Help with allocation

[alewisdvm]

Emergency funds: About 1 month
Debt: Indicate if you have any debt: Credit cards paid in full monthly, no car loans, no mortgage, school loans of about $33,000 consoliated at 2.7%
Tax Filing Status: Married filing jointly with 1 dependent.
Tax Rate: Federal 25% State: 9.3%
State of Residence: CA
Age: 36 Wife: 35
Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: not sure. I was thinking about 30%. But not sure if should be international, emerging markets, or some split to make up the 30%
Portfolio: under 100,000

Annual income: $155,000

Desire: Good diversification and a bit more aggressive. So many advised I needed to get some bonds in to portfolio so now aiming for about 20%? I haven't contributed any new funds to small cap since I thought 18% currently was pretty good. REIT is already at 10% so leaving alone for awhile. Wasn't sure what to do with Welleseley, International, 401K funds, etc...

Current allocation
Myself
Vanguard Total International Index (traditional IRA) 7% (no new money)
Vanguard REIT Index Fund Investor (ROTH IRA) 10% (no new money)
Vanguard Total Bond Index (ROTA IRA) 16% + 3-4% of bonds in Welleseley (no new money)

Wife
Vanguard Welleseley (traditional IRA) 12% (no new money)
Vanguard Small Cap Value Admiral (ROTH IRA) 18% ( no new money)

My 401K 
Dryden S&P 500 Index through Prudential 42% (currently, contributing 15%-20% of paycheck)

Daughter 529: Vanguard Aggressive growth $5500

I get a small match of 8% for what I put in to 401K, but limited to $9,500 due to higher earner cap for the company I work for.

I'm just not sure where to continuing contributing or if I should change any funds. International seems a bit low, but wasn't sure if I should add to the tIRA international OR if maybe I should invest in a emerging market fund contained within the 401K (typical management fees are about 1.3% except the dryden fund which was about 0.3%.

1. The 401K funds available at Prudential include:

Guaranteed Income Fund Guaranteed Income Fund Fund Summary
Stable Value Exp Ratio 0.4%

Core Bond Enhanced Index/PIM Fund Core Bond Enhanced Index/PIM Fund Fund Summary Exp Ratio 0.37%
Fixed Income - Domestic


Prudential TIPS Enhanced Index Fund Prudential TIPS Enhanced Index Fund Fund Summary Exp Ratio 0.91%
Fixed Income - Domestic

Prudential IncomeFlex Target EasyPath Balanced Fund Prudential IncomeFlex Target EasyPath Balanced Fund Fund Summary Exp Ratio 1.78%
Retirement Income - IncomeFlex

Lifetime Aggressive Growth Fund Lifetime Aggressive Growth Fund Fund Summary Exp Ratio 1.01%
Balanced - Lifetime

Lifetime Balanced Fund Lifetime Balanced Fund Fund Summary
Balanced - Lifetime Exp Ratio 0.84%

Lifetime Income & Equity Fund Lifetime Income & Equity Fund Fund Summary Exp Ratio 0.56%
Balanced - Lifetime

SA/Oakmark Equity & Income Strategy SA/Oakmark Equity & Income Strategy Fund Summary Exp Ratio 0.8%
Balanced - Value

Large Cap Value/AJO Fund Large Cap Value/AJO Fund Fund Summary Exp Ratio 1.12%
Large Cap Stock - Value

Large Cap Value/Barrow Hanley Large Cap Value/Barrow Hanley Fund Summary Exp Ratio 1.11%
Large Cap Stock - Value
Large Cap Stock - Growth

Mid Cap Value / CRM Fund Mid Cap Value / CRM Fund Fund Summary Exp Ratio 1.15%
Mid Cap Stock - Value

Mid Cap Growth/Artisan Partners Mid Cap Growth/Artisan Partners Fund Summary Exp Ratio 1.21%
Mid Cap Stock - Growth

SA/Wells Fargo Small Cap Value Strategy SA/Wells Fargo Small Cap Value Strategy Fund Summary Exp Ratio1.35%
Small Cap Stock - Value

SA/Invesco Small Cap Growth Strategy SA/Invesco Small Cap Growth Strategy Fund Summary Exp Ratio 1.23%
Small Cap Stock - Growth

AllianceBernstein International Value Fund (Class K Shares) AllianceBernstein International Value Fund (Class K Shares) Fund Summary Exp Ratio 1.25%
International Stock - Value

