IRA/401k or Other?

[DivietoDiSosta]

So I recently met with a financial adviser, and as part of his plan he recommended that I stop contributing to my 401(k) beyond what my employer will match (4%), stop contributing to my IRA (I no longer qualify for Roth) and use that money to fund other investments like individual mutual funds and ETFs.

The opinion of internet advice blogs seems to be that retirement savings trump everything but paying off debt, but this financial adviser's argument was that by choosing low cost personal investment options over retirement accounts, I will average a better return that I would be able to achieve with my company's choice of funds, and additionally have the flexibility to dip into that money in the short to mid term if I need it.

Is the emphasis on retirement savings focused mostly on the tax advantages of those accounts or the imposed discipline of keeping that money inaccessible?

Can anyone help me sort this out?

Thanks.

[disneysteve]

this financial adviser's argument was that by choosing low cost personal investment options over retirement accounts, I will average a better return that I would be able to achieve with my company's choice of funds

This is probably true. Within the 401k, you are restricted to the investment choices the 401k happens to offer, which may not be that great. On your own, you can invest in virtually anything you want.

and additionally have the flexibility to dip into that money in the short to mid term if I need it.

This makes no sense. Either the money is intended for retirement or it isn't. Whenever possible, your retirement money should take full advantage of tax-favored investments like 401k, IRA, and Roths. If, however, you are investing money that you might need for other purposes before retirement, that's different and obviously that money shouldn't be going into your IRA or 401k.

So you need to figure out how much you want to be investing for retirement (15% of income is the rule of thumb) and how much you want to be investing for other needs outside of retirement.

[Petunia 100]

So I recently met with a financial adviser, and as part of his plan he recommended that I stop contributing to my 401(k) beyond what my employer will match (4%), stop contributing to my IRA (I no longer qualify for Roth) and use that money to fund other investments like individual mutual funds and ETFs.

The opinion of internet advice blogs seems to be that retirement savings trump everything but paying off debt, but this financial adviser's argument was that by choosing low cost personal investment options over retirement accounts, I will average a better return that I would be able to achieve with my company's choice of funds, and additionally have the flexibility to dip into that money in the short to mid term if I need it.

Is the emphasis on retirement savings focused mostly on the tax advantages of those accounts or the imposed discipline of keeping that money inaccessible?

Can anyone help me sort this out?

Thanks.

If your income is high enough you cannot directly contribute to a Roth, then the tax-deferral offered by your 401k must be valuable to you. Why would this adviser recommend you forego the tax break in favor of a taxable account? Could it be possible the taxable account would be invested with his/her help, translating into income for him/her?

You do not make too much to contribute indirectly to a Roth. You simply contribute to a traditional IRA and then convert it. There are no income limits to convert. If you have no deductible contributions sitting in traditional, SEP, or Simple IRAs, it is a very straightforward thing to do.

[snafu]

Does the advisor hold the Certified Financial Planner designation? Many 'advisors' are salesmen promoting products so clients need to be cautious. What are you currently holding in your employer's 401K? What are the Management fees and costs passed on to you? Age and your risk tolerance likewise play important roles.

[autoxer]

So I recently met with a financial adviser, and as part of his plan he recommended that I stop contributing to my 401(k) beyond what my employer will match (4%), stop contributing to my IRA (I no longer qualify for Roth) and use that money to fund other investments like individual mutual funds and ETFs.

The opinion of internet advice blogs seems to be that retirement savings trump everything but paying off debt, but this financial adviser's argument was that by choosing low cost personal investment options over retirement accounts, I will average a better return that I would be able to achieve with my company's choice of funds, and additionally have the flexibility to dip into that money in the short to mid term if I need it.

Is the emphasis on retirement savings focused mostly on the tax advantages of those accounts or the imposed discipline of keeping that money inaccessible?

Can anyone help me sort this out?

Thanks.

