Financial know-how solicited: IRA vs 401k

"Dr. Zoidberg - RIP Oppo" (thetomselleck) 11/17/2019 at 12:05 • Filed to: financialopnik

0

31

My employer — which has made many dubious changes this last year — announced that after over a decade of offering an IRA (which they match your contribution up to whatever percent), they are ceasing this offering effective end of the year, and instead offering a 401k.

This was quickly glossed over in staff meeting (I mean, they literally said the above and moved on), with zero follow-up since then. Pardon the cynicism, but they wouldn’t be doing this change unless it somehow saved them money, or perhaps they are preparing to lower what they match as well.

So, I guess I should open a 401k with them regardless, right? And put in the maximum that they will match? Would there be any reason not to do so?

Further, my IRA is still floating out there, but will have zero contributions from my employer as mentioned. Should I still throw a few pennies at it here and there as the years roll by even though no one is there to match my contribution?

This is truly my year of financial bullshit.

Thank you.

HammerheadFistpunch > Dr. Zoidberg - RIP Oppo 11/17/2019 at 12:08

4

diversify. compound interest. tax deferred.

you've now exhausted my financial knowledge

Wrong Wheel Drive (41%) > Dr. Zoidberg - RIP Oppo 11/17/2019 at 12:15

2

Shouldn't you just be moving said IRA money into the new 401k plan? And I'm confused but I had thought IRA was just a type of 401k, not that they were entirely different things. Unless you mean the difference between Roth and non-roth? Either way, having more of the money in one account is ideal so that compound interest has more effect. 

Grindintosecond > Dr. Zoidberg - RIP Oppo 11/17/2019 at 12:17

2

your right about what to so. Whatever they match, put that in the 401k, and continue with the ira. Nerdwallet has a good piece on this.  But just getting their match is free giant gainz. Then work what other is best for your money if you still have an option.

Jayvincent > Dr. Zoidberg - RIP Oppo 11/17/2019 at 12:19

2

If there’ s going to be a company match, then definitely open a 401k.. Choose from the offered 401k investment options based on your risk tolerance. I’m hazy on the rules to transfer funds between 401K and IRA: i i you choose to do so at a later date, hopefully someone here will chime in.

WilliamsSW > Wrong Wheel Drive (41%) 11/17/2019 at 12:20

7

NO!!!! Do not move the IRA money into the 401k. Keep it separate.

You can invest both separately. I have been through a corporate bankruptcy and it tied up the 401k money for several years - it causes hardship for people close to retirement and going through a divorce.

ALWAYS take your 401k money out when you leave a company and roll it into an IRA .

But do contribute as much as you can to the 401k - at a minimum get as much matching as they offer. That’s free money as IM said.

wbizarre - OEM fetishist > HammerheadFistpunch 11/17/2019 at 12:25

1

Portfolio.

Wrong Wheel Drive (41%) > WilliamsSW 11/17/2019 at 12:30

3

I don't understand any of this stuff. This is why I really don't want to leave my current job. It's very easy to just keep contributing the maximum matching amount to my 401k as simply as possible. I get to see my 10-20% returns each year and just be ignorant of how it all really works behind the scenes. This stuff should be taught in school, I don't understand why learning chemistry was more important than this. 

HammerheadFistpunch > wbizarre - OEM fetishist 11/17/2019 at 12:32

0

Dammit! I knew that would be on the quiz and I choked!

Dr. Zoidberg - RIP Oppo > Grindintosecond 11/17/2019 at 12:34

0

But do I try to keep adding to the IRA or just leave it for now

WilliamsSW > Wrong Wheel Drive (41%) 11/17/2019 at 12:44

2

So true. It’s insane that we don’t teach this in schools. It’s so damn important.

I’m just lucky that I work in corporate finance, and am old enough to have seen some things, good and bad.  The bankruptcy I was involved in was ugly, and I felt bad for those who left all their retirement savings in the 401k.  They did get it all eventually, but it was locked down for 3 years or so.  

BrianGriffin thinks “reliable” is just a state of mind > Dr. Zoidberg - RIP Oppo 11/17/2019 at 12:46

1

Def contribute to the 401k the max that they’ll match (and/or the max you can afford). For 2020 the contribution limit is $19,500, which doesn’t count whatever they match.

Take a look at that IRA and see who holds it, what it’s invested in, and most importantly, the expenses incurred. You should probably roll it over into a low-fee IRA you set up privately, Fidelity for example, and have it invested in some basic index fund. Of course, if the IRA is a good performer and consistently beats the S&P, leave it where it’s at, though that’s unlikely.

