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Other than the tax advantage and possible company match, do you feel 401K is a good saving/investment tools? Do you know how much you're being charged in fees? Does anyone think it is a bit 'hyped' by the financial services industry? What are the alternatives to 401K? Thanks.
IRA (regular and Roth) are your most common alternatives but you will pay fees on those too.
Simply, if you get a company match you aren't going to do better and should contribute to get the match. If you DON'T get the match then you will have to consider your age, wages (tax bracket), goals...basically your whole financial picture and then make an appropriate decision.
If you can not look at performance, then what else can you look at?
Long term, would be nice, but no, 401K systems did not exist long ago. So tha tis not an option either.
The performance of any particular 401k depends (for the most part) on the funds held within and the participant's chosen allocations. Anyone who included decent chunks of bonds, foreign stocks & REITs (not as likely, granted) in their allocation, probably did significantly better than those who didn't.
As far as performance over the last year, that's totally irrelevant, IMO. Last 10 years? Anyone contributing to a 401k over the last 10 years didn't do as badly as you might think, because they were dollar-cost-averaging (DCA) into their positions throughout, including the bear market of 2000-2002 when they were picking up lots of extra shares at cheaper prices. Over the long haul, these kinds of temporary market slumps actually benefit DCAers.
So while some folks like to point at hand-picked 10-year periods that began with market tops/bear markets and say "look how poorly the market did," that's not neccessarily the case for those DCAing, or smart enough to buy low rather than high, or smartly diversified, etc.
Quote:
Originally Posted by Drover
Technically every savings instrument is "tax-free growth" since taxation does not occur until gains are realized (except, of course, in the case of a Roth IRA).
Well, most growth is tax-deferred, not tax-free. Only with Roths is growth truly tax-free.
Quote:
Originally Posted by Drover
And a Roth 401(k) in lieu of a traditional 401(k) is not necessarily the best option. Since Roth contributions are not tax-deferred, you have less to put in and less compounding over time occurs as a result.
This is an argument that's often made against a Roth (of either kind), but I think it's a faulty one. I believe most people will contribute just as much to a Roth as they would to the traditional 401k. Think about it: Many 401k participants will either 1) contribute up to the amount of the company match to take full advantage of the free money, or 2) max out their contributions completely. In either case, those people will probably do the same with a Roth 401k, despite the fact that they'll take home a little less in pay each couple of weeks. I'll bet many don't even realize they'll take home less pay with the Roth. So, assuming equal contributions to a traditional or Roth 401k, the Roth clearly comes out ahead because of the tax-free growth, even potentially if you're in a lower tax bracket in retirement.
Also, as far as those tax rates now vs. the future; if you're contributing to a traditional 401k as a young person, chances are between that and social security and whatever other investments you may have, your income may not be too shabby in retirement. Combine that with the probability that future tax rates in general are likely to be higher than they are now makes it harder to assume you'll be in a lower bracket during retirement too.
... Also, as far as those tax rates now vs. the future; if you're contributing to a traditional 401k as a young person, chances are between that and social security and whatever other investments you may have, your income may not be too shabby in retirement. Combine that with the probability that future tax rates in general are likely to be higher than they are now makes it harder to assume you'll be in a lower bracket during retirement too.
I agree that we do not know what the future will hold for us in terms of income tax brackets.
Our nation's history of individual income taxation is a young history, and it has changed a great deal during these past few decades of it's history.
Assuming that your future tax bracket will be lower than today's is a large assumption.
Personally I fail to see the fascination that many folks have with paying income taxes in the first place. Why lose a portion of your Gross income to the Fed? It seems kind of dumb. [but each year only about a third of the American population are tax exempt. It varies from 25% to 35% ish]
I feel that it is wiser to remain tax-free, and to keep all of a person's investment tax-free, all of the time.
Not just tax-deferred. Hold off on paying taxes today, what and pay them on another day. Is still paying them.
