New Bogleheads seeking help!

[NOLA]

Hi Bogleheads,

My wife and I are a new Bogleheads and would love some input from this great community. Currently we have accounts in 401ks, Roth and taxable. We own a house that most bogleheads probably think is a little too expensive compared to our annual inome, but we feel comfortable about our monthly payment and refinanced to a 15-year mortgage 12 months ago. I am 32 and she is 31, and we are looking to have an AA of 75% stocks/25% bonds. However, we are not sure how to get there in a more efficient way. As you can tell, we are a little bit all over the place and maybe not the most tax efficient, but we try to keep it all in low cost index funds. So please let us know what you would recommend.

Emergency funds: 6 months of expenses
Total household income:$125,000 (up from $110,000 in 2012)
Debt: Mortgage $320,000 @3.25% w/$150,000 in Equity (14 years left)
Tax Filing Status: Married Filing Jointly
Tax Rate: 25% Federal, 6% State?
State of Residence: Louisiana
Age: Him-32, Her-31
Desired Asset allocation: 75% stocks / 25% bonds
Desired International allocation: 20% of stocks

We would like to keep our portfolio simple, but a small tilt towards small cap and 10% REIT as well.


New annual Contributions
$3,000 his 401k , employer matching 15% up to 6%
$3,500 her 401k, employer matching 50% up to 4%
$5,000 his Roth IRA
$5,000 her Roth IRA

Current Total Portfolio: $175,000

His 401k (6%)
ING Global Bond Port Adv (1.87%)
PIMCO Real Return Fund R (1.81%)
45% - PIMCO Total Return Fund R (1.80%)
American Funds EuroPacific (1.83%)
ING Oppenheimr Global Port Adv (1.95%)
MFS International Value Fund R2 (2.23%)
Franklin Growth Fund R (1.89%)
ING Large Cap Growth Portfolio (2.14%)
ING U.S Stock Index Portfolio Adv (1.71%)
55% - ING Russel Mid Cap Index Port A (1.65%)
ING Russell Sm Cap Index Port A (1.68%)
ING Index Solutions 2015-2055 (1.84%-1.87%)

Her 401k (15%)
PIMCO Real Return (0.75%)
PIMCO Total Return (0.75%)
Nuveen Real Estate A (1.29%)
Glenmede Smcp Eq Adv (0.90%)
Spartan Tot Mkt Index Adv (0.07%)
100% - FID Freedom 2020-50 (0.76-0.78%)

His Roth IRA (6%)
Vanguard REIT (0.10%)

Her Roth IRA (6%)
Inflation Protected Sec (0.11%)

His Taxable at Vanguard (35%)
21% - European Stock Index Fund (0.14%)
79 % -Total Stock Market Index Fund (0.06%)

Her Taxable at Vanguard (32%)
24% - Total International Stock Index Fund(0.18%)
76 % -Total Stock Market Index Fund (0.06%)

Questions:
1. Since his 401k is pretty terrible, is it would make sense to invest in low-cost index funds in taxable instead? I invest enough to get the small match, but then max out my Roth IRA & put the rest in my taxable Vanguard acct. I work at a Country Club and very few offer 401ks so its doubtful that I will switch to a different club that offers a better situation for my 401k.

2. Early this year, I sold a mutual fund that had a 5k loss. Still frustrated that I was “fooled” by Chase to invest it in, but thanks to it I found Bogleheads so I guess it’s a small price to pay. Assuming that stock market doesn’t change much in the next few days, we will have around a 5k gain in taxable this year. I assume it would make sense to sell those assets no later than 12/31 to since I should be able to deduct the taxes?

3. In her 401k, she holds all of her assets in a Target fund with 80/20 AA. However, since the exp ratio is 0.76%, wouldn’t it make more sense to split it between the Spartan index fund (0.07%) and the PIMCO fund (0.75%)? Not sure yet if the "advisors" charge anything, so the ER could very well be higher then the numbers i currently have.

4. She invests enough to get the match, then ROTH & taxable. We are Swedish citizens, but have green cards and live in the U.S. She says that she doesn’t want to put too much into 401k since there is a possibility that we will move back one day. Does that make any sense at all?

Sincerely,

Anders

[umfundi]

Anders,

A quick answer: You seem to be in pretty good shape. Given your exposure with your own property, I would drop the tilt to REIT.

