New here: Help with 401k, IRA, first taxable account

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sunny_socal
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New here: Help with 401k, IRA, first taxable account

Post by sunny_socal »

Hello,

First post. I haven't lurked long, but I can see that this is one of the best investment websites :D
I'm very new to the world of investing. I've participated in 401k, but that's been all and I haven't really paid attention to what I've been doing. However I've had some kind of "midlife crisis" and realized that I could have been doing a lot better and potentially be retiring early if I hadn't made some financial mistakes earlier in life. I'm now busy reading books and preparing for what's ahead.

Anyway, this is where I stand right now.

Background
Emergency funds: Fully funded for 6 months expenses
Debt: 360k Mortgage, 20-year, 3.625%. Plan to pay off in 10 years.
Tax Filing Status: Married Filing Jointly
Tax Rate: 33% Federal, 10% State (however, the effective rate reduced after charitable giving and other itemization)
State of Residence: CA
Age: 44
Note: Not eligible for Roth or Backdoor Roth due to income limits

Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 50% of stocks

Current retirement assets
Taxable
None

Employer 401k at Fidelity
Value: low six figures.
Allocation:
- Vanguard Target Retirement 2035 (VTTHX) (0.18) [20%]

EDIT: This IRA will be rolled into the 401k due to Roth considerations:
Rollover IRA at Fidelity (Came from older 401k)
Current value mid six figures.
Current allocation:
- Fidelity Balanced Fund (FBALX) (0.56) [20%]
- Fidelity Freedom Fund 2040 (FFFFX) (0.78) [10%]
- Spartan US Bond Index Fidelity Advantage Class (FSITX) (0.17) [13%]
- Spartan Intl Index Fund Advantage Class (FSIVX) (0.12) [15%]
- Spartan Total Market Index Fidelity Advantage Class (FSTVX) (0.05)[7%]
- Spartan 500 Index Fund Advantage Class (FUSVX) (0.05)[15%]

Contributions
- Taxable: None today, but will have ~$20k/year starting this fall
- IRA: None, above income limit for deductions
- 401k: Max allowed by law

Available Funds
Employer 401k
- Fidelity International Money Market Portfolio (FMPXX) (0.21)
- Fidelity Government Income Fund (FGOVX) (0.45)
- PIMCO Total Return Fund – Institutional Class (PTTRX) (0.46)
- Vanguard Windsor II Fund – Admiral Class (VWNAX) (0.28)
- Vanguard Institutional Index Fund - Institutional Plus (VIIIX) (0.02)
- Fidelity Contrafund® - Class K (FCNKX) (0.54)
- Fidelity OTC Portfolio - Class K (FOCKX) (0.65)
- Vanguard Mid-Cap Index Fund-Institutional Plus Shares (VMCPX) (0.06)
- American Beacon (ABF) Small Cap Value Fund (AVFIX) (0.81)
- Fidelity Low-Priced Stock Fund - Class K (FLPKX) (0.72)
- Vanguard Explorer Fund - Admiral Class (VEXRX) (0.36)
- American Funds Capital World Growth and Income Fund - Class R6 (RWIGX) (0.44)
- American Funds EuroPacific Growth Fund - Class R6 (RERGX) (0.49)
- Dimensional (DFA) Emerging Markets Value Portfolio (DFEVX) (0.55)
- Vanguard Target Retirement Income (VTINX) (0.16)
- Vanguard Target Retirement 2015 (VTXVX) (0.16)
- Vanguard Target Retirement 2025 (VTTVX) (0.17)
- Vanguard Target Retirement 2035 (VTTHX) (0.18)
- Vanguard Target Retirement 2045 (VTIVX) (0.18)

EDIT: This IRA will not exist soon
Rollover IRA
- Any funds should be available, correct? I could even do the “Three Vanguard Funds”.
Questions:
1. Is the allocation within my current 401k ok? Can I do better with the funds available? Some of the expense ratios are very low, eg. VMCPX and VIIIX

EDIT: The IRA is going away
2. Should I sell everything in my IRA and go for the “Three Fund Portfolio”?
3. This fall I will be able to begin investing on my own. I just need to open a new taxable account and get started? I would like to keep things simple so leaning toward the three fund portfolio here as well.

