No. of Recommendations: 0
Is it best to continue contributing 15% on 150K income, with lousy fund choices and expense ratios on average of 1.5%, or just contribute 5% to get the company match, or invest in lost cost mutual funds.Thanks, new Fool here
Print the post Back To Top
No. of Recommendations: 0
Is it best to continue contributing 15% on 150K income, with lousy fund choices and expense ratios on average of 1.5%, or just contribute 5% to get the company match, or invest in lost cost mutual funds?

"Best" is something that can only be determined in light of your total financial plan, only a small portion of which is the 'investing' portion. It's the total situation that has to be considered within which your 40k1 allocation is merely a tactical decision that would be reviewed periodically.

But, were it me, I'd be maxing out my allowable contribution to the 40k1 (both to capture the match and to shelter as much income as possible), as well as contributing the max to an IRA, as well as dumping as much as I could into a margin account each year and then putting each of the three to work as best I could.

Also, so-called 'lousy funds' typically aren't lousy. They are merely used ineffectively by most investors. (IMHO, 'natch)
Print the post Back To Top
No. of Recommendations: 0
It's really about total return after all expenses are paid and after taxes are paid (including those on your 401k distributions in retirement). If the low cost mutual funds you mention give consistently better returns, the long term buy and hold strategy (LTBH in Foolish lingo) lets you pay taxes at capital gains rates. That can be preferable if the differences in returns are large.

Most would at least participate in the 401K to get the employers match. Plus the fact that pretax contributions reduce your income tax liability makes them very attractive. Deductible IRA contributions are equivalent, but have smaller contribution limits, and are limited with salary caps, after which contributions are no longer deductible.

Even when your 401k is lousy, keep in mind changing employers will allow rollover to an IRA, where you can make your own choices. The higher contribution limits on 401k allows accumulation of larger sums more suitable for retirement.

As Charlie pointed out, the ability to accumulate funds in your 401K and let gains accumulate tax free is a considerable advantage. The distributions are taxable at ordinary income tax rates in retirement but by then you hope to have accumulated a sizable sum. The LTBH approach has tax advantages but holding investments long term through the ups and downs in the market is not easy. Plus capital gains rates may be going up if some politicians get their way.
Print the post Back To Top
No. of Recommendations: 2
The gerneral advice which I agree with is to contribute to your 401k up to get the maximum employer contribution, then contribute to a Roth IRA if eligible to its max, then continue contributing to the 401k, and then to a taxable account.
Some of the 401k plans seem to be poor, but, they may be better than other alternatives.

Bob
Print the post Back To Top
No. of Recommendations: 0
thanks, that follows with what I have been doing
Print the post Back To Top
No. of Recommendations: 0
The general advice which I agree with is

(1) to contribute to your 401k up to get the maximum employer contribution,
(2) then contribute to a Roth IRA if eligible to its max,
(3) then continue contributing to the 401k,
(4) and then to a taxable account.


Bob,

That's an excellent summary of the allocation steps, way better than what I said, that puts a would-be investor into a good position to maximize his/her capital appreciation with the least present (and maybe future) impact from taxes.

Charlie
Print the post Back To Top
No. of Recommendations: 0
thanks for the advice, I am doing what you say, it just sounded better coming from someone else
Print the post Back To Top
No. of Recommendations: 0
The only thing I might add is to insert contributing to a child's 529 college savings plan somewhere either after the Roth IRA or second 401k contribution but before the taxable investments.

Fuskie
Who would also add an emergency savings goal before the Roth IRA contributions if an appropriate eFund does not yet exist...
Print the post Back To Top
Advertisement