International Blend / Thornburg Fund International Blend / Thornburg Fund Fund Summary Exp Ratio 1.36%
International Stock - Blend

QMA Emerging Markets Fund QMA Emerging Markets Fund Fund Summary Exp Ratio 1.47%
International Stock - Blend

International Growth/Artisan Partners Fund International Growth/Artisan Partners Fund Fund Summary Exp Ratio 1.16%
International Stock - Growth

Cohen & Steers Realty Shares Fund Cohen & Steers Realty Shares Fund Fund Summary Exp Ratio 0.99%
Specialty - Real Estate

Dryden S&P 500 Index Fund Exp Ratio 0.32%

****I was directed previously on bogleheads that the Dryden S&P 500 was the lowest cost and easiest way for me to complement my other funds.

--------------------------------------------------------

[damjam]

Your funds you have in your portfolio are pretty good. I would just questions the Vanguard Welleseley in your wife's account. Not because it is bad, but because it makes keeping track of your AA a little more of a pain.
The thing your lacking is a complete Asset Allocation plan. You seem to be close to a Three-fund portfolio with a small/value tilt and REITS added for spice.
You need to decide if you are in fact going to go 80/20 stock/bond. It's a little on the aggressive side but not unreasonable.
Then you need to decide what percentage of stock you want to be allocated to international. Based on historical data Vanguard recommends in the 20%-40% range. Some people have no international allocation at all, arguing that many US firms are mutinational. I personally have 40% of stock invested in international. YMMV
You also seem to want a small/value tilt. I would search around the board regarding this, there are many threads addressing this issue.
10% REITS as part of your stock allocation is not unreasonable. Although I personally don't hold a separate REIT fund since I own rental properties.

I get a small match of 8% for what I put in to 401K, but limited to $9,500 due to higher earner cap for the company I work for.

I'm not sure what that means, do you get 100% match for the first 8% of salary?
Since you are limited on contributions to your 401k, I would work to contribute to both your tIRA/Roth and your wife's tIRA/Roth.

Do you have a pension? If not I would want to be saving in the range of 20% of gross income annually. Your not particularly savings rich given your income and age. Your situation is not horrendous but I would like a little more savings. Have you done any simulations of how much you need to be saving to reach your retirement objectives? Of course at your age it is all highly speculative, a lot can happen, but I think the exercise is worthwhile. Try: Retirement calculators and spending. A conservative rule of thumb is you need 25-30x annual spending at 65. Obviously the key is spending, the more you can get that under control the easier it is to achieve your goal.

Your post is close to the preferred format, but it could use a little tweaking. See: Asking Portfolio Questions. You can edit your original post so all information is available right at the top.

[alewisdvm]

Sorry.
I meant that I get a 8% match of only what I put in. So, at the maximum, a match of about $760.

Yes, I am interested in adding more international exposure. But, wondering if that should be done by "adding" to the international fund already owned, or if perhaps instead of contributing to the dryden fund in the 401K, should I now start allocating some of 401K funds to a international or emerging markets fund?

Yes, I did like having just a bit of REIT exposure. I am a renter, and I like the idea of having some real estate type of investment. I would not likely go over about 10% for the REIT.

Suggestion to replace Welleseley? I was using the Wellesely to get a little extra bond exposure since I am not actively making any contributions to the total bond index, which is within a ROTH right now.

I also cleaned up first post a bit to be easier to read. Thanks

[retiredjg]

I think you need a wee bit of an overhaul. But you need to determine the tax cost before doing it. A few comments first.

Emergency funds: About 1 month

This is not an adequate emergency fund. I didn't see any indication you plan to increase it. You need to consider doing that.

Age: 36 Wife: 35
Desired Asset allocation: 80% stocks / 20% bonds

This is on the aggressive side, but not unreasonable. When you hit 40, you need to add at least 5% bonds and keep doing that every 5 years. This will keep you aggressive, but not stupid.