Thanks!
Last edited by sunny_socal on Sat Mar 28, 2015 8:46 am, edited 1 time in total.
Twins Fan
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Re: New here: Help with 401k, IRA, first taxable account

Post by Twins Fan »

I'd say what you have now is not all that bad. So, good job using lower cost funds and keeping it fairly simple.

The rollover IRA looks to have a bunch of overlap going on between the freedom fund having probably all the bond, international, and total market funds in it, the total US market has all the S&P 500 stocks in it, and the balanced fund probably has a bunch of the same stocks and similar bonds (I'm not familiar with that fund though, so..).

My thoughts to start simplifying would be to use the Institutional Index fund (S&P 500) and the .02 ER, maybe the mid-cap fund if you want, and that's about it there. Being as the 401k is currently smaller than the rollover IRA, you can have your international and bond funds in the rollover IRA and fill out the remainder of the US market also, or small cap value, or REIT, or emerging markets, or... up to you there. Of course, there will soon be a taxable account to figure into the mix also. I will let others advise there, since I don't have a taxable account to know much about that part.

The target date type funds work fine in the tax advantaged account, but they're not so good in taxable. My personal feeling it that holding say, the target date fund in the 401k and then separate stock/bond funds in other account complicates things. Not that it can't be done, but I think target date funds in all accounts or separate funds for each asset class across the accounts is the better either or there.

From the looks of it, you have done pretty well so far and it's an easy fix to get you straightened out even more. :sharebeer
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sunny_socal
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Re: New here: Help with 401k, IRA, first taxable account

Post by sunny_socal »

Thanks for the feedback. Anyone else?

I've also had a suggestion to roll my IRA _back_ into my 401k. (I wasn't aware this was possible.) It would clear the way for Roth backdoor conversions. A Roth would indeed be my next priority after getting the existing retirement accounts sorted out.

So, assuming I'm going to have just a big 401k, is there a suggested mix from the funds provided or is it enough to just stick with the VTTHX?
JW-Retired
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Re: New here: Help with 401k, IRA, first taxable account

Post by JW-Retired »

sunny_socal wrote:
I've also had a suggestion to roll my IRA _back_ into my 401k. (I wasn't aware this was possible.) It would clear the way for Roth backdoor conversions. A Roth would indeed be my next priority after getting the existing retirement accounts sorted out.

So, assuming I'm going to have just a big 401k, is there a suggested mix from the funds provided or is it enough to just stick with the VTTHX?
Excellent idea to roll IRA into the 401k to clear for your backdoor Roth. I don't see anything much better than VTTHX.

What about spouse investments? You should coordinate the entire portfolio.
JW
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sunny_socal
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Re: New here: Help with 401k, IRA, first taxable account

Post by sunny_socal »

JW Nearly Retired wrote: Excellent idea to roll IRA into the 401k to clear for your backdoor Roth. I don't see anything much better than VTTHX.

What about spouse investments? You should coordinate the entire portfolio.
JW
My wife stays at home, has no accounts in her name and only works a part time job earning ~$4k/year to fund her hobbies. I've considered setting up a spousal IRA for her but we exceed the income limits that would have allowed the IRA to be deductible.

Is the backdoor ROTH conversion available for my wife as well? I'll have to look into it, possibly even ask her to quit working so she has no income to report.
JW-Retired
Posts: 7189
Joined: Sun Dec 16, 2007 11:25 am

Re: New here: Help with 401k, IRA, first taxable account

Post by JW-Retired »

sunny_socal wrote:
JW Nearly Retired wrote: Excellent idea to roll IRA into the 401k to clear for your backdoor Roth. I don't see anything much better than VTTHX.

What about spouse investments? You should coordinate the entire portfolio.
JW
My wife stays at home, has no accounts in her name and only works a part time job earning ~$4k/year to fund her hobbies. I've considered setting up a spousal IRA for her but we exceed the income limits that would have allowed the IRA to be deductible.