That's my point, it is hidden in fine print. You have to do a lot digging to find out how much it actually costs. I look at the rate of return on my investments the last 12 months, and it has been miserable. My IRA has done fairly better.
I would imagine fees vary by the number of them applied and dollar amount per plan. However, I find the fees outlined as a percentage of share price in my current plan. Unfortunately, but expectedly, trying to figure out the exact dollar amount applied per share is a real pain in the arse. Calling someone, at least at my high profile plan, is a test of patience knowing that they probably won't have an clear answer to offer, anyway.
As far as the 401k, for me, I only found it beneficial that there was employee matching. So, I would only contribute up to the amount the employee would match. A sort of buffer for my own contribution (which, now, is very important). Even with the great losses my 401k took lately, I don't feel entirely bad since my actual earned dollar amount hasn't been chipped at... just the employee matched portion. Hey, I gotta find some way of looking at the brighter side of things.
The whole pretax contribution thing is all fine and dandy, but I don't know how much I'll be taxed on the money when I finally take it out. My rate could be a whole lot higher by then, who knows? So, I don't look at that as the ultimate encouragement, but it's not bad either using pre-tax dollars especially if it grows.
I don't have a lot of faith in focusing all my funds toward a 401k. It really is about diversification as a number of people have alluded. I'll have market based retirement vehicles (401k, IRA's, Roth's, Etc), CD's, and Real Estate. And, I'm sure I'll get some supplemental funds from social security because it probably won't bust by the time I retire.
Unfortunately, and I sort of expect this, medical bills will probably be the downfall to my financial existence in the future no matter what careful planning I do. I'll never be a wealthy enough man to ever financially weather a catastrophic illness. Even with all my planning, saving and budgeting, I can already see by the medical bills we already receive for routine preventative medicine that our future will be wiped out by some sort of hospital experience in this country, even with our insurance.
So, as a part of my future strategy, I'll continue diversifying and create a contingency plan for my inevitable bankruptcy when that real illness occurs. Because when it comes to faith, I have no faith our medical financial and insurance system will be there to take care of us, or anyone of average means. So, in a way, I'm sort of strategizing and saving for them (unless my investment strategies prove quite successful).
Also I believe 401Ks are lawsuit and creditor proof.
You're right. That's another advantage. To summarize from all the postings the advantages of a traditional 401K are as follow:
- tax-deferred growth
- possible match from an employer (mine matches 100% up to 6% of gross income)
- protected from lawsuit and creditor
- automatic investment through payroll deductions
- loan can be taken out that will not appear on the credit report/score
- hardship withdrawal (medical, to prevent foreclosures or eviction, tuition fees and buying a first home)
- bigger take home pay
- reduces Adjusted Gross Income (AGI) which could qualify you for another tax credit
Disadvantages:
- if income tax increases in the future, will take a bit out of the earnings
- 20% tax taken by the employer and 10% penalty if withdrawn prematurely (before age 59.5)
- high fees can eat into earnings compounded long term
-loan has to be paid back in full if employment is terminated
- choice of funds in the 401K could be deficient
- employer can suspend contribution to the plan if loan or withdrawal is taken, thereby reducing future earnings.
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As far as I know the hardship withdrawal issue with a 401k is up to the company and plan administrator. And unless you're using that money to pay for medical expenses that exceed 7.5% of your income, you're still going to hit the 10% penalty. I think if you need money from your 401k, you'd be better off borrowing.
If you have an IRA, you have more freedom as far as taking money out for the above and avoiding the 10% penalty (if it would normally apply).
For me, I have a 401K only in as far as my employer matches--100% up to the first 6%. However, the fees are so high and the choices so incredibly limited, that it's driving me crazy--right now I'm too heavy in one sector and I have to fix it--probably by limiting contributions to the 401k and putting my money somewhere else.
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Because when it comes to faith, I have no faith our medical financial and insurance system will be there to take care of us, or anyone of average means. So, in a way, I'm sort of strategizing and saving for them (unless my investment strategies prove quite successful). 
