Retirement Savings Question

[varnco]

Background:
I currently put 6% of my salary into a company 401K, which my employer matches 100%, up to 3% of my salary.
I also have a Cash Balance savings where my employer puts in 3.25% of my salary, and it is earning about 1.2% annually.

Recently, my 401K matching was changed to match up to 1% of my salary (down from 3%). But, they instituted a new Retirement account which is 2.2% of my salary, and earns about 1.2% annually.

Summary:
401K Match: 1% invest on my own in Mutual Funds only.
Cash Balance: 3.25% average return 1.2% interest
New Retirement Acct: 2.2% average return 1.2% interest

Question:
Should I continue to put 6% of my salary into my company 401K, if they are only matching 1%, or should I take what they aren't matching (5%) and put that into my traditional IRA?

Thanks!

[thesimplemoneyblog]

The answer is: it depends.

If you prefer the limited options in the 401k to select from, then it can make sense to continue to put more money in the 401k. However, if you prefer to have more investment options available and you have the time (and ability) to manage your own account (since you are essentially doing that now with your 401k), then funding an IRA can make sense. Do keep in mind that you have more flexibility to access the IRA funds (note there could be substantial taxes and penalties - just like there would be on the 401k if you took the money out) while a lot of 401k plans prevent people from accessing the funds unless they are disabled, separate from service, etc. Also, not all 401k plans allow a person to take a loan out of the account, and you are not allowed to take a loan out against your IRA.

For these reasons, you have more flexibility with the Traditional IRA, but you may have more work on your hands to manage it (particularly in researching investment options).

[bjl584]

I'd recommend opening a Roth IRA if you qualify.

Saving 6% is not enough to fund retirment. You should strive to save 20%.

[jpg7n16]

Background:
I currently put 6% of my salary into a company 401K, which my employer matches 100%, up to 3% of my salary.
I also have a Cash Balance savings where my employer puts in 3.25% of my salary, and it is earning about 1.2% annually.

Couple things:

1) As pointed out in posts above, 6% is probably woefully short
2) 1.2% is a good return for cash holdings, but a terrible return for retirement savings. You should really invest in something different for your retirement.

Have you ever run through some numbers on what you need to save? Try this free calculator:

AARP Retirement Calculator - How to Retire, Plan for Retirement

And how are your accounts invested?

[Petunia 100]

Background:
I currently put 6% of my salary into a company 401K, which my employer matches 100%, up to 3% of my salary.
I also have a Cash Balance savings where my employer puts in 3.25% of my salary, and it is earning about 1.2% annually.

Recently, my 401K matching was changed to match up to 1% of my salary (down from 3%). But, they instituted a new Retirement account which is 2.2% of my salary, and earns about 1.2% annually.

Summary:
401K Match: 1% invest on my own in Mutual Funds only.
Cash Balance: 3.25% average return 1.2% interest
New Retirement Acct: 2.2% average return 1.2% interest

Question:
Should I continue to put 6% of my salary into my company 401K, if they are only matching 1%, or should I take what they aren't matching (5%) and put that into my traditional IRA?

Thanks!

Keep in mind you may not be able to deduct your traditional IRA contributions. Since you are covered by an employer plan, the income limits are not generous. Are you single or married?

I suggest you continue to contribute 6% to your 401k and also open a Roth IRA.

I agree with Jpg. Your long-term money does not belong in cash earning 1.2%. Your long-term money should be invested in a mix of US stocks, foreign stocks, and US bonds.

[smk]

It is very difficult to discuss your investment and retirement strategy without knowing more about your circumstances.

All else equal, for the same dollars the decision between 401k and regular ira boils down to the difference in investment options. If your company negotiated some particularly good options that you can't get in an IRA, then you would have reason to consider it. But if you can get the same options and more in the IRA, I am not sure why you would want to do that. Some suggest using a Roth IRA. You need to consider your age, your maginal tax rates going in as well as projected tax rates at withdrawal, and whether you plan on putting stocks or bonds in the account to determine which is better.

[varnco]

Thank you for the replies.

I have no say how the cash plans work, it is based on the one year note plus 1%, so its generating 1.2% at the moment.

I am married, and exceed the phase out for traditionalIRA deductable, apparently?

My wife works part time, and her work does not offer retirement, could an account in her name be opened to qualify for deuctable IRA? I think this is an option?

I have about 12 funds to choose from to invest with my 401k, and i am averaging about a 6.9% return over the past 5 years.

I have relatively unlimited options with my IRA, and have achieved about a 7.3% return in past 5 years.