Deciding whether or not to continue to contribute depends on the IRA’s expenses and performance versus your 401k. You’re allowed to contribute less (only $6k total, $13k if it was a SIMPLE plan ) annually to an IRA account. Likely this is the reason your company switched - 401k accounts are more attractive and advantageous to employees (and also allow loans). 

Grindintosecond > Dr. Zoidberg - RIP Oppo 11/17/2019 at 12:48

2

they say, “Once you get the (401k) match, go max out an IRA for the year, return to the 401(k) and resume contributions there” So hit 401 for match, then hit the ira till maxxed for the year, then return to and hit 401 after that.

LongbowMkII > Dr. Zoidberg - RIP Oppo 11/17/2019 at 12:49

0

Cash it out and buy a lotus

Dogsatemypants > Dr. Zoidberg - RIP Oppo 11/17/2019 at 12:55

0

Liquidate it all and buy landcruisers. They only go up in value

koawaft1 > Dr. Zoidberg - RIP Oppo 11/17/2019 at 12:59

1

What kind of IRA is it? If it is SIMPLE or SEP m ove it to a rollover IRA. SIMPLE and SEP are both accounts for small businesses. I see owners set these plans up with THEIR financial advisors. You can likely move and save in fees. If it was through vanguard, schwab or f idelity you might just keep there if it with Merrill, Morgan or other bank I would suggest you move.

Unless it is a ROTH account I would not contribute to it anymore. If you can save more I suggest opening a ROTH or regular investment account. You may make too much to contribute to a regular IRA and get to deduct it. Non deductible IRAs are a pain in the ass. Avoid them. Now that your employer offers a workplace account the max amount you can earn and still get the deduction goes petty low for a couple, you can’t make more than like 50k. (I’m too lazy to Google for the moment)

This move is likely costing your employer more. 401k is much harder and more costly too manage than other retirement accounts. They likely have grown too much or their accountant has let them know they are about to get in trouble with the department of labor or IRS.

And everyone else is right no reason not to contribute to 401k to get the max match. 

facw > Dr. Zoidberg - RIP Oppo 11/17/2019 at 13:10

0

Put whatever gets you full match into the 401k. Also make sure you max out your Traditional /Roth IRA.

4kc > Dr. Zoidberg - RIP Oppo 11/17/2019 at 13:14

0

Dr. Zoidberg - RIP Oppo > facw 11/17/2019 at 13:24

0

I don’t have the kind of disposable income to do both... :(

Wuelling > Dr. Zoidberg - RIP Oppo 11/17/2019 at 13:51

1

In this order. 401k only to match. Free money yo. If you have a hsa max that next. Roth IRA are so much better in the long run, max that next. If your IRA is traditional just leave it and let it grow and open a Roth. Any extra money left over can add to 401k over the match 

dogisbadob > Dr. Zoidberg - RIP Oppo 11/17/2019 at 13:53

0

401k has a higher max contribution than IRA. You can contribute $19k this year into a 401k, whereas the limit for IRA is only $6000 (both limits slightly higher if you’re over 50)

Yes, you should still contribute to your IRA so it keeps growing.

Contribute the max amount match in the new 401k, then the $6000 to the IRA, then anything else to the 401k.

SBA Thanks You For All The Fish > Dr. Zoidberg - RIP Oppo 11/17/2019 at 14:48

0

Keep adding to it....   but there’s a complex formula as to how much you’ll even be able to put in.  Generally the “combined” limit is somewhere between $5K and $6500 a year.  You’ll need to do some research.  Or call your IRA Administrator’s HELP line--- they tend to know all the rules well.

M.T. Blake > Dr. Zoidberg - RIP Oppo 11/17/2019 at 15:13

0

Max out a Roth IRA every year. Best place for money. 

MKULTRA1982(ConCrustyBrick) > HammerheadFistpunch 11/17/2019 at 16:09

0

MKULTRA1982(ConCrustyBrick) > Dr. Zoidberg - RIP Oppo 11/17/2019 at 16:11

0

Screw both of them and invest in the currency of the future: ice! Gubbmint can’t tax ice and most witch- doctors Already accept it

Gone > Dr. Zoidberg - RIP Oppo 11/17/2019 at 17:10

0

Set it up for 401k match. Lots of places fo rce you to put in a ll year to get the match (divv ied out over the year). Any other money you can save tow ards retirement should go in a Roth IRA (Vanguard or Fidelity).

