What to do without a 401k?
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What to do without a 401k?
by CorporateCEO » Sun Mar 16, 2014 2:59 pm
Hi Bogleheads,
This is my first post, so first thing's first: Thanks for having such a great community and providing such valuable information.
My wife has recently taken a job in IT through a recruiter, as a contractor. They do not offer any benefits, or a 401k. They do withhold her taxes and she will receive a W-2. I believe this means she cannot be considered "self employed" for purposes of opening accounts like an SEP, or Simple IRA.
I'm mostly just familiar with the "regular" types of tax advantaged accounts: IRA (traditional and Roth) and 401k. She will open a traditional (maybe Roth?) IRA, but as far as I understand, once she hits $5500 the only thing left is to direct money to a taxable account. Could anyone let me know if there is a better course of action than this? Any recommendations would be appreciated.
Thank you.
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Re: What to do without a 401k?
by jdilla1107 » Sun Mar 16, 2014 10:00 pm
Everything you say sounds correct to me and I don't think there is anything else you can do along the lines of retirement accounts. Taxable can be pretty decent if you stick to passive equity index funds. It has lower cap gains and dividends rates than income rates.
You could consider I bonds or EE bonds which are tax deferred. Or you could consider a 529 if you have any children.
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Re: What to do without a 401k?
by Laura » Sun Mar 16, 2014 10:14 pm
Since she gets no benefits perhaps she should look into how she can be a true contractor rather than a W2 employee. That would at least allow her to open up her own 401k.
Laura
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Re: What to do without a 401k?
by CorporateCEO » Mon Mar 17, 2014 10:47 am
Thanks for the responses. So, taxable may be the only option after an IRA is maxed. It feels like not having a 401k is a really bad thing, but maybe it isn't as bad as I'm thinking. Just this morning I find this article by Rick Ferri advising that it may even be better to stay out of a 401k that just has high fees:
That is a little reassuring. And when I mention a taxable account, I do mean Vanguard index funds, definitely. We will also look into being a true contractor (no W2).
Any feedback from anyone on just how bad (or not) you think not having a 401k is? I guess I'm wondering if most people would consider this to be a serious problem, or would not overly worry about it too much.
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Re: What to do without a 401k?
by leonard » Mon Mar 17, 2014 12:11 pm
You should run a tax scenario for your wife to see what would happen if she went 1099 with the contracting company - set up her own business and opened her own solo 401k. Depending on state taxes, she may be able to get a 401k under that scenario and have it still be cost effective.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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Re: What to do without a 401k?
by placeholder » Mon Mar 17, 2014 1:41 pm
Have you looked at the replies in that thread disagreeing with that point?
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Re: What to do without a 401k?
by CorporateCEO » Mon Mar 17, 2014 3:01 pm
leonard, I'm not familiar with "going 1099". So, that will give me something to look into. Thanks.
placeholder, I don't see disagreement so much as just questioning the idea. I mean, no one is exactly calling the idea of staying out of a high fee 401k crazy. But, I admit I am trying to justify, at least in my own mind, the idea of not having a 401k as "not so bad" since my wife just has no choice, in her current position. But, yeah, I really wish she did have a 401k.
There is always the hope that the company hires on after the contract period, which would change everything, of course.
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Re: What to do without a 401k?
by ruralavalon » Mon Mar 17, 2014 3:51 pm
Corporate CEO wrote:. . .but as far as I understand, once she hits $5500 the only thing left is to direct money to a taxable account. Could anyone let me know if there is a better course of action than this? Any recommendations would be appreciated.
In addition to an IRA and then a regular taxable account, she could consider I-bonds. I-bonds are held outside tax-protected accounts, and grow tax-free for up to 30 years: link to wiki article.
For the taxable account use tax-managed stock funds, large cap or total market type stock index funds : link to wiki article. With very low turnover, such funds can very very tax-efficient costing you very little in taxes.
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Re: What to do without a 401k?
by TFinator » Mon Mar 17, 2014 5:32 pm
Hi all,
I am in a similar situation. I get a W-2, but we don't have any retirement plans. I am 25 and just started investing/ saving, so it hasn't become a problem yet (still filling out an E-Fund in online savings account).
In addition to the alternatives above, last week I read a few posts about HSAs. I am not sure they're right for me, but maybe this kind of account could be considered as well?
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Re: What to do without a 401k?
by Angelus359 » Mon Mar 17, 2014 5:40 pm
She could use municipal bonds + highly efficient index funds like total stock market
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Re: What to do without a 401k?
by leonard » Mon Mar 17, 2014 6:01 pm
CorporateCEO wrote:leonard, I'm not familiar with "going 1099". So, that will give me something to look into. Thanks.
