Started my first 401(k)

[WellManicuredMan]

I am very happy to announce that I have finally started my first 401(k). I wasn't sure how I would feel having money taken out of my paycheck every 2 weeks that I would never see until I turned 59 1/2 but after everything I have read about them I feel very good now, like a burden has been lifted.

I am currently 26 and my employer matches me 50 cents on the dollar up to 2%. So I can get the maximum match by contributing 4%. I decided to start out at 8% to get my feet wet. I understand that experts recommend more like 12-15% (including the employer match) for someone my age.

The 401(k) is offered through Vanguard. I decided to put 100% of my contribution into a fund they offer called the Vanguard Target Retirement 2045 Fund (VTIVX). It is designed for people who will be retiring around the year 2045 like myself...

.... Is this fund a good choice? I almost went with the basic S&P 500 index fund they also offer but thought this fit me better. Vanguard states that the fees are 0.21% but I don't know if there are any other hidden fees. What do you guys think? Thanks!

well it was great until today! got it's a## kicked in the bloodbath (but then so did most everyone else).


seriously, it's done fine for me in my Roth.


I'm using it until I get the balance up to where I can start reasonably branching out (the money's gonna be in there for awhile).

[PRICEPLUS]

When the market goes down you get more shares for your money. If you are near retirement your exposure in stock should be lower.

You have many years till your retirement. You have meade an important first step in your financial future.

[WellManicuredMan]

This article scares me:
http://www.latimes.com/business/la-f...home-headlines

Does anyone know if VTIVX is like this?

[WellManicuredMan]

In addition to the fees charged for the funds I invest in, I also found the following fees associated with my 401(k), is this pretty normal??? Are these standard Vanguard 401(k) fees??? Looks kind of scary at first.



Fees Associated With the Plan
The Plan permits the payment of Plan-related expenses from Plan assets. The expenses paid using the Plan's assets will generally be allocated among the accounts of all Participants in the Plan. These expenses will be allocated either on a pro rata basis based on the value of account balances or as an equal dollar amount based on the number of Participants in the Plan. The method of allocating the expenses depends on the nature of the expense itself. For example, certain investment expenses are based on the total value of the assets in the Plan. These expenses typically would be allocated based on the account balance of each Participant. For example, on a pro rata basis, if the Plan pays $1,000 in expenses and your Individual Account balance constitutes 0.5% of all the account balances of all Participants, your Individual Account would be charged $5 ($1,000 x 0.5%) of the expense.

However, there are certain expenses that will be paid just from your Individual Account. These are expenses that are specifically incurred by or attributable to you. The Plan Sponsor may, from time to time, change the manner in which expenses are allocated. As of July 8, 2005, the Plan Sponsor will pay the majority of the Plan related fees and expenses. However, you will be charged as follows:
•$40 for the initiation of a loan;
•$25 annual maintenance fee for as long as your loan remains outstanding;
•$27 per year for the administration of your account ($6.75 deducted each quarter); and
•0.25% on any investment you have in the PIMCO Total Return Fund, assessed the second month of each calendar quarter

[sweeps]

Originally Posted by WellManicuredMan

I am very happy to announce that I have finally started my first 401(k).

Congrats! Great move.

Originally Posted by WellManicuredMan

I am currently 26 and my employer matches me 50 cents on the dollar up to 2%. So I can get the maximum match by contributing 4%.

That's great that you're contributing more, but if your 401(k) really "matches 50c on the dollar up to 2%", then you only get a match up to 2%. Contributing more doesn't get you any more match.

The 401(k) is offered through Vanguard. I decided to put 100% of my contribution into a fund they offer called the Vanguard Target Retirement 2045 Fund (VTIVX). It is designed for people who will be retiring around the year 2045 like myself...

.... Is this fund a good choice? I almost went with the basic S&P 500 index fund they also offer but thought this fit me better. Vanguard states that the fees are 0.21% but I don't know if there are any other hidden fees.

It's an excellent fund choice. Much more diversified than your basic S&P 500 index. And a .21% expense ratio is dirt cheap.

The fees you mentioned are not unreasonable for a 401(k) plan. A $27/year administration fee is annoying, but pretty small in the grand scheme of things.

[sakigt]

Congrats! I started up last week as well, but not as high as you are! Keep it up.

[WellManicuredMan]

Thank you everyone for replying.

sakigt,

Congrats to you! But what do you mean by "not as high as you are"?

Sweepsplayer,

That makes me feel better about the $27 annual fee. They didn't come right out and say that so I was a little bummed when I finally found it in the fine print. After reading about how fees are eating up people's earnings due to the compounding factor I had become very concerned about trying to avoid this.

