401K AND taxable account

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401K AND taxable account

Postby sari » Fri Jul 26, 2013 9:42 pm

I received much help from this forum with our new 401K setup (see below). Thank you. I would like some insights into which fund to select among the choices below. Also, I have additional money to invest in a taxable account and needs ideas that will be tax efficient (ETF index?)
Age: mid 40's, married. No debt. Thinking about Life Strategy fund 60/40 (or should I be a bit more aggressive? I would have other income to tap into if needed during retirement).

Work 401K lineup:

Vanguard Prime Money Market Fund (VMMXX)
Vanguard Total Bond Market Index Signal
(VBTSX)
Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)
Vanguard Small-Cap Value Index Fund (VISVX)
Vanguard Total International Stock Index Fund Investor Shares (VGTSX)
Vanguard FTSE All-World ex-US Small-Cap Index Fund Investor Shares (VFSVX)/
Vanguard Emerging Markets Stock Index Fund Investor Shares (VEIEX)
Vanguard Emerging Markets Stock Index Fund Investor Shares (VEIEX) vs. Vanguard Emerging Markets Select Stock Fund (VMMSX)
Vanguard REIT Index Fund Investor Shares (VGSIX)

Vanguard Target Retirement 2015 Fund (VTXVX)
Vanguard Target Retirement 2020 Fund (VTWNX)
Vanguard Target Retirement 2025 Fund (VTTVX)
Vanguard Target Retirement 2030 Fund (VTHRX)
Vanguard Target Retirement 2035 Fund (VTTHX)
Vanguard Target Retirement 2040 Fund (VFORX)
Vanguard Target Retirement 2045 Fund (VTIVX)
Vanguard Target Retirement 2050 Fund (VFIFX)
Vanguard Target Retirement 2055 Fund (VFFVX)
Vanguard Target Retirement 2060 Fund (VTTSX)

Vanguard LifeStrategy Conservative Growth Fund (VSCGX)
Vanguard LifeStrategy Growth Fund (VASGX)
Vanguard LifeStrategy Income Fund (VASIX)
Vanguard LifeStrategy Moderate Growth Fund (VSMGX)
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Re: 401K AND taxable account

Postby ieee488 » Fri Jul 26, 2013 9:56 pm

It is not just which funds to choose but tax-efficient placement. http://www.bogleheads.org/wiki/Principl ... _Placement
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Re: 401K AND taxable account

Postby Kevin M » Fri Jul 26, 2013 9:58 pm

Wow, what a great choice of funds!!! The LifeStrategy and Target Retirement funds are great if you want simplicity. The next step up in complexity is to use the three underlying funds directly: Total Stock, Total International, Total Bond, split 70/30 US/International and whatever split you want for Stocks/Bonds.

Using individual funds allows you more flexibility to optimize for tax efficiency. The standard advice is to hold bonds in tax-advantaged accounts (like 401k or IRA) and stocks in taxable, but at today's low rates it can be argued that it's more efficient to do it the other way around. You almost certainly will hear more people here recommending to hold bonds in tax-advantaged accounts.

Once you've maxed out your 401k, how about an IRA, either traditional or Roth depending on your tax situation?

For taxable, I'd just open up a Vanguard mutual fund account and use the mutual funds. The ETFs are just different share classes of the Vanguard funds, and are more complicated to buy and sell. If you hold an international stock fund in taxable, you'll get the benefit of the tax credit for dividends (which you don't get in your 401k), but the higher dividend yield will offset this benefit to some extent. There is a Boglehead Wiki article that covers this.

No one can answer the stock/bond split (risk vs. expected return) question for you. It depends on your unique ability, willingness and need to take risk. Age in bonds is a common rule of thumb, so 60/40 for a 40-year old probably wouldn't be crazy.

If you post your situation using the format suggested in the Portfolio Advice post (see link in my signature line below), you are likely to get more detailed suggestions.

Kevin
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Re: 401K AND taxable account

Postby joe8d » Fri Jul 26, 2013 10:03 pm

Vanguard LifeStrategy Growth Fund (VASGX) would be my choice for the 401k.
All the Best, | Joe
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Re: 401K AND taxable account

Postby sari » Fri Jul 26, 2013 10:14 pm

Kevin M wrote:Wow, what a great choice of funds!!! The LifeStrategy and Target Retirement funds are great if you want simplicity. The next step up in complexity is to use the three underlying funds directly: Total Stock, Total International, Total Bond, split 70/30 US/International and whatever split you want for Stocks/Bonds.

Using individual funds allows you more flexibility to optimize for tax efficiency. The standard advice is to hold bonds in tax-advantaged accounts (like 401k or IRA) and stocks in taxable, but at today's low rates it can be argued that it's more efficient to do it the other way around. You almost certainly will hear more people here recommending to hold bonds in tax-advantaged accounts.

Once you've maxed out your 401k, how about an IRA, either traditional or Roth depending on your tax situation?

For taxable, I'd just open up a Vanguard mutual fund account and use the mutual funds. The ETFs are just different share classes of the Vanguard funds, and are more complicated to buy and sell. If you hold an international stock fund in taxable, you'll get the benefit of the tax credit for dividends (which you don't get in your 401k), but the higher dividend yield will offset this benefit to some extent. There is a Boglehead Wiki article that covers this.

No one can answer the stock/bond split (risk vs. expected return) question for you. It depends on your unique ability, willingness and need to take risk. Age in bonds is a common rule of thumb, so 60/40 for a 40-year old probably wouldn't be crazy.

