What’s Inside Your Target Date or LifeCycle Retirement Fund?

Posted on January 28, 2009 // 16 Comments

I ran across a BusinessWeek article today about retirement plans in 2008 from top 401(k) provider Fidelity Investments. It stated that although the average retirement account balance fell a whopping 27% to $50,200 last year, people actually contributed slightly more in 2008 than in 2007.

This quote also caught my eye:

Are investors making a lot of changes within their retirement accounts?
Some 60% of plans administered by Fidelity in 2008 utilized a lifecycle fund as a default investment option, that’s up from 38% in 2007. What happens in a time of short-term volatility is that investors in these funds are not switching. Only 1% lifecycle fund investors made a change compared to the overall average to 6.1%.

Makes sense overall. Investors in these types of funds want all-in-one simplicity. However, almost every company these days offer a lifecycle retirement fund. And most 401(k) investors can only invest in the one that happens to be in their plan. Check out this Money magazine example of the possible extremes out there for a mutual fund designed for a worker retiring in 2010:

On the aggressive side, the Oppenheimer Transition 2010 Fund (OTTAX) has 65% in stocks for someone on the verge of retirement, resulting in a 46% loss in 2008. On the conservative end, this AP article has an even better example – The DWS Target 2010 Fund (KRFAX) only has 18.1% in stocks and only had a 3.6% loss in 2008. The rest was in cash and bonds. (Of course, it also had a fat front-end load and is closed to new investors.)

That is some pretty stark contrast. Do you know what is inside your target-date fund? Dig up the ticker symbol, plug it into Morningstar, and scroll down to “asset allocation”.

What about the big boys like Vanguard?
Even the most highly-rated mutual fund companies don’t agree on the asset allocation for each time horizon. See how Vanguard, Fidelity, and T. Rowe Price differ in their target-date retirement funds.

Filed Under: Investing, Retirement //

Strategies For Maxing Out Your 401k/403b and Company Match, True-Up Contributions

Posted on January 22, 2009 // 23 Comments

Why the interest in 401k limits? Well, we found out that my wife now gets a company match to her 403b retirement plan. Score! I then wanted to explore how to maximize both our $16,500 401k limits and the company match.

Example: Maxing Out But Missing Out Too

You make $120,000 per year and get a full 3% company match during each pay period. Let’s just say you get paid $10,000 gross monthly. However, you are a really motivated saver and can defer 20% of your income each month into the 401k.

For the first 8 months of the year, you put away $2,000 (20% of $10,000) and the company matches $300 (3% of $10,000). That’s brings you to $16,000 in salary deferrals. On the 9th month you can only contribute $500, which the company also matches $300 again. On the remaining 3 months of the year, you can’t contribute at all, so there is nothing to match! Even though you contributed significantly more than 3% of your salary, you’ll miss out on $300 x 3 = $900 of free money.

Solutions and Potential Problems
The solution is usually given to space out your salary deferrals evenly throughout the remainder of the year. For the above example, you would divide $16,500 by 12 = $1375 each month. If you can only set percentages, you’d set aside 13.75% each month ($1,375 / $10,000).

The problem with this is that for those people who earn hourly wages, overtime, or bonuses, it can be hard to synchronize. Get paid too much, and you’ll lose match again. Get paid too little, and you might max out your match, but not fully reach the $16,500 limit. Also, if you quit or are laid off before the end of the year, you might not be able to reach the limits either.

My tweaked solution. I would vary the percentage so that you always contribute at least 3% each pay period the entire year, but otherwise front-load contributions early on. Again with the example, you could set aside the $2,000 per month for 6 months, and then put in $750 per month for 6 months. Percentage-wise, this is 20% for first half the year, and then 7.5% for the last half. This way, you are balancing getting your annual limit maxed out as closely as possible, along with getting all the available match.

True-Up Contributions

But before going too far, you should ask your benefits administrator whether they offer what is called “true-up” contributions. What this does is compare your year-to-date (YTD) contributions to your YTD salary. If you contributed at least 3% of your YTD salary, but did not receive a 3% company match, then they will send in an additional contribution to “true-up” the numbers.

Some companies perform this true-up calculation after every pay period, while others wait until the end of each year. If they true-up every pay period, then it would seem to be a good idea to contribute as much as you can as early as you can – you’ll get the full year’s match early this way.

Our company does one true-up after the end of the year, and the credit doesn’t show up until March. However, I was also told that if you aren’t employed in March, you won’t get this credit. So again, the front-load with minimum method might be the best idea to get your match as it comes available.

