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geo123 said:   
Depends on the occupation, career path, etc... Highly successful CEO's, for instance, frequently have multiple periods where they are in between jobs (whether by choice or not). A ton of highly successful enterpreneurs have countless periods of $0 income. Quite a few employers offer sabbaticals to certain types of employees (it's fairly common in academia; it's less common but also isn't unusual in a number of industries).

It also depends on the reason that you are in a relatively high tax bracket. For instance, a couple of professionals making $140K/year each is in the 33% tax bracket. If the wife (or the husband -- I don't mean to be sexist here) ends up taking some time off to care for the kids, the couple's tax bracket drops to 25%. This happens all the time and represents a great conversion opportunity.


Sure again the problem with talking in generalities, but generally speaking I tend to believe that great conversion opportunities tend to be few and far between for most professionals. We could all provide examples to the contrary(by the small business owners throw up an entirely different strategy track that makes this conversation a bit of amateur hour for them). Don't forget that the physical conversion itself throws into the AGI meaning that you trigger higher tax brackets with often not particularly large sums of money(i.e. frequency is more valuable here than often times size). Also realize that the higher tax liability against a lower temporary income increases your burn rate which means that you could end up tapping emergency funds faster or lower contribution rate for that year/overwithdrawing to cover a portion of the tax liability of the move. Now this is easier on people with larger taxable holdings, but for those that don't have high taxable holdings(particularly if they're using retirement accounts for emergency funds which ideally they should be) this is a factor for consideration. 
geo123 said:   
Once again, the tax rates do not need to be the same in order for you to be far better off with 100% of your money in traditional accounts. You still need taxable income to fill lower tax brackets, so in situations where your only sources of income will be Social Security and your retirement savings, tax rates would have to rise dramatically (not just a few percentage points) for you to come out ahead with a Roth (unless you made those Roth contributions while you were in an ultra low tax bracket or you somehow accumulated retirement savings that are causing your income to be much higher than it was while you were working, which would be quite unusual)


I thought I covered this already? I agree you have make sure to back fill the lower brackets in your contribution strategy(it was my primary point of the very first comment I made on this thread). Again majority of assets in traditional. We're talking about that last 10-40% of assets here.

Speaking of putting emergency funds in a Roth IRA (not a Roth 401(k), as you typically cannot make in-service withdrawals), I know that quite a few people are in favor of this approach. I am not one of them, however.

The big advantage of a Roth account is the fact that none of the earnings are taxed. Your emergency funds, however, have to be readily available, so they are generally invested very, very conservatively, which also means that the earnings are quite small, which greatly reduces the attraction of having the funds in a Roth account in the first place. I realize that the argument here is that by having your emergency funds in a Roth IRA, you are effectively preserving your Roth space, so that if things change you'll be able to invest those funds more aggressively. There's certainly some truth to that, but personally, I just don't think that I'll be in a position where I'll feel comfortable without any emergency funds until I'm quite close to retirement, which won't really be the time to get all that aggressive with my money. I also realize that once you've accumulated very substantial balances in your Roth IRA's you may feel comfortable investing all of them pretty aggressively under the theory that even if there's an emergency at the same time that the market is down, you may be forced to effectively buy high and sell low but you'll still have enough money to weather an  emergency. That's a more persuasive argument to me, but I still think that there's tremendous value associated with having a true emergency account in liquid non-Roth funds, with Roth IRA funds perhaps being the second line of defense.

geo123,

If I'm not mistaken you are suggesting it is better to have both an emergency fund and a RothIRA - I think the idea is it is better to have just a RothIRA if your choice is one or the other.

1-It gets the assets off the FAFSA calculation.
2-It preserves the Roth contribution that is lost after April 15.
3-Interest rates are near-zero, so it costs your emergency fund nothing.
4-It starts the clock on the 5-year holding period.
5-I believe the asset is protected from creditors / lawsuits better than a cash account.

I'm in the 25% bracket in a relatively high state tax state, and I do 100% pretax into 401k, and then max out Roth IRA. So I'm hedging some, and since my options of IRA are Roth or none (no Traditional since I have a 401k through employer), it's an easy choice there.

elektronic said:   geo123,

If I'm not mistaken you are suggesting it is better to have both an emergency fund and a RothIRA...
That's correct.

1-It gets the assets off the FAFSA calculation.To the extent that this is an issue, it is certainly a very valid point.

