 401K fees were "reasonable" (compared yours). So I just maxed out my 401K from 50 to 55+ when I FIRE'd. The extra $$'s I had from LBYM, I used to get my kids through college, payoff my mortgage, and any extra $$'s I had I just threw into my after tax account. I can't remember why I didn't open a Roth IRA. I think the numbers just were not favorable or maybe it wasn't enough money to worry about, or maybe I was too lazy to figure it all out.
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Old 02-03-2015, 12:54 PM   #15
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Thanks all!
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Old 02-03-2015, 01:05 PM   #16
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The reason to have money in a tax deferred plan is that you'll pay less tax on it in the future. The flip side is the RMDs forcing you to pay taxes on withdrawals you don't need & the possibility of getting bumped into a higher tax bracket & having to pay taxes on SS.

Calculate your RMDs making some assumptions on returns based on the assets you have in there & the amount you'll withdraw to fund your retirement before 70 1/2. Since most of your portfolio is in tax-deferred accounts, you may need to withdraw more than your RMDs any way.

Deferring taxes on almost $70K over 3 years is quite a good deal. After that, you could transfer your moneys from the 401-K to an IRA to save on management fees.

Do the calculations. The amount you save may not be worth the aggravations - but you will not know it unless you get into the nitty gritty.

There was a good article on ROTH conversions at
http://www.caniretireyet.com/roth-ir...ersions-needs/

All the best.
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