As I write this, I realize that I really overthink some of this stuff. What can I say, I’m excited about our new match, and I just can’t help myself!

Filed Under: Retirement, Taxes //

2009 401k/403b Maximum Salary Contribution Limits

Posted on January 22, 2009 // 10 Comments

The 2009 inflation-adjusted limits for 401(k) and 403(b) defined-contribution plans are as follows:

  • The 401(k) elective deferral limit goes to $16,500, up from $15,500.
  • The “catch-up” amount allowed for those age 50 years and up increases to $5,500, up from $5,000.
  • The overall annual defined-contribution plan limit goes to $49,000, up from $46,000. This usually comes into play when you have additional employer contributions.
  • These numbers apply for both Traditional pre-tax and Roth after-tax contributions.

Maxing out pre-tax 401(k) contributions
$16,500 annually works out to $1375 per month. If you get paid bi-weekly that’s $635 per paycheck. But since this is gross income, if you are using pre-tax contributions (not the Roth 401k option*) your actual reduction in take-home pay will be less.

According to the calculators at PayCheckCity, if you are single with one allowance, earn a gross annual income of $60,000 per year ($5,000/month), and you live in a state with no income taxes, this works out to a reduction in your monthly take-home pay of $1,031. (It would go from $3,804 down to $2,773.)

You can also get to the same number by first finding your 2009 marginal tax rate. Since a such a person would be in the 25% bracket, taking 75% of $1375 is $1,031.

* If I were in the 15% tax bracket or lower, I would go with the Roth option (if available) because historically that is a low rate. Pay the low rates now, so you can avoid paying them later! For higher tax brackets, it depends on some personal variables like how much taxable income you expect to generate when withdrawing for retirement.

Filed Under: Investing, Retirement //

Add More Money Your Roth IRA – Undo and Redo Contributions After Losses?

Posted on January 20, 2009 // 32 Comments

So you listened to the financial experts and dutifully contributed $5,000 to your Roth IRA in early 2008. Unfortunately, stuff hit the fan and now you’re left with a lot less. Wouldn’t it be nice to be able to find some silver lining and shield another ~$1,000 plus earnings from taxes forever?

Well, here’s a slightly controversial idea that I ran across in this Boglehead Forum thread that might help you do just that. I think the easiest way to explain it is to continue with an imaginary scenario. Note that this leaves some variables in exchange for simplicity.

Example Scenario
Sometime in early 2008 you contributed $5,000 to your Roth IRA for the 2008 tax year. At the time, your IRA was worth $20,000 in total after the contribution. Now, in January 2009, the entire IRA is now worth $15,000.

You first “undo” your 2008 $5,000 contribution by following the same steps as someone who ended up being ineligible for a Roth IRA due to too much income*. Because your entire IRA account dropped by 25%, your $5,000 contribution is considered to have dropped by the same amount. You end up receiving a check for $3,750. You have received a return of your contribution, and have now technically contributed nothing to your 2008 Roth IRA.

Soon afterward, you simply open up a new IRA either at a new broker, or at your current broker if they are on the ball and have your 2008 total contributions as zero. (Otherwise they might throw a fit…) You can now throw in another $1,250 and contribute $5,000 again to your Roth IRA for the 2008 tax year before April 15th, 2009. Even if you just reinvest the $3,750 the same way as you did before, by using this strategy you have allowed another $1,250 to grow shielded from taxes, forever.

Is This Legal?
This is somewhat similar to the Traditional-to-Roth IRA reconversion method to save taxes. I read some skeptical posts in the BH thread as to the legitimacy of this action, but none were really backed by any evidence. I don’t see why both methods aren’t equally legal.

As another example, you might have made two separate $5,000 contributions by accident, and need to undo one of them. If everything is accounted for correctly by your IRA custodian, the IRS shouldn’t blink an eye. Here is another educated discussion in support of this idea. Other tax pros please add your thoughts in the comments below.

We ended up not being eligible for a Roth IRA this year, but if I was a candidate I think I would take advantage of this idea. In the long run, even stuffing another $1,000 in a Roth could save a lot of money in taxes.

* More information on correcting excess contributions in this Investopedia article. It must be done by the owner’s tax-filing deadline, which usually April 15, 2009 unless you file for an extension. Note that this is not the same as taking a distribution.

