How much is not having your money tied up worth to you?

[b0mbrman]

Suppose that you're not paying income tax on your earnings this year. Suppose also that you (you) had a retirement plan that offered the following retirement funds at the respective ratios:

S&P 500 Index Fund @ 0.05%
Wilshire 4500 Index Fund @ 0.05%
MCSI EAFE Index Fund @ 0.05%

Pretty low, no? However, as you might be aware, Vangaurd, E*Trade, and Fidelity have been locked in a pretty hot expense war of late. Of note:

E*Trade offers an S&P 500 Index fund @ 0.09%
Fidelity offers a Wilshire 4500 Index fund @ 0.10%
E*Trade offers an MSCI EAFE Index Fund @ 0.09%

So, the differences are 0.04%, 0.05%, and 0.04%. Would that percentage be enough for you to use the funds your employer offers rather than the non-retirement funds?

 

[BreakApart]

There are more important things to compare between the different options, than expense ratio. That would be fairly low on my "things to worry about". IMHO

-Employer matching
-Account management fees/options
(cost for them to manage the movement and selection of funds that best suits you)

Not everyone enjoys picking what should go where, I prefer to let a professional do that for an acceptable fee of course.

Now all things being equal than i might pick the best expense ratio, I just find there are more important things to worry about.

 

[b0mbrman]

Originally posted by: BreakApart
There are more important things to compare between the different options, than expense ratio. That would be fairly low on my "things to worry about". IMHO

-Employer matching
-Account management fees/options
(cost for them to manage the movement and selection of funds that best suits you)

Not everyone enjoys picking what should go where, I prefer to let a professional do that for an acceptable fee of course.

Now all things being equal than i might pick the best expense ratio, I just find there are more important things to worry about.

No employer matching nor other fees/loads...nor are there really any user-level managers.

It's an extremely limited retirement plan with those 3 funds, a bond fund, and a lifecycle fund.

 

[BlueFlamme]

Originally posted by: b0mbrman
No employer matching nor other fees/loads...nor are there really any user-level managers.

It's an extremely limited retirement plan with those 3 funds, a bond fund, and a lifecycle fund.

Its the Thrift Savings Plan that the federal govt which is available to federal employees and military members. Since you don't get matching you're either military or under the CSRS.

Anyway the C is the S&P 500, S is the Wilshire 4500, and I is the MCSI EAFE, all very good investments as far as mutual funds go.

Worth mentioning is that it is free to transfer between the funds so you can better manage your funds than some of those other locations I believe.

However, since you're not paying any taxes this year you would not want to invest in the TSP. That .05% is nothing since by the time you take it out you will be hit with it as earned income. I would suggest a Roth IRA which is typically after-tax dollars and when you go to take it out you get to keep all of it. Another option is the straight up mutual fund but then you're paying taxes on dividends and capital gains.

I personally have my money evenly split between the TSP and the Vanguard Total Stock Market which is basically combining the C and the S.


Cliffs:
OP is talking about the federal 401k equivalent, the TSP
Don't do TSP since you lose all tax advantages it offers
Either a regular mutual fund or Roth IRA

My recommendation: Start maxing out your Roth IRA while your taxes are as low as possible. I'd recommend Vanguard who has had very low costs and is highly regarded. Only caveat is you need like $3K to open the fund.

 

[BreakApart]

If that's the case I don't see any real benefit to using the employers fund company, you'll want to move it when you change jobs later anyway. Maybe using your own personal fund company would be better from the get go. But, that's entirely your choice.

I get a matching amount and they offer complete management for .03%(used to be .09%)
Otherwise I would have started moving things years by year from my 401k plan into my personal Roth account.

My big items for a new fund company would be what funds they offer, management options, how often things can be adjusted(moving funds, changing % to each fund, and deposit amounts)
Then I'd look at the expense ratio before deciding.

The important thing is your putting money into a 401k/Roth right now, then learn how to move things around to fit your goals.

 

[alrocky]

Originally posted by: BreakApart
If that's the case I don't see any real benefit to using the employers fund company, you'll want to move it when you change jobs later anyway.

I couldn't disagree more. The Expense Ratios of the index funds in the TSP is spectacular and virtually unbeatable! They should represent the CORE holdings of anyone's portfolio and there is little reason to transfer to another fund company upon leaving his employer.

E.R. ................. E.R. -- equivalent fund
0.05% C Fund... 0.18% (VFINX) 500 Index
0.05% S Fund... 0.25% (VEXMX) Extended Market Index
0.05% I Fund... 0.29% (VDMIX) Developed Markets Index
0.04% G Fund... free lunch!
0.04% F Fund... 0.20 (VBMFX) Total Bond Market Index

b0mbrman, open a ROTH IRA and max it out at $4,000. You can contribute up to $15,000 annually in the TSP. You are currently in tax exempt status. If you wish to invest more than $4000 this year, you may as well as invest in the TSP. Investing in a taxable account outside of the TSP means you'll be paying taxes on "dividends and capital gains."

 

[b0mbrman]

Originally posted by: BlueFlamme
Its the Thrift Savings Plan that the federal govt which is available to federal employees and military members. Since you don't get matching you're either military or under the CSRS.

Ya caught me

I believe the only ones that get matching are people who re-enlist with it in their contract and into impact MOS's

 

[TallBill]

Originally posted by: b0mbrman

Originally posted by: BlueFlamme
Its the Thrift Savings Plan that the federal govt which is available to federal employees and military members. Since you don't get matching you're either military or under the CSRS.

Ya caught me

I believe the only ones that get matching are people who re-enlist with it in their contract and into impact MOS's

Yeah, I contributed to TSP, and have seen NO evidence of any sort of matching whatsoever, and thus stopped contributions. I will however participate in the deployed savings program as soon as I have 31 days in Iraq. (10%) Fixed interest on up to $10,000. Cant go wrong with that!

 

[b0mbrman]

Originally posted by: alrocky

Originally posted by: BreakApart
If that's the case I don't see any real benefit to using the employers fund company, you'll want to move it when you change jobs later anyway.

I couldn't disagree more. The Expense Ratios of the index funds in the TSP is spectacular and virtually unbeatable! They should represent the CORE holdings of anyone's portfolio and there is little reason to transfer to another fund company upon leaving his employer.

E.R. ................. E.R. -- equivalent fund
0.05% C Fund... 0.18% (VFINX) 500 Index
0.05% S Fund... 0.25% (VEXMX) Extended Market Index
0.05% I Fund... 0.29% (VDMIX) Developed Markets Index
0.04% G Fund... free lunch!
0.04% F Fund... 0.20 (VBMFX) Total Bond Market Index

b0mbrman, open a ROTH IRA and max it out at $4,000. You can contribute up to $15,000 annually in the TSP. You are currently in tax exempt status. If you wish to invest more than $4000 this year, you may as well as invest in the TSP. Investing in a taxable account outside of the TSP means you'll be paying taxes on "dividends and capital gains."

Actually, I'm in a combat zone so I can do upwards of $40k this year :Q

Right now, the bulk of my investments are in a taxable portfolio of a decently-diversified mix over at Vanguard.

As for comparable funds...between Fidelity and Etrade, you can get 0.10% or 0.09% (but of course more liquid). Really, the only place it is extremely better is in bond funds where the lowest expense ratio is Vanguard's VBIIX @ 0.18%

 

[b0mbrman]

Originally posted by: TallBill

Originally posted by: b0mbrman

Originally posted by: BlueFlamme
Its the Thrift Savings Plan that the federal govt which is available to federal employees and military members. Since you don't get matching you're either military or under the CSRS.

Ya caught me

I believe the only ones that get matching are people who re-enlist with it in their contract and into impact MOS's

Yeah, I contributed to TSP, and have seen NO evidence of any sort of matching whatsoever, and thus stopped contributions. I will however participate in the deployed savings program as soon as I have 31 days in Iraq. (10%) Fixed interest on up to $10,000. Cant go wrong with that!