Current allocation
Myself
Vanguard Total International Index (traditional IRA) 7% (no new money)
Vanguard REIT Index Fund Investor (ROTH IRA) 10% (no new money) <<---not tax-efficient
Vanguard Total Bond Index (ROTA IRA) 16% + 3-4% of bonds in Welleseley (no new money) <<---not tax-efficient

Wife
Vanguard Welleseley (traditional IRA) 12% (no new money) <<---not tax-efficient
Vanguard Small Cap Value Admiral (ROTH IRA) 18% ( no new money)

The funds that I labeled as not tax-efficient should not be held in your taxable account. That is because they cost you extra in taxes. Right now, the bond fund is not doing too much damage since bonds aren't making much money. Do you have large unrealized (not yet taxed) gains in these funds?



You need a bond fund or stable value fund in your 401k:

Stable Value Exp Ratio 0.4%<--what is this fund paying?
PIM Fund Core Bond Enhanced Index/PIM Fund Fund Summary Exp Ratio 0.37% <--what is the description of this fund?

There is no mention of any IRA and no mention of your wife's 401k/403b or IRAs if she has any. Are there any other accounts set aside for retirement?

What is the money in the taxable account for?

How much money do you plan to save each year and what accounts is the money going to go to?

[alewisdvm]

Hello,
1. I plan to add at least $9500 to 401K each year. About $3200 to a HSA account. My wife is not employeed, so no other 401K available.
2. I paln to try and add more to traditional IRA's.

The ROTH ira's have not received additional funds in years. They were from a few years ago, and now I am more interested in tax savings. So, the ROTH funds have stagnated. So, I know they are not tax efficient for future contributions but wasn't going to be adding any more to them, so don't know what to do with the ROTH funds.

3. Yes, emergency fund is weak. As of this year, I am adding enough to a separate savings account so I can add an extra 1 month of emergency savings for every 3 months. So, I should be close to 5-6 months by end of this year.

4. Don't understand the following:
"Right now, the bond fund is not doing too much damage since bonds aren't making much money. Do you have large unrealized (not yet taxed) gains in these funds?"

These are ROTH IRA's. I thought any earnings are not taxed? Onlly money put into the ROTH is taxed?

About those other funds:

Stable Value Exp Ratio 0.4%<--what is this fund paying?
Guaranteed Income Fund 0248 Price Shares/Units Value Fund Fact Sheet (PDF)
As of 01/28/2013 31.76 N/A N/A
Performance as of 12/31/2012
Prior Month Prior Quarter YTD* 1 Yr 3 Yr 5 Yr 10 Yr or Since Inception
0.19% 0.55% 0.15% 2.27% 2.57% 2.90% 3.08%
Inception Date Expense Ratio
02/28/2005
Gross Expense Ratio 0.40%**
Net Expense Ratio 0.40%
Guaranteed Income Fund
Third Quarter 2012
Fund Fact Sheet
Key Facts
ISSUER: Prudential Retirement
Insurance and Annuity Company
INVESTMENT ADVISER: Prudential Investment
Management, Inc.
FUND CATEGORY: Stable Value
NET ASSETS: $16,826 Million
INCEPTION DATE: January 1, 1981
Investor Risk Profile
This Fund may be suitable for investors who seek:
■ Preservation of capital plus competitive
intermediate-term returns.
■ Liquidity and income.
Commercial Mortgage Loans1 18%
Public Corporate Bonds 34%
Private Securities 23%
CMO/CMBS2 10%
ABS3 4%
Agency MBS 9%
US Treasury & Agencies 0%
Other4 1%
Cash and Short Term 1%
Portfolio Allocation As of 09/30/2012
Guarantee Quality AAAverage
Duration 3.2
Total High Yield Exposure 4.27% (included in the
above allocations)
U.S. Treasury Rates As of 09/30/2012
Objective & Structure
The Guaranteed Income Fund (GIF) is a Stable Value fund designed to provide safety of principal, liquidity,
and a competitive rate of return.
The Fund Offers
■ Stability of crediting rate
■ Guaranteed protection of principal and accumulated interest from market volatility
■ Intermediate-term fixed income returns
Features
■ Principal and accumulated interest are fully guaranteed by Prudential Retirement Insurance and Annuity
Company (PRIAC).
■ The guaranteed interest rate is announced in advance and is guaranteed for a six-month period.5 A
minimum rate will apply.
■ GIF invests in a broadly diversified, fixed-income portfolio within PRIAC’s general account. The portfolio
is primarily invested in public bonds, commercial mortgages and private placement bonds.