Filed Under: Retirement, Taxes //

Historical Federal Tax Rates by Income Group

Posted on January 18, 2009 // 13 Comments

In my last post on 2009 marginal tax rates, reader Alexandria (aka MonkeyMama) made a very good point that planning our retirements around future tax brackets is very difficult as they change all the time. But isn’t that what we are forced to do every time we contribute to a IRA and/or 401k? We can either pay tax now (Roth), or pay tax later (Traditional). In any case, I figured I should look into this more.

I previously explored this area in my post about historical marginal tax rates vs. median income. There, I concluded that at my current high income level, my personal tax rates would probably go up in the future. Now why might I change my mind?

Total Federal Tax Rate vs. Income Group
More recently, the NY Times published the following graph that plots the total federal tax rate vs. income starting from the 1960s. Total federal tax rate includes income taxes and also things like payroll taxes and capital-gains taxes.

As you can see, tax rates as a whole have been dropping recently and are relatively low compared to the past. I would also note that the total tax rate at the median income group (middle 20% line) has varied very little over the last few decades, hovering around 18-20%.

Federal Income Taxes For Median Family
Next, here is a 2006 chart from the Center on Budget & Policy Priorities, which is based on Treasury Dept. data. The Center estimates that the median-income family of four will pay only 5.6 percent of its income in federal income taxes in 2006, the lowest since 1955.

As you can see, the range for this median family has stayed between 6 and 12%.

My short take. Tax rates right now are historically low. Given this and all our future governmental obligations, they will most likely go higher. However, future tax hikes will probably be more heavily placed on high income earners as opposed to those earning at the median or below. The tax rate paid by the “middle class” tends to stay in a relatively low and narrow range.

Everyone’s situation is different. Right now, we are earning in the top 5% or so. But in retirement, I think we can easily fit into this median group, especially if the mortgage is paid off. So even though the future is unknown, my bet is that our tax burden will decrease upon retirement.

Filed Under: Retirement, Taxes //

Undo/Redo Traditional to Roth IRA Conversion After Market Losses

Posted on January 16, 2009 // 4 Comments

If you did a Traditional IRA to Roth IRA conversion in 2008, and have since suffered some significant losses, you may want to consider undoing the conversion now that it is 2009. Then, as long as you wait 30 days after that and still qualify, you can redo the conversion again. This way, you only owe income taxes on the lower amount.

This Roth IRA conversion “do-over” is discussed in this CNN Money article, which included a helpful example scenario:

One of the main considerations are that you want to make sure your losses are enough that they likely won’t be recouped in the 30 days you are “out” of the market. One option is to re-invest the money in a taxable account during that period, but you’d be subject to more potential losses, as well as taxes on gains.

Another consideration is that you are essentially doing a entirely new 2009 conversion. You’ll have to again meet the income limits, and make sure your new tax bracket is acceptable to you. I did a Traditional to Roth IRA conversion in 2007 and shared my decision process, including the eligibility requirements and how to pay for it. There are more details on reconversions in this Fairmark article.

Next up: Controversial ways to deal with other Roth IRA losses.

Filed Under: Retirement, Taxes //

January 2009 Financial Status / Net Worth Update

Posted on January 6, 2009 // 21 Comments
Net Worth Chart 2008

Credit Card Debt
I have no actual consumer debt. In the past, I have been taking money from credit cards at 0% APR and immediately placing it into high-yield savings accounts or similar safe investments that earn 5% interest or more, and keeping the difference as profit. I even put together a series of step-by-step posts on how I make money off of credit cards this way. However, given the current lack of no fee 0% APR credit card offers, I haven’t been as active with this recently.

Retirement and Brokerage accounts
The value of our passively-managed portfolio bounced back by about 10% compared to last month. There were no new contributions. As noted, we did manage to max out both of our 401(k)s this year, and plan on making 2008 IRA contributions by the April deadline.

Cash Savings and Emergency Funds
Our emergency fund balance is nearly at 12 months of our total monthly expenses. So theoretically both my wife and I could be laid off and we would be okay for 12 months without having to sell any longer-term investments. I am very happy with this cash cushion.

Where is it? I suppose you could say I “actively manage” my cash, putting it in various places to maximize yield while maintaining the highest possible safety. For example, I have some in a previous WT Direct promo at over 6% annualized interest, some in Series I Savings Bonds at over 6%, and a chunk at a WaMu 12-month CD paying 5% APY with about 10 months remaining.

Compare this to the piddly 0.14% for 90-day T-Bills and 0.43% on 1-year Treasuries! If you didn’t get in on any or all of these, keep reading or subscribe to updates for new deals as they come up.

Home Equity
I continue to estimate our home value using internet tools, starting with the average estimates provided by Zillow, Cyberhomes, Coldwell Banker, and Bank of America. This left me with $584,516. Then, I shave off 5% to be conservative and subtract 6% for expected real estate agent commissions (11% total) to reach my final estimate. Fortunately, we bought as prices were falling already, and the area where we live has not been hit nearly as bad as other major metropolitan areas.

Looking ahead, I am working on new goals for 2009, and also better metrics for measuring our financial progress. You can see our previous net worth updates here.

Filed Under: Goals, Investing, Real Estate, Retirement //

Worry-Free Investing: Calculate Your Risk-Free Savings Rate For Retirement

Posted on December 17, 2008 // 11 Comments

Conventional advice has been that we should invest in some mix of stocks and bonds to reach our retirement goals. But as we’ve seen, rolling the dice on a varying return distribution every year can be quite stressful. What if we start our retirement planning based on buying a safe investment that guarantees a steady after-inflation return instead? This question is posed in the book Worry-Free Investing by Bodie and Clowes.

Treasury Inflation-Protected Securities (TIPS) are bonds that promise you a total return that adjusts with the CPI index for inflation. Very generally, it works like this: if the stated real yield is 2% and inflation ends up at 4%, your return would be 6%. TIPS are issued and backed by full faith of the U.S. government, so they are as safe as they get. As your investment the automatically adjust with inflation, you will never have to deal with the stomach-churning swings of stocks, and also you avoid the risk of underperforming inflation that traditional (nominal) bonds have.

How much would you have to save if you decided to take zero market risk and invest solely in TIPS? The book outlines the mathematical formulas to use, but also provides a free spreadsheet calculator to do the heavy lifting for us. I uploaded it to ZohoSheets:

I would recommend playing with the numbers a bit. To start, the book was written in 2003 when the real rates were relatively high at around 3%. Given the recent history of the 20-year TIPS yield (shown below), I would assume a maximum of a 2.5% real interest rate.

I would also change the replacement rate to something that more closely tracks your specific expected expenses. The book recommends the income required to maintain your “minimum acceptable living standard”. For the skeptical and/or early retirees, don’t put in anything for Social Security. Finally, don’t forget to input your current savings.

You now have your personal risk-free savings rate to reach your goals. (Warning: It might be really high! If so, try retiring at 65 and input something for Social Security.) But let’s say you need to save 10%, but you are able to save 15%. You could put the 10% in the ultra-safe TIPS, and put the other 5% in something riskier to boost your returns while still guaranteeing a minimum future income. I’ll share a possible solution from the book once I get access to a flatbed scanner.

Now, there are lots of potential glitches with this simulation. For one, there is reinvestment risk because the TIPS real interest rate will continue to vary, and could drop to much lower levels. The government could even conceivably stop selling new TIPS at any time. Some people are skeptical that the CPI properly tracks inflation. Finally, TIPS are taxed at ordinary income levels, so one should keep them in tax-advantaged accounts. However, most people’s 401ks don’t include TIPS as an option! Otherwise, taxes are going to hurt returns.

In the end, I think a portfolio of 100% TIPS is impractical for most people. However, I definitely like TIPS as a component, and see this thought process as a way to estimate a “target” savings rate that can let those so-inclined to take less risk and sleep better at night.

Filed Under: Investing, Retirement, Tools & Calculators //

Saving More May Allow You To Take Less Stock Market Risk

Posted on December 11, 2008 // 14 Comments

Vanguard has a new article titled The importance of saving more, which tries to address evidence that investors may believe that “choosing investments that offer the possibility for relatively higher returns—and accepting the accompanying greater degree of risk—is a more viable alternative than saving more.”

In addition, the last few months probably have many of us re-examining the amount of risk we are comfortable with in our portfolios. I know I have. So what can we do?

Taken from the article, the figure below shows hypothetical outcomes for different portfolios based upon the following scenario: A 35 year-old individual begins saving 4% (grey bars) of his gross annual salary ($50,000, adjusted annually for inflation) each year for 30 years. In the red bars, the same individuals instead saves 6% of his salary. I highlighted two of the more interesting situations with the green arrows:

Here you see that based on historical data, the combination of a 50% stock/50% bond allocation and a 6% contribution rate leads to a similar range of outcomes as a 100% stock allocation and a 4% contribution rate. In fact, the former has a slightly better median outcome with much smaller swings over the years.

For example, a 50/50 asset allocation this year would have been down only around about 20%, instead of the stomach-churning 40% drop of a 100% stock portfolio. Wouldn’t that have been nice?

