Continue with contributions to "pooled" 401k w/no match

[afr]

I've contributed to my employer's 401k plan for the last 15 yrs. mainly for the pretax benefit. Its a pooled office account managed by Raymond James with a 60/30/10 asset allocation that I have no control over and my employer offers no matching contribution. My wife and I are 61 and 56 yrs. old respectively, and she has no 401k offered through work. We max our TIRA's annually and also contribute to a joint taxable account, all with Vanguard. We're in the current 24% tax bracket. I plan on retiring in 6 more yrs. and take SS at 67(my wife at 62). The only yearly notification I receive regarding the 401k is a yearly copy on a sheet of paper showing my beginning balance, yearly contribution, earnings, end balance and vested balance. Unable to access online since its a pooled account under the name of my place of employment(an IRS form 5500-SF is filed yearly by my employer). Worthwhile to keep contributions going for my remaining 6 yrs. or discontinue and simply increase contributions to our joint taxable account which is something I do have control over?

[CordMcNally]

What's the 60 and 30 makeup of those selections? If they're reasonably diversified then I'd keep contributing. If they're not reasonably diversified then I'd probably continue to keep contributing.

[spiritrider]

A pooled 401k plan is not necessarily a bad thing. At one time most if not all 401k plans were pooled accounts. Participant directed accounts have not been the panacea that many believe. In those plans it is well documented that many participants do not have adequate diversification and asset allocation and are their own worst enemies.

The real problem is probably that it is managed by Raymond James. Like Edward Jones they are typically invested in high expense ratio mutual funds and have high administrative fees. I still might make employee deferrals to the 401k, depending on just how high the total costs are.

Now on to the bigger question and possible problem. How/why are there traditional IRA contributions. If you are in the 24% tax bracket and you are an active participant in an employer retirement plan, you were/are ineligible to take the traditional IRA tax deduction. Depending on where you are in the 24% bracket, your wife was/is ineligible to take the traditional IRA tax deduction if your IRA MAGI was/is > the IRA deduction income limit. For 2021, the deduction is phased out from $198K - $208K.

You and quite likely your wife should have been doing the Backdoor Roth instead all along. If you have significant pre-tax earnings to go along with the non-deductible basis in all your traditional, SEP and SIMPLE IRA accounts. This will complicate a possible option to move assets out of the 401k plan now.

The tax code allows, but does not require 401k plans to support in-service rollovers of employee deferrals and earnings >= age 59 1/2. You should check with your plan to see if they support such in-service rollovers.

However, if in fact you have (as is quite likely) non-deductible basis and pre-tax earnings in the traditional IRAs and your individual 401k plans support IRA rollover contributions. You should rollover your respective pre-tax earnings and only your pre-tax earnings into your respective 401k plans. Then you each can do Roth conversions of the remaining non-deductible basis and any trailing earning. The Roth conversions will have little to no tax liability.

If you need to do this step, you must complete it this year and delay any in-service rollover until next year if so desired. If you do the in-service rollover, it would be inadvisable to do any future Backdoor Roths or for that matter any future non-deductible traditional IRA contributions.

[litovskyassetmanagement]

I've contributed to my employer's 401k plan for the last 15 yrs. mainly for the pretax benefit. Its a pooled office account managed by Raymond James with a 60/30/10 asset allocation that I have no control over and my employer offers no matching contribution. My wife and I are 61 and 56 yrs. old respectively, and she has no 401k offered through work. We max our TIRA's annually and also contribute to a joint taxable account, all with Vanguard. We're in the current 24% tax bracket. I plan on retiring in 6 more yrs. and take SS at 67(my wife at 62). The only yearly notification I receive regarding the 401k is a yearly copy on a sheet of paper showing my beginning balance, yearly contribution, earnings, end balance and vested balance. Unable to access online since its a pooled account under the name of my place of employment(an IRS form 5500-SF is filed yearly by my employer). Worthwhile to keep contributions going for my remaining 6 yrs. or discontinue and simply increase contributions to our joint taxable account which is something I do have control over?

You can request to get a full asset allocation from the employer, including all of the fees taken out of the account. Next, if the fees are high I would consider talking with the employer about moving to a low cost platform, and possibly upgrading to a participant-directed plan. A pooled plan is great if there is just the owner and a handful of staff, but once the practice grows beyond that with participants of different ages and who are also interested in self-directing, pooled plans should be upgraded to participant-directed ones. Another issue is that pooled plans are valued once per year, so you are not able to take distributions until valuations are complete, which makes it much more difficult to get your money out of the plan as you might have to wait over a year to get it depending on when you request the distribution. These plans are often set up by the advisers of the owner for the benefit of the owner, but the owner is also the plan sponsor who has fiduciary responsibility to make sure that the plan is set up with the best interest of the staff, not just the owner. The more money you have in the plan, the more you pay in fees, which is really not fair at all, so you have a good standing to approach the owner and discuss this with them.