2-It preserves the Roth contribution that is lost after April 15.Correct, but if you continue to invest it in a very conservative manner, which is the way that emergency funds are typically handled, what is the upside of such a contribution? In and of itself, having funds in a Roth account doesn't get you anywhere. The reason that Roth accounts are attractive is the fact that all earnings there are tax free. Well, if you have virtually no interest because the funds are being invested very conservatively, then you aren't accomplishing all that much by having those funds in a Roth account.

3-Interest rates are near-zero, so it costs your emergency fund nothing.See my point above.

4-It starts the clock on the 5-year holding period.There is no 5 year clock on original Roth IRA funds. You can open a Roth IRA today and withdraw 100% of your principal tomorrow or the following year without any penalties.

5-I believe the asset is protected from creditors / lawsuits better than a cash account.That's correct and is a valid point.

Like I mentioned above (and you've added some additional valid considerations), there are some situations where putting your emergency funds in a Roth IRA can make sense and, even in the absence of those situations, it's not illogical to do so. It is just that for the reasons above, I do not consider it to be a perfect substitute, so I think that there's still a lot of value in having a separate non-Roth emergency account.

dukerau said:   I'm in the 25% bracket in a relatively high state tax state, and I do 100% pretax into 401k, and then max out Roth IRA. So I'm hedging some, and since my options of IRA are Roth or none (no Traditional since I have a 401k through employer), it's an easy choice there.
Precisely, it's a very easy choice in your case.

We have the opposite problem (admittedly, it's a good problem to have, but it's still a problem), as in our tax bracket it makes no sense whatsoever for us to have any Roth funds. My wife and I both have access to Roth 401(k)'s but, because of our tax bracket, we max out our traditional 401(k)'s. I absolutely hate funding backdoor Roth IRA's because the Roth is causing us to significantly overpay our taxes, but I still do it because they are more advantageous than taxable accounts. It's also an easy choice in our situation.

geo123 said:   Speaking of putting emergency funds in a Roth IRA (not a Roth 401(k), as you typically cannot make in-service withdrawals), I know that quite a few people are in favor of this approach. I am not one of them, however.

The big advantage of a Roth account is the fact that none of the earnings are taxed. Your emergency funds, however, have to be readily available, so they are generally invested very, very conservatively, which also means that the earnings are quite small, which greatly reduces the attraction of having the funds in a Roth account in the first place. I realize that the argument here is that by having your emergency funds in a Roth IRA, you are effectively preserving your Roth space, so that if things change you'll be able to invest those funds more aggressively. There's certainly some truth to that, but personally, I just don't think that I'll be in a position where I'll feel comfortable without any emergency funds until I'm quite close to retirement, which won't really be the time to get all that aggressive with my money. I also realize that once you've accumulated very substantial balances in your Roth IRA's you may feel comfortable investing all of them pretty aggressively under the theory that even if there's an emergency at the same time that the market is down, you may be forced to effectively buy high and sell low but you'll still have enough money to weather an  emergency. That's a more persuasive argument to me, but I still think that there's tremendous value associated with having a true emergency account in liquid non-Roth funds, with Roth IRA funds perhaps being the second line of defense.

  
Geo, you didn't follow.

Step 1: Hold emergency fund in tIRA/t401k with maybe a stable value fund, short or ultra short durations, etc. or just apart of a good safe(low duration) fixed income mix already in there
Step 2: Invest Roth IRA aggressively

Step 3: Emergency strikes
Step 4: Sell Roth IRA equities and withdraw
Step 5: Sell stable assets within tIRA/401k and buy equities in their place to implicitly hold the equities you sold out of the Roth IRA.

Stare at this is as long as it takes for you to see why this works. What I've succeeded in doing is utilizing the Roth IRA to "funge" the money out of the tIRA/401k via the Roth IRA by matching/canceling out purchases and sales leaving the same amount of equities their before and after(and I'm definitely not worse off than holding an emergency fund in a taxable account and not having a Roth IRA at all).

And even still if I just kept the safe/stable assets in the Roth(like you said) it would still be better than holding the same assets in a taxable emergency fund. There is absolutely no reason someone would forgo tax sheltered vehicles when they have a Roth they can draw from quite easily. 

geo, I can assure you that arguing in favor of a taxable account for emergency assets with the absence of any Roth contributions whatsoever is a bad argument to make.

There is no downside to maintaining either a Roth as an emergency fund or using it as a fungible passthrough emergency fund when the alternative is a taxable emergency fund. There is absolutely no upside to using a taxable emergency fund in lieu of making Roth contributions.

There are tax credits that also phase out through the 25% bracket.