PIM Fund Core Bond Enhanced Index/PIM Fund Fund Summary Exp Ratio 0.37% <--what is the description of this fund?
Core Bond Enhanced Index/PIM Fund 0302,0381,1254 Price Shares/Units Value Fund Fact Sheet (PDF)
As of 01/28/2013 21.80 N/A N/A
Performance as of 12/31/2012
Prior Month Prior Quarter YTD* 1 Yr 3 Yr 5 Yr 10 Yr or Since Inception
-0.19% 0.13% -0.70% 4.38% 6.17% 6.04% 5.16%
Inception Date Expense Ratio
Gross Expense Ratio 0.37%**
Net Expense Ratio 0.37%
Investment Overview
DESCRIPTION/OBJECTIVE
The Separate Account (the “Fund”), which is advised by Prudential Investment Management, Inc., is structured to reflect many of
the characteristics of the Barclays Capital U.S. Aggregate Bond Index (the “Index”), including duration and interest rate exposure.
It seeks to achieve performance results that are similar to those of the Barclays Capital U.S. Aggregate Bond Index, while offering
the potential for incrementally higher returns. The Fund also attempts to minimize the month-to-month variability between the
return of the Fund and that of the Index

[alewisdvm]

I'm all messed up now because no idea what to do with the ROTH ira's, which right now can somewhat fit into a asset allocation, but if I am no longer contributing to them, what do I do with them?

[damjam]

1. I plan to add at least $9500 to 401K each year. About $3200 to a HSA account. My wife is not employeed, so no other 401K available.

Is this $9500 including the employer match?

2. I paln to try and add more to traditional IRA's.

That's great.

3. Yes, emergency fund is weak. As of this year, I am adding enough to a separate savings account so I can add an extra 1 month of emergency savings for every 3 months. So, I should be close to 5-6 months by end of this year.

Sounds like a good plan.

4. Don't understand the following:
"Right now, the bond fund is not doing too much damage since bonds aren't making much money. Do you have large unrealized (not yet taxed) gains in these funds?"

These are ROTH IRA's. I thought any earnings are not taxed? Onlly money put into the ROTH is taxed?

You are correct only contributions to Roth IRAs are taxed. I suspect that retiredjg missed the Roth designation.

I'm all messed up now because no idea what to do with the ROTH ira's, which right now can somewhat fit into a asset allocation, but if I am no longer contributing to them, what do I do with them?

I'm not sure I really understand this question. You invest the funds in the Roth IRAs according to your desired AA. The fact that you are currently not contributing to the Roths just means that the Roth accounts will become a smaller and smaller part of your overall portfolio as you contribute more to your other accounts.

[alewisdvm]

1. I plan to add at least $9500 to 401K each year. About $3200 to a HSA account. My wife is not employeed, so no other 401K available.

Is this $9500 including the employer match?

No, $9500 + the match of 8% of $9500.

2. I paln to try and add more to traditional IRA's.

That's great.

3. Yes, emergency fund is weak. As of this year, I am adding enough to a separate savings account so I can add an extra 1 month of emergency savings for every 3 months. So, I should be close to 5-6 months by end of this year.

Sounds like a good plan.

4. Don't understand the following:
"Right now, the bond fund is not doing too much damage since bonds aren't making much money. Do you have large unrealized (not yet taxed) gains in these funds?"

These are ROTH IRA's. I thought any earnings are not taxed? Onlly money put into the ROTH is taxed?

You are correct only contributions to Roth IRAs are taxed. I suspect that retiredjg missed the Roth designation.

I'm all messed up now because no idea what to do with the ROTH ira's, which right now can somewhat fit into a asset allocation, but if I am no longer contributing to them, what do I do with them?

I'm not sure I really understand this question. You invest the funds in the Roth IRAs according to your desired AA. The fact that you are currently not contributing to the Roths just means that the Roth accounts will become a smaller and smaller part of your overall portfolio as you contribute more to your other accounts.

Yes, but eventually, I guess that means I will need to establish new duplicated traditional IRA's to match the ROTH's as the % allocation decreases. Oh...funny...I guess I could just do that. Can you simply have both a traditional and a roth ira of same vanguard funds?

It looks like the biggest improvement I can make to allocation is that I need to:
1. Do maybe something with the Welleseley? Change for something else?
2. Add more to international traditional IRA OR do I add international or emerging markets fund in the 401K?

3. Any benefit to breaking up my 30% international asset to 15% international and 15% emerging market?

[damjam]

Can you simply have both a traditional and a roth ira of same vanguard funds?