Absolutely. I maxed that out as soon as possible

10% (or 10.38% APY before you hit $10k) guaranteed = unbeatable

 

[b0mbrman]

Oh, the other issue is that the funds they offer don't allow for as much diversification as I'd like...in particular, I want some value and some emerging markets

Here's the TSP funds as seen next to their closest competitor

Expense Ratio Fund Name

Bond
0.04% TSP F Fund
0.18% Vanguard Intermediate-Term Bond Index

Large Blend
0.05% TSP C Fund
0.09% E*Trade S&P 500 Index Fund
0.10% S&P Depositary Receipts (ETF)
0.10% Fidelity Spartan 500 Index


Small Blend
0.05% TSP S Fund
0.10% Fidelity Spartan Extended Market Index
0.22% E*Trade Russel 2000 Index

International Large Blend
0.05% TSP I Fund
0.09% E*Trade International Index
0.10% Fidelity Spartan International Index



As for the Roth, I have until April of 07 to max that out and I'll be back stateside by then so I haven't touched it yet...

 

[TallBill]

Originally posted by: b0mbrman

Absolutely. I maxed that out as soon as possible

10% (or 10.38% APY before you hit $10k) guaranteed = unbeatable

I just wish that someone would have informed me of this program on the last deployment.

 

[alrocky]

Originally posted by: b0mbrman
Oh, the other issue is that the funds they offer don't allow for as much diversification as I'd like...in particular, I want some value and some emerging markets

As for the Roth, I have until April of 07 to max that out and I'll be back stateside by then so I haven't touched it yet...

C Fund (S&P 500) + S Fund (Dow Jones Wilshire 4500 Completion Stock Index) = Vanguard Total Stock Market Index Fund Investor Shares (VTSMX). Those two funds combined represents total diversification of the entire US stock market. The C and S funds should comprise the CORE of bulk of your domestic investment portfolio; the I fund, the CORE portion of your international investment porfolio. If you wish to add weight to value and also add Emerging Market - fine, but don't put the cart before the horse.

You should try to stick to two or preferably only one retail no load mutual fund company. You don't want the hassle of multiple paperwork from multiple firms and the costs and fees will nickle and dime you. Vanguard, Fidelity, or T.R. Price.

Have you invested already and what percentage in each TSP fund?

 

[b0mbrman]

Originally posted by: alrocky

Have you invested already and what percentage in each TSP fund?

I got here at the beginning of the year and took the following steps:

Max out SDP
Missed the deadline to max out my Roth IRA for 2005
Then, put in $3k each in Vangaurd Large, Vanguard Large-Value, Vanguard Small, Vanguard Small-Value, Vanguard Int'l Developed Markets (Large), Vanguard Int'l Emerging Markets

...and plan to max out Roth IRA for 2006 before leaving

But yeah, $0 so far in the TSP.

You should try to stick to two or preferably only one retail no load mutual fund company. You don't want the hassle of multiple paperwork from multiple firms and the costs and fees will nickle and dime you. Vanguard, Fidelity, or T.R. Price.

I've got a Vanguard account and a long-dormant E*Trade account...which would allow me access to all but one of the lowest expense-ratio funds by sector (Fidelity Spartan Extended Market). Neither are really bad about fees...

 

[b0mbrman]

Originally posted by: TallBill

Originally posted by: b0mbrman

Absolutely. I maxed that out as soon as possible

10% (or 10.38% APY before you hit $10k) guaranteed = unbeatable

I just wish that someone would have informed me of this program on the last deployment.

Yeah, I definitely wish I had more knowledge about it all. I'm finding out as I go...

 

[alrocky]

Originally posted by: BlueFlamme
Since you're not paying any taxes this year you would not want to invest in the TSP.

Cliffs:
OP is talking about the federal 401k equivalent, the TSP
Don't do TSP since you lose all tax advantages it offers
Either a regular mutual fund or Roth IRA

How would a regular mutual fund be better than investing in his TSP? The earnings in his TSP would still be tax deferred whereas the regular mutual fund would be subject to "taxes on dividends and capital gains". Also his contributions to a regular mutual fund would be taxed upon withdrawal.

 

[b0mbrman]

Originally posted by: alrocky

Originally posted by: BlueFlamme
Since you're not paying any taxes this year you would not want to invest in the TSP.

Cliffs:
OP is talking about the federal 401k equivalent, the TSP
Don't do TSP since you lose all tax advantages it offers
Either a regular mutual fund or Roth IRA

How would a regular mutual fund be better than investing in his TSP? The earnings in his TSP would still be tax deferred whereas the regular mutual fund would be subject to "taxes on dividends and capital gains". Also his contributions to a regular mutual fund would be taxed upon withdrawal.