Contributing to a traditional 401k lowers your AGI which in turns can help you qualify for those tax credits so take this into account as well in the decision to go Roth vs. traditional 401k.

dshibb said:   
Geo, you didn't follow.

Step 1: Hold emergency fund in tIRA/t401k with maybe a stable value fund, short or ultra short durations, etc. or just apart of a good safe(low duration) fixed income mix already in there
Step 2: Invest Roth IRA aggressively

Step 3: Emergency strikes
Step 4: Sell Roth IRA equities and withdraw
Step 5: Sell stable assets within tIRA/401k and buy equities in their place to implicitly hold the equities you sold out of the Roth IRA.

Stare at this is as long as it takes for you to see why this works. What I've succeeded in doing is utilizing the Roth IRA to "funge" the money out of the tIRA/401k via the Roth IRA by matching/canceling out purchases and sales leaving the same amount of equities their before and after(and I'm definitely not worse off than holding an emergency fund in a taxable account and not having a Roth IRA at all).

You are generally a very good poster but you tend to lack practical knowledge, which is the reason that some of your posts end up sounding like this.

As a practical matter, most people are going to have access to totally different investment choices in their IRA's and 401(k)'s, which is the reason that this suggestion tends to sound great in theory and tends to fail miserably in practice (not for all people but for quite a few). For instance, as I've previously posted, in my 401(k) I have access to institutional shares of excellent funds, which end up costing just a fraction of what they'd cost on the retail market. I am also given access to phenomenal active funds with waived loads, can invest in otherwise closed funds, etc...

In other words, if I were to implement your suggestion, in my case it would end up costing me a rather substantial amount of money, as my IRA investments would be way inferior and significantly more expensive. It goes without saying that not everyone out there is in the same situation, but if you have a good 401(k), your IRA and 401(k) investments are anything but fungible, which would make implementing your suggestion a disaster.

Now, and this is a much smaller point, but people using backdoor Roth IRA's, which is what I posted about above, do not and cannot have traditional IRA's, as traditional IRA's (whether original or rollover) defeat the backdoor IRA strategy.
And even still if I just kept the safe/stable assets in the Roth(like you said) it would still be better than holding the same assets in a taxable emergency fund.
At this point, safe/stable assets in the Roth would earn about 1% or substantially less. With earnings like that, the Roth structure is saving you virtually nothing (income taxes on virtually nothing are virtually nothing) but is forcing you to accept potential delays and administrative hassles associated with early withdrawals.

Further, if you are forced to do backdoor IRA's, there is the step transaction doctrine to potentially worry about. As I pointed out in the other thread, I think that if the IRS wanted to somehow assert a claim that there was something wrong with backdoor IRA's and wished to apply the step transaction doctrine to them, they would've done it by now or they would've issued official guidance regarding them. It's certainly not conclusive, but at this point I just cannot imagine that the IRS would do so retroactively. Having said that, there's some degree of risk that's associated with the strategy, which, if you are going to hold your Roth IRA funds in very conservative investments anyway, means that the upside is so limited that it doesn't take much for the downside factors to eclipse it.

You also have to remember that if we are talking about conservative investments Roth IRA holdings can have substantial opportunity costs. For instance, most high yield savings accounts are not compatible with IRA's; you cannot use your IRA funds to qualify for most promotional offers that frequently come up, etc...

To clarify, I don't have a dog in this fight, as we already max out our 401(k)'s and do backdoor IRA's, so we just don't have any untapped tax advantaged options. If, however, I had to use my emergency fund to fund Roth IRA's, for the reasons above I would think long and hard about it. Like I mentioned above, it is not an illogical thing to do but there are also downsides that would have to be considered, so, for a lot of people, it's not a perfect replacement of a taxable emergency fund.

awstick said:   It mostly comes down to tax rate now vs. tax rate in retirement.... Your marginal tax in retirement would have to be higher than that to make a Roth beneficial. When you are retired you will probably earn less than you do now, maybe 80% of that figure, 
  
I often question the 80% figure and think it is very inflated.  I would expect in retirement the following expenses will not be necessary:

  • mortgage
  • kids (with some luck)
  • retirement contribution
  • savings

These can easily account for at least 50% of my current income. 
Because of the progressive nature of the tax, it is very likely that I will be  in the lower bracket in retirement.  Still, my strategy has been to contribute to both (three parts pre-tax to one part Roth) so that I have the flexibility of withdrawing pre-tax funds at lower rates and supplement them with Roth funds once I reach higher tax brackets.

geo123 said:   
dshibb said:   
Geo, you didn't follow.