Absolutely. I have a few duplicates across my accounts. It just happens over time.

[alewisdvm]

Oh..good to know...trying to keep thing so organized and didn't realize the duplicate funds would possibly happen anyway. Makes perfect sense as salary changes as well.

I edited a few more questions into previous post, if you have any other suggestions. Very helpful!

[retiredjg]

These are ROTH IRA's.

Sorry, I missed that. I wondered why damjam didn't think you need to fix it.

So, no, you don't need an overhaul after all.

[alewisdvm]

Thanks.
I guess final questions are:
1. If changing Welleseley to something else, what?
2. If only at 7% international and shooting now for 30%, should I
a. increase holdings in the traditional ira international fund
b. add a international fund to 401K and decrease Dryden contributions
c. add a emerging markets fund either in 401K or as a separate traditional vanguard fund?

3. Any potential benefit to spreading the 30% for international AA to 15% emerging and 15% international?

4. I assume I will just let the roth ira's dwindle, and then as indicated, add a new traditional ira to add more funds to keep asset allocation steady.

[damjam]

It looks like the biggest improvement I can make to allocation is that I need to:
1. Do maybe something with the Welleseley? Change for something else?

In the end I probably would do that but I think you need to build your portfolio and then see what you need.
When building a portfolio you start with the account that has the most restricted investment choices. That would be your 401k. You choose the lowest cost funds that fit your desired asset choices. My scan of your 401k fund choices finds three funds that have expense ratios under .50%:

1. Guaranteed Income Fund Guaranteed Income Fund Fund Summary Stable Value Exp Ratio 0.4%

2. Core Bond Enhanced Index/PIM Fund Core Bond Enhanced Index/PIM Fund Fund Summary Exp Ratio 0.37%
Fixed Income - Domestic

3. Dryden S&P 500 Index Fund Exp Ratio 0.32%

I would use only these funds as needed to fill your portfolio.

2. Add more to international traditional IRA OR do I add international or emerging markets fund in the 401K?

I would avoid the emerging markets fund in your 401k since you earlier said "QMA Emerging Markets Fund QMA Emerging Markets Fund Fund Summary Exp Ratio 1.47% International Stock - Blend " that's a higher expense ratio than anything you could get with Vanguard in your tIRA. To be honest I would probably skip having emerging market to avoid having to pay that expense ratio.

3. Any benefit to breaking up my 30% international asset to 15% international and 15% emerging market?

As long as you realize you would be overweight emerging market. Some people feel EM has had its run up. I dunno. Vanguard's Total International already includes emerging market at its market weight.



It looks like your portfolio should look like this: (Correct me if I misunderstood you)
20% Bonds
46% Total Stock (This can be split between large and small if desired)
24% Total International Stock(30% of 80%)
10% REIT

Does that look right?

[alewisdvm]

It looks like your portfolio should look like this: (Correct me if I misunderstood you)
20% Bonds
46% Total Stock (This can be split between large and small if desired)
24% Total International Stock(30% of 80%)
10% REIT

Does that look right?[/quote]

I would say bonds are a bit below if I remove the Wellesley fund, which I am okay with. I can adjust bonds to equal 20% by now adding a bond fund within the 401K since its one of the 3 that qualifies for the lower expense.

My international stock is very low. I think only about 7% right now and no emerging markets. So, I may consider converting the Wellesley to vanguard total international.

10% REIT I do like. Probably no more than that.

[alewisdvm]

Yes. If I convert the Welleseley to total international, that would give me about 18% for international funds between mine and wife's traditional ira's. Also, since they are traditional, it will enable to continue making contributions to them yearly as the asset allocation needs it.

Any advantage to doing any type of split across international growth, value, total?

I think I will stay away from emerging markets for now.

[damjam]

Any advantage to doing any type of split across international growth, value, total?

I go with total so I match the market (more or less).
If you are going to overweight you overweight value never growth.
I would advise you to do some reading regarding using small/value tilt. You should understand what your doing before implementing any strategy.
You can find many, many threads regarding small/value tilt. Some swear by it, others swear at it. You need to make your own decision.
When you overweight any part of the market you open yourself up to the possibility of outperforming the market, but you can also underperfom.

[alewisdvm]

It's a bit tough though with the 401K.
With the ability to add up to $9500.
Right now, I am a bit heavy on large/small caps, but I really don't want to invest 9500 in just the core bond or guaranteed income funds?