Is the backdoor ROTH conversion available for my wife as well? I'll have to look into it, possibly even ask her to quit working so she has no income to report.
Yes. No need to ask her to quit working. She can do a backdoor Roth IRA just like you can. If she has no income, or a little income, or lots of income it doesn't matter. Only your joint income matters in determining if the tIRA first step is tax deductible or not. As with your own backdoor Roth maneuver, the only complication would be if she already has a pretax IRA that would get included pro-rata.

There are no other constraints on the tIRA to Roth conversion step.
JW
http://www.irs.gov/Retirement-Plans/Pla ... ion-Limits
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sunny_socal
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Re: New here: Help with 401k, IRA, first taxable account

Post by sunny_socal »

Thanks for the comments on the IRA->401k rollover prior to Roth backdoor, I'll definitely do both.

Any feedback on what to select out of the 401k funds to achieve a 70/30 stock/bond mix?
- Fidelity International Money Market Portfolio (FMPXX) (0.21)
- Fidelity Government Income Fund (FGOVX) (0.45)
- PIMCO Total Return Fund – Institutional Class (PTTRX) (0.46)
- Vanguard Windsor II Fund – Admiral Class (VWNAX) (0.28)
- Vanguard Institutional Index Fund - Institutional Plus (VIIIX) (0.02)
- Fidelity Contrafund® - Class K (FCNKX) (0.54)
- Fidelity OTC Portfolio - Class K (FOCKX) (0.65)
- Vanguard Mid-Cap Index Fund-Institutional Plus Shares (VMCPX) (0.06)
- American Beacon (ABF) Small Cap Value Fund (AVFIX) (0.81)
- Fidelity Low-Priced Stock Fund - Class K (FLPKX) (0.72)
- Vanguard Explorer Fund - Admiral Class (VEXRX) (0.36)
- American Funds Capital World Growth and Income Fund - Class R6 (RWIGX) (0.44)
- American Funds EuroPacific Growth Fund - Class R6 (RERGX) (0.49)
- Dimensional (DFA) Emerging Markets Value Portfolio (DFEVX) (0.55)
- Vanguard Target Retirement Income (VTINX) (0.16)
- Vanguard Target Retirement 2015 (VTXVX) (0.16)
- Vanguard Target Retirement 2025 (VTTVX) (0.17)
- Vanguard Target Retirement 2035 (VTTHX) (0.18)
- Vanguard Target Retirement 2045 (VTIVX) (0.18)
lack_ey
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Re: New here: Help with 401k, IRA, first taxable account

Post by lack_ey »

sunny_socal wrote:Thanks for the comments on the IRA->401k rollover prior to Roth backdoor, I'll definitely do both.

Any feedback on what to select out of the 401k funds to achieve a 70/30 stock/bond mix?
Hrms...

Vanguard Target Retirement Income (VTINX, is 30/70) in the 401k, stock index funds elsewhere to reach 70/30. If at some later point that results in insufficient bonds, fill the IRAs with bonds too. Earlier on if that makes the allocation too bond heavy, use target retirement 2015, 2025, 2035, or 2045 instead as appropriate to get the ratio where it needs to be. You can see the stock/bond allocation inside the target retirement funds at Vanguard's website.
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Duckie
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Re: New here: Help with 401k, IRA, first taxable account

Post by Duckie »

sunny_socal wrote:Any feedback on what to select out of the 401k funds to achieve a 70/30 stock/bond mix?
If you're going to be rolling the IRA into the 401k then the easiest choice is a mix of (VTTVX) Vanguard Target Retirement 2025 Fund (0.17%) and (VTTHX) Vanguard Target Retirement 2035 Fund (0.18%). Between the two of them you should be able to keep your 70/30 AA for years.
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sunny_socal
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Re: New here: Help with 401k, IRA, first taxable account

Post by sunny_socal »

Duckie wrote:
sunny_socal wrote:Any feedback on what to select out of the 401k funