401(k) employer match

John Oliver wrote in news: snipped-for-privacy@ns.sdsitehosting.net:

How about creating another account called "Employer Match" and transfer the money there?

So, Quicken cannot handle 401(k) accounts properly??? That doesn't make sense. Employer matches are nearly always on a vesting schedule. I cannot possibly be the first person to run into this issue.

Late to the discussion, But, my thought is to create another 401(k) account "Unvested Employer Contribution" Then transfer what is not vested into that account. R.C. is probably rolling in the aisles

Bob

How about creating another account called "Employer Match" and transfer the money there?

That is the only "solution" I have ever heard of.

Hi, Bob.

Nope. Since I never was a fan of 401(k) anyhow, and I've never had one, and never had a client with one since I retired and started using Quicken - I don't really know what you guys are talking about. ;^}

To me, the whole 401(k)/IRA/etc. subject is treated wrong in Quicken. Except for your contributions to the plan, it doesn't belong in your Quicken file, in my inexperienced opinion. There should be a separate "file" for funds belonging to the Trustee of the plan. In that file, contributions would be received, not paid out. Plan gains and losses (and expenses, if any, paid by the plan) would be recorded here, year after year, and would not affect your personal Quicken file at all. Some day, at retirement or other plan ending, pension payments to you would be recorded in the plan's file as disbursements, mirroring the pension income recorded in your personal Quicken file.

"Vesting" is a non-accounting idea, and it is hard to account for in any plan, whether a 401(k) or a traditional fixed-benefit pension plan. About all that we can do is account for the total amount in the plan, and keep notes somewhere as to the portion that is vested. In the plan's books/file, we can establish two separate accounts for the plan beneficiary, transferring equity from the unvested to the vested account as time or other vesting contingencies are met. But all this is way too complex for a simple checkbook program like Quicken.

And I have no good idea how to record your interest in the plan before it vests, fully or partially. :>( To me, it is kind of like trying to account for the inheritance that you MIGHT get from your rich uncle some day. No matter how precisely we can calculate your expected windfall, we can't guarantee that Uncle John won't suffer catastrophic losses (or gains), or marry some gold-digger (or rich widow), or simply spend all or most of your inheritance. (I suppose that we can be sure that he won't take it with him, but those other contingencies are less certain.)

I know all that is not helping solve your real-world problems, which is why I usually stay completely out of 401(k)/IRA/SEP/etc. threads. But, you invited me in, Bob. ;^}

RC

Well, that and the fact that most company plans try to make your 401K account look like a savings account instead of a true mutual fund. They mix contributions (both yours and the companies) with a pseudo delta value to account for changes in the share price.

-- "Tell me what I should do, Annie." "Stay. Here. Forever." - Life On Mars

I don't have a 401k account for myself, but I am maintaining one in Quicken for a friend. And that friend has had at least two different 401k account administrators since I have been keeping track of the account.

I wouldn't characterize the 401k administrator's goal quite the same as you have: I think the main thing the 401k administrator's care about is making money ... which they often approach by reporting as little detail as possible including not reporting the sale of securities to pay fees.

The 401k administrators benefit in, at least, two ways from this practice: fewer transactions lead to smaller statements [also a consideration when deciding how often to issue statements), which lead to lower mailing costs; and failing to show the sale of shares to pay for administrative fees makes it more difficult for the average user to compare the actual effect of fees between administrators, and to complain about fees that are too high.

[I know that some fee percentage is often announced to the plan participants ... a percentage which the participants usually, promptly, forget (and which they have no remembered way to compare to some other administrator's fees anyway); and do not know how to utilize when they do remember it. Watching one's assets being shrunk periodically by an unmistakable fee, is the best way I can think of to bring the issue of the importance of fees to the conscious mind of the participant.]

John, I agree with you. I do have a 401(k) with Vanguard and their reporting through Quicken and the Web never match. They download transactions like "remove shares" to represent a fee they change for management (which I have agreed to BTW), when in fact they should be sales IMHO so I can track the true cost. They also can't handle (in Quicken) the new Roth 401(k) option which I have.

As far as I am concerned, Quicken just needs a simple approach to load transactions and handle vesting. I for one don't care if it is before tax, after-tax, Roth contributions, company match as long as I can get back to an amount that I have vested. I can always go back to the administrator for more detail.

At least with Vanguard, I do not have MONA (May our Numbers Agree).

Oilcan

I'm curious as to why you don't like 401K's. Even if the choices are limited, the employer match makes it a very good vehicle.....

Hi, Hank.

It's a very fine point, but I didn't say I "don't like" them, just that I'm "not a fan". They're OK and they can provide motivation for someone who would not have the persistent willpower to save. And if the employer matches some or all of your contributions, then that is a clear bonus to you. But the tax deferral can be an illusory savings.

Why illusory? Because of simple arithmetic that we learned in grade school. When we are dealing with subtraction and division, the SEQUENCE of the calculations makes a major difference. (4 - 3 gives a much different answer than 3 -4; ditto 4 / 3 versus 3 / 4) But with addition and multiplication, the order doesn't matter. (4 + 3 equals 3 + 4; 4 * 3 equals 3 * 4) When we mix the operations, we have to observe the order to see what results to expect.

To work out detailed examples would take much more time than I'm willing to spend on this today. But for a quickie: What's the difference between: $2,000 (per year) * 20 (years of contributions) = $40,000; minus 25% (assumed tax rate) leaves $30,000; versus $2,000 - 25% (pay-as-you-earn tax) = $1,500 * 20 (years) = $30,000?

This obviously leaves out three key factors: (1) investment income over 20 years; (2) inflation over 20 years; and (3) varying tax rates.

