New and Trying to Make Good Decisions

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Topic Author
DragonWagon
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Joined: Wed Sep 17, 2014 11:16 pm

New and Trying to Make Good Decisions

Post by DragonWagon »

Hi All,

I've read the Boglehead's Guide to Investing, and am almost 3 months into putting my financial future in order. I always thought "saving" cash was the number one goal of a good financial future, but now I'm learning. Please check over my plan for my first year, and tell me if I'm missing anything.

Up until now, both my wife and I just added the minimum to our 401ks to get the company matches and let them sit in target retirement funds. We saved the rest in cash. After reading the book, I did my best to do my own asset allocation across our 401ks with minimal fees, bumped up our percentages to make sure we max out our 401ks, and I opened a brokerage account with Vanguard.

Financial Summary
  • 32 years old
  • Combined Gross Salary - 200k
  • Combined 401ks - 141k
  • Brokerage Account - 30k
  • Cash on Hand - 130k
  • Projected Saving Per Year - 80k
  • No Debt Except Mortgage - 200k left at 3.5% - 150k Equity
Current Investments
Wife's 401k:
  • EQUITY INDEX TRUST CLASS C - 30.3k - ER: .10%
  • VANGUARD EXT MRKTS IDX SIGNAL - 7.7k - ER: .10%
  • VANGUARD TOT INTL STK INDX SIG - 15.2k - ER: .14%
  • US BOND ENHANCED INDEX TRUST B - 24.8k - ER: .15%
  • TOTAL - 78k
My 401k:
  • SPTN 500 INDEX ADV - 24.6k - ER: .05%
  • SPTN EXT MKT IDX ADV - 6k - ER: .07%
  • VANG TOT INTL STK AD - 12.5k - ER: .14%
  • SPTN US BOND IDX ADV - 20k - ER: .10%
  • TOTAL - 63.1k
Vanguard Brokerage:
  • VTSAX - 20.2k - ER: .05%
  • VTIAX - 9.6k - ER: .14%
  • TOTAL - 30k
I opened the brokerage account with 30k just to make sure I got the admiral shares, and that I understood everything before investing more. I told myself that if I was comfortable in 120 days, I would invest 100k more, bringing my cash on hand down to 6 months of expenses. That day is 11/1.

When I first did the asset allocation, I set it to 68% Stocks / 32% bonds following the "age in bonds" idea. After doing more research, I think I'm more comfortable at 75% stocks / 25% bonds. Since I first moved everything around, my current allocation is at 74% stocks / 26% bonds just because of the market and our 401k contributions.

I wanted to contribute to 2 roth IRAs this year, but I'm not sure if we'll be eligible because of bonuses for my wife and I later in the year that might make us ineligible.

Questions
  • If we can't contribute to a roth IRA this year, should we be looking at opening traditional IRAs and making non-deductible payments? (I do not understand how to judge this against just putting money into our brokerage account)
  • I'm planning on using our 401ks to house all of our bonds, and adjust asset allocation of stocks in the 401k and in the brokerage account. Does this make sense?
  • I've never done taxes that included any taxable investments. I'll have put 130k in our brokerage account this year, unless you guys suggest otherwise. Anything I need to know tax-wise?
  • Am I missing anything?
If you read this whole thing, I really appreciate it. I hope to have this stuff on semi-auto pilot soon.

Thanks!
Last edited by DragonWagon on Fri Sep 19, 2014 11:58 pm, edited 4 times in total.
Yossarian
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Re: New and Trying to Make Good Decisions

Post by Yossarian »

Welcome to the forum! It looks like you are well on your way with a pretty simple, low cost investment plan.

A few quick comments and questions:

You didn't list expense ratios, but I assume they're all low. What are the ERs of the non-Vanguard funds in your wife's 401k?

There's some duplication between holdings in your and your wife's 401k. You could make things even simpler by treating all of your funds as one big pool. Then you could hold all of, say bonds, in one account.

In general, 401k is the best place for your bond funds. One consideration for the holdings in your taxable account (brokerage) is that you may have a different investment timeline for those funds vs. pure retirement funds. If you plan to need the taxable funds in the near term, VTSAX and VTIAX may not be the best place for them.

Search for "backdoor Roth" on this forum. You may find that you can still contribute to a Roth by this method.

Nothing special about taxes and your brokerage account. Just keep track of your cost basis and use specID when you sell to get maximum tax savings. VTSAX and VTIAX kick off dividends each quarter so you'll have to declare those, but no big deal, Vanguard will send you the statements. There is a small additional tax savings you can get by keeping more VTIAX in taxable vs your international indexes in the 401ks due to foreign tax credit.
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Duckie
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Re: New and Trying to Make Good Decisions

Post by Duckie »

DragonWagon, since you show no non-Roth IRAs you can easily use the 
Backdoor Roth IRA
 method. It's simple:
  1. Open a Traditional IRA account and contribute up to the $5.5K max. These will be considered non-deductible contributions but your TIRA custodian doesn't need that information, just the IRS.
  2. Once the contribution clears a day or two later, convert the entire amount to a Roth IRA.
  3. When you file your taxes you need to include IRS Form 8606, one for each of you if you both contribute. You will fill out Part I for the non-deductible contribution and Part II for the conversion.
  4. As long as the TIRAs are empty at the end of the year (and you have no other non-Roth IRAs) you won't have to deal with the pro-rata rule and any taxes on the conversion will be negligible.
livesoft
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Re: New and Trying to Make Good Decisions

Post by livesoft »

What a great first post. Someone has done their homework.

I can only put another plug into the Backdoor Roth thing. And perhaps the HSA thing if you all eligible.
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OpenRoad
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Re: New and Trying to Make Good Decisions

Post by OpenRoad »

DragonWagon wrote:
  • I'm planning on using our 401ks to house all of our bonds, and adjust asset allocation of stocks in the 401k and in the brokerage account. Does this make sense?
  • I've never done taxes that included any taxable investments. I'll have put 130k in our brokerage account this year, unless you guys suggest otherwise. Anything I need to know tax-wise?
Hi DragonWagon -

You want to have a little overlap of asset classes, exactly as you did, between taxable and taxadvantage. I have a similar setup to you. My goal is to only accumulate, and not sell in the tax advantage account, while doing any necessary rebalancing in the 401ks. This way you avoid capital gains tax.
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dratkinson
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Re: New and Trying to Make Good Decisions

Post by dratkinson »

Your study, demonstrated attention to detail, and execution of BH philosophy is obvious.


Municipal bonds. If needed, you are a candidate for using municipal bonds in your taxable account. The recommended fund is a national intermediate-term (~5 year duration) fund. Vanguard's is VWITX($3K min)/VWIUX ($50K min). You don't say your state of residency so you may be able to benefit more from a state-specific municipal bond fund.

Using muni bonds in taxable saves your tax-advantaged space for higher-growth equities. Your choice.


Tax-loss harvesting/wash sale issues. I notice you have total international stock index in both tax-advantaged and taxable accounts. This could produce a wash sale problem if you attempt to tax-loss harvest TISM in your taxable account.

Read the Wiki topics on Tax Loss Harvesting, Wash Sales, and how to avoid problems. To avoid problems, ensure you understand these concepts: family accounts, replacement shares, substantially identical funds.

Thumbnail overview of TLHing/wash sale issues: http://www.bogleheads.org/forum/viewtop ... 8#p2193768

http://www.bogleheads.org/wiki/Tax_loss_harvesting
http://www.bogleheads.org/wiki/Wash_sale


Tax reporting/return. Your account custodians will send you the paperwork necessary to do your taxes. Just drop the numbers into tax software and it will take care of the rest.

Pay particular attention to sales documentation as any error can be difficult to correct at tax time. Stay on top of this issue as you make each sale and correct any errors immediately.

