joetaxpayer wrote:

- quote -

As a point of reference, my company has a 70% maximum contribution.

--
Jennifer

"Elle" <honda.lioness[at]nospam.earthlink.net> wrote in message
news:Ys3Ng.6080$v%4.1382[at]newsread1.news.pas.earthlink.net...
- quote -

Joe pointed out that an investor "need[s] to look at the fees of the funds
within his 401." Of course. Nowhere did he claim 401(k) fund expenses are
typically higher.

In point of fact, the average retail (non-institutional) fund expense is
0.96%
http://news.morningstar.com/article/....asp?id=130874

while the average expense ratio for 401(k) funds is 0.75%
http://deloitte.net/dtt/cda/doc/cont...lts_020806.pdf
(Exhibit 91, p. 23; pdf p. 25 of 39 )

Note that Morningstar's 0.96% figure is a dollar-weighted average that
understates the unweighted average expense of retail funds; in fact,
Morningstar reports that the average expense of all funds is 1.38%. (Use
its fund screener and ask for all funds; at the bottom of the results page
is this figure.)

Even if one restricts the Deloitte survey results to what it calls
"micro -asset plans", one still doesn't see expenses higher than this
1.38%average. Deloitte reports these micro-asset plans' fund average
expenses are typically in the 0.86% to 1.25% range.
http://deloitte.net/dtt/cda/doc/cont...uts_020806.pdf

I'm open to contrary sources that support your assertion that fund expenses
are typically higher in a 401(k) plan.

This is not to say that there are not some incredibly lousy plans - at the
company I just left, I personally moved the plan from one where people were
losing money in the money market fund - it charged more in expenses than it
earned, so people came out worse than using the proverbial mattress.

Likewise, there are some incredibly lousy retail funds that one should
similarly avoid when investing outside of a 401(k).

Mark Freeland
BnetOnewsX[at]sbcglobal.net

Mark Freeland wrote:
- quote -

My post made reference to positions in the taxable account
being taxed at "the very low (knock on wood) capital gain
and dividend tax rates." I contemplated the investor holding
mostly stocks in the taxable account. Contrary to your
hypothetical, the earnings and growth on the stocks would be
taxed at far less than the income tax rate. Namely, 15% for
most people. Plus, as Joe pointed out, the typically higher
expenses of funds in a 401(k) may result in the taxable
account being the superior choice.

So take the unmatched 401(k) offers, factor in the typically
higher fees of 401(k) choices, apply the higher tax bracket
in retirement, and compare it to the taxable account, less
X% for taxes, with the much lower tax rate.

Depending on the assumptions, the taxable account may be the
superior choice.

Mark Freeland wrote:
- quote -

Absolutely. But if he is 15% now (as is possible, given he retired
earlier this year and wont start again till 10/1) the math changes. And
Jack Bogle aside, he need to look at the fees of the funds within his
401. A 1%/yr incremental cost would wipe out the gains shown above.
JOE

"Elle" <honda.lioness[at]nospam.earthlink.net> wrote in message
news:gwVMg.9908$xQ1.4955[at]newsread3.news.pas.earthlink.net...
- quote -

You are forgetting the fact that the 401(k) (or a traditional IRA, for that
matter) is tax-sheltered. This means that any taxes that would otherwise be
paid on the earnings if in a taxable account stay in the plan, and grow for
many years until finally distributed and taxed. Even with a higher tax rate
in retirement, one can come out ahead because of this.

Here's an example:

Current tax rate: 25%, tax rate at retirement: 28% (higher!)
Bond investment, yielding 5%/year for 20 years
$15000 earnings, pre-tax.