At first glance, it sounds like terrible advice, but without knowing the full picture it's tough to say. He's got two different reasons, low cost and accessibility

Have you looked at the expense ratios of the funds in your 401k and compared all of your choices? There are calculators that can show you what kind of drag the expense ratio puts on your investments. Does your 401k plan allow in service rollovers? If you are no longer eligible for a ROTH, then you must have a pretty high income and a high tax bracket, making the tax deferral more attractive. Can you max out the 401k and also fund a taxable account?

Do you need accessibility to the money in the short term? Do you have a sufficient emergency fund?

[feh]

Can anyone help me sort this out?

Thanks.

First thing you need to do is determine the advisor's motivation. Is he going to profit if you follow his advice?

For most people (IMO), an advisor is not necessary. Post questions here and/or on bogleheads.org. You'll get excellent advice for free, in most cases.

I suggest you read this page: http://www.bogleheads.org/wiki/Bogle...g_start-up_kit

[JulieAlbright]

I'm going to take it in chunks

1. Only contribute to the matching limit

Okay, that sounds reasonable at first glance. Many 401ks have extremely limited and/or expensive investment options. Take the amount where you are getting advantage of the employer contribution and then go search for greener pastures. This might apply to you or might not. Some people have awesome 401k or Roth 401k plans and they might need immediate tax deferral because of high incomes.

2. Stop contributing to the IRA and use that for other investments like Individual Mutual Funds and ETFs

This is the part that really does not make sense to me. There is no reason (in fact it is quite common) for an IRA contribution to hold Mutual Funds and ETFs. If you want mutual funds and etfs, a prime consideration should be HAVING an IRA because it allows you to invest tax advantaged dollars.

3. No longer qualify for a Roth.

Okay, might or might not be valid. But any Financial Advisor worth anything should have discussed with you the advantages/disadvantages of contributing to a Non-Deductible IRA and then converting your Contributions to a Roth. This might or might not be a good idea for you, there are several calculators around the internet that can show you the issues and possible benefits.

4. Easier access to the funds if they aren't labeled "Retirement."

Okay. This might be a good point. What other goals and assets do you have and is having a chunk of investment money outside of retirement accounts a good idea? For instance, many people save long-term for a 2nd home or other long-range goals.

Or perhaps he wants you to have some sort of layered emergency fund strategy …. like 3 months of expenses in cash like vehicles for immediate liquidity and then 2 months in low risk bond funds, then 2 months in intermediate risk etc etc

But remember - there are also some ways to meet those goals in tax advantaged accounts like IRAs and HSA. So those need to be examined too.

[jIM_Ohio]

This is probably true. Within the 401k, you are restricted to the investment choices the 401k happens to offer, which may not be that great. On your own, you can invest in virtually anything you want.


This makes no sense. Either the money is intended for retirement or it isn't. Whenever possible, your retirement money should take full advantage of tax-favored investments like 401k, IRA, and Roths. If, however, you are investing money that you might need for other purposes before retirement, that's different and obviously that money shouldn't be going into your IRA or 401k.

So you need to figure out how much you want to be investing for retirement (15% of income is the rule of thumb) and how much you want to be investing for other needs outside of retirement.

Steve-

I disagree with your logic, and I agree with part of the advisors logic.

Too many people (myself included) invest for retirement in a vacuum. Yes the 401k up to the match should be used. Yes an IRA should be used (I disagree with NOT funding the IRA, but I do agree a taxable account is needed too).

I have made significant changes to my savings over last 2 years to where just as much money is put into taxable investments as to tax deferred investments.

I disagree with advisor that rate of return in a taxable account will be better than rate of return in an IRA
I agree with advisor that having a pool of money available for circumstances you cannot plan for is a good thing.