If you like, you can play the annual "I bonds with federal tax return" game: makes doing taxes less onerous. They mature in 30 years (62 in your case), are tax-deferred until redeemed, state-tax exempt when redeemed, and tax-exempt if used for qualified educational expenses. Trick: use I bonds to fund 529 plan to get full tax exemption, including on non-qualified items.

See "Purchasing with your IRS tax refund" in: http://www.bogleheads.org/wiki/I_savings_bonds



Welcome.
d.r.a., not dr.a. | I'm a novice investor; you are forewarned.
bdpb
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Re: New and Trying to Make Good Decisions

Post by bdpb »

You should check both 401k for the ability to do "after-tax contributions" and "in-service withdrawals".

http://www.bogleheads.org/wiki/401%28k% ... 401.28k.29

This allows for massive Roth contributions.

Any debt? Consider paying down debts before taxable investing.
Topic Author
DragonWagon
Posts: 4
Joined: Wed Sep 17, 2014 11:16 pm

Re: New and Trying to Make Good Decisions

Post by DragonWagon »

Wow, wow, wow. The book said this forum was friendly and helpful... but what a response. I wasn't able to check the forum at work or last night, and was hoping I'd get some advice, but this is amazing. Thank you all truly.

In response to what I've missed in my original post, I've added that we have no debt except our mortgage and all the expense ratios for the investments.

Now on to questions about specific advice:
Yossarian wrote: Just keep track of your cost basis and use specID when you sell to get maximum tax savings. VTSAX and VTIAX kick off dividends each quarter so you'll have to declare those, but no big deal, Vanguard will send you the statements.
I was hoping that Vanguard would keep track of everything I would need come tax time. Do others have to keep a spreadsheet of purchase/sell activities? What's specID?
Duckie wrote:DragonWagon, since you show no non-Roth IRAs you can easily use the 
Backdoor Roth IRA method.
I'll have to read up on this over and over. My heart says great! My head asks why on earth would they stop me from putting money into a rIRA if all I had to do was run it through a tIRA? I'm sure it can be done, but the "why" has me confused.
livesoft wrote:And perhaps the HSA thing if you all eligible.
I'll have to look. I know a few older co-workers have HSAs, but I've never really looked into their benefits or if my wife and I are eligible for them. Does the money in them roll over each year, or do you have to be expert planners in order to use them correctly?
dratkinson wrote:Municipal bonds. If needed, you are a candidate for using municipal bonds in your taxable account.
I'll read up on Municipal bonds. Thank you.
dratkinson wrote:Tax-loss harvesting/wash sale issues.
This got advanced quick. I read about this once so far, and it was over my head at the time. I'll try to understand this further and see how it might (will?) affect my own situation. Thanks.
bdpb wrote:You should check both 401k for the ability to do "after-tax contributions" and "in-service withdrawals". This allows for massive Roth contributions.
It seems I'm going to have to really read up on the backdoor roth contributions. I see the words "massive contributions" and I get nervous that I might make a mistake in doing this and end up with some bad penalties comes tax time.

Questions are bolded.

Thank you all for this dialog.
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telemark
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Re: New and Trying to Make Good Decisions

Post by telemark »

Those are great 401K plans. I wish mine was that good. In your place I would be trying to move some of your cash on hand into the 401K plans. You can't do this directly, but you can get the same effect indirectly by maxing your 401K contributions and spending down the cash to make up the difference.
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ruralavalon
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Re: New and Trying to Make Good Decisions

Post by ruralavalon »

Welcome to the forum :) .

Great job so far, you have obviously put a lot of thought into this already.