1. Obviously, ,000 will earn more than ,500 (if invested similarly), and 20 years of compounding of those earnings will produce a larger result. (At 6% APY, ,571 vs. ,178) But the larger fund is taxable when received; the smaller one is not; after 25% tax on the larger amount, the net result will be equal to the smaller one.

1. Inflation matters - but it applies whether the tax is paid now or paid later. Its result can be calculated by simply adjusting the APY by the inflation rate. The numbers will change, but the ratio will stay the same - and the two final numbers will be equal.

2. Tax rates? That's the big unknown, and it can make a major difference in the final results! But how do you predict tax rates 20 years from now, and year by year over that 20 years? I can't do it, and I doubt that you can. My quickie example assumes that the tax rate remains steady, and that is probably not likely. Not only can Congress change the rates, but life circumstances can change them, too.

The popular press - and most people - don't understand our progressive tax rates and the effects that they have on all of us. Most people don't even understand tax brackets on their own income! They think that someone in the

25% bracket will always pay that rate on additional income or save that rate on deductions. But, as the very name "bracket" implies, that rate applies ONLY to income within an upper and lower limit. If a 25% taxpayer gets a $1,000 bonus, he probably will pay $250 on it. But if he gets a $100,000 bonus (or lottery winning), his tax will probably be more. If he is already at the top of the 25% bracket ($123,700 TAXABLE income - that's AFTER deductions and exemptions! And I'm looking at the 2006 rates for joint returns: then the bonus gets taxed at 28% on the first $64,750 ($18,130) and 33% on the top $35,250 ($11,633) for a total of $29,763, or nearly 30%, not the 25% that he might have been using in his planning. On the other hand, a $1,000 deduction would save him $250, all right, but a $100,000 deduction would probably save him only $18,109, the tax on the bottom $100,000, most of which fits into less-than-25% brackets, for an effective rate of about 18%. MANY other factors can affect the actual tax rates that must be assumed to make meaningful calculations. The essential factors to keep in mind is that more income causes the tax rates to increase, while less income (or more deductions) causes rates to decline, but the increases and decreases are NOT LINEAR! They go UP faster than they go DOWN. As we just illustrated, a $100,000 bonus could cost 30%, while an equal loss would save only 18%, both for someone who is "in the 25% bracket".

For many taxpayers, 401(k)/IRA/SEP, etc., are great. But I'm not a fan, I've never used Quicken to account for one, and I know very little about them. So I really should keep my nose out of discussions of them.

RC

RC:

Thanks for another excellent exposition. I would add that the "standard" argument for deferring taxes in 401(k)s is that most people will earn less in retirement than while actually working. Of course, as you said, nobody can predict what tax rates will ACTUALLY BE in retirement.

Employer match is a bonus, and there is one subtle advantage to being in an employer-sponsored plan. Employees with small 401(k)s can participate in funds that usually require large buy-ins.

e.g. Fidelity's FRTXX usually requires a minimum of $100,000, but can be the default in a large employer plan.

Of course, people who can buy into FRTXX anyway, probably have the discipline to save outside of 401(k)s ;-)

Bob

This is why my primary retirement account is my Roth IRA. But, of course, even with that, there's no guarantee that the Socialists in DC will decide to tax the gains, or what the hell, go ahead and double-tax that money... after all, it isn't fair that I might retire with hundreds of thousands of dollars when there are some poor, destitute crackheads that really should get that money. But what else can we do? Bury the money in the back yard? Buy krugerrands? Stock up on ammo and MREs?

But no way am I giving up an automatic 10% return on my money with the

401(k).

"Socialists in DC"

Heh.

That begs a key question: when do you plan to retire? I expect I will still be working when I reach the age of mandatory withdrawals from my retirement accounts, in which case I may be in a pretty high tax bracket too. So during a year when my income was low ('cause I lost my job), I took the opportunity to convert all my 401(k)s to an IRA then to a Roth IRA. And paid the tax on the lump out of my low income (ouch), which in a sense means I saved that much more. But the *real* reason I got rid of the 401(k)s was they were with Fidelity and I intensely disliked their statements. Unreadable.

Una

The age of mandatory withdrawals is 70 1/2. Do you really think you'll be making more @ 70 1/2 than you are now? I don't.

Not necessarily. The power of the Roth is that you get to withdraw your retirement savings tax free. That is provided the government doesn't change their mind down the road and decide to tax those withdrawals in the future. Don't think it can happen? Trust your government? Sure you can trust your government - just ask a Native American about how much you can trust your government! I smile when the Native American's open up casinos and are finally getting a little bit of revenge...

I just (today) drained my Fidelity funds to move into a new Sep-IRA (glad the market did well today). I told the Fidelity rep that I had asked for an accounting of my funds 3 times and they failed to deliver - so I'm voting with my feet...

In my case, almost certainly.

Re the "savings" of paying taxes now instead of later, consider this: By putting $2000 in a pre-tax IRA you set aside $2000 now. By putting $2000 in a Roth IRA you set aside $2000 *plus* taxes now.

Una

Really? Now I'm curious. Exactly what do you do that gets you so much more salary at 70 1/2 than at (what's your age now?)? I just gotta know!

Sorry you lost me there. What exactly does "*plus* taxes now" mean? Oh I fully understand that money placed in a Roth is after tax so you've already paid the tax. But again, you're banking on the fact that the government doesn't change it's mind and say pass a law when you say turn

70 stating that people in high earning brackets, as you say you'll be, will have their Roth IRAs taxed "slightly" since the dumb American public thinks you already have too much. That could happen. Then you've already paid taxes when contributing to the Roth and you're paying it on the back end too.

IMHO, very possible, like taxable social security benefits for those rich individuals making more than $25,00 and rich couples making more than $32,000. :)