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(The Motley Fool)   Maxing out your 401(k)? We've got some bad news for you   (fool.com) divider line
    More: Interesting, Taxation, Tax, tax-protected retirement account, Capital gains tax, Capital gain, Capital gains tax in the United States, Tax refund, Investment  
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2355 clicks; posted to Business » on 01 Oct 2022 at 10:38 AM (9 weeks ago)   |   Favorite    |   share:  Share on Twitter share via Email Share on Facebook



47 Comments     (+0 »)
View Voting Results: Smartest and Funniest
 
2022-10-01 7:46:22 AM  
Maybe. It certainly depends on whether you have an employer who provides a matching contribution to your 401K.
 
2022-10-01 8:44:29 AM  
Any Fark accountants want to comment on this?  What the article is implying doesn't make any sense in my experience, but maybe I'm missing something.
 
2022-10-01 9:01:12 AM  

TaDu: Any Fark accountants want to comment on this?  What the article is implying doesn't make any sense in my experience, but maybe I'm missing something.


Depends. Does your employer offer index funds or other vehicles with little or no fees? If so, current times suggest buying now while prices are depressed. The markets should rebound eventually.

This article pushing brokeage accounts sounds more like an advertisement, IMHO.

/Remember to invest in 401k programs for the long term.
 
2022-10-01 9:16:52 AM  
shiat like this makes me nihilistic... and angry
 
2022-10-01 9:36:00 AM  
I do age-based funds and the fees are like .1%.  Employer matches first 5% but this year will just be buying on the dios and it'll come back by the time it's time to retire.  I hope.
 
2022-10-01 9:37:00 AM  
i.ytimg.comView Full Size



Thanks for the bad advice, Popeye!
 
2022-10-01 10:48:19 AM  
We have lower fees something like .002 and 10% match. With catchup that's 54000 together. We could dial it back but at this point it's a habit. We have outside Roths as well.
 
2022-10-01 10:49:12 AM  
I don't have a 401(K), I have a 403(b).

Chessmate, libulardos!!!1!
 
2022-10-01 10:51:10 AM  
The plus to a 401(k) is it is deducted before you can spend it and once there, most people forget it. That allows you to accumulate a decent amount over time. 

Honestly, the cheapest index funds are the best way to go. Age based funds have higher fees.

All that said, if you are disciplined you will get better results outside the system.
 
2022-10-01 10:51:35 AM  

Another Government Employee: The plus to a 401(k) is it is deducted before you can spend it and once there, most people forget it. That allows you to accumulate a decent amount over time. 

Honestly, the cheapest index funds are the best way to go. Age based funds have higher fees.

All that said, if you are disciplined you will get better results outside the system.


Oh, and the employer match is free money.
 
2022-10-01 10:59:11 AM  
Seems like more of an argument against abusive fees than an argument against using 401(k)s.
 
2022-10-01 11:19:27 AM  
People have retirement accounts? What are those, and what is this "retirement"?
 
2022-10-01 11:20:49 AM  
LOL, considering I'm 56 and, outside of Uncle, have never held a job with a retirement plan, I wouldn't feel too bad about any kind of 401. My retirement plan weighs 200 grains.
 
2022-10-01 11:41:56 AM  
0.88% quoted in the article is a hell of a lot better than paying 22% in taxes before it goes into an non tax deferred account. If your employer offers a 401k you're limited in your tax deferred options. If you make more than 70 something grand a year you can put money in a traditional IRA if your employers offers a plan.

While some 401ks plans probably steer clients money into high fee funds, unless you have a real shiatty plan you can probably opt out of their management of your money and just go with low expense index funds.
 
2022-10-01 11:46:41 AM  
Unless you plan on borrowing against your 401k you should just be rolling it over into an IRA.  Especially since most people are changing jobs more often and already doing a rollover.  In an IRA it's easier to manage and controll and no fees or trade costs if you go to most big investment firms like Merrill or Ameritrade or whatever.  Also easy online management.  One more benefit.  If you manage at say Merrill and have all your checking/savings at boa you get crazy good benefits for having so much money there.
 
2022-10-01 11:50:06 AM  

drewogatory: LOL, considering I'm 56 and, outside of Uncle, have never held a job with a retirement plan, I wouldn't feel too bad about any kind of 401. My retirement plan weighs 200 grains.


Fark user imageView Full Size
 
2022-10-01 11:57:33 AM  

OhioUGrad: People have retirement accounts? What are those, and what is this "retirement"?


It's the best way to keep the most of your checks. 401ks are pre-tax, so they both save money that is not taxed and lowers your taxable income as well.
 