Higher savings provides a higher probability of success by shifting some of the responsibility for accumulation from the less-certain return stream of risky assets to a more-certain savings stream. In the end, if an investor is trying to maximize future wealth, a marginally higher savings rate rather than a substantially higher risk portfolio is the most likely path to retirement success.

As opposed to many rules of thumb, not everyone at the same age has to have the same asset allocation. Savers may get to take less risk and sleep better at night. 🙂 Something to think about…

Filed Under: Investing, Retirement //

December 2008 Investment Portfolio Update

Posted on December 9, 2008 // 23 Comments

I’ve been trying to re-balance my portfolio using my recent 401k contributions, but I ran into some speed bumps, so here is a brief interim update.

9/08 Portfolio Breakdown
 
Retirement Portfolio Actual Target
Asset Class / Fund % %
Broad US Stock Market 27.7% 34%
VTSMX – Vanguard Total Stock Market Index Fund
DISFX – Diversified Stock Index Institutional Fund*
FSEMX – Fidelity Spartan Extended Market Index Fund*
US Small-Cap Value 9% 8.9%
VISVX – Vanguard Small Cap Value Index Fund
Real Estate (REITs) 8.5% 8.5%
VGSIX – Vanguard REIT Index Fund
Broad International Developed 25.8% 25.5%
FSIIX – Fidelity Spartan International Index Fund*
International Emerging Markets 7.1% 8.5%
VEIEX – Vanguard Emerging Markets Stock Index Fund
Bonds – Short-Term 4.6% 3.8%
VFISX – Vanguard Short-Term Treasury Fund
Bonds – Inflation-Indexed 12.7% 11.3%
VIPSX – Vanguard Inflation-Protected Securities Fund
Cash 4.7% 0%
FDRXX – Fidelity Cash Reserves
Total Portfolio Value $95,678
 

* denotes 401(k) holding given limited investment options

Contribution Details
For 2008, we have finally both contributed the annual maximum of $15,500 each towards our respective 401ks. We have not made any 2008 IRA contributions, but we did make 2007 contributions in April 2008. We will likely do our 2008 contributions in April 2009 deadline.

YTD Performance
The 2008 year-to-date time-weighted performance of our personal portfolio is now -42.5% as of 12/8/08.

For reference, the Vanguard S&P 500 Fund has returned -36.69% YTD, their FTSE All World Ex-US fund has returned –47.98% YTD, and their Total Bond Index fund is +2.20% YTD as of 12/8/08. The Vanguard Target 2045 Fund has returned -35.79 YTD, primarily due to a small international allocation.

Investment Changes
In my wife’s 401k plan, a few new investment options were added, including the Fidelity Extended Market fund (FSEMX). This is a nice complement to their in-house S&P 500 index fund. If you take 75% S&P 500 and 25% Wilshire 4500 Completion Index, you pretty much get the Total US Market, so we have moved our investments to that and sold off the bit that we had in the actively-managed Dodge & Cox fund. Nothing else in that 401k is terribly appetizing.

We have used our new contributions to bring us back towards our asset allocation target, with a 85% stocks/15% bonds split. This means I have been buying more International, REIT, and Small Cap. I have also been swapping funds around to make things “fit” better, due to the limitations of spreading money across different accounts.

You’ll notice that I am really below-target in my US allocation, and have $4,500 in cash. This is because the fund minimum for the Fidelity Spartan Total US index fund is $10,000 (in my 401k). In early 2009, I hope to add enough money to reach the minimum. I could buy ETFs instead or another more expensive Fidelity fund as a tracker, but not sure if I want to pay the roundtrip commissions given that it will be less than a month. Currently on the fence.

You can view all my previous portfolio snapshots here.

Filed Under: Investing, Retirement //

December 2008 Financial Status / Net Worth Update

Posted on December 4, 2008 // 24 Comments
Net Worth Chart 2008

Credit Card Debt
I have no actual consumer debt. In the past, I have been taking money from credit cards at 0% APR and immediately placing it into high-yield savings accounts or similar safe investments that earn 3-5% interest or more, and keeping the difference as profit. I even put together a series of step-by-step posts on how I make money off of credit cards this way. However, given the current lack of good low fee 0% APR credit card offers, I don’t think I’ll be doing anymore in the near future.

Retirement and Brokerage accounts
Ignoring new contributions, my retirement accounts have lost about ~$8,500 over the last month. I will perform another portfolio update soon to find more accurate year-to-date return numbers.