If you post your situation using the format suggested in the Portfolio Advice post (see link in my signature line below), you are likely to get more detailed suggestions.

Kevin


I have a SEP IRA (in an actively managed fund prior to the 401K) which I would like to roll into the new 401K plan. Tax bracket is 39%. I'm maxing out the 401K/profit sharing already.
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Re: 401K AND taxable account

Postby Kevin M » Fri Jul 26, 2013 10:40 pm

sari wrote:I have a SEP IRA (in an actively managed fund prior to the 401K) which I would like to roll into the new 401K plan. Tax bracket is 39%. I'm maxing out the 401K/profit sharing already.

OK, at that tax bracket, you would have to do what we call a backdoor Roth IRA contribution. So rolling the SEP-IRA into the 401k is a good idea (assuming you can do it--I know nothing about SEP-IRAs). Assuming you have nothing in traditional IRAs, you can do the backdoor Roth thing with no tax complications.

You make a non-deductible contribution to a traditional IRA, then immediately convert it to a Roth IRA. It's easy to do, and Vanguard can help you do it. This gives you another $5,500 (in 2013) in tax-advantaged accounts. This is your first choice before investing in taxable accounts.

Any follow-up questions or comments on the other stuff?

Kevin
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Re: 401K AND taxable account

Postby sari » Fri Jul 26, 2013 11:37 pm

Would a back door roth 401K be advisable since my tax bracket will definitely go down (assuming the current scale stays the same) during retirement? Won't I still have to pay taxes at the current rate to roll it into a back door 401K? Also, since I will be maxing out at 51K for the 401K, I don't believe I can still contribute to an IRA? Thank you.
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Re: 401K AND taxable account

Postby Default User BR » Sat Jul 27, 2013 1:29 am

sari wrote:Would a back door roth 401K

What is that?


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Re: 401K AND taxable account

Postby sari » Sat Jul 27, 2013 9:38 am

Default User BR wrote:
sari wrote:Would a back door roth 401K

What is that?


Brian


I meant Roth 401K.
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Re: 401K AND taxable account

Postby Kevin M » Sat Jul 27, 2013 4:28 pm

sari wrote:Would a back door roth 401K be advisable since my tax bracket will definitely go down (assuming the current scale stays the same) during retirement? Won't I still have to pay taxes at the current rate to roll it into a back door 401K? Also, since I will be maxing out at 51K for the 401K, I don't believe I can still contribute to an IRA? Thank you.

Let's keep it simple at first.

  • You are contributing to a 401k.
  • You can still contribute to an IRA no matter how much you contribute to a 401k.
  • You can always make non-deductible contributions to a traditional IRA (assuming you have earned income).
  • You will pay taxes on that money anyway, so you don't lose anything by making the non-deductible contribution to a tIRA.
  • You pay no additional taxes when you convert the tIRA to a Roth IRA (other than on any small gains that you might make before the conversion; put it in a money market and there will be essentially no gains).
  • Distributions from the Roth after age 59 1/2 are tax-free, but you would pay taxes on gains in a taxable account.
  • A Roth IRA, via backdoor, is a no-brainer for you.

Let's get this straight before discussing a Roth 401k (which probably doesn't make sense if you will be in a lower tax bracket in retirement).

Kevin
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Re: 401K AND taxable account

Postby sari » Tue Jul 30, 2013 10:49 pm

If I choose the Lifestrategy fund 80/20 for the max contribution to the 401K, the components are:

1. Vanguard Total Stock Market Index Fund Investor Shares: 56.3%
2. Vanguard Total International Stock Index Fund Investor Shares: 23.6%
3. Vanguard Total Bond Market II Index Fund Investor Shares: 16.2%
4. Vanguard Total International Bond Index Fund Investor Shares: 3.9%

For the taxable account[/u], the most tax efficient placement includes:
a Total US Market Stock Fund, a Total International Stock Index Fund and Bond funds

The scenarios for the taxable accounts are:

1. Lifestrategy fund in tax deferred 401K account and a repeat of the Lifestrategy fund in a taxable account (however, this is not tax efficient placement although it simplify things)?

2. Vanguard Total Stock Market Index Fund Admiral Shares + Vanguard Total International Stock Index Fund Admiral Shares. 80/20? or Add total bond index to this equation: Vanguard Total Bond Market II Index Fund Admiral Shares for a 70/30?

3. All in zero Coupon Municipal Bonds only for taxable account: http://www.investinginbonds.com/learnmo ... 27&id=3142

4. All in CDs?
Thank you.
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Re: 401K AND taxable account

Postby Kevin M » Wed Jul 31, 2013 12:23 am

Hi sari,

I already answered much of this in my reply to your PM. What about my answer didn't you understand?

It's hard to coordinate replies to PMs and replies to posts if there's no coordination between the two. It seems as if you either did not read or did not understand my PM reply. Shall we post the PM reply here so others can see what I already said?

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Re: 401K AND taxable account

Postby sari » Wed Jul 31, 2013 7:42 am

Kevin M wrote:Hi sari,

I already answered much of this in my reply to your PM. What about my answer didn't you understand?

It's hard to coordinate replies to PMs and replies to posts if there's no coordination between the two. It seems as if you either did not read or did not understand my PM reply. Shall we post the PM reply here so others can see what I already said?

Kevin


Your correct. I didn't check for your reply prior to posting. Thank you.
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Re: 401K AND taxable account

Postby Kevin M » Wed Jul 31, 2013 3:02 pm

OK sari, no problem. Please post any follow up questions here.

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