So, I guess that really leaves me with most of 401K funds still going to the Dryden 500?
Than, contributing whatever I can to increase the traditional ira holdings in international, and some in bonds as needed?

[alewisdvm]

Just added a additional statememt above.
Your right...I didn't even remember that it was small 'value' as opposed to small cap index. Not sure why or when I did that, but will likely change.

[damjam]

I think you should make a spreadsheet to model the various scenarios.
I have one and use it whenever I need to rebalance.

[alewisdvm]

Just did over past few hours. That is what made it easier to see converting Welleseley to total international would give be better proprotion of international exposure..

[retiredjg]

I'd be happy to help you with an allocation suggestion, but your accounts add up to 105%. Can you fix that to be something closer to 100%?

[alewisdvm]

How about:

15% Bonds
30% Dryden S&P 500
15% smal cap index
30% total international stock index (I believe has some % of small caps as well)
10% REIT

1. Small cap is weighted higher currently, but since i is a roth, it will continue to decline in % with no contributions.

2. Bonds would be quite good if I take away the Welleseley fund. As I need to add bonds (and since vanguard bond fund is a roth), I will than add a bond fund in 401K.

3. Converting Welleseley to total international should help close in on 20%, and then will add more to wife's total international fund through tIRA.

4. I'll let REIT drop as % of total for awhile, and then maybe add a separate REIT tIRA in future.

I'll take all comments, criticisms, whatever you got. Been extremely helpful.

[retiredjg]

Not enough in bonds....

[alewisdvm]

15% Bonds
30% Dryden S&P 500
15% smal cap index
30% total international stock index (I believe has some % of small caps as well)
10% REIT

Change to:
20% Bonds and reduce international to 25%?

I can add more bonds through one of the low expense funds in 401K. But, 15% is considered to low for a 35 year old?

[retiredjg]

If you use 80/20, then 25% in international is 31% of your stocks in international. That is right in the middle of what Vanguard suggests. Not a bad place to be.

You could go higher in international if you want, but you'd have to give up some REIT or some small cap. Both your REIT and your small cap are overweighted. It makes no sense to change your stock to bond ratio (increase your risk) and keep unnecessary overweights.

I don't know if 15% is considered "low" for a 35 year old. It is at the minimum I would consider suggesting - age minus 20 in bonds is the most aggressive I would go. Many would suggest more bonds - age in bonds is something a lot of people suggest.

If you use 20% bonds now, you have 5 years before you need to add another 5% in bonds.

[damjam]

I can add more bonds through one of the low expense funds in 401K. But, 15% is considered to low for a 35 year old?

I agree with retiredjg you need more bonds.
15% is too low for anyone IMHO.
A few studies have shown that you reduce risk with little-to-no loss in portfolio returns if you have 20% bonds.
It also gives you a reserve, dry powder, to take from and buy more stock when the stock market is down.

[alewisdvm]

Okay.
Why is the Core Bond Enhanced offering in the 401K performing so bad even in comparison to the vanguard total bond index. It makes me reluctant to want to be shifting funds out of dryden just to pick up that Core Bond fund?

Of course, I want that $700 in matching (not a lot but better than nothing), but that does mean Ineed to contribute $9500 to "something" in those prudential funds?

[alewisdvm]

Unless of course,
I decide to keep the Welleseley fund?
It's about 60% bonds + I get a little play out of dividend paying stocks. It's not quite as safe as straight bonds, but certainly gives me at least 20% between Welleseley and vanguard total bond?

[retiredjg]

If you keep Wellesley, where are you going to put your international?

[alewisdvm]

I will either fund the international fund that I have already or I will open a new traditional ira for my wife this year and simply have a second total international index fund.

But!
Now I have a problem.
It just occurred to me. I am limited by my company to only contributing $9500 to my 401k.
But, because of income limitations I don't believe I can fund my own tIRA.
I can put $5000 in to my wife's but not mine due to phase out.

So, another question if anyone can assist.
I work a second job on the internet. Would it be worthwhile to maybe setup up either a solo 401K or a sepIRA?

Now, my company limited me on their 401k, but I believe if I have a solo 401k as well, than I would be allowed to contribute up to the full $17,000?

[jlb1119]

I am limited by my company to only contributing $9500 to my 401k.