I have sent in another $5,000 late last month and $5,000 this month in order to max out my pre-tax 401k contributions for this year. My asset allocation is way off target so I need to sit down and try to rebalance using these funds today. It might be tricky to due to the $10,000 minimums for index funds at Fidelity, and I might actually buy ETFs and pay the trade commission.

Cash Savings and Emergency Funds
Why am I not panicking (yet)? Well, I think a big part is my fat cash pile that serves as my emergency fund. In my mind, having a separate short-term reserve keeps me from worrying about my long-term “can’t touch” portfolio.

I have about $49,000 net in sitting in different forms of safe cash earning from 3 to 6% interest, while now my entire retirement portfolio is worth about $93,000. I will keep accumulating cash until I reach a full year’s worth of expenses, which is about $60,000. I think this is prudent given the high unemployment rate right now.

Home Equity
This is the second month of testing out my new way of estimating our house’s value. Again, I take the average estimates provided by Zillow, Cyberhomes, Coldwell Banker, and Bank of America. Then, I shave off 5% to be conservative and subtract 6% for expected real estate agent commissions (11% total). I use this final number as my estimate for home value. Looks like my home value has dropped by another 1% or so.

Overall, another tough month. However, I am very thankful we both still have jobs – knock on virtual wood!

You can see our previous net worth updates here.

Filed Under: Goals, Investing, Real Estate, Retirement //

Vanguard’s New Self-Employed 401(k) Plan – Roth Option Included

Posted on November 16, 2008 // 22 Comments

Vanguard has recently announced the details of their Individual 401(k) plan – otherwise known as Solo 401k or Self-Employed 401k. Although you can’t apply yet it seems, many of us passive investors have been waiting for Vanguard to offer this for a long time.

The Vanguard® Individual 401(k) plan is a retirement plan for self-employed individuals. This plan is available only to sole proprietors or partners in business who have no common-law employees. The only other participant allowed in this plan would be a spouse of the business owner if he or she works for the business. Business owners should not establish this plan if they have common-law employees, including their children.

There is some confusion as to whether this includes the sole owners of an S-Corporation, but I’m betting it does as it is a passthrough entity and we are essentially self-employed. Here are some more Vanguard-specific details, along with some comparison with the Fidelity Self-Employed 401(k) which I currently have:

  • Seems like you can buy any Vanguard fund with no commissions, and there is “no minimum initial investment required to open most funds” (emphasis mine). It doesn’t seem like you have the option to buy ETFs through their brokerage service. At Fidelity, the Fidelity funds are also free, but I am subject to minimum initial investments. However, I do have the ability to buy any ETF with a $12-$20 commission, as well as buy individual bonds.
  • The Vanguard Individual 401(k) will accept three types of employer and employee contribution sources: individual employee salary deferral contributions (pre-tax money), traditional employer contributions (pre-tax money), and Roth salary deferral contributions (post-tax money). Roth is available! Fidelity does not have this.
  • Employees can move money between different Vanguard funds by phone or in writing only. This is kind of a pain. I can manage my Fidelity Self-Employed 401(k) online like a regular brokerage account, with limit trades and everything.
  • There are no set-up fees charged to the employer for a Vanguard Individual 401(k) plan. Vanguard charges employees a $20 annual account service fee for each mutual fund held in an account within the Vanguard Individual 401(k). If you like to own multipole funds, that can add up quickly! (Note: If at least one participant in a Vanguard Individual 401(k) plan qualifies for Flagship™, Voyager Select™, or Voyager™ Services, the account service fee will be waived for all participants in the plan.) Fidelity has no setup fees, and no annual account fees at all.
  • Rollovers are permitted out of the Vanguard Individual 401(k), but not into it. Not sure why this is the case.

This is only a superficial review, but so far I’m not planning to try and open one. It turns out that I am quite happy with my Fidelity Solo 401k, as it provides a lot of flexibility, great customer service, and reasonable costs. Vanguard has a wider array of index funds, but I can also buy the equivalent Vanguard ETFs at Fidelity. If I buy in large enough chunks, the commission is balanced out by the lower annual expense ratios. Besides, if you are at not at least Voyager ($50k in assets), the $20 fee per fund from Vanguard costs as much as two trades anyway.

The main thing going for Vanguard is the Roth option, which I must admit should be very attractive for most people. But for us, our current tax bracket is high enough that I prefer pre-tax contributions.

Via Guzzo the Contrarian and Bogleheads.

Filed Under: Investing, Retirement //
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