I’d suggest backdoor Roth -i fy ing your IRA (again to Fidelity or V anguard). This has tax implications! You will have to pay income tax at your current rate o n this when you Roth- ify the money. Tax can be taken from your IRA money or paid o ut of pocket. Moving your money can also be spread out over time to minim ize tax payments if you’r doing it out of pocket . If you move it to Vanguard or Fidelity first as an IRA, it is very simple to move it to a Roth late r. Regardless of Roth-ifying or not, move your IRA to Vanguard or Fidelity if it’s not there already. Sav e on fees and have much better funds to choose from.

I had an old 401k that was move d t o an IRA wh en I quit . Last year I moved it to Fidelity (already had a brokerage acct and c urrent 401k there but would have done Vanguard if I didn’t have a Fidelity account) as an IRA and had them open a Roth at the same time (you don’t have to fund it when yo u open it). Planning to move $10k/yr to it every   in Q4 and just adding it my tax bill (payin g out of pocket).

Dan > Wuelling 11/17/2019 at 17:23

0

How can you say Roth IRA is so much better without any qualification? If you amass 1 mil in a 401k and draw down 4% a year for 30 years you are only taking out 40k and taxes are non-existent.  The upfront tax advantage is worth it for anyone making over 100k and debatable in then 80-100k range.

Wuelling > Dan 11/17/2019 at 18:47

0

Do you think taxes are going to be lower or higher as time goes on? You only get a tax cut of the max contribution so like 6000-7000 range. Traditional iras are taxed like normal income when withdrawn, roths grow tax free and aren’t taxed coming out. There is a reason a lot of rich people are doing roth conversions right now, taxes are probably as low as they will ever be right now, 

wafflesnfalafel > Dr. Zoidberg - RIP Oppo 11/17/2019 at 22:53

0

yes - 401k is likely better than an IRA for folks who plan to be in lower tax brackets while in retirement. Grow tax free but pay income tax when you pull it out.  The benefit of the IRA is betting that you are in a lower tax bracket now than when you retire - which works if you are lucky and retire well, but not if you are poor like me and won’t.   I also recommend a WRX fund through a local credit union.

Ash78, voting early and often > Dr. Zoidberg - RIP Oppo 11/18/2019 at 08:41

0

As a guy who might break even every year, NEVER skimp on the 401(k) to get the match. In the case of emergency, you can always tap those funds like you would a savings account (don’t make it a habit, though).

Personally, I’ve never heard of an employer offering an IRA, so I suspect switching to a 401(k) was slightly more tax beneficial to them, and potentially allows them to be more generous to the employees.

Hahahahaha.

Probably just the tax benefits. But from your perspective, they’re pretty much identical.

Eric @ opposite-lock.com > Dr. Zoidberg - RIP Oppo 11/18/2019 at 13:34

0

Multiple thoughts here:

1) Yes, get the match in the 401(k).

2) Most employers use 401(k) plans because they can shift more of the expenses to the employee, but there are other reasons, including: Higher contribution limits, larger numbers of employees than some types of IRA , etc. On the other hand, there are curious rules about the company making up contributions for people that participate but under-contribute relative to others (there are a lot of rules on them and they do/don’t screw higher income people over).

3) A 401(k) is better in some respects because the contribution and income limits are far higher than with IRAs.

4)   Unless the IRA has screaming low expenses, create a new one with really low expenses and roll over to that. You’ll want that low-expense one for a 401(k) rollover when the time comes. You don’t need to contribute to the old IRA because it makes your taxes more complex.

5) You can exploit the higher 401(k) contribution limit to back door roll over more money into your IRAs. Read up on it.

The difference is stark. 401(k) plans allow around 4x the contributions of an IRA. On the other hand, if you’re nowhere near the contribution limit on a 401(k), you should think about a Roth IRA. Since the contribution limit is the same, unless you really need that small drop in your taxable income, the tax-free growth is a bonus (it’s bigger the lower your current tax rate is, so if married and in WA), so you should always do Roth accounts here. If you’re single, it’s a wash, and I have a lot of money in a traditional IRA due to my time in CA and when I was single up here (since compounding is greater on the larger balance). Personally, I switched entirely to Roth accounts after getting married (both my wife and I max out our Roth IRAs annually).

As for who to get a low-fee IRA with, I highly recommend Vanguard. No vested interest, but that’s who we use because I found them the best for my needs years ago and they are the oldest in the discount investment business. They also have numerous exceptional funds for retirement.   There’s currently a battle to the bottom among online brokerages that might upset this balance at some point...

Eric @ opposite-lock.com > Dr. Zoidberg - RIP Oppo 11/18/2019 at 13:37

0

Put all you can beyond meeting your employer  match into a Roth IRA.