Step 1: Hold emergency fund in tIRA/t401k with maybe a stable value fund, short or ultra short durations, etc. or just apart of a good safe(low duration) fixed income mix already in there
Step 2: Invest Roth IRA aggressively

Step 3: Emergency strikes
Step 4: Sell Roth IRA equities and withdraw
Step 5: Sell stable assets within tIRA/401k and buy equities in their place to implicitly hold the equities you sold out of the Roth IRA.

Stare at this is as long as it takes for you to see why this works. What I've succeeded in doing is utilizing the Roth IRA to "funge" the money out of the tIRA/401k via the Roth IRA by matching/canceling out purchases and sales leaving the same amount of equities their before and after(and I'm definitely not worse off than holding an emergency fund in a taxable account and not having a Roth IRA at all).

You are generally a very good poster but you tend to lack practical knowledge, which is the reason that some of your posts end up sounding like this.

As a practical matter, most people are going to have access to totally different investment choices in their IRA's and 401(k)'s, which is the reason that this suggestion tends to sound great in theory and tends to fail miserably in practice (not for all people but for quite a few). For instance, as I've previously posted, in my 401(k) I have access to institutional shares of excellent funds, which end up costing just a fraction of what they'd cost on the retail market. I am also given access to phenomenal active funds with waived loads, can invest in otherwise closed funds, etc...

In other words, if I were to implement your suggestion, in my case it would end up costing me a rather substantial amount of money, as my IRA investments would be way inferior and significantly more expensive. It goes without saying that not everyone out there is in the same situation, but if you have a good 401(k), your IRA and 401(k) investments are anything but fungible, which would make implementing your suggestion a disaster.

Now, and this is a much smaller point, but people using backdoor Roth IRA's, which is what I posted about above, do not and cannot have traditional IRA's, as traditional IRA's (whether original or rollover) defeat the backdoor IRA strategy.
And even still if I just kept the safe/stable assets in the Roth(like you said) it would still be better than holding the same assets in a taxable emergency fund.
At this point, safe/stable assets in the Roth would earn about 1% or substantially less. With earnings like that, the Roth structure is saving you virtually nothing (income taxes on virtually nothing are virtually nothing) but is forcing you to accept potential delays and administrative hassles associated with early withdrawals.

Further, if you are forced to do backdoor IRA's, there is the step transaction doctrine to potentially worry about. As I pointed out in the other thread, I think that if the IRS wanted to somehow assert a claim that there was something wrong with backdoor IRA's and wished to apply the step transaction doctrine to them, they would've done it by now or they would've issued official guidance regarding them. It's certainly not conclusive, but at this point I just cannot imagine that the IRS would do so retroactively. Having said that, there's some degree of risk that's associated with the strategy, which, if you are going to hold your Roth IRA funds in very conservative investments anyway, means that the upside is so limited that it doesn't take much for the downside factors to eclipse it.

You also have to remember that if we are talking about conservative investments Roth IRA holdings can have substantial opportunity costs. For instance, most high yield savings accounts are not compatible with IRA's; you cannot use your IRA funds to qualify for most promotional offers that frequently come up, etc...

To clarify, I don't have a dog in this fight, as we already max out our 401(k)'s and do backdoor IRA's, so we just don't have any untapped tax advantaged options. If, however, I had to use my emergency fund to fund Roth IRA's, for the reasons above I would think long and hard about it. Like I mentioned above, it is not an illogical thing to do but there are also downsides that would have to be considered, so, for a lot of people, it's not a perfect replacement of a taxable emergency fund.

  
Geo, do you work in finance? Sorry, but in this instance you don't know what you're talking about.

Fee structure is a factor, but I can assure you that the difference between institutional mutual funds and Vanguard funds in terms of cost is so minuscule that it's a drop in the bucket relative to tax issues. I honestly don't give 2 $hits if you have access institutional at 4 basis points. It's meaningless and no 'it wouldn't cost you a bunch of money'. Also the fact that you have institutional inside of 401k is extremely rare so talk about failing in practice(everybody else acting like you are would not only be making the mistakes you are, but it would be even much worse).

Look up isolation of tax basis and you'll realize that a person can run a solo 401k practically the same exact way as a tIRA.

Bold: Bull$hit!