Hi CorpCEO - By this I mean your wife sets up her own business, she bills the contracting company for her time, the pay the invoice. So, it's a business to business transaction - not an employee-employer relationship. Your wife could then set up a 401k for her business (herself) and fund it via the business.
Most every contract company will give potential employees the option to become employees of the contracting companies or bill them via invoice (1099).
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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Re: What to do without a 401k?
by CorporateCEO » Tue Mar 18, 2014 7:06 am
We will definitely look into the 1099 option.
Just wanted to add, the I-bonds sound pretty great. It got me thinking, though, that we should probably be considering our accounts as a whole. If she went 100% stock market index in IRA / taxable, the bonds in my 401k could be increased to keep the target allocation. In a sense, that gives her the 401k space to hold what would have been her bonds. It sounds like I-bonds basically capture that same idea, so maybe you break even either way.
It's a lot to think about, but great to know there is another "tax advantaged" option in I-bonds. Thanks for the ideas!
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Re: What to do without a 401k?
by dickenjb » Tue Mar 18, 2014 8:05 am
CorporateCEO wrote:My wife has recently taken a job in IT through a recruiter, as a contractor. ..... They do withhold her taxes and she will receive a W-2.
This does not sound right to me. If she is an independent contractor she will receive a 1099-MISC. If she receives a W-2 she is an employee.
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Re: What to do without a 401k?
by laughlinlvr » Tue Mar 18, 2014 8:28 am
I have done this kind of consulting in the past. For other BHs the situation arises in that one becomes an employee of the consultancy which then sends you out on an as-needed basis to clients. The fact that this could be a single client and a long-term engagement is neither here nor there. So one's salary comes in the form of W-2 income since all the consultancy does is bill its employees timesheets to the client and collects the agreed-upon compensation in return. In the business we call these kinds of consultancies body-shops since all the do is sell carbon lifeform labor. The employee gets nothing from their true employer except record keeping.
As to retirement savings, I seem to remember the limits are changed (i.e. much, much higher) for employees whose employers do not provide a pension plan. It has to do with a certain box in the W-2 being unchecked that qualifies for this tax benefit.
I would imagine it's best to wait until the following year to make one's IRA contribution after receiving the W-2 for the previous tax year just to make sure one is eligible for the deduction.
I don't know how this is handled if the employee works for more than one employer in the year and at least one of them offers a pension plan (i.e. 401k/403b).
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Re: What to do without a 401k?
by dickenjb » Tue Mar 18, 2014 8:45 am
OK I get it - she will be an employee of the temp firm who then contracts her out to the firm with needs. Then she gets a W-2.
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Re: What to do without a 401k?
by ruralavalon » Tue Mar 18, 2014 10:35 am
Corporate CEO wrote:. . . we should probably be considering our accounts as a whole. If she went 100% stock market index in IRA / taxable, the bonds in my 401k could be increased to keep the target allocation. In a sense,
Tha'ts exactly the way to look at the investments, view all accounts together as a single unified whole.
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Re: What to do without a 401k?
by greg24 » Tue Mar 18, 2014 11:21 am
CorporateCEO wrote:Any feedback from anyone on just how bad (or not) you think not having a 401k is? I guess I'm wondering if most people would consider this to be a serious problem, or would not overly worry about it too much.
401ks are important, IMO, to reduce your taxable income. Fortunately for married couples, if one spouse has a 401k and the other doesn't, the spouse that has a plan can "over" allocate to the 401k.
I'm guessing you have a 401k? What percentage of your salary do you put into your 401k? I'm gonna guess you are putting something like 15% in it, maybe you could push it as high as 25%. Technically, it doesn't matter where you are avoiding taxation across your combined income. Though I do appreciate that one spouse will feel kind of left out if all the 401k investing is under one spouse's name.
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Re: What to do without a 401k?
by CorporateCEO » Tue Mar 18, 2014 11:44 am
greg24, I put 24% to the 401k. I can't go higher than that. This ensures the max is hit at the end of the year, capturing all possible matches. I also max a Roth and do taxable each month. The 401k is through Vanguard, so I'm all in target retirement there. When I need more bonds I just switch the TR fund to a closer date.
I didn't fully understand what you meant if a spouse doesn't have a 401k, the other spouse can over allocate to theirs. I think you may have meant in the case that the spouse was not already maxing their 401k?
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Re: What to do without a 401k?
by greg24 » Tue Mar 18, 2014 11:55 am
CorporateCEO wrote:greg24, I put 24% to the 401k. I can't go higher than that.
I didn't fully understand what you meant if a spouse doesn't have a 401k, the other spouse can over allocate to theirs. I think you may have meant in the case that the spouse was not already maxing their 401k?
Yes, thats what I meant. You are already maxing yours, so my idea fell on its face. 
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