6% is all i can do for now, as I have kids in private school and one going into college. My wife will soon be working again full time and we will inrease savings at that point.

I think Ira will give me more options, so I am leaning towards taking the 5% from 401k and putting it into IRA, in my wifes name. I will keep the 401k into aggressive/growth finds, and continue funding at 1% plus 100% match.?

[jpg7n16]

Thank you for the replies.

I have no say how the cash plans work, it is based on the one year note plus 1%, so its generating 1.2% at the moment.

You mean to tell me that your employer has an account that they will put into a cash type investment that you cannot access or reallocate until retirement??

I have never heard of such an arrangement. I get that you can't control how much the cash is earning, but you should have the ability to control how much you keep in that account. Move funds out of the cash account into investments better suited for the long term.

I am married, and exceed the phase out for traditionalIRA deductable, apparently?

My wife works part time, and her work does not offer retirement, could an account in her name be opened to qualify for deuctable IRA? I think this is an option?

The phaseout range for a Roth is $173-183k for married filing jointly.

IRA Limits for 2012

If you're under that, you can do $5k each ($10k total).

6% is all i can do for now, as I have kids in private school and one going into college. My wife will soon be working again full time and we will inrease savings at that point.

You can borrow for college. You cannot borrow for retirement.

I think your retirement savings should be given priority over your kids' college expenses.

I think Ira will give me more options, so I am leaning towards taking the 5% from 401k and putting it into IRA, in my wifes name. I will keep the 401k into aggressive/growth finds, and continue funding at 1% plus 100% match.?

I usually recommend the following 3 steps:

1) Contribute your company's match (In your case 1%)
2) Max Roth IRAs (This would be 10k total)
3) Increase company plan savings until you are saving 15-20% of pretax salary

Given that you've only been saving 6%, and are focusing on paying college expenses before your own financial future, I'd say you're probably behind on savings and may need to be in the upper end of that range. (Obv a big assumption there, so please go through the retirement calculator above to be sure)

[smk]

You can borrow for college. You cannot borrow for retirement.

I think your retirement savings should be given priority over your kids' college expenses.



I usually recommend the following 3 steps:

1) Contribute your company's match (In your case 1%)
2) Max Roth IRAs (This would be 10k total)
3) Increase company plan savings until you are saving 15-20% of pretax salary

Given that you've only been saving 6%, and are focusing on paying college expenses before your own financial future, I'd say you're probably behind on savings and may need to be in the upper end of that range. (Obv a big assumption there, so please go through the retirement calculator above to be sure)

money is fungible. i understand people tend to think about it in buckets and this person is trying to encourage savings. but if you take out a high interest student loan so you can invest the money in low interest bonds or stocks that could even lose money, it would not be such a good idea. financial analysis is strictly incremental. that means if i do X, what are the effects - do the changes make or lose money.

as for roth vs trad ira, you need to consider tax rates when you fund it as well as when you withdraw it. you also need to consider whether you should put stocks or bonds in each type of account or outside of an ira. there isn't one straight answer, you need to decide based upon all the factors.

i agree that it is difficult to advise someone if you don't really know their circumstances...

[jpg7n16]

money is fungible. i understand people tend to think about it in buckets and this person is trying to encourage savings. but if you take out a high interest student loan so you can invest the money in low interest bonds or stocks that could even lose money, it would not be such a good idea. financial analysis is strictly incremental. that means if i do X, what are the effects - do the changes make or lose money.

Please refer to the OP. These are not personal college expenses. These are college expenses for their kids.

Would you rather save for a known need (the need to have funds to live on for the rest of your life after your working years)? Or gift that needed money to your kids for a want (the desire to pay for your kids college education so they don't have to)?

If OP is on track for his own retirement, I see nothing wrong with paying your kids' tuition. In fact, I'd encourage it. I truly think it's great to give your kids a headstart on life like that. But I do see a problem when you sacrifice your needs to do it.

as for roth vs trad ira, you need to consider tax rates when you fund it as well as when you withdraw it.

Believe it or not, the above 3 step process actually does consider tax rates for when you fund as well as w/d.

Please see: http://www.savingadvice.com/forums/p...ions-403b.html for a pretty good discussion on it

you also need to consider whether you should put stocks or bonds in each type of account or outside of an ira. there isn't one straight answer, you need to decide based upon all the factors.

Although I agree with what you're saying, with regards to the retirement investing, this only comes into play for someone who has maxed their tax advantaged accounts (401k and IRAs) and needs to use taxable accounts for their savings. As the OP has not been anywhere close to maxing all the retirement options available to him, asset location isn't a factor at this time.