Yes, I can't imagine how (all else equal and comparing funds similar to those available in the TSP) a regular mutual fund would be better...

Only thing I can think of is the liquidity...

BTW, according to the TSP site, they earmark which funds were deposited while in a combat zone so those funds are not taxed on the way out either. I'm not exactly sure on the details (i.e. are they referring to the initial investment or div/capital gains as well?)...obviously I've got to research this quite a bit more.

 

[alrocky]

Originally posted by: b0mbrman
Yes, I can't imagine how (all else equal and comparing funds similar to those available in the TSP) a regular mutual fund would be better...

Only thing I can think of is the liquidity...

BTW, according to the TSP site, they earmark which funds were deposited while in a combat zone so those funds are not taxed on the way out either. I'm not exactly sure on the details (i.e. are they referring to the initial investment or div/capital gains as well?)...obviously I've got to research this quite a bit more.

As originally posted in: TSP website:
You receive no direct tax benefit from contributing pay to the TSP which has been excluded from gross income; however, the earnings on those contributions are tax-deferred.

When you make a withdrawal, money is taken from your total account balance proportionally from your taxable funds and your tax-exempt funds. The amount attributable to tax-exempt contributions will not be taxable.

Your service will notify the TSP whenever your contributions are from tax-exempt money. The TSP will then account for your tax-exempt contributions and, as indicated above, will ensure that these amounts are not reported to the IRS as taxable income. Consequently, those contributions will not be subject to taxation when you withdraw them. Your quarterly participant statement will show your tax-exempt balance separately.

Sounds like your tax exempt contributions aren't taxed upon withdrawal but it's earnings are taxed. Would be nice for you if they weren't taxed. It'd behoove you to throw as much of your tax exempt income into a ROTH IRA. It's too bad you didn't get to max out your 2005 ROTH IRA. Now the question becomes what fund for the ROTH?

If you wish to invest more money toward retirement, you'd be better off starting your TSP over adding to your existing taxable Vanguard accounts. The current dip in the market makes for more attractive prices too. Have you figured out your asset allocation?

 

[b0mbrman]

Originally posted by: alrocky
Sounds like your tax exempt contributions aren't taxed upon withdrawal but it's earnings are taxed. Would be nice for you if they weren't taxed. It'd behoove you to throw as much of your tax exempt income into a ROTH IRA. It's too bad you didn't get to max out your 2005 ROTH IRA. Now the question becomes what fund for the ROTH?

Yeah, I was dumb in the beginning...was just happy to be making so much more than normal that I didn't take advantage of all the potential benefits available...

 

[b0mbrman]

BTW, why the sudden switch from maxing the TSP first? Or was the Roth always the better first choice?

As for my allocation, I'm thinking 50/50 domestic v. international, and then split further between large/small and blend/value. Oh, and emerging markets'll make up part of that international

 

[alrocky]

Because your income/money is tax exempt, the first and best place to invest it is in your ROTH IRA. All the earnings in the ROTH would be tax free upon withdrawal. If you placed it in the TSP, the contributions would be tax free but it's earnings would be taxed upon withdrawal. So if you have tax exempt income, max out the ROTH before the TSP.

Small cap and value funds tend to be tax-inefficient as they distribute relatively more in dividends and capital gains. You'd generally want to place those types of funds in a tax sheltered account, ie an IRA.

From the Vanguard Diehard forum at Morningstar.com:

Taylor Larimore posted this list that helped me.

4-Step Rule for Tax Efficient Fund Placement:

1. Put your most tax-inefficient funds in 401ks, 403bs, Traditional IRAs and similar retirement accounts. When full..
2. Put your next most tax-inefficient funds in your Roth(s). When your Roth(s) are full-
3. Put what's left into your taxable account.
4. Try to use only tax-efficient funds in taxable accounts.

Here is a list of securities in approximate order of their tax-efficiency. (Least tax efficient at the top.):
Hi-Yield Bonds
Taxable Bonds
TIPS
REIT Stocks
Stock trading accounts
Small-Value stocks
Small-Cap stocks
Large Value stocks
International stocks
Large Growth Stocks
Most stock index funds
Tax-Managed Funds
EE and I-Bonds
Tax-Exempt Bonds

 

[b0mbrman]

Hmmm...and where would ETFs fall on this list?

