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Kecpa wrote:
>> I start a new job tomorrow morning. My new employer
>> offers a 401K but no matching. All of the funds
>> available have a *minimum* 3.5% front end load.

TMFPixy wrote:
> You have to run the numbers to be sure, but on the
> surface and in the absence of any employer
> match, it seems you can do better for yourself
> elsewhere.

Actually I strongly disagree with TMFPixy. The 401(k) program is a great way to set aside money without taxes. The max 401(k) contribution this year is $10,000 whereas the max IRA contribution is $2,000. Deducting it right from your paycheck before you even see the money is a great way to save.

These days there aren't a lot of tax breaks available, and setting aside $10K per year (more in the future) and allowing that money to grow without taxes is something that you can't turn down. As you begin to earn more money and get to higher tax brackets, this becomes more and more important. I am going to pay as much in taxes this year as my gross salary my first year out of college :-).

Yes the front-end load on your 401(k) funds definitely sucks, no question about it. The 401(k) companies know they have you over a barrel since you have to go with their investments so they always hit you with fees.

However consider what is happening. You're charged a 3.5% fee *once* when you get into the fund, but the money is likely to stay there for many years -- if you're 30 years old now, it may be there for 40 years. During those 40 years, it will grow without any taxes at all. Over time that 3.5% that you paid at the beginning is going to be less and less significant.

Consider what you'd be up against if you invested the money after taxes. First you'd have to pay 28-35% income tax on the money before investing it, which may make all the rest of your taxes more expensive since your AGI will be higher. Then each year you would add to your AGI through dividends and distributions. Then you'll be hit with taxes *again* for capital gains when you want to cash out of your investments. Your investments would have to return at least 28-35% more *per year* to offset the tax benefits you would be getting with a 401(k). Here you're on the wrong side of the compounding equation.

In short, if you put the money into a decent mutual fund (most of them offer an index fund these days) in the 401(k) program and forget about it, the 3.5% front load will diminish over time.

Also note that if you leave your company, you can take your money out of that 401(k) program and, without penalty, roll it over to a self-directed IRA which you can invest as you choose. I did this a couple of years ago, I combined the 401(k) accounts from three previous jobs and put it into a self-directed IRA brokerage account which I invested in good long-term stocks (FNM and BRKB). A few weeks ago I converted that to a Roth IRA. This account is sizable because I was contributing up to around $8,500-9,500 for those years rather than $2,000 per year for an IRA. I got hit with various fees along the way, but I'm still way ahead of the game. And I'm sitting on some pretty huge capital gains in my investments, of which Uncle Sam won't see a dime :-).

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