[smk]

sorry jpg7n16, i did not see where the op gave their tax rates initially or at withdrawal, age, life expectancy, etc to do an analysis for roth vs regular ira. i also did not see where they said they have no assets outside the ira. maybe you know them better than i do. for asset location, i use the faj article and my own analysis, but thank you for the referral.

for their decision to fund their children's education, i just took that as their decision. once the decision is made, money is fungible. if i were going to discuss the decision on whether to fund their children's education or not, it would have to involve a much greater discussion on qualitative aspects of their lives and what is important to them or not. thanks for your feedback...

[jpg7n16]

sorry jpg7n16, i did not see where the op gave their tax rates initially or at withdrawal, age, life expectancy, etc to do an analysis for roth vs regular ira.

Oic. Well then I'll help you out.

Tax rates initially and at time of withdrawal:

I am married, and exceed the phase out for traditionalIRA deductable, apparently?

My wife works part time, and her work does not offer retirement, could an account in her name be opened to qualify for deuctable IRA? I think this is an option?

Married filing joint, with income less than the IRA limit for 1 covered spouse = <$173k income = max 28% bracket in 2012

If income is in the 28% bracket, roughly $143k+, then 15-20% would be at least $21,405. Of which $10k to a Roth and the rest to a 401k would give a good split and hedge against tax rates today and tax rates at time of withdrawal.


If OP was in a tax bracket that indicated he should not consider a Roth as the tax advantage today is too great to ignore (aka 33%+), then he would make too much to qualify for a Roth in the first place, and would use 401k as much as possible.

Age: somewhere between 38-55 (old enough to have kids in college, young enough to think retirement is still too far away to worry about)
Life expectancy: as client is saving something for retirement, he expects to at least make it there ; also see retirement calculator shown above to help with the calculation

i also did not see where they said they have no assets outside the ira. maybe you know them better than i do.

6% is all i can do for now, as I have kids in private school and one going into college. My wife will soon be working again full time and we will inrease savings at that point.

ie. "As I do not have enough money to both pay for my kids education and save over 6% to my retirement."

ergo, no massive taxable holdings to be used for funding retirement savings.

for asset location, i use the faj article and my own analysis, but thank you for the referral.

Asset location only applies to funds being earmarked towards a single goal.

Retirement money should certainly be invested differently than money for a new home in say 3 years. The funds would be treated differently, with their own asset allocations.

Since OP does not have the funds needed to max out his retirement accounts, asset location doesn't come into play, as there are no retirement goal funds outside of tax advantaged accounts.

From: The Key To Tax-Efficient Investing: Asset Location - Forbes.com

In general, you want to follow this four-step rule for tax efficient fund placement:

1. Put your most tax-inefficient funds in 401(k)s, 403bs, traditional IRAs and similar retirement accounts. When these are full…
2. Put your next most tax-inefficient funds in your Roth(s). When your Roths are full…
3. Put what's left into your taxable account.
4. Try to keep only tax-efficient funds in taxable accounts.

ie. asset location only comes into play after you've maxed out your tax advantaged accounts.

I swear I said something like that...

for their decision to fund their children's education, i just took that as their decision. once the decision is made, money is fungible. if i were going to discuss the decision on whether to fund their children's education or not, it would have to involve a much greater discussion on qualitative aspects of their lives and what is important to them or not. thanks for your feedback...

Good for you. I think it's a bad decision and as OP is asking for advice, I'm giving it. Sorry you don't like my answer.

[smk]

jpg7n16, you have been able to narrow down a few things somewhat with assumptions, but there may be other things we don't know that can materially affect any suggestions. they could have a great pension or inheritance at some point in the future that can change things. for me, i need to know more about someone first so i would not feel comfortable offering advice over the internet like this. i am more interested in directing people to resources or methods of analysis where they can get answers to their questions. on the asset location question, to me the decision is more complex. quoting an article where the author does not do the analysis themselves. i need to dig into the math...formulas, spreadsheets, etc. the forbes article really does nothing for me...thank

[smk]

jpg,

i just reviewed a situation with a 25% federal tax bracket and assumed 15% tax bracket at withdrawal. the analysis showed to minimize roth iras and place exclusively stocks in them up to returns 10% for 35 years or 5% for 60 years. the you are better with roth with high returns for very long periods. equity premiums to bonds were 3%, and capital gains were harvested at a rate of 20%/year. if equity premiums to bonds were 0% this would really favor bonds in trad iras.