With the 401(k) (or a deductible IRA), you contribute $15000.
- In 20 years, it grows to $39799.47
- You pay 28% in taxes, leaving 72% or $28,655.62

Outside the 401(k), you pay 25% in taxes, and invest the remaining $11,250.
- Each year, you pay 25% in taxes on the earnings for that year,
that is, of the 5% gain, you pay 25%, leaving you a net gain of
75% * 5% = 3.75%
- Compounding a net earnings rate of 3.75% on $11,250 over 20 years,
gives you $23,491.71

You come out several thousand dollars better in this hypothetical with the
tax-sheltered investment, even with a higher tax rate at retirement.

The advantage of the tax-sheltered investment is most pronounced when you
would otherwise be paying taxes during the investment period
(pre-withdrawal). I selected an example here where you'd have to pay taxes
yearly.

If you were to run numbers with an investment in, say, a tax-managed fund,
the winner (tax-sheltered or taxable account) would depend more upon your
tax rate in retirement vs. your current tax rate, as Elle suggested.

The bottom line is that if you have several years until you will be using
the money, a tax-sheltered account is usually better (even if tax rates go
up somewhat).

Mark Freeland
BnetOnewsX[at]sbcglobal.net

Mark Bole wrote:

- quote -

Keep in mind, most companies have a maximum percentage, maybe 30% that
can be contributed. I believe the IRS limit is strictly an yearly dollar
max and not a percentage. For this you need to check the plan itself.
And the matching will be calculated on the percentage withheld. 100%
withheld will just get the 4% match.
I suggest you take the time to project your taxable income for the year.
A pre-tax 401K for money that would otherwise be taxed at 15% or less
doesn't always make sense. Since you are close to actually retiring, you
should also see what rate you'll find yourself once retired.
(see http://www.fairmark.com/refrence/index.htm for the rate charts)
JOE

Since you have maxed out your 2006 Roth IRA, if you put in
more than the 8% that is matched by 50% in the 401(k), then
you are betting that your tax rates in retirement will be
lower than they are now. Have you estimated your income in
retirement, and so computed your expected tax bracket? Which
granted could change.

Also, can you discuss the expenses and loads on the choices
in your new company's 401(k)? ISTM at times, depending on
the individual's tax situation now and in retirement, when
the expenses and loads are high enough, a taxable account
can make more sense than the unmatched 401(k). This is in no
small part due to the fact that the taxable account has the
benefit of being taxed at the very low (knock on wood)
capital gain and dividend tax rates. Plus in a taxable
account, you can choose very low expense index funds, for
one. But the 401(k)'s distributions in retirement get taxed
at the higher (for now) income tax rate.

Lastly, are you sure you'll always be under the income limit
for a full contribution to the Roth IRA in the next six
years (age 56 to 62) or so of your working life? The current
limit being $95k per year if you're single; $150k for joint
filing. Will you be able to max out your Roth IRA for 2007
and do the matching of the 401(k)?

CIL wrote:

- quote -

Yes, if you have an salary deferral election in place from the
beginning. You only have to calculate FICA (Soc Sec/Medicare)
deductions, as the rest of your pay won't be subject to income tax
withholding since it's deferred compensation.

-Mark Bole

Good Morning,



I am 56 years old, retired Civil Service, DOD. When I retired earlier this
year I envisioned returning to work and saving 100% of my earnings and use
the retirement check to live on. I would like to become eligible to draw my
social security when I turn 62 even though it will be severely cut because
of the windfall elimination act. I only need 4 more quarters to qualify
since I paid before I went to work Civil Service and the 3.5 years in the
Air Force. Plus this savings will add to the travel and vacation account.



I plan on returning to work in the near future for a local company that
offers a 401k. If I returned to work on 10/1/06 and the max this year for
401K contributions is $15,000, could I / should I, contribute 100% of the
$15000 during the final quarter of the year? That is assuming that I will
clear $15000 after Fed, State and Social Security deductions, if not I would
like to contribute all that I clear. The Company match is 50% on the first
8% that I contribute and 0 after 8%.



At my age do you think that it makes since to do this or what percentage do
you recommend? I have maxed the Roth for the past several years including
2006.



Thanks

cil