 

[b0mbrman]

An interesting twist to the burgeoning off topic part of this post:

http://www.dod.gov/releases/2006/nr20060530-13137.html

On May 29, President Bush signed the Heroes Earned Retirement Opportunities (HERO) Act, which amends the Internal Revenue Code to allow service members to still exclude their military compensation from federal income tax, but also contribute to an Individual Retirement Account (IRA) while serving in a combat zone tax exclusion area.

Military compensation earned by members of the armed forces while serving in combat zone areas is excluded from federal income tax. Enlisted members and warrant officers exclude all such military compensation. Commissioned officers exclude up to the maximum enlisted pay plus imminent danger pay for the months they serve in a combat zone tax exclusion area.

The HERO Act is retroactive to tax year 2004. Therefore, members who did not make an IRA contribution during 2004 or 2005, because they were not eligible due to combat zone tax exclusion, have until May 28, 2009 (three years from the date of enactment) to make a contribution to an IRA for those years.

Thankfully, my December 05 income was just enough to max a Roth based on 2005's limits

 

[alrocky]

http://news.morningstar.com/article/art...sp?id=163555&_QSBPA=Y&etfsection=Comm3
http://socialize.morningstar.com/NewSoc...forumId=F100000015&convSeqNumber=28165

Post 4: "I think you are trying to make the point that tax-managed funds are less tax-efficient than ETF's. I readily acknowledge that this is usually the case."

Post 9: "John makes a strong case for ETFs being preferable to TM funds, but Greg and Taylor rightly point out that there are many costs to consider. Against the TM fund's redemption fees must be set the account fees, trading costs (commissions, spreads, shares bought at a premium to NAV), and dividend reinvestment problems that may attend an investment in ETFs."

Post 14: "The second tangent involves ETFs. As stated, the ETFs are cheaper, avoid the large redemption fees, AND appear to be at least as tax efficient as Tax Managed Funds."

You pay commisions on EFTs so unless you can invest a tidy sum... And you'd be hard pressed to beat the TSP Expense Ratios. I'd be inclined to start investing in the TSP over taxable accounts.

 

[b0mbrman]

Oh yes, I'm definitely doing TSP and Roth before taxable accounts.

I was just wondering as to the question answered by this part of your post:

Post 4: "I think you are trying to make the point that tax-managed funds are less tax-efficient than ETF's. I readily acknowledge that this is usually the case."

Post 9: "John makes a strong case for ETFs being preferable to TM funds, but Greg and Taylor rightly point out that there are many costs to consider. Against the TM fund's redemption fees must be set the account fees, trading costs (commissions, spreads, shares bought at a premium to NAV), and dividend reinvestment problems that may attend an investment in ETFs."

Post 14: "The second tangent involves ETFs. As stated, the ETFs are cheaper, avoid the large redemption fees, AND appear to be at least as tax efficient as Tax Managed Funds."

Because the minimum to open most funds is $3k anyway, it might make sense to buy $3k worth of an ETF, no? I'd have to do the research and math to figure out where the breaking point is, though...also, ETF's really don't allow me to make small, diversified contributions as time goes by...

The rub is that Vanguard only has three tax-managed stock funds that mirror TSP's stock funds (eg S&P 500, small blend, and international)

So here's my plan for now:

TSP
Allocate in percentage 36-36-28 to C, S, and I funds, respectively
2006: Max out starting now. Jul-Dec is 6mo @ $5k/mo = $30k
2007: Jan-Jun is 6mo @ $2.5k/mo = $15k

Roth
@Vanguard
2006: $4000 to VEIEX (Int'l EMkts to diversify toward more int'l) c. Jul 06
2007: $4000 to VIVAX (Large Value) c. Feb 07
2005: $4000 to VISVX (Small Value) c. Jul 07


Taxable Account
@Vanguard
Sadly, I will have to liquidate these to indirectly fund the retirement accounts...that is, sell these to buy food and pants, so I can afford to devote such a high percentage of my income to the TSP. The $11k or so I pull out of SDP once it matures around Mar 07 may ease my pain a bit.

Jun 07: Leave the Army with $57k in tax-friendly retirement accounts

Thoughts?

And by the way, thanks for all your help