Do that "backdoor Roth thing".
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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Duckie
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Re: New and Trying to Make Good Decisions

Post by Duckie »

DragonWagon wrote:
Yossarian wrote: Just keep track of your cost basis and use specID when you sell to get maximum tax savings. VTSAX and VTIAX kick off dividends each quarter so you'll have to declare those, but no big deal, Vanguard will send you the statements.
I was hoping that Vanguard would keep track of everything I would need come tax time. Do others have to keep a spreadsheet of purchase/sell activities? What's specID?
Vanguard does keep track, but you should keep good records of your own. You don't need a spreadsheet if you don't want it. Just keep confirmations (on computer or on paper) until you get quarterly statements and the quarterly statements until you get the year-end statement.

"SpecID" means specific ID -- precisely which shares are being sold. For example, you tell Vanguard to sell the 100 shares purchased on May 15, 2012 and the 50 shares purchased on June 22, 2013. This is done all the time for individual stocks. It's more complicated for mutual funds.
Duckie wrote:DragonWagon, since you show no non-Roth IRAs you can easily use the 
Backdoor Roth IRA method.
I'll have to read up on this over and over. My heart says great! My head asks why on earth would they stop me from putting money into a rIRA if all I had to do was run it through a tIRA? I'm sure it can be done, but the "why" has me confused.
The reason is that many people have non-Roth IRA assets and because of the pro-rata rule if they use the backdoor method they will have to pay taxes on some of those assets now as opposed to later. Congress wants the money now.
livesoft wrote:And perhaps the HSA thing if you all eligible.
I'll have to look. I know a few older co-workers have HSAs, but I've never really looked into their benefits or if my wife and I are eligible for them. Does the money in them roll over each year, or do you have to be expert planners in order to use them correctly?
The money rolls over every year. Some people pay for medical expenses with current cash and save their HSA assets for ages. Once you're 65 you can use the HSA for non-medical expenses without penalties just like a TIRA. If you're eligible it's an extremely advantageous option.
bdpb wrote:You should check both 401k for the ability to do "after-tax contributions" and "in-service withdrawals". This allows for massive Roth contributions.
It seems I'm going to have to really read up on the backdoor roth contributions. I see the words "massive contributions" and I get nervous that I might make a mistake in doing this and end up with some bad penalties comes tax time.
The "after-tax contributions" and "in-service withdrawals" in a 401k have nothing to do with the backdoor Roth IRA. They're two separate types of accounts. You can do both.
Lafder
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Re: New and Trying to Make Good Decisions

Post by Lafder »

welcome!

What is the balance of your mortgage and your interest rate? Paying down debt is a way of investing and increasing your net worth. As well as decreasing future monthly expenses faster, when your mortgage is paid off.

Lafder
LongerPrimer
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Re: New and Trying to Make Good Decisions

Post by LongerPrimer »

If you are planning to have children, start a 529. :oops:
Topic Author
DragonWagon
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Re: New and Trying to Make Good Decisions

Post by DragonWagon »

telemark wrote: You can't do this directly, but you can get the same effect indirectly by maxing your 401K contributions and spending down the cash to make up the difference.
My wife and I are currently maxing out our 401ks. This will be the first year we've done that.
ruralavalon wrote: Great job so far, you have obviously put a lot of thought into this already.
Without Bogle's book and this forum, I'd be lost and frustrated. So thank you all for the warm welcome.
Duckie wrote:"SpecID" means specific ID -- precisely which shares are being sold. For example, you tell Vanguard to sell the 100 shares purchased on May 15, 2012 and the 50 shares purchased on June 22, 2013. This is done all the time for individual stocks. It's more complicated for mutual funds.
I am now the proud owner of a Spec ID Spreadsheet. What makes the mutual funds more complicated than individual stocks?
Duckie wrote:The reason is that many people have non-Roth IRA assets and because of the pro-rata rule if they use the backdoor method they will have to pay taxes on some of those assets now as opposed to later. Congress wants the money now.
Oh. Whenever I'm confused, I'll just ask myself... "Who's getting paid?"
Duckie wrote:The "after-tax contributions" and "in-service withdrawals" in a 401k have nothing to do with the backdoor Roth IRA. They're two separate types of accounts. You can do both.
Ahh, yeah I was confused. Thank you.
Lafder wrote:What is the balance of your mortgage and your interest rate?
I've updated my original post. We have 200k left on the mortgage at an interest rate of 3.5%.
LongerPrimer wrote:If you are planning to have children, start a 529.
We are planning on having children. Do you really start investing for children, prior to actually having children? What if children (for whatever reason) never come, can you get that money back?