2022-10-01 12:02:46 PM  

TaDu: Any Fark accountants want to comment on this?  What the article is implying doesn't make any sense in my experience, but maybe I'm missing something.


I am in the top tax bracket, so every dollar I put in I get an immediate ROI.  My employer matches up to 5% as well.  The limit is much higher than an IRA, and you can still save in an after tax IRA and immediately convert it to a Roth every year as well.
Fees?  Sure.  Once you leave the job roll it over into an IRA and invest in ETFs like VOO.  Once you save over $150,000 or so Fidelity waives most transaction fees as well.
The key isn't to max it out necessarily but save consistently and as early as possible in your working life.  A high school grad that saves and builds skills to earn more can retire a millionaire with surprisingly low monthly contributions.
Lastly, most financial advice is garbage.  If you suddenly find yourself with a lot of money, put it it in a brokerage account and take a bucket list vacation.  Come back and invest in VOO, and every year roll the maximum into a Roth IRA (Roth conversion).  Don't buy a power boat.  Don't buy a luxury car.  Don't buy a home you can't afford in the long run.

/hookers and blow, the rest you wasted.
 
2022-10-01 12:06:07 PM  

AirForceVet: TaDu: Any Fark accountants want to comment on this?  What the article is implying doesn't make any sense in my experience, but maybe I'm missing something.

Depends. Does your employer offer index funds or other vehicles with little or no fees? If so, current times suggest buying now while prices are depressed. The markets should rebound eventually.

This article pushing brokeage accounts sounds more like an advertisement, IMHO.

/Remember to invest in 401k programs for the long term.


Motley Fool is for fools who believe anything Motley Fool publishes is worthwhile financial advice.
 
2022-10-01 12:15:37 PM  
Meh. Four years ago my 401(k) was looking real good. Then the university changed it to a 401(b). It has lost almost half its value since then and is basically worthless.
 
2022-10-01 12:44:03 PM  
This is an ad.
 
2022-10-01 12:54:58 PM  
I don't own a shovel big enough to dig through the whole article, but 40+ years of investing and a short conversation with my CPA (AKA wife, really is a CPA) says there is no pony in the pile. 0.88% fees vs 10-20% taxes?
 
2022-10-01 1:19:49 PM  

natazha: 0.88% fees vs 10-20% taxes?


That's the basic issue I'm trying to understand.  It seems like in almost every common situation, you'd be better off reducing your taxable income AND having more $$ invested early rather than paying more taxes and thus investing less (even if it's tax free when you withdraw it later).  I was wondering if this was more of a theoretical problem that might affect someone at the extremes of the wage scale rather than the situation most people are in.

Thanks everyone for your thoughts on this.
 
2022-10-01 1:47:31 PM  

natazha: I don't own a shovel big enough to dig through the whole article, but 40+ years of investing and a short conversation with my CPA (AKA wife, really is a CPA) says there is no pony in the pile. 0.88% fees vs 10-20% taxes?


Your wife is a CPA and she has you in a 401K program with .88% fees? I think you need a divorce.
 
2022-10-01 1:54:35 PM  
You may be better off using a regular brokerage account.
The alternative to maxing out your 401(k) is to use a regular brokerage account. You'll have to pay taxes on anything you save in your regular brokerage, but it could be beneficial.


Fark user imageView Full Size
 
2022-10-01 2:32:38 PM  
My employer matches up to 5% of my salary. That's money I would be leaving on the table if I don't put away at least that much.
 
2022-10-01 2:39:05 PM  

natazha: I don't own a shovel big enough to dig through the whole article, but 40+ years of investing and a short conversation with my CPA (AKA wife, really is a CPA) says there is no pony in the pile. 0.88% fees vs 10-20% taxes?


The 10-20% are a one time thing on the money coming in.  The .88% is for the whole bundle.  So if you are close to taking out money, it shouldn't matter.  But younger farkers might think about other tax dodges.

AeAe: My employer matches up to 5% of my salary. That's money I would be leaving on the table if I don't put away at least that much.


That's something you can't beat.  Definitely don't leave money on the table (unless you suspect your employer will steal the whole 401k account.  CEOs like to think of pensions as their own income and lift accordingly).
 
2022-10-01 2:55:01 PM  

yet_another_wumpus: That's something you can't beat. Definitely don't leave money on the table (unless you suspect your employer will steal the whole 401k account. CEOs like to think of pensions as their own income and lift accordingly).


401ks don't work that way.  The company doesn't own the account, you do.  They can't steal it without the banker running the fund going to jail.

Pension funds on the other hand... different ball of wax entirely.
 
