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Unread 2016-01-20, 09:40 AM   #1
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Default Open IRA or add to 401k

So, my wife and I both recently got promotions and this last tax year, we're getting back way less than anticipated, which isn't a bad thing, but in planning for next year, I want to make sure we don't owe.

I'm on a pension plan with fixed contribution amounts so I cannot increase my contributions. I'll open an IRA.

My wife on the other hand has a 401k. She's already contributing 10%.

So, the question is, would it be smarter to just up her contribution limit or open an IRA? If the former, should we contribute pre or post tax? Since I'm budgeting a set amount for income, I would calculate it so the take home pay is the same regardless if it's pre or post, which means we could contribute more pre-tax.

Is there really any difference or am I just overthinking it?

Edit: Relevant information, at her current contribution she's already receiving the maximum for her employer match. So increasing her contribution won't change that.

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Unread 2016-01-20, 10:30 AM   #2
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I would vote a Roth IRA if you're hitting her match.
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Unread 2016-01-20, 10:32 AM   #3
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Is her match 10%? TYPICALLY a Roth is a better idea than a traditional 401k as a whole if you ask me. So if her match was...say 6%. I would take that other 4% you're currently contributing and dump it into a Roth.

But I know there are other guys here that know WAY more about personal finance for me. That's just what my wife and I are doing.
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Unread 2016-01-20, 11:17 AM   #4
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Originally Posted by evilpoptart View Post
Is her match 10%? TYPICALLY a Roth is a better idea than a traditional 401k as a whole if you ask me. So if her match was...say 6%. I would take that other 4% you're currently contributing and dump it into a Roth.

But I know there are other guys here that know WAY more about personal finance for me. That's just what my wife and I are doing.
Roth IRA won't help me reduce my current tax burden.

I think for simplicity, we're going to bump her 401k contribution and rather than do an IRA for me, I have the option of doing a 457(b) account. I think that may be the best route.

Then if we still look like we're going to be paying in at the end of the year, we can stuff some money away in our HSA or something.
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Unread 2016-01-20, 03:48 PM   #5
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To give you a better answer I would need to know what tax bracket your in, and if you are going to be phased out of a traditional IRA. While I assume you dont want to share that with the world my generic advise is:

If you both make good money a traditional IRA likely wont work for you, phase out starts at 98,000 of modified AGI (not taxable) and is fully phased out at 118,000, so if you are wanting to reduce your tax burden you might be "stuck" by only contributing extra to her 401k.

A roth really depends on where you think your tax bracket will fall in retirement and what bracket you are in currently. My own opinion is that if you are currently in the 25% federal bracket it can go either way, if you are above 25% federal bracket I am less likely to put money in a roth vs a traditional. If you are in the 10-15% bracket the Roth wins 99% if the time.
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Unread 2016-01-21, 01:01 AM   #6
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There is actually still time to help your 2015 taxes and 2016 taxes.
Each of you can contribute 5.5k to an IRA for 2015 before April 15th. That will accomplish what you are trying to do. You can do the same thing for 2016.
IMO, IRA will be much better than upping your 401k.
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Unread 2016-01-24, 01:00 PM   #7
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In addition to the last two posts, if you were to bump the 401K (a possible option), are the investment options worth it? Some 401Ks have crappy investment options and many times expanding outside the 401K is the best route.

IMO, people over-think the Roth IRA. I'd have one. Most everyone will fall in the 10-25% brackets at retirement. If you are above the 25% bracket, you've likely got a rather complex investment portfolio and are a rich SOB. I'd say less than 1% of the retirement population will fall into the +25% brackets.
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Unread 2016-01-24, 01:46 PM   #8
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Personally as a prodigious saver and a Boglehead...I try to max out all my tax-advantaged vehicles so I have both a 401k AND a Roth IRA maxed out each year.

So always bit weird when I hear people trying to decide between a 401k OR a IRA. But if you can max out both that's what I personally do.

And as for Traditional vs Roth IRA...I lean towards Roth as I get to pay taxes now and save on any future taxes later (you never know what would happen in the future for taxes....)
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Unread 2016-01-24, 01:57 PM   #9
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The expenses in your 401(k) are going to be much cheaper overall than a retail account. Unless of course you use vanguard, but index investing is always leaving money on the table because of the investment expense itself.

The nicest thing about the 401(k) is that it is automatic. The IRA contributions are going to be manual in one way or another, and it will be super easy to opt out of them or miss making them.
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Unread 2016-01-24, 02:20 PM   #10
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Quote:
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The expenses in your 401(k) are going to be much cheaper overall than a retail account. Unless of course you use vanguard, but index investing is always leaving money on the table because of the investment expense itself.

The nicest thing about the 401(k) is that it is automatic. The IRA contributions are going to be manual in one way or another, and it will be super easy to opt out of them or miss making them.
Depends on the funds within the 401k. There are some real crappy 401ks with real high expense ratios.