Another suggestion is to take in-service distribution. These are usually available as early as 59 and 1/2, but it depends on the plan document (and usually it depends on the money type - some money types such as profit sharing can often be taken out sooner vs. employee deferrals for example). You can request that this be amended to a lower age (if it is set to say 65) so that you can simply take your money out of this plan if the owner does not want to negotiate about moving to a low cost participant-directed plan. This will definitely mess up your backdoor Roth IRA, and this would be a tradeoff that is determined by the fees you are paying while using the plan.

[afr]

What's the 60 and 30 makeup of those selections? If they're reasonably diversified then I'd keep contributing. If they're not reasonably diversified then I'd probably continue to keep contributing.

Yes its well diversified.

[afr]

A pooled 401k plan is not necessarily a bad thing. At one time most if not all 401k plans were pooled accounts. Participant directed accounts have not been the panacea that many believe. In those plans it is well documented that many participants do not have adequate diversification and asset allocation and are their own worst enemies.

The real problem is probably that it is managed by Raymond James. Like Edward Jones they are typically invested in high expense ratio mutual funds and have high administrative fees. I still might make employee deferrals to the 401k, depending on just how high the total costs are.

Now on to the bigger question and possible problem. How/why are there traditional IRA contributions. If you are in the 24% tax bracket and you are an active participant in an employer retirement plan, you were/are ineligible to take the traditional IRA tax deduction. Depending on where you are in the 24% bracket, your wife was/is ineligible to take the traditional IRA tax deduction if your IRA MAGI was/is > the IRA deduction income limit. For 2021, the deduction is phased out from $198K - $208K.

You and quite likely your wife should have been doing the Backdoor Roth instead all along. If you have significant pre-tax earnings to go along with the non-deductible basis in all your traditional, SEP and SIMPLE IRA accounts. This will complicate a possible option to move assets out of the 401k plan now.

The tax code allows, but does not require 401k plans to support in-service rollovers of employee deferrals and earnings >= age 59 1/2. You should check with your plan to see if they support such in-service rollovers.

However, if in fact you have (as is quite likely) non-deductible basis and pre-tax earnings in the traditional IRAs and your individual 401k plans support IRA rollover contributions. You should rollover your respective pre-tax earnings and only your pre-tax earnings into your respective 401k plans. Then you each can do Roth conversions of the remaining non-deductible basis and any trailing earning. The Roth conversions will have little to no tax liability.

If you need to do this step, you must complete it this year and delay any in-service rollover until next year if so desired. If you do the in-service rollover, it would be inadvisable to do any future Backdoor Roths or for that matter any future non-deductible traditional IRA contributions.

We're going to do gradual conversions in retirement as we will be in a lower tax bracket. The costs to convert due to pro rata will cost us too much at present time.

[afr]

You can request to get a full asset allocation from the employer, including all of the fees taken out of the account. Next, if the fees are high I would consider talking with the employer about moving to a low cost platform, and possibly upgrading to a participant-directed plan. A pooled plan is great if there is just the owner and a handful of staff, but once the practice grows beyond that with participants of different ages and who are also interested in self-directing, pooled plans should be upgraded to participant-directed ones. Another issue is that pooled plans are valued once per year, so you are not able to take distributions until valuations are complete, which makes it much more difficult to get your money out of the plan as you might have to wait over a year to get it depending on when you request the distribution. These plans are often set up by the advisers of the owner for the benefit of the owner, but the owner is also the plan sponsor who has fiduciary responsibility to make sure that the plan is set up with the best interest of the staff, not just the owner. The more money you have in the plan, the more you pay in fees, which is really not fair at all, so you have a good standing to approach the owner and discuss this with them.

Another suggestion is to take in-service distribution. These are usually available as early as 59 and 1/2, but it depends on the plan document (and usually it depends on the money type - some money types such as profit sharing can often be taken out sooner vs. employee deferrals for example). You can request that this be amended to a lower age (if it is set to say 65) so that you can simply take your money out of this plan if the owner does not want to negotiate about moving to a low cost participant-directed plan. This will definitely mess up your backdoor Roth IRA, and this would be a tradeoff that is determined by the fees you are paying while using the plan.

I've spoken to my employer and he said I can take it or leave it. My choice. Like I said, I was only contributing for the pretax benefit. But as my income dropped this past year(and will likely remain at its current level until retirement in 6 years), I'm questioning if its worth it to keep contributing.

[litovskyassetmanagement]

I've spoken to my employer and he said I can take it or leave it. My choice. Like I said, I was only contributing for the pretax benefit. But as my income dropped this past year(and will likely remain at its current level until retirement in 6 years), I'm questioning if its worth it to keep contributing.

What about in-service distribution?

[afr]

What about in-service distribution?

Nope.

[spiritrider]

We're going to do gradual conversions in retirement as we will be in a lower tax bracket. The costs to convert due to pro rata will cost us too much at present time.