4. She invests enough to get the match, then ROTH & taxable. We are Swedish citizens, but have green cards and live in the U.S. She says that she doesn’t want to put too much into 401k since there is a possibility that we will move back one day. Does that make any sense at all?

So, it's sheltered from taxes in the USA. You should maximize that.

It may be taxable in Sweden, if you move back, but I cannot imagine a down side.

Can you now make tax-advantaged investments in Sweden? Look for investments that are not subject to taxation in both countries.

Keith

[Bob's not my name]

Total household income:$125,000 (up from $110,000 in 2012)
Debt: Mortgage $320,000 @3.25% w/$150,000 in Equity (14 years left)
Tax Filing Status: Married Filing Jointly
Tax Rate: 25% Federal, 6% State?
State of Residence: Louisiana

$125,000 gross income
- $3,500 pre-tax health, dental, and disability insurance premiums withheld from your pay (guess)
- $20,500 401k contributions, maxing hers and keeping his at $3,000
-----------------
$101,000 AGI
- $7,800 two personal exemptions
- $18,200 itemized deductions (guess based on that mortgage)
-----------------
$75,000 taxable income

This taxable income puts you in the 28% federal bracket next year (25% if the current rates are extended). I'd guess your LA tax is 4%, but I'm not a LA taxpayer. 4% deducted against federal tax means 3% effective, so your total marginal rate is 31%. If you don't contribute this much to your 401k's, then your state rate will be 6%, or about 4.5% effective after deducting, so your total marginal rate will be 32.5%.

At these tax rates, it takes more than $16,000 of gross income to make two $5,500 Roth IRA contributions (on which you pay $5,000 of tax). Instead, use that $16,000 of gross income to increase her 401k contribution by $14,000. That leaves another $2,000 of gross income. You might use that to make a $2,000 deductible TIRA contribution -- your AGI puts you about halfway into the eligibility phaseout, so you may be able to contribute $2,000 or $3,000 each, depending on your actual numbers vs. my illustrative stack above.

[NOLA]

Thanks for the replies Keith and Bob.

Unfortunately its very tough to find any kind of tax sheltered investments in Sweden. You do get to put some towards a retirement account if you work there. However, the rules are a lot more favorable in the U.S and capital gains are always 30% as far as I can remember. Wish they had a Roth or similar back there.

Bob, thanks for taking the time to show us a specific example. Its a lot easier to understand now and we will definitely discuss it.

Also, I know I should probably discuss it with a CPA (have never had one before) but would it be smart to sell the gains in the taxable account and invest it again the next day. Can I deduct the 5k gain that way?

[Bob's not my name]

would it be smart to sell the gains in the taxable account and invest it again the next day. Can I deduct the 5k gain that way?

I don't understand the question. When you recognize $5,000 of gains you ADD $5,000 to your taxable income.

[umfundi]

If you have 5k of losses yes, you can realize 5k of gains and offset the two.

If not, the losses carry over until you do realize gains.

Keith

[Bob's not my name]

If you have losses it is better not to realize gains. It is better to use the losses to offset ordinary income, which is taxed at a higher rate than long term capital gains. You can use $3,000 of losses against ordinary income each tax year.

[NOLA]

Thanks, that makes sense. This would be short term gains, but can always keep them and offset the losses against ordinary income.

Also, for me(him) does it make sense not to invest more in the 401k since the ER is so high?

[Bob's not my name]

His 401k is pretty much criminal, so I would max hers and get the match in his, then maybe do some Roth IRA. If you're going to be with this employer less than 20 years, or if they improve the 401k in less than 20 years, contributing to his 401k after maxing hers would make sense.

[NOLA]

Thanks Bob, yeah its an ugly 401k but don't think its gonna get better anytime soon.

Also, forgot to mention it earlier, but we are expecting our first child in March which is very exciting. How will that affect our deductions?

[Bob's not my name]

You'll get a third personal exemption. Under the Bush tax cuts that would have been enough to get you to the 15% bracket, but one of several marriage penalties that will be introduced in 2013 under current law is a reduction in the MFJ 15%-28% threshold.

Provided your AGI stays under $110,000 you will get the child tax credit. It has been worth $1,000 under the Bush tax cuts but returns to $500 under current law.

There should be no change in deductions.

With a child you can be more aggressive with FSA contributions. These are now limited by the ACA, but if you and your spouse both have access to FSAs this should not be an issue. FSAs are discussed here: viewtopic.php?f=10&t=101267