Geo, I realize as a lawyer you don't like to be wrong. Let me tell you that in this particular instance you are wayyyyy wrong and trying to pull up de minimis issues to grab at straws like the difference in expense charges between institutional and index funds where the spread is so tiny that most would never even care to talk about it.

aleck said:   
awstick said:   It mostly comes down to tax rate now vs. tax rate in retirement.... Your marginal tax in retirement would have to be higher than that to make a Roth beneficial. When you are retired you will probably earn less than you do now, maybe 80% of that figure, 
  
I often question the 80% figure and think it is very inflated.  I would expect in retirement the following expenses will not be necessary:

  • mortgage
  • kids (with some luck)
  • retirement contribution
  • savings

These can easily account for at least 50% of my current income. 
In addition to the above, which are all absolutely correct, you will no longer have to continue to pay a premium to live closer to the office. So, you may be able to relocate to a less expensive area and pocket the difference. When you travel, you'll be in a much better position to structure your trips in a way that maximizes the savings, which may've been difficult to do while you were working.

On the other hand, once you retire you'll have infinitely more free time than you had while you were working, so, ideally, you'll probably want to spend more time (and money) enjoying your hobbies, traveling, etc...
 

dshibb said:   
Fee structure is a factor, but I can assure you that the difference between institutional mutual funds and Vanguard funds in terms of cost is so minuscule that it's a drop in the bucket relative to tax issues.

Ummm, no, it's not. On an S&P500 index fund, the difference is going to be small. On something a lot more exotic, the difference is going to be a lot more substantial.
I honestly don't give 2 $hits if you have access institutional at 4 basis points. It's meaningless and know 'it wouldn't cost you a bunch of money'.
Frankly, I don't really know how to respond to that. I am all for indexing but when you have access to some of the top actively managed funds at a fraction of their retail cost, if you are inclined to invest in them but can't because you are implementing your strategy, it is certainly costing you a small fortune.
Also the fact that you have institutional inside of 401k is extremely rare so talk about failing in practice(everybody else acting like you are would not only be making the mistakes you are, but it would be even much worse).
I don't know what to tell you. It's certainly not universal but is much more common than you seem to realize. Although many large employers do have crappy 401(k) holdings and smaller employers just do not have the fund balances to qualify for institutional shares, there are a ton of medium sized and large employers that offer institutional shares to their 401(k) participants, as it's not costing them anything extra. Their account balances just simply cause them to qualify for institutional shares.
Bold: Bull$hit!
Ummm, no, it's not. It's not a mammoth undertaking and it's not an enormous delay, but it's certainly not the same as walking into your bank and walking out with a withdrawal from your taxable account or writing a check or sending wire on the spot.
Geo, I realize as a lawyer you don't like to be wrong. Let me tell you that in this particular instance you are wayyyyy wrong and trying to pull up de minimis issues to grab at straws like the difference in expense charges between institutional and index funds where the spread is so tiny that most would never even care to talk about it.
I actually love to be proven wrong and love people questioning my views, as that's what causes me to re-examine them and also keeps things intellectually stimulating. In this case, however, you are just failing to understand and appreciate the practical implications of your strategy. I do certainly agree that for the most part the downsides are not catastrophic (which is also the reason that I keep pointing out that it is not illogical to do so, although there are also a lot of situations, such as some of the ones that I've mentioned above, in which it would categorically make sense to stay away from this strategy) but there are quite a few of them and, when taken together, they aren't all that tiny. As I also keep pointing out, for the reasons above the upside here is actually very, very small, so it doesn't take all that much for the downsides to outweigh it.

I also do think that you are making a mountain out of a molehill. 

1) Eww exotic, like what?

2) And what criteria are you using to determine 'top actively managed funds'? And why should a person be so confident in that criteria as to put 100% of their 401k assets in those equity funds?(because keep in mind if it's even 70% the other 30% can be invested differently and funged out). 

3) Let's say a very generous 10% of people have 401ks/403bs with institutional funds(much, much higher percentage than I've seen, but whatever) that is still rare for you to be basing the entire crux of your argument on.

4) Really? So you think that having maybe a few $k in your checking account to cover the day to day + medium sized stuff that comes up, and then maybe once every 5, 10, or 15 years requiring much more than a few thousand dollars(plus your income mind you) and going to your Roth at that time is a huge hassle worthy of killing tax efficiency, contribution capacity, etc. over? Huh! You must really value 15 minutes of your time maybe once every 5-10 years. Oh and that lost job situation you actually have to burn through the first few grand in your checking account first before needing the Roth funds. It would have to be the slowest custodian in the world times 100 for you to ever be delayed enough for it to be an issue.


