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O.K. I need a little help figuring out my new 401k plan at work.

It has high fees. About 2.15% on average for the contract fees and fund fees.

I have run two calculators - the Retire Early 401k shaft calculator, and another calculator by Timothy Owen Younken (I apologize for no links, they're in here, do a search of the message boards!)

Both are basically saying that I can do better investing in a taxable account rather than the pre-tax and tax-deferred 401k.

Is this really true? I spoke with the guy from Baird today who said that I'm automatically getting a 20%+ return on my investment because of the pre-tax feature.

I'm confused (easily). Please help me figure this one out!

If I did not do the 401k, I could either:
A) Contribute regularly to my brokerage acct. and buy Spyders

B) Contribute regularly to my pre-existing Vanguard variable annuity (don't ask)(nice low fees! - only .57% for S&P 500 index!) This would give tax-deferral.

C) Make some nice monthly contributions into a DRIP portfolio that I'd develop to substitute my 401k.

My husband also has a 401K that he's contributing 12% to. We could certainly up this to 15% as well.

Sorry this is limited information, I truly appreciate your insights!!

Thanks,
Karen

P.S. I might post this on Retire Early as well.
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Greetings Karen,

Is there any matching or fee waivers for your 401k?
http://www.geocities.com/WallStreet/8257/shaft2.html does have some points about how bad high fees on a 401k can be.


If I did not do the 401k, I could either:
A) Contribute regularly to my brokerage acct. and buy Spyders


http://news.morningstar.com/news/Wire/0,1230,3236,00.html shows that some open-end funds do give them SPDRs a run for the money, IMO.

B) Contribute regularly to my pre-existing Vanguard variable annuity (don't ask)(nice low fees! - only .57% for S&P 500 index!) This would give tax-deferral.

NO! This gets some tax-deferred on the growth but you would be investing POST-tax dollars.(Also, you would be paying almost triple the index fund cost and unless you have a long time to let tax-deferral work for you it isn't that good. http://www.scottburns.com/Columns/970413su.htm is one article about this.)

C) Make some nice monthly contributions into a DRIP portfolio that I'd develop to substitute my 401k.

Why not look at a Roth IRA for one idea? Also, consider tax-managed funds that could also be a good idea. If the 401k options are bad.

JB
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I spoke with the guy from Baird today who said that I'm automatically getting a 20%+ return on my investment because of the pre-tax feature.

Spoken like a true plan salesman. His response is such because he has a vested interest in you contributing to the plan - a % of your money in his pocket.

And over the long-term, you'd be giving that return, and then some, right back paying fees like that. Ask him to provide you with a spreadsheet or some other viewable data that can back up a claim like that.

I'd heed JB's thoughts.

BmF

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JB - thanks for the great links, I didn't know anything about tax-managed mutual funds before, so now I'll take a look at that option.

I should have included more info. with my first post. Hubby and me both have Roth IRAs that we're funding. We're early 30's.
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I spoke with the guy from Baird today who said that I'm automatically getting a 20%+ return on my investment because of the pre-tax feature.

Spoken like a true plan salesman. His response is such because he has a vested interest in you contributing to the plan - a % of your money in his pocket.

And over the long-term, you'd be giving that return, and then some, right back paying fees like that. Ask him to provide you with a spreadsheet or some other viewable data that can back up a claim like that.

I'd heed JB's thoughts.

BmF

BMF,

I don't like to tell people they are wrong, but you are.

When you chose to invest in a non-retirement account you pay your income tax and capital gains tax. That is being taxed twice.

When you invest in a retirement account (401K) you don't pay any tax until you retire. Then you pay your income tax. You are ONLY taxed once. And if your tax bracket drops in retirement (or we get a tax cut) you get a bonus.

Before saying someones advice is bad just because they are a salesperson. YOU need to do the numbers.

The fees are high, but those can be changed by educating the employee as to the alternatives.

Thanks (sorry to be harsh)

Michael A
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When you chose to invest in a non-retirement account you pay your income tax and capital gains tax. That is being taxed twice.

I don't see how. The capital gains tax is not paid on your cost basis (the invested amount on which you paid ordinary income tax). It is only assessed against the gains on that investment.

If I invested $1000 of my earnings (for which I paid $280 in Federal income tax) in a stock , and that investment grew to $3000 by the time I sold it over a year later, I would then pay 20% LTCG on the $2000 gain ($400). I now have $3000 cash in hand for which I paid a total of $680 in taxes. No double taxation here.

Where do you ever pay both ordinary income tax and capital gains tax on the same dollar?

Shy
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ShyCouger;

Please refer to my post 401k vs. Non-retirement account!

I have illustrated the numbers!

Thanks

Michael A
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skitime said:
BMF,

I don't like to tell people they are wrong, but you are...Before saying someones advice is bad just because they are a salesperson. YOU need to do the numbers...(sorry to be harsh)


No problem, it's over a message board, not anyone I know.

When you chose to invest in a non-retirement account you pay your income tax and capital gains tax. That is being taxed twice.

I don't like to tell people...yadda yadda yadda. That may be two different times your taxed, but each dollar is only getting taxed once. The money you put in is taxed as ordinary income, and the money you made (hopefully) down the line when you sell the investment.

When you invest in a retirement account (401K) you don't pay any tax until you retire. Then you pay your income tax. You are ONLY taxed once. And if your tax bracket drops in retirement (or we get a tax cut) you get a bonus.

And if you're in the 28% tax bracket and stay in that bracket when you retire, since if you're a successful investor, you'll be comfortable in retirement, that being taxed once is still 28%. I'd rather not use optimistic or speculative scenarios, instead plan conservatively, and not be caught short-handed.

Using the #'s you supplied in one of your posts and using them with the SEC'S Mutual Fund Cost Calculator here:
http://www.sec.gov/investor/tools/mfcc/get-started.htm

I got some different #'s.

Investing the same $2,000 with the same 10% return, but over the long-term (since this is in a retirement account), say 30 years and subtracting the 2.15% expense ratio the original poster stated, your account would be worth $18,181.74. And would have paid $5,012.43 in fees. Now tax this at 28% ($5,090.89) and you'de be left with $13,090.85.

Investing $1440 at 10% return over 30 years in SPY as the original poster wanted to do and subtracting .12% expense ratio and broker cost of $10 (discount broker) your account is worth $33,640.50 ,paying $833.64 in fees, taxed at the max long-term capital gains tax rate of 18% ($6055.29), youre left with $27,585.21. And since SPY's yield is a paultry 1%, it's not much more than the .12% expense ratio, which is tiny compared to the ordinary income tax rate.

Holding long-term in a taxable account can sometimes be a better alternative. Especially when compared to a costly 401k plan. But you'll never learn that from an advisor, though. But you will at the Fool.

BmF
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Michael A: I have illustrated the numbers!

Sorry, this furrball must be stupid as well as shy. I couldn't follow your illustration. In any case, I still don't see the same dollar being taxed more than once, but oh well....

I'm going to go take a nap now. Obviously not getting enough sleep lately.

Shy
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