Questions are in bold.

Thanks!
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celia
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Re: New and Trying to Make Good Decisions

Post by celia »

Dragon, The MOST important factor in your long term financial success is the amount of money you save/invest early. It is more important than what you invest in. You have time working for you so it can grow. I'm glad you learned early to max out the 401k instead of contributing the minimum for a match. If you have Roth 401k's available, consider contributing to that instead of traditional 401Ks.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
Topic Author
DragonWagon
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Re: New and Trying to Make Good Decisions

Post by DragonWagon »

celia wrote:If you have Roth 401k's available, consider contributing to that instead of traditional 401Ks.
I thought my 401k was the best vehicle for retirement savings for a couple in our tax bracket? Also, I'm going to find a way to invest in a Roth this year. How much should I consider a Roth 401k?

Thanks!
LongerPrimer
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Re: New and Trying to Make Good Decisions

Post by LongerPrimer »

529 is nothing more than a tax deferral ROTHbut used for secondary education. Investing early in a 529 is like investing for retirement except you have less time to invest. SO if you can lengthen the investment time, you have the opportunity in smaller amounts for longer time to get a bigger outcome.

Within the next ten years, you will know if you will have children. There are rules, but no more onerous than IRAs. If you have children you will be far ahead of others who start 529 later. And if you don't have children, the conditions are not so bad as you couldn't afford the penalties. You won't have that much accumulated anyway but enough accumulated to be a fortune if you continue. :annoyed :beer
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celia
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Re: New and Trying to Make Good Decisions

Post by celia »

(Longer Primer means the 529 plan is used for college expenses.)

OP, I assume you mean you plan to invest in a Roth IRA this year. That has a maximum contribution of $5,500 ($6,500 if over age 50).

The reason you would want more Roths is for diversity of tax rules for your various assets. The income tax rates change every so often. Right now they are on the low side historically speaking. If you save most of your retirement savings in traditional IRAs/401Ks, the Required Minimum Distributions starting at age 70 will soon be "killing you" as some would say as the amount you have to withdraw each year pretty much increases. Even if you don't have need for the distributions, you have to take them. And they are taxed on top of all the other income you have to pay taxes on. Someone with your current salaries most likely will have higher than average pensions and Social Security benefits which will be taxed too!

The general rule of thumb is to pay rates on your retirement money (IRAs and 401Ks) when your tax rate is lowest. No-one knows what the rates will be when you are 70 so it is difficult to determine that unless you are close to retirement. With your family income, you probably think the rates are killing you now. That's why they say a 401k is the best vehicle for retirement savings, but that includes traditional as well as Roth 401Ks. The traditional 401K is great, as you know, since you can shelter some income from taxation now. But the Roth 401K is also great since you can shelter some income from taxation FOR THE REST OF YOUR LIFE once you pay the taxes with this years' income. You never have to take distributions, but your heirs will, and they won't have to pay taxes on the distributions either.

Another advantage to the Roth 401K is that the contribution you make can be larger than with the traditional 401K. Yes, the dollar amount is the same, but the taxes on the Roth are paid for using money outside the Roth when you pay your 2014 income taxes, whereas the tax on the traditional 401K is thought of as being part of the invested amount.

In other words, a dollar in a Roth 401K/IRA is worth more than a dollar in a taxable account, which is worth more than a dollar in a traditional 401K/IRA.
(The Roth already has had its taxes paid, the taxable account is taxed each year on capital gains and profits, the traditional account has not yet been taxed.)
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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