5) I'm "failing to understand and appreciate the practical implications of my strategy"? Huh, wow! Gee who would have thought that apparently all of these people are sitting on amazing exotic funds in their 401k that are going to all outperform the market by so much that large guaranteed tax savings are meaningless in comparison and then there is of course the unbelievable inconvienence to ever establishing a Roth to hold excess funds instead of a taxable account because God forbid you might actually have to fill out a form and wait a couple days to get your distribution when you need maybe once every 7 or 8 years. Wow! I really missed the boat, Geo!


P.S. The upside is quite large. You're talking about having people give up precious contribution capacity in retirement accounts over tiny, tiny differences in the speed and hassle of withdrawing funds that would likely only happen once or twice a decade(and I'm being generous there) if that. Giving up precious contribution capacity alone is a big deal!

dshibb said:   1) Eww exotic, like what?
The first example that pops in my mind is many foreign and emerging market funds and sectors. You can certainly invest in an index but, IMHO, this is one of those areas where active management on the cheap can pay significant dividends. In this area, traditionally and historically successful actively managed funds are expensive and a number of them are closed -- with institutional shares, I am paying a fraction of their retail costs and have access to some excellent closed funds.

Would I invest in any of these actively managed funds if I was purchasing retail shares? Not in a million years, as index funds are so much cheaper. With institutional shares, the price difference between index funds and actively managed funds becomes so small that it ends up making a ton of sense to do it.

There is no reason to turn this into a debate over investment philosophies, which would be completely OT in this thread. My point here is that if you have access to excellent 401(k)/403(b) choices, then your IRA deposits are anything but fungible.
Let's say a very generous 10% of people have 401ks/403bs with institutional funds(much, much higher percentage than I've seen, but whatever)...
I have no idea whether this type of data is available, but in my experience it is about 40%. Without independent data, however, there's obviously no way to tell which number is actually representative of what's out there.
Giving up precious contribution capacity alone is a big deal!
That depends on what you would do with it. If the money would be held in a stable value fund earning you 0.2% interest for the next 20 years, then putting it in a Roth is largely a waste of time, as the so-called "tax advantages" are going to be miniscule, particularly for people in lower tax brackets, and may actually end up costing you money, as you'll have to forego bank bonuses, high yield savings accounts that can't be used with IRA's, etc...

I am intentionally cutting out the rest of your post, as I think that your context is that of a single person without too many potential financial liabilities and your definition of an emergency is one that can be covered by a couple thousand dollars. Neither of these is a bad thing but I'm just approaching it from a very different standpoint. My context is quite different from yours and my definition of an emergency involves situations that I suspect are quite different from the ones that you are thinking of and would involve way more money.



 

1) Geo, you do realize that even if we hypothetically agreed that you there are areas like international where institutional makes sense, in order for you to actually have a case at all you have to be able to claim that 100% of your 401k should be in those institutional mutual funds leaving no room for fixed income there and only elsewhere. That is an extremely tall order. So I certainly hope you aren't saying you're 100% institutional foreign mutual funds(because if you are it's been rough ride my friend). Geo, the tax savings are stark and guaranteed. You're talking about only a hope that these funds will out perform, but don't know that for sure. Regardless of whether I agree with you or not about institutional funds being theoretically superior A) It doesn't trump guaranteed tax savings and B) It probably shouldn't be 100% of your 401k.

2) Considering just the market share of Principal I can assure you that it's not 40% unless of course you have a weird definition of 'institutional shares'. The vast majority of peoples 401ks are $hitty choices, but not $hitty enough to overcome the tax advantages. Then another large group have decent choices, but just no real(sub 30 bps) institutional share mutual funds. A very distinct minority have access to true institutional mutual funds. Also by the way if any mutual fund(institutional or otherwise) holds more than about 75 positions you'd better off just holding the cheapest in that category because they've largely diversified away their ability to actually stand out in any meaningful way(unless they're sector stacking or window dressing).

3) .2% for the next 20 years is a preposterous straw man. You and me both know that eventually rates will be higher and all of that IRA capacity you've built up is at that time going to pay huge dividends over any taxable account.