A couple of clues:
1) you stated you are NOT eligible for a Roth, this implies a MAGI (modified adjusted gross income) of over 181k for a married couple. I would make sure this is correct, (verify advisor is right with a CPA) and then lets focus on savings which suggest

a) save 20% of your gross income each year. This is $40k per year on $200k income.
a1) put $17,500 of this in your 401k. You will be saving 28% ($4900) in taxes each year by doing this. No brainer to me.
a2) contribute $5500 to a traditional IRA.
a3) contribute $17,000 to a taxable account each year

2) This solves all 3 issues
1) you know what your 401k contribution is
2) You still use the traditional IRA
3) You create a taxable account

3) you sought out an advisor, so you have a clear desire to get answers, I would focus on making sure you ask thorough questions and educate yourself so you know if advisor has your interests aligned with their own.

The advisor makes money on the accounts they control (taxable) so they have an interest in seeing that go up. I might suggest finding a fee only advisor and you might see the advice change (I have a fee only practice and I do charge for assets in 401k and assets in an IRA and assets in a taxable account, if an advisor works for a brokerage, it is against the law for them to charge on assets held at another brokerage- and a 401k is likely managed at another brokerage).

[jIM_Ohio]

First thing you need to do is determine the advisor's motivation. Is he going to profit if you follow his advice?

For most people (IMO), an advisor is not necessary. Post questions here and/or on bogleheads.org. You'll get excellent advice for free, in most cases.

I suggest you read this page: http://www.bogleheads.org/wiki/Bogle...g_start-up_kit

If you have to question the advisors motivation, find a different advisor.

[DivietoDiSosta]

Thanks to everyone who has weighed in on this question.

To offer some context, I have an adjusted gross income of about $135k for 2014. I currently contribute 10% to my 401(k) and the max to my IRA (Roth until this year). I have an emergency fund of $32k in a high interest online savings account, $12k of which is earmarked to pay off my student loans as soon as I graduate next spring, so effectively $20k of emergency cash, or about 4 months of monthly expenses and mortgage payments.

I don't regularly contribute to my savings or my taxable mutual funds, since I don't have a lot of wiggle room in my budget, but I feel like I have enough of a cushion if something were to happen.

I'm going to sit down with the advisor again and ask him to explain his reasoning. Maybe I'm missing something. He did explain using the backdoor route to get my IRA contributions for this year into my Roth IRA, but only when I asked about it. I feel like I need more information before I can make a good decision.

[jIM_Ohio]

Thanks to everyone who has weighed in on this question.

To offer some context, I have an adjusted gross income of about $135k for 2014. I currently contribute 10% to my 401(k) and the max to my IRA (Roth until this year). I have an emergency fund of $32k in a high interest online savings account, $12k of which is earmarked to pay off my student loans as soon as I graduate next spring, so effectively $20k of emergency cash, or about 4 months of monthly expenses and mortgage payments.

I don't regularly contribute to my savings or my taxable mutual funds, since I don't have a lot of wiggle room in my budget, but I feel like I have enough of a cushion if something were to happen.

I'm going to sit down with the advisor again and ask him to explain his reasoning. Maybe I'm missing something. He did explain using the backdoor route to get my IRA contributions for this year into my Roth IRA, but only when I asked about it. I feel like I need more information before I can make a good decision.

If you file as single, the Roth limit is $112k for 2014 and $114k for 2015.

Here is what I would do (before visiting advisor):

Add up 2014 401k contributions plus $5500 to IRA.

This is the amount you are saving now...
what % of gross income is this now (likely about 12-15%?).
If you contributed this amount to your 401k, would that lower your AGI? Because of taxes, it is possible that the 12% you are saving now (10% pre-tax to 401k and 2% after tax to Roth/Traditional IRA) becomes 15%-18% pre-tax to your 401k.

Meaning you can actually save more if you funnel more money to the 401k.
This would lower the taxes you pay, allow you to save more money
and possibly open door for a Roth contribution if you receive an end of year bonus.

This is just one part of a solution, as I agree you should also have a taxable account which received at least $200/mo for accumulation. Could be invested in cash, stocks, or something else, but growing your taxable savings gives you options down the road when you need to access money before age 55/59.5.