The plan is a "pooled" account in which I have no control over. I either contribute or not. It is administered through Raymond James and is split 60/40 stock/fixed income. I am 54 yrs. of age and my wife is 49 yrs. old(she works PT). We both have individual IRA accounts plus a joint taxable account with Vanguard. Would it be wise to skip the 401k pretax contribution and just contribute the 17,500 my joint taxable account instead, using after tax dollars?
Hi Andrew. This question is not a simple one to answer because there are other factors that will guide the answer to your question. If you qualify for Roth IRA accounts, you both could contribute the post-tax dollars to maximize your Roth IRA accounts and get the tax deferred growth. By contributing to your 401k pre-tax, you lower your taxable income. That tax savings may work in your favor--I'm unable to advise since I don't know your entire situation. Also, now that you are over 50, you can take advantage of the $5,500 catch-up provision in the 401k plan, enabling you to contribute $23,000. My best advice is to find an independent CFP(R) in your area that does hourly consultation or would charge you a flat planning fee. S/he can give your situation the comprehensive look it deserves. Good luck!
The one question no has yet asked is: How has the Raymond James 60/40 portfolio performed relative to various balanced mutual funds like Janus Balanced or T. Rowe Price Capital Appreciation? Make sure you review recent and longer term performance and learn as much as you can find out about the manager or management team. If the performance has been comparable to the balanced funds I mentioned or others you know of, then you could probably benefit from the tax-deferral in the company 401K.
If you want a more aggressive portfolio, you can always invest more aggressively in your IRA to compensate for the 60/40 split in the 401K. You should also consider the Roth IRA as others have suggested for post tax dollars if you are eligible to contribute. If you do not feel confident making the kind of evaluation I suggested, then you may want to seek help from a financial advisor.
The only way to get a firm answer to your question is to sit down with a financial planner and have them run some numbers for you using your personal financial situation. There were so many moving parts to your question. For it to be answered accurately we would have to know what your income tax rate is today, when you plan to retire, your assumed income tax rate in retirement, how you need the funds invested to reach your retirement goals (for example is a 60/40 portfolio not appropriate or is it?), are the expenses in the Raymond James account high or low, etc., etc.
But I would certainly not decline to contribute to your 401(k) simply because there is no match. If you think about it there will be no match to your IRA or to your taxable account either. At least the 401(k) will give you the best opportunity for a current year tax write off.
You are asking a good question. Again, to get a good answer I strongly suggest you sit down with a fee-only planner. Try to avoid a planner who is compensated by the products they recommend because you will have a tough time knowing if the recommendation is really in your best interest or theirs.
Hope this helps
Andrew as you can see from the responses, there are many moving parts to a question like this. But, I'll give you a general idea of what you should focus on most based on having wrestled with this question with many clients. Let's assume you able and willing to defer the entire $23,000 you are allowed to defer annually into your 401k plan ($17,500 + $5,500 catch for over age 50). If your in a 28% marginal tax bracket that means you'll save roughly $6,440 per year in immediate federal income tax savings. ($23,000 x 28%). You'll also get tax deferral on any investment returns from your current age 54 to at least age 70 1/2 before you have to start making withdrawals.
Now, that's the primary advantage of max funding your 401k plan, the tax savings. You simply need to weigh the tax savings advantage vs. the restrictions that come with doing your saving and investing inside of a plan like this. One of the key things we look for when evaluating a decision like this is whether the client is needing to play catchup on their retirement saving or not. If yes, then usually generating the tax deductions is an important thing because it allows you to save more, faster. If no, then it is more attractive to consider the advantages of accumulating retirement capital outside the restrictions of IRA/401k type plans. There are many reasons you might want to have money outside of plans like that. More investment choices, easy access for larger purchases, gifts to your kids or family, funding business opportunities, etc... All of those things are harder to pull the trigger on when you know you're having to withdraw money and pay deferred income taxes on large chunks coming out of retirement plans.
So, are you playing catch up or not? Is your tax bracket high enough to generate large tax savings on the contributions? Are you the sort of person who'll really take advantage of better investment options by saving outside of the 401k plan? Those are some things to think about. Best of luck! :)
First of all let me congratulate you and your wife on setting up IRA accounts. Since I do not know your entire financial situation I can only comment in generalities on your question about the company retirement plan. The 60/40 asset allocation in your pooled account is a fairly standard allocation for growth and income over the long-term in a pooled retirement plan. In regards to whether or not you should contribute to the company’s plan, if I was your advisor, I would suggest that you take advantage of the company’s plan as the real focus should be investing on a pre-tax basis versus after tax. Not only would you be reducing your current taxable income but the earnings would grow tax deferred, which is not the case in your Vanguard taxable account. If your plan administrator or the trustees of the plan would like to explore other plan design options that allow the participants more control over their investments, please have them contact us.
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I concur - there are many questions here. What is your current income? What is expected retirement income - which is partially estimated by asking how much of your assets is in qualified vs. non-qualified accounts? Is Roth an option? If your household income is high, though, you should not look down on the powerful impact of a $23000 reduction in your taxable income, as well as tax deferred compound growth opportunity.
Hi Andrew, You are asking the correct question but the answer as the other advisors have said is tough to answer in a forum like this. I would encourage you sit down with a financial planner who can demonstrate how contributing from a pre-tax qualified plan to a taxable account will impact your current situation as well as your time in retirement.
I've been watching the back and forth here and re-read your question a couple of times.
Sometimes simple and direct is better, and I think your last comment clears things up for most of us.
My take on it - and my business is almost entirely made up of serving people who are in their last few years of working - or are actually living in retirement - is that if I were you, I'd take the $17,300 tax deduction NOW since your income tax bracket is so high... and worry about your tax bracket once you are already IN retirement - later. You said you are way underfunded in your retirement accounts, so I'm assuming your required minimum distributions won't be so terribly high that they will be a tax burden later.
Now - I would also save as much money as possible in after tax accounts, as you are suggesting. If you can't find the money in your budget with a $260K per year... then its time to address that issue as well.
Andrew. I do not know all of the details, but, in general, I would think you would want to try to take advantage of tax advantages offered through investing in a 401(k)or an IRA. You could invest in a tax efficient manner in an after tax account, but I think, depending on your risk tolerance and investment philosophy, you might be better just putting it in an IRA If you invested in an IRA, either Roth or Traditional, the most you could invest would be $6500 for you and another $6500 for your wife. If you are comfortable with just investing $13,000 annually, this might be the simplest and best solution. The 60/40 portfolio at Raymond James offered to you might be at a good risk tolerance for you, but if you invested in an IRA, you would have control over your investment choices.
My experience with pooled accounts is they post a valuation annually or semi-annually. So if you leave the company, and want to transfer your account to an IRA anyway, you may have to wait a few months until the administrator comes up with a valuation for you. People have gotten really upset about this delay. So long as you know and expect it, it is not the end of the world.
If you wanted to invest $17500, you might be able to invest in both the 401(k) and IRA’s but there are phase-outs for deductibility in an IRA, if you are also investing in a 401(k). BTW, at your current age, you are able to invest up to $23,000 into a 401(k).
You really are best advised to speak to a qualified financial professional in your area, preferably a CFP®. Ask trusted friends, relatives, and co-workers to a referral to someone they trust. The decision should be a simple one, but there are just many unknown variables that need to be considered.