You didn't answer how/why you are doing traditional IRA contributions. Are they like I suggested non-deductible contributions? You also didn't answer whether or not you know if your 401k plan accepts IRA rollovers?

If you can not rollover the pre-tax earnings on non-deductible traditional IRA contributions and doing Backdoor Roths, you should never have been making non-deductible traditional IRA contributions. You would be far better off making tax efficient taxable investments.

You might be better asking whether you should be making the IRA contributions instead of the 401k contributions.

[spiritrider]

Nope.

Are you sure? It is extremely unusual in this day and age for a 401k plan to not allow in-service rollovers at age 59 1/2.

if this is really true, you should follow Kon's advice and petition for a change in this plan's prohibition. It is a very participant unfriendly, antiquated and when combined with what is likely a very expensive 401k plan.

When the tax code and IRS regulations allow it. Are prima facie evidence of a fundamental failure of the employer to meet their fiduciary duty and is ripe for litigation.

[litovskyassetmanagement]

Are you sure? It is extremely unusual in this day and age for a 401k plan to not allow in-service rollovers at age 59 1/2.

if this is really true, you should follow Kon's advice and petition for a change in this plan's prohibition. It is a very participant unfriendly, antiquated and when combined with what is likely a very expensive 401k plan.

When the tax code and IRS regulations allow it. Are prima facie evidence of a fundamental failure of the employer to meet their fiduciary duty and is ripe for litigation.

Looks like employer told OP to take it or leave it. Sounds very old school, but it certainly happens. In such cases I would appeal to the owner's own bottom line since they are presumably paying the bulk of the fees, but if this plan is run by their adviser, they might be reluctant to change because it means getting rid of the adviser. Definitely a conflict of interest, so unless the owner is also into low cost index funds and understand AUM fees, I doubt this is going to go anywhere. The reality is that most plans out there have high AUM fees because most plan sponsors have simply no idea there is anything better. I would think that even if they don't have in-service at 59 and 1/2 there might be in-service distribution at some age (maybe 62), and some money types can usually be distributed. This might be in an SPD, so OP should probably double check. But if all else fails, they have 6 years left, if OP is in the highest tax bracket, they should take the tax deduction.

[afr]

You didn't answer how/why you are doing traditional IRA contributions. Are they like I suggested non-deductible contributions? You also didn't answer whether or not you know if your 401k plan accepts IRA rollovers?

If you can not rollover the pre-tax earnings on non-deductible traditional IRA contributions and doing Backdoor Roths, you should never have been making non-deductible traditional IRA contributions. You would be far better off making tax efficient taxable investments.

You might be better asking whether you should be making the IRA contributions instead of the 401k contributions.

We were making non-deductible traditional IRA contributions(since 2007)due to our MAGI. When I first became aware of the backdoor Roth a few years ago, the costs due to pro rata rule were too much for us to cover. My wife and I are going to be in a lower tax bracket in 6 yrs. when we retire and are planning to do gradual conversions in retirement. My 401k accepts no IRA rollovers. I just assumed the non-deductible TIRA's would be another bucket for us to use in retirement. So you'd recommend making no further non-deductible TIRA contributions and just limiting adding to our joint taxable account only? What's your rationale?

[spiritrider]

My 401k accepts no IRA rollovers.

Wow, you have a really bad 401k plan.

What about your wife's 401k? Does it accept IRA rollovers. You and your wife's IRA/401k accounts are totally separate.

I just assumed the non-deductible TIRA's would be another bucket for us to use in retirement. So you'd recommend making no further non-deductible TIRA contributions and just limiting adding to our joint taxable account only? What's your rationale?

Simply compare making non-deductible IRA contributions that you can not do an immediate Roth conversion to tax efficient taxable investments.

• Non-deductible traditional IRA earnings are pre-tax. They will be subject to the much higher ordinary income tax rates.
• Tax efficient taxable investments such as a total stock market mutual fund or ETF are subject to much lower capital gains tax rates.
• Unless you have insufficient space in your tax-advantaged accounts for tax inefficient asset allocations. Non-deductible traditional IRA contributions that you can not immediately Roth convert are counter-productive.

[afr]

Wow, you have a really bad 401k plan.

What about your wife's 401k? Does it accept IRA rollovers. You and your wife's IRA/401k accounts are totally separate.


Simply compare making non-deductible IRA contributions that you can not do an immediate Roth conversion to tax efficient taxable investments.

• Non-deductible traditional IRA earnings are pre-tax. They will be subject to the much higher ordinary income tax rates.
• Tax efficient taxable investments such as a total stock market mutual fund or ETF are subject to much lower capital gains tax rates.
• Unless you have insufficient space in your tax-advantaged accounts for tax inefficient asset allocations. Non-deductible traditional IRA contributions that you can not immediately Roth convert are counter-productive.

My wife has no 401k. We have separate TIRA's but share a joint taxable account. We'll most likely be in the 12% tax bracket in retirement.