I'm glad my work has Vanguard fund options with in their 403b (same as 401k virtually...)

Though I'm curious what you mean by index investing always leaving money on the table? I thought index investing was a preferable way to go because you definitely get to pocket more returns after 30yrs vs an active fund with higher fees and therefore better?...
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Unread 2016-01-24, 02:30 PM   #11
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Depends on the funds within the 401k. There are some real crappy 401ks with real high expense ratios.

I'm glad my work has Vanguard fund options with in their 403b (same as 401k virtually...)

Though I'm curious what you mean by index investing always leaving money on the table? I thought index investing was a preferable way to go because you definitely get to pocket more returns after 30yrs vs an active fund with higher fees and therefore better?...
First, I am a registered investment adviser, so looking at investment expenses even in my current role on the provider side is a regular occurrence. Most plans are using institutional share class investments these days, which typically have lower expense ratios than retail investments.

Not to mention the trading expenses are zero in most environments, and when I say expenses, I am referencing all in costs.

In regards to index investments, you are never going to get the full experience of the market in your returns. The goal of the index investment is to mirror the performance of the index, so at best you would break even with the index. However, because the expenses come out of your returns, you will never match the market performance.

Example, S&P returns 15% return in a given year. You are going to make 14.XX% return based on whatever the expense ratio of your fund.

That said, you are always leaving some portion of up/down market capture on the table with index investments as well. You'll never capture the full effects of a bull market, and conversely a bear market either. A good active investment manager will capture more of the upside and lose less during the downside.

There is certainly a place for index investing, but an entire portfolio of index investments would only be a viable solution for a very specific type of investor with certain goals and time horizons.
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Unread 2016-01-24, 02:58 PM   #12
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Ah true on the institutional shares. My work's Vanguard fund is an insitutional share class with one of the lowest fees!

And good point on the mirroring...it certainly is impossible to replicate exact returns and there are costs associated with it as well.

As I alluded to earlier I've been sold, so far, on the Boglehead philosophy of index investing. Obviously don't want to get free investment advice over internet as this is your profession...but what would be alternative resources to look at for active management? And how to find a good manager/fund? The bogleheads always tout how on avg the active guys do not provide extra value when taking into account fees...
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Unread 2016-01-25, 04:44 PM   #13
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Quote:
Originally Posted by The Lox View Post
First, I am a registered investment adviser, so looking at investment expenses even in my current role on the provider side is a regular occurrence. Most plans are using institutional share class investments these days, which typically have lower expense ratios than retail investments.

Not to mention the trading expenses are zero in most environments, and when I say expenses, I am referencing all in costs.

In regards to index investments, you are never going to get the full experience of the market in your returns. The goal of the index investment is to mirror the performance of the index, so at best you would break even with the index. However, because the expenses come out of your returns, you will never match the market performance.

Example, S&P returns 15% return in a given year. You are going to make 14.XX% return based on whatever the expense ratio of your fund.

That said, you are always leaving some portion of up/down market capture on the table with index investments as well. You'll never capture the full effects of a bull market, and conversely a bear market either. A good active investment manager will capture more of the upside and lose less during the downside.

There is certainly a place for index investing, but an entire portfolio of index investments would only be a viable solution for a very specific type of investor with certain goals and time horizons.
This is all pretty much true. I will say not until just recently did I really start researching my investments and just how much of my money I was loosing to fees, whether it be the investment itself or my broker's (Morgan Stanley). After a lot reading and discussions with friends, family, and other investment professionals, I promptly moved over 50% of my portfolio from Morgan Stanley to Vanguard and bought a handful of the more common Vanguard index funds as well as some Berkshire H.

I've been in the market for about 20 years now and I surely haven't seen the "returns" my broker and the industry said I should be getting. I'm invested in some pretty decent stuff, but fees (especially broker/advisor fees) can and do take a big chunk. I'm done with it. I'm savvy enough now to know what I want to invest in and don't need my broker/advisor, who honestly hasn't been a huge help (definitely not in comparison to performance). I will be done with Morgan Stanley by the end of 2016.

And yes, I am a big fan of the more common index funds that more or less match against the SP500/market. It's safe and it's solid and chances are VERY likely that you'll come out way ahead compared to most other types of investing.

The ONLY way I'd have an "advisor" now is one I pay by the hour. That's it. Investing isn't remotely as complex as these guys make it out to be.

Lastly, don't be a sucker and do like I did and have "managed accounts". A total waste of time and money. That's what I have to unload from MS and I need to figure out all the tax implications of selling it and figuring out what I want to do with it. It's a hefty sum.

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Unread 2016-01-25, 08:11 PM   #14
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Thanks for sharing ^^

Looks like MS is shying away from managed accounts from this news article I dug up: http://www.reuters.com/article/morga...0RD1PD20140912

If you had superior returns for all your years than it may be worth it but it seems many times lot of the active managed assets don't perform better than index/market after fees.
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