2022-10-01 2:55:32 PM  

yet_another_wumpus: natazha: I don't own a shovel big enough to dig through the whole article, but 40+ years of investing and a short conversation with my CPA (AKA wife, really is a CPA) says there is no pony in the pile. 0.88% fees vs 10-20% taxes?

The 10-20% are a one time thing on the money coming in.  The .88% is for the whole bundle.  So if you are close to taking out money, it shouldn't matter.  But younger farkers might think about other tax dodges.

AeAe: My employer matches up to 5% of my salary. That's money I would be leaving on the table if I don't put away at least that much.

That's something you can't beat.  Definitely don't leave money on the table (unless you suspect your employer will steal the whole 401k account.  CEOs like to think of pensions as their own income and lift accordingly).


I work for one of the top 3 telecoms. I don't think our CEO has the balls to think about raiding the 401k.
 
2022-10-01 3:08:16 PM  

MadHatter500: yet_another_wumpus: That's something you can't beat. Definitely don't leave money on the table (unless you suspect your employer will steal the whole 401k account. CEOs like to think of pensions as their own income and lift accordingly).

401ks don't work that way.  The company doesn't own the account, you do.  They can't steal it without the banker running the fund going to jail.

Pension funds on the other hand... different ball of wax entirely.


GOP legislation step 1. Allow employers to consolidate 401(k)s back into singular company pension fund to "protect employee investments".
GOP step 2. You already know what that is.
 
2022-10-01 3:11:30 PM  

Chagrin: natazha: I don't own a shovel big enough to dig through the whole article, but 40+ years of investing and a short conversation with my CPA (AKA wife, really is a CPA) says there is no pony in the pile. 0.88% fees vs 10-20% taxes?

Your wife is a CPA and she has you in a 401K program with .88% fees? I think you need a divorce.


No, 0.88% is from the article and I don't have a 401K, just IRAs.  Both of which are no-load.
 
2022-10-01 3:35:50 PM  
How many minutes would it take me to find a Motley Fool article from a couple of years ago recommending I max out my 401k?
 
2022-10-01 3:35:52 PM  
The 100 percent match on six percent seems worth it to me
 
2022-10-01 3:43:17 PM  
Wow. I didn't think Motley Fool was that bad, but TFA is absolute trash.

Doesn't mention the employer match many 401(k)s have. Oh, the typical fee is 0.88%? I think the 6% from my employer tax free makes up for that.

Also doesn't mention capital gains taxes. 401(k) is tax deferred, not tax free. Withdraws are taxed like regular income, while if you invest after paying taxes, returns are taxed at capital gains rates that are currently lower than income tax rates. 

So maxing your 401(k) may or may not be right for you, but TFA won't help you find out.
 
2022-10-01 3:45:08 PM  

TaDu: Any Fark accountants want to comment on this?  What the article is implying doesn't make any sense in my experience, but maybe I'm missing something.


Not an accountant, but come from an accounting family. (think Mona Lisa Vito from My Cousin Vinny and mechanics)

TFA isn't necessary wrong, it just misses so many important details so that it's useless.
 
2022-10-01 4:42:29 PM  

TaDu: Any Fark accountants want to comment on this?  What the article is implying doesn't make any sense in my experience, but maybe I'm missing something.


The person who wrote this article is an idiot.

If your employer chargers you a fee for the administration of your 401k program, that can be a serious issue. Even a fee that appears insignificant, like 0.75%, can add up, especially when compounded. HOWEVER, if employers provide you with a retirement plan, they have a fiduciary duty to provide one with the lowest possible fees. If they're being lazy and going with a high-fee plan when there are are lower ones out there, but they don't want to spend time shopping around, you can sue them. And this happens often.

So now returning to the article -- maxing out your 401k has nothing to do with the plan fees.

Let's table the issues of fees for a moment.

401k contributions reduce your tax liability today because you only pay taxes today on your income minus what you contributed (you pay taxes on the contribution when you cash out). The more you contribute the more you save in taxes because the amount of your income that is taxable today shrinks. And those tax savings can be invested today, and with compounded interest, grow to quite a bit in 20 or 30 years. So if you earn $100k and max out, you'll save $4,400 in taxes; if you just contributed $10k, you save $2,200. $4,400 invested at an average annual return of 7 percent over 30 years is $415k. Again, you will have to pay taxes on that, but you get the point about how those front-end tax savings can add up to quite a sum.

So now the question: Under what scenarios is it not cost effect to participate in your company's 401k program. Probably few. First, if your employer offers a match, you should contribute up to the match because that's free money.