Based on screen name, available 401k choices, and also how the company match works, I think we work for the same company....are you sure you are limited to just $9500k/year? If we do have the same employer as far as I know you can contribute 1-25% of your total salary.... say hypothetically you contribute 20% of your 80k salary, you are almost at the allowable limit of 17.5 k/year.

[alewisdvm]

Funny.
No, limited to 9500. In fact, anyone who gets classified as a high earner, will automatically find this out, as the company will send you a check back for the difference and correct your pay stub to max contribution of $9500.

However,
A solo 401k or sep-ira against my second job income declared as a S.P. on schedule C may fix my problem.
But, not quite sure which to go with or IF EITHER is possibly limited by the 401k contributions in first job.

[jlb1119]

Interesting... guess I'll find out soon enough if my intuition was correct

[alewisdvm]

As of 2011, if you file a joint return, the deduction for your IRA contribution will begin to phase out if your modified adjusted gross income is between $169,000 and $179,000, after which it drops to zero.

I want to verify if the above is correct. So, if MAGI is under 169,000 and even if you contribute to a 401k, you can still make a max 5,500 contribution to your own ira AND to a non-working spouse?

[alewisdvm]

Married filing jointly or qualifying widow(er): If your MAGI is $95,000 (up from $92,000) or less, you can take a full deduction. If more than $95,000, but less than $115,000 (up from $112,000) – you get a partial deduction. If over $115,000, no deduction.

So, which is correct?????
Is the phase out beginning at $95,000? or was it the higher amount in previous post

[damjam]

As of 2011, if you file a joint return, the deduction for your IRA contribution will begin to phase out if your modified adjusted gross income is between $169,000 and $179,000, after which it drops to zero.

I want to verify if the above is correct. So, if MAGI is under 169,000 and even if you contribute to a 401k, you can still make a max 5,500 contribution to your own ira AND to a non-working spouse?

I have the limits for 2012
for Roth IRA:full contribution up to $173,000 MAGI, partial contribution between $173,000 and $183,000
I don't know the limits for 2013... irs.gov

The limits for a deductible traditional IRA are different depending on whether you are the one covered by a retirement plan or not.

Anyone can make a non-deductible contribution to a traditional IRA. No immediate tax benefit though. Only the earnings are tax deferred.

[alewisdvm]

Yeah...
I am looking for phase out for deductible contributions if:
I am contributing to 401k as well. I believe I can contribute 100% to tIRA for wife since she has no employer plan at all, but I don't believe I can contribute to my own.

[damjam]

Yeah...
I am looking for phase out for deductible contributions if:
I am contributing to 401k as well. I believe I can contribute 100% to tIRA for wife since she has no employer plan at all, but I don't believe I can contribute to my own.

Try HERE.

[alewisdvm]

Agreed.
So, I can contribute for my wife, but my tIRA is lost. I will need to do a sep-ira or solo 401k to complement my restricted employer's 401k

[alewisdvm]

The one last point I am still struggling with is how to make the allocation work with the 401k contributions.

I'm trying to keep fund expenses down (under 0.4%), and therefore, as previously instructed can only really use
dryden, the guaranteed income, the core bond fund.
But, if I put $9500 into any of these, i'll be heavy in bonds or even heavier in dryden.

Now, I can offset with contributions to some of the other vanguard funds with new sep ira or solo 401k, but still, I am stuck with how to allocate the $9500 for the 401k for few choices. Do I just suck it up, pay the higher expenses to get the mid-cap value or some international in 401k prudential choices?

Or, do I reduce my 401k contribution, since employer match is $760 max, and maximize whatever I can put into my own traditional ira, wife's traditional ira, and sep-ira. So, giving up the $760 in exchange for more flexibility of where I put money?

[damjam]

Now, I can offset with contributions to some of the other vanguard funds with new sep ira or solo 401k, but still, I am stuck with how to allocate the $9500 for the 401k for few choices. Do I just suck it up, pay the higher expenses to get the mid-cap value or some international in 401k prudential choices?

I would consider paying the higher expense ratios if the funds are good.
You need to investigate the funds. I don't know them and you haven't provided the tickers.

You may not be at this company your whole career. If you change employers you can rollover your 401k to an IRA and invest in anything you want.

[alewisdvm]

Interesting point about what the future can hold.
Sorry, these funds don't have readily easily to find tickers if at all. I think they are designed for 401k programs for our company????