Geo, if this was more of "an opinion I can see your point" type thing I would be responding closer to how I responded to psychtobe. The fact that you haven't backed off this largely indefensible position is a bit surprising. I like you, but you will hold onto a losing argument longer than you should. Just let it go. There is practically no set of circumstances where anybody would be correct in following what you're suggesting.... Do I sound like I'm not sure of that?

dshibb said:   1) Geo, you do realize that even if we hypothetically agreed that you there are areas like international where institutional makes sense, in order for you to actually have a case at all you have to be able to claim that 100% of your 401k should be in those institutional mutual funds leaving no room for fixed income there and only elsewhere.
No, we don't. You'd just invest an amount equal to your desired emergency fund in stable value funds offered by your 401(k) and leave the rest of the funds in your 401(k) allocated the same way as you normally would. My comments regarding you foregoing the benefits associated with excellent 401(k)'s apply to those specific emergency funds.
Geo, the tax savings are stark and guaranteed.
Once again, if the money would be held in a stable value fund earning you 0.2% interest for the next 20 years, then putting it in a Roth is largely a waste of time, as the so-called "tax advantages" are going to be miniscule, particularly for people in lower tax brackets, and may actually end up costing you money, as you'll have to forego bank bonuses, high yield savings accounts that can't be used with IRA's, etc...
.2% for the next 20 years is a preposterous straw man. You and me both know that eventually rates will be higher and all of that IRA capacity you've built up is at that time going to pay huge dividends over any taxable account.
Historically, stable value funds offer yields that are significantly lower than the yields that we can get on taxable high yield savings accounts (and you can't use IRA's with those), and you are also foregoing signup bonuses and the like, most of which are only offered on taxable accounts.

Once again, if we are talking about emergency funds held in stable value funds, the so-called "tax advantages" are going to be miniscule, particularly for people in lower tax brackets, and may actually end up costing you money, as you'll have to forego bank bonuses, high yield savings accounts that can't be used with IRA's, etc... From the tax standpoint, what makes Roth accounts advantageous is their ability to shield all the earnings from being taxed. If your Roth funds aren't generating much in terms of those earnings, which would be the case for emergency funds invested in stable value funds, then there isn't much to tax.
Geo, if this was more of "an opinion I can see your point" type thing I would be responding closer to how I responded to psychtobe. The fact that you haven't backed off this largely indefensible position is a bit surprising. I like you, but you will hold onto a losing argument longer than you should. Just let it go. There is practically no set of circumstances where anybody would be correct in following what you're suggesting.... Do I sound like I'm not sure of that?
No, it actually sounds like you haven't read any of my explanations and are continuing to make a mountain out of a molehill, all while intentionally disregarding all the practical considerations that have been outlined above.
 

Geo, if you're going to be intentionally disingenuous and intentionally throw out massive strawmen that have no basis in reality than it's not really worth talking to you any more about it.


Just to reiterate:
1) Wrong! If you put in stable value(yielding more like 1-2% territory) you only have to do it with a portion of funds. Institutional(if it's that important to you) can occupy the remaining 50, 60, 70, whatever percent of said 401k. You can then load Roth with equities funds that you're using institutional with. It's quite simple in practice actually to re-shuffle the deck the way you want to. ***So unless you think that 100% institutional funds in your 401k is not only going to outperform the market, but also outperform the tax benefits than there is no argument since a person can just use a mix of your precious institutional and stable value(or whatever) for the emergency fund.

2) .2% a year for 20 years is a joke and you know it. You're saying that because you don't have a case. And even still it's only to try to minimize the impact and still can't turn it in your favor(furthermore and I don't expect you to follow this, but the vast majority of the tax value is primarily in allowing the equities in the Roth so via a counterweight in the 401k to funge money over...the flexibility this creates within the Roth produces ***massive*** tax savings). Placing emergency money in retirement accounts does not preclude someone from chasing bank balances.

3) That is false. Compare bank deposit rates in the 50s, 60s, 70s, 80s, and 90s to things like short duration bond funds. The rise of merchant fees being a very strong source of revenue in the 2000s allowed banks to start offering more attractive rates temporarily(but it's also not universally true either). Given an FFR rate of 0% I can assure you that in the coming years the historical yield premium of exiting FDIC will return.

You're not following!



4) I've read and completely understand your explanations. There isn't that much too them. If you were claim that I didn't understand such simple explanations than you would be claiming I was an idiot and dyslexic. It's just your explanations are wrong, plane and simple!!! They are the most starkly wrong than any other set of comments on this entire thread. ...Again, I like you Geo. You're a smart guy! But sorry this is a big deal and you need to have the humility to say that maybe you're missing something.

dshibb said:   Just to reiterate:
1) Wrong! If you put in stable value(yielding more like 1-2% territory) you only have to do it with a portion of funds. Institutional(if it's that important to you) can occupy the remaining 50, 60, 70, whatever percent of said 401k.
This has been getting silly for a while, as you are posting the same thing over and over without even reading the responses. If you had read it, you would've noticed that this is exactly what I said above.