Now the article argues that if the fees exceed the tax savings, then you shouldn't participate, pay taxes on your full income, and invest the after tax money. It's very simple to calculate what you're paying in fees and saving in taxes, and see what the difference is. If your 401k balance was $500k and the annual administration fee was .5%, you'd pay $2,500 (I think that's pretty high, but not high enough to tap out of the plan).

The writer of the article insinuates that the average administration fee is .88%. I think that's BS. From googling, I saw various numbers, but they seemed to all be between .45% and .55%. If your company was charging .88%, you'd have a good lawsuit on your hands because there are cheaper options out there. (As a person in the c-suite at my company, I'm proud to say that we pay the administration fee for our employees because it's BS to pass that fee on to them, and we want to help them build wealth.)

So what should you do? Max out, or contribute as much as possible. You should also look at the fees of the funds in your plan on the administration fee you pay. If either are high, talk to your company. Often times, the person in charge just doesn't know better, and switching to lower fee funds and plans doesn't cost the company anything, especially if they're passing all of the fees off to the employee. And if they are really high and the company won't budge, you've got a slam-dunk lawsuit -- major companies like Boeing have been sued over this and lost.
 
2022-10-01 5:25:05 PM  

TaDu: Any Fark accountants want to comment on this?  What the article is implying doesn't make any sense in my experience, but maybe I'm missing something.


As a tax accountant, whose job involves explaining 401k and similar accounts to taxpayers unfamiliar with them, my read on TFA is that if you have a plan with high fees (presumably because your employer is getting a discount for using them) then it can be bad.

And sure that is true.

But if you have one with lower fees and a decent employer match and you have sufficient cash flow, it will almost always make sense to max out your 401k than have a taxable brokerage account.

The big exception is you need to be reasonably certain that you will not need those funds prior to turning 60. The early withdrawal penalty is a killer.
 
2022-10-01 5:55:48 PM  

dywed88: TaDu: Any Fark accountants want to comment on this?  What the article is implying doesn't make any sense in my experience, but maybe I'm missing something.

As a tax accountant, whose job involves explaining 401k and similar accounts to taxpayers unfamiliar with them, my read on TFA is that if you have a plan with high fees (presumably because your employer is getting a discount for using them) then it can be bad.

And sure that is true.

But if you have one with lower fees and a decent employer match and you have sufficient cash flow, it will almost always make sense to max out your 401k than have a taxable brokerage account.

The big exception is you need to be reasonably certain that you will not need those funds prior to turning 60. The early withdrawal penalty is a killer.


You can take a loan out from your 401k and you pay interest to yourself. There are very few scenarios where an early withdrawal would make more sense than the loan.
 
2022-10-01 5:59:49 PM  

natazha: I don't own a shovel big enough to dig through the whole article, but 40+ years of investing and a short conversation with my CPA (AKA wife, really is a CPA) says there is no pony in the pile. 0.88% fees vs 10-20% taxes?


Except .88% fees for decades can add up to a lot more than the upfront taxes. Plus your 401k withdrawals are all taxed as ordinary income, while a regular brokerage account can get preferential rates.

Yeah a 401k is almost always a good idea, but if you have high fees (the .88% they provide are average, so many are greater than that) and a low employer match it absolutely could make sense to invest in a taxable account.
 
2022-10-01 8:02:31 PM  

flamark: Maybe. It certainly depends on whether you have an employer who provides a matching contribution to your 401K.


Not an account or finance person, but I do have an MBA with a finance focus and a PhD in Operations Management.

First point is the nature of the fees - there are (broadly) two sources: administrative fees through your employer/administrator of the plan and the fund fees. The former you don't really have control over, but will be pretty minimal, the second, and what you do have control over are the funds in which you invest. I never use target date retirement funds or actively managed funds, because they have higher fees (my personal rule is anything over 0.1% is a bad fee).

For example - these are (some) of the funds offered through my current employer - anything over the 0.1% threshold I won't even consider:

Fark user imageView Full Size


Second point is around employer match, if they do it (and almost all do) it's a large, up front effective return - specifically in comparison to doing brokerage investing.

Third point is around the traditional (invest pre-tax dollars, get taxed as income later) versus Roth (invest post-tax dollars, come out tax free). The general advice is to do traditional if you expect your income at retirement to be lower than your current income, and Roth if you expect it to be higher. The reason is, if you pay the income tax now and that marginal rate now is lower than the future (either because your income is higher or because you expect the marginal tax rate to rise) then Roth makes sense. If, however, lowering your current tax burden is expected to save you more than in the future (because your income will be lower or you expect marginal tax rates to fall) then traditional makes sense. Because it is hard to predict where future tax rates will be, that's why you focus on your current income vs expected retirement income.