Now what happens if I leave the company, can I keep the money where it is and let Vanguard continue to manage the account for me as if I never left the company or do I HAVE to roll it into something else? I suppose the fees would change if I leave it alone since it states the "Plan Sponsor will pay the majority of the Plan related fees and expenses".

[sweeps]

If you leave your company and you are satisfied with your VTIVX investment, then I would recommend you roll over your 401(k) balance to an IRA at Vanguard. That way you can avoid the management fee, and it gives you the added flexibility of an IRA. This assumes of course that you can meet the $3,000 minimum balance at Vanguard.

[sakigt]

Im not contributing as much to my 401k as you are

[WellManicuredMan]

Originally Posted by Sweepsplayer

If you leave your company and you are satisfied with your VTIVX investment, then I would recommend you roll over your 401(k) balance to an IRA at Vanguard. That way you can avoid the management fee, and it gives you the added flexibility of an IRA. This assumes of course that you can meet the $3,000 minimum balance at Vanguard.

Good idea, thanks! I see Vanguard has all the info about how to do this on their site. I will definately have to remember this if I change jobs.

[WellManicuredMan]

Sweepsplayer, BTW, how does that work for taxes when you roll a 401k into, say, a Roth IRA? Because the money you put into a Roth is supposed to be taxed before-hand, which is not the case for any money in a 401k. Is this a loophole?

[sweeps]

No loophole. I was referring to a traditional IRA. If you want to convert to a Roth IRA, then yes, you must pay taxes on it.

[CRFSaver]

401K providers get compensated in a variety of ways. They either get paid an administration fee from the company sponsoring or the individuals, through 12b-1 fees or if it is hosted by a fund company they throw in the administration from using their funds. The insurance companies are the worst since they throw you into their own funds, and charge you an administration fee and sometimes those funds have 12b-1 fees. Many times its the provider taking advantage of the company that doesnt know any better.

Either way I think its wonderful that you have started your 401K. Keep up the match and it will grow slow but sure. I have discovered with me for every dollar I put in my 401k it only reduced my take home by 50 cents since no taxes are taken out. Keep it up!

[WellManicuredMan]

Originally Posted by Sweepsplayer

No loophole. I was referring to a traditional IRA. If you want to convert to a Roth IRA, then yes, you must pay taxes on it.

Ah, that is what I figured. So would you recommend rolling it into a traditional? I'm guessing the Roth route would be really stupid since taxes would kick in just as if you decided to withdraw the money. And withdrawing the money is a big mistake.

[sweeps]

Originally Posted by WellManicuredMan

Ah, that is what I figured. So would you recommend rolling it into a traditional? I'm guessing the Roth route would be really stupid since taxes would kick in just as if you decided to withdraw the money. And withdrawing the money is a big mistake.

Converting to a Roth is a good idea if your income is very low that year. Let's say for example, you have a traditional IRA and (unfortunately) you've been laid off from work for a whole year. That would be an ideal time to convert to a Roth because you'll be in an ultra-low tax bracket and will pay minimal taxes on the conversion.

Side note: You must roll over a 401k to a traditional IRA. You can't roll over directly to a Roth IRA, as far as I know.

[veronak]

All I can say is congratulations I do not have a 401K but a Roth IRA, at first I thought it would be hard to contribute but with automatic payments I do not even miss the money out of my check

[WellManicuredMan]

Originally Posted by veronak

All I can say is congratulations I do not have a 401K but a Roth IRA, at first I thought it would be hard to contribute but with automatic payments I do not even miss the money out of my check

Thank you

Now I have been reading up on Roth IRAs and I'm trying to decide if I should start one of these as well. In another thread I talked about how I am also saving for my first home purchase. Because of this I decided to only contribute 4% to my 401(k) to get the maximum match from my employer. However, a Roth doesn't have the same draw-backs that 401(k)'s have when you might need the money before 59 1/2 because you can withdraw up to $10,000 for your first home without any penalty. And you can withdraw the contributions at any time without a penalty (just not the earnings) since you've already paid taxes on them. If I understand it correctly... or do you have to have the account open for 5 years first?

[WellManicuredMan]

Originally Posted by WellManicuredMan

I was trying to find out if I can use the same account with Vanguard so I can have the Roth and 401(k) under the same username/password. Anyone know?

Nevermind! I just answered this question for myself when I attempted to create a new account on Vanguard. It let me log in using my 401(k) information to add an account to it.

[Broken Arrow]

I could be wrong, but I think you have to have the money in the account for five years before you can withdraw the principal without penalty. Even then, it only qualifies for certain conditions, such as a downpayment for a house as you mentioned.

However, I believe an IRA is best used as it was intended: For retirement. (Or... is it? Anyone want to comment on that?)