Regardless, this is just such a small issue that we've beaten to death here, that it's not really productive to keep belaboring it. All the considerations, both pro and con, are already set out above.

geo123 said:   
dshibb said:   Just to reiterate:
1) Wrong! If you put in stable value(yielding more like 1-2% territory) you only have to do it with a portion of funds. Institutional(if it's that important to you) can occupy the remaining 50, 60, 70, whatever percent of said 401k.

This has been getting silly for a while, as you are posting the same thing over and over without even reading the responses. If you had read it, you would've noticed that this is exactly what I said above.
 

  
Which means that utilizing a 401k/tIRA for an emergency fund is not going to negatively impact your ability to invest in institutional actively managed funds if that is what you desire.

dshibb said:     
Which means that utilizing a 401k/tIRA for an emergency fund is not going to negatively impact your ability to invest in institutional actively managed funds if that is what you desire.
Once again, read the posts. This specific point was addressed several times above.
 

geo123 said:   
dshibb said:     
Which means that utilizing a 401k/tIRA for an emergency fund is not going to negatively impact your ability to invest in institutional actively managed funds if that is what you desire.

Once again, read the posts. This specific point was addressed several times above.

  I did! But nothing you said covered your "special funds" argument after I pointed out that it doesn't preclude you from those special funds. You can feel free to point out where I missed something, but no where do you say that running an emergency fund out of your 401k precludes a person from utliizing special funds in your 401k(unless you were going to use all of your 401k in such funds of which you said you wouldn't).

Essentially your points have been:
1) I get special funds out of your 401k. --Counter: Well unless they're so amazing that you're going to use the entirety of your 401k on them then that is a moot point because there would be room left over. ---Response: Zero(other than to confusingly restate my counter as evidence for your point when it's not.

2) Running an emergency fund out of 401k and funging out of Roth or just running out of a Roth is a paperwork and delay hassle when funds are needed. --Counter: A) Not really. Similar to pulling money out of any brokerage account or money market account. B) We're not talking about a day to day checking account here just the excess for when you really have a legitimate emergency. --Response: Zero other than to say that you have big expenses(fine then you probably also have a much larger emergency fund than others(or should) and shouldn't be keeping it all in a taxable account.

3) Running an emergency fund out of a 401k --> Roth or out of your Roth will preclude people from taking advantage of things like sign up bonuses: --Counter: No it wont as small amounts are only needed for sign up bonuses and actually the only ones that are asset determined tend to be brokerage account bonuses of which you can use your Roth to get as well(if desired). --Response: Zero

4) Running an emergency fund out of a 401k stable value fund or a Roth wont have any material tax savings because it's low yield of .2%. --Counter: A) Things like stable value funds don't yield .2%; try like 6 times that. B) It wont stay that way forever. C) You're giving up contribution capacity which you will pay dearly for that mistake when yields rise. D) Not only is .2% an extreme low, 20 years is an extreme stretch of time that we all know wont hold for even 1.5%.E) If you run it through the 401k the principal tax savings is in getting equities from 401k to Roth which adds up to a huge sum of money over time, and F) You're point isn't even a con and instead only an incorrect attempt to make a strong pro seem like an insignificant pro. --Response: Repeat what was said before about it being insignificant because people are only going to get .2% for 20 years(2 false statements) 


So what did I miss in summarizing what you already wrote? Did I miss anything! Last I checked I could read, but you never know right

dukerau said:   I'm in the 25% bracket in a relatively high state tax state, and I do 100% pretax into 401k, and then max out Roth IRA. So I'm hedging some, and since my options of IRA are Roth or none (no Traditional since I have a 401k through employer), it's an easy choice there.
  
Technically speaking, aren't your IRA options between Roth IRA or Traditional IRA that is non-deductible, instead of Roth or None at all? Even if you have a 401k through employer?
Of course for the Traditional IRA that is non-deductible, the next step is to do the backdoor ROTH conversion, because you wouldn't want to hold funds on a non-deductible traditional IRA for too long anyway.

gaffer said:   dukerau said:   I'm in the 25% bracket in a relatively high state tax state, and I do 100% pretax into 401k, and then max out Roth IRA. So I'm hedging some, and since my options of IRA are Roth or none (no Traditional since I have a 401k through employer), it's an easy choice there.
  
Technically speaking, aren't your IRA options between Roth IRA or Traditional IRA that is non-deductible, instead of Roth or None at all? Even if you have a 401k through employer?
Of course for the Traditional IRA that is non-deductible, the next step is to do the backdoor ROTH conversion, because you wouldn't want to hold funds on a non-deductible traditional IRA for too long anyway.


Right, so functionally speaking, Roth or none.



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