Either way, I will try to simply compare apples to apples. See what matches certain vanguard funds, see if performance as at least somewhat similar and go from there.

Good point about if I change jobs, it can all be converted to vanguard anyway.

[retiredjg]

alevisdvm, your current portfolio looks like this.

His 401K 
42% Dryden S&P 500 Index

His tIRA
7% Vanguard Total International Index

His Roth IRA
10% Vanguard REIT Index Fund Investor
16% Vanguard Total Bond Index

Her tIRA
12% Vanguard Welleseley

Her Roth IRA
18% Vanguard Small Cap Value Admiral

The problem is that it adds up to 105% instead of 100%. That's just too large an error to work with. I'm going to subtract 1% from each account to make it 100% for the purpose of an example. Here's a way you could set things up.


His 401K 41%
36% Dryden S&P 500 Index
5% Bonds or Stable Value

His tIRA 6%
6% Vanguard Total International Index

His Roth IRA 25%
10% Vanguard REIT Index Fund Investor
15% Vanguard Total Bond Index

Her tIRA 11%
11% Vanguard Total International

Her Roth IRA 17%
17% Vanguard Small Cap Value Admiral or Small Cap or Extended Market Index

Contributions = $21,260

His 401k $10,260 <--$878 to Bonds or Stable Value, $9,382 to 500 Index
His Roth IRA $5,500 <--$2,126 to REIT, $3,374 to Bonds
Her tIRA $5,500 <--all to International until the allocation gets as high as you want it

If you set up your portfolio this way, it would be 80% stocks, 20% bonds, with 21% of the stocks (17% of portfolio) in international. In the next year or two, putting all of Her tiRA into the international fund would bring the international allocation up to something closer to what you want. Another alternative would be to set it up with a higher amount of international now, but I won't do that just yet because it involves more buying and selling. I'd rather find out what you like and don't like about this idea before tinkering with it.

Regarding your thoughts on a Solo 401k or SEP IRA. Unless you are saving a lot more than $21,260 it probably is not worth it.

[alewisdvm]

Thank you very much.
I greatly appreciate the detailed breakdown.

So far, although not quite as you outlined I was planning:
1. The Welleseley fund will be converted to Total International.
2. I will add $5000 to wife's tIRA in Total International
3. I will add a few thousand more in my sep-ira to total international.
This should get me right to about 25%

4. Of the 9500 allowed into 401K, I am going to break it down to 80% split between mid-cap growth and mip-cap value (there was no mid-cap blended fund) and the Core bond enhanced. I wanted to diversify a bit more out of Dryden 500, so will add about 10% into mid-caps. As soon as I hit that point, I will go back to Dryden 500 to lower expenses. That way, I am really only paying about 1% expense ratio for the mid-caps. Worth it to me for a little more diversification.

As the ratios of reit and small cap decrease, I will gradually add to them by using 1 new tIRA in small caps for wife and 1 new reit sep-ira for me.

[retiredjg]

If you have a SEP IRA, that should have been included in the above accounts. Unless it was empty.

I would recommend against using anything in the 401k except the 3 funds that have low expense ratios. If you are worried about missing mid caps, there are other was of getting it.

1) The small cap value you currently have and the 500 index both contain some mid cap. You may already have plenty. You could run this through Morningstar's Instant Xray to find out. (Morningstar webpage, tools, instant xray)

2) A combination of 83% 500 Index and 17% Small Cap Index has the same amount of mid caps as total stock market.

3) A combination of 80% 500 Index and 20% Extended Market Index has the same amount of mid caps as total stock market.

There is no need to pay over 1% in the 401k to get mid caps when you can pay a lot less by using the small cap value, small cap, or extended market indexes in Her Roth IRA. The cleanest combination is Extended Market, but the others will work.


Wiki article link: Approximating Total Stock Market

[alewisdvm]

Interesting. I didn't realize the small cap and S&P 500 had that much mid-cap in it. Good to know.
Yes, will change to continue dryden 500 contributions, but will allocate a bit more to core bond fund.

[alewisdvm]

I like combination #2.
I am already carrying small caps in wife's fund so will simply continue to contribute to small caps and 500 to make up mid-cap. Your right, no need to pay the extra expense.

In fact, with getting a company match of only about $760 (8% of the 9500 put in), those expenses just eat in to it.