Question about Roth vs 401K

[chrisg202]

Hi all,

I contribute into my 401K to get the hospital match (6%) then I fully fund my Roth. The same for me and my wife.

I am a 3rd year fellow and I'm doing another (1 year) fellowship in July but the new program do not offer a matching contribution to 401K.

My question: Do I continue to contribute towards my 401K with no program matching OR do I explore opening a taxable account (just for that year) until I get a real job? and why?

Thank you

[Hank]

Look at the annual cost of the 401(k) and the expense ratio of the funds they offer.  If you have good, low cost funds that meet your needs, then still used the 401(k) despite not getting a match.  A 401(k) will offer better asset protection than a taxable account.  You also can roll the funds into a new 401(k) at your next employer.

If all the funds are crappy and havelousy expense ratios, then you should avoid the 401(k).

[jhwkr542]

401k. It's tax deferred.

[jfoxcpacfp]

chrisg202 wrote:

I contribute into my 401K to get the hospital match (6%) then I fully fund my Roth. The same for me and my wife.

I am a 3rd year fellow and I’m doing another (1 year) fellowship in July but the new program do not offer a matching contribution to 401K.

My question: Do I continue to contribute towards my 401K with no program matching OR do I explore opening a taxable account (just for that year) until I get a real job? and why?

Click to expand...

This is a situation in which you'll probably pay taxes at a higher marginal rate when you take distributions in the future than you will today, because, as a fellow, you are presumably in a marginally lower tax bracket. I'm not really in favor of further 401k contributions because of this, as well as the fact that you will also have complete flexibility in a taxable account (along with other advantages) while you won't with a 401k.

My advice would change if your 401k has a Roth option, as that would allow you to r/o to a Roth when you finish training.

[chrisg202]

jfoxcpacfp wrote:

chrisg202 wrote:

I contribute into my 401K to get the hospital match (6%) then I fully fund my Roth. The same for me and my wife.

I am a 3rd year fellow and I’m doing another (1 year) fellowship in July but the new program do not offer a matching contribution to 401K.

My question: Do I continue to contribute towards my 401K with no program matching OR do I explore opening a taxable account (just for that year) until I get a real job? and why?

Click to expand…

This is a situation in which you’ll probably pay taxes at a higher marginal rate when you take distributions in the future than you will today, because, as a fellow, you are presumably in a marginally lower tax bracket. I’m not really in favor of further 401k contributions because of this, as well as the fact that you will also have complete flexibility in a taxable account (along with other advantages) while you won’t with a 401k.

My advice would change if your 401k has a Roth option, as that would allow you to r/o to a Roth when you finish training.

Click to expand...

Thanks Johanna for the advice
I didn't get your last sentence... can you please clarify it?

[jfoxcpacfp]

chrisg202 wrote:

Click to expand…

Thanks Johanna for the advice
I didn’t get your last sentence… can you please clarify it?

Click to expand...

Sure. You were trying to decide whether to contribute to the 401k or save outside the 401k. I was leaning toward outside the 401k. However, if the 401k has a Roth option, allowing you to build up your Roth savings, I would change my opinion to recommend you add to the 401k using the Roth. The reasoning is that you are in a lower tax bracket than you will be in the future so you don't need the deduction as much as you will when you are an attending PLUS you'll be able to roll it out to your own Roth after you finish training. Does that help?

[AZdoc68]

chrisg202 wrote:

Hi all,

I contribute into my 401K to get the hospital match (6%) then I fully fund my Roth. The same for me and my wife.

I am a 3rd year fellow and I’m doing another (1 year) fellowship in July but the new program do not offer a matching contribution to 401K.

My question: Do I continue to contribute towards my 401K with no program matching OR do I explore opening a taxable account (just for that year) until I get a real job? and why?

Thank you

Click to expand...

I'm confused.  The thread title seems to be asking a different question than your post.  Are you asking if you should fund a Roth IRA vs a 401k OR a taxable account vs a 401k?

Since you are still in training, I assume your income is relatively low and you are Roth-eligible.  If so, keep contributing to the Roth because soon you be able to do so (not directly, anyway).  Even without a match, I think it's hard to criticize funding a 401k.  The upfront tax deduction, long-term tax deferral, and asset protection benefits are tough to beat.  The downside compared to a taxable account is that you can't access the money nearly easily if you needed to.  Do you have an emergency fund (plain old savings account) set aside?  If so, 401k over taxable for sure.

My priorities in your situation would be:

1) Roth IRA

2) 401k

3) Taxable

If you don't have a cash cushion emergency fund yet, consider reversing #2 and #3 until you do.  And keep that portion in cash.