So:
If you face large fees, check your investment options, if they all suck (fund fees >.1%) go talk to your HR rep about getting lower fee index funds. VTSAX, VIIIX (aka Vanguard Index funds), Fidelity Spartan, TIAA Index funds all exist, are widely available to pretty much any administrator that wants them. I did this at a former employer - they offered one index fund and a bunch of terrible funds (>0.5% fee) and I went to the head of HR and explained why it was terrible, they added options.

Check the amount of employer match (and also how long it takes to vest), lower match or a long vesting time, lowers the value of employee sponsored retirement plans.

If the above suck, and they won't change, consider a brokerage investment where you can get the low fees. Find out what their minimums are to invest in "institutional" shares, which are even lower fee. Many funds have low minimums (500-5k usually).

Next, if you think you're going to make more now than later, consider traditional, and vice versa, consider roth

Finally, both take a course in financial/investment literacy (the basics will give you a lot of control and ability to make better decisions), and/or talk (privately because of laws in the US regarding who can give financial advice) to a financially literate person that you trust and has no incentive in a particular investment you make.
 
2022-10-01 8:19:33 PM  
Wow. Nice.
 
2022-10-01 8:40:27 PM  

natazha: I don't own a shovel big enough to dig through the whole article, but 40+ years of investing and a short conversation with my CPA (AKA wife, really is a CPA) says there is no pony in the pile. 0.88% fees vs 10-20% taxes?


Don't forget to factor in the yearly gains on that 20% in taxes you've saved.

The article is extremely niche case where it "may" be an effective strategy but you'd need some pretty extreme situations to have it make any sense.
 
2022-10-01 8:51:06 PM  
B...E...S...U...R...E...T...O...D...R...I...N...K...Y...O...U...R...O...V...A...L...T...I...N...E
 
2022-10-01 8:52:25 PM  

thornhill: dywed88: TaDu: Any Fark accountants want to comment on this?  What the article is implying doesn't make any sense in my experience, but maybe I'm missing something.

As a tax accountant, whose job involves explaining 401k and similar accounts to taxpayers unfamiliar with them, my read on TFA is that if you have a plan with high fees (presumably because your employer is getting a discount for using them) then it can be bad.

And sure that is true.

But if you have one with lower fees and a decent employer match and you have sufficient cash flow, it will almost always make sense to max out your 401k than have a taxable brokerage account.

The big exception is you need to be reasonably certain that you will not need those funds prior to turning 60. The early withdrawal penalty is a killer.

You can take a loan out from your 401k and you pay interest to yourself. There are very few scenarios where an early withdrawal would make more sense than the loan.


If you need to manage a temporary cashflow issue, a loan is good. It it is a more long term issue, you may not be able to pay back your loan and it will turn into a withdrawal anyway.
 
2022-10-01 8:59:20 PM  

TaDu: Any Fark accountants want to comment on this?  What the article is implying doesn't make any sense in my experience, but maybe I'm missing something.


If you have the financial means, instead of maxing out a 401k with an employer you can, say, invest in an index linked variable annuity with lower fees, greater growth potential and a guarantee against market losses.

It's a "don't put all your eggs in one basket" strategy.
 
2022-10-02 8:11:32 AM  
Whew, thank God, my inability to earn as much as  $30K per has saved me from making the mistake of maxing out my 401K. Next, let's read an article explaining why we would all be better off if social security were privatized. I think the financial arm of a health insurance company, like Kaiser Permanente, would be perfect for managing America's collective retirement.
 
2022-10-02 9:22:50 AM  

dywed88: thornhill: dywed88: TaDu: Any Fark accountants want to comment on this?  What the article is implying doesn't make any sense in my experience, but maybe I'm missing something.

As a tax accountant, whose job involves explaining 401k and similar accounts to taxpayers unfamiliar with them, my read on TFA is that if you have a plan with high fees (presumably because your employer is getting a discount for using them) then it can be bad.

And sure that is true.

But if you have one with lower fees and a decent employer match and you have sufficient cash flow, it will almost always make sense to max out your 401k than have a taxable brokerage account.

The big exception is you need to be reasonably certain that you will not need those funds prior to turning 60. The early withdrawal penalty is a killer.

You can take a loan out from your 401k and you pay interest to yourself. There are very few scenarios where an early withdrawal would make more sense than the loan.

If you need to manage a temporary cashflow issue, a loan is good. It it is a more long term issue, you may not be able to pay back your loan and it will turn into a withdrawal anyway.


Which is all the more reason to always start out with a loan - there's no extra penalty vs an early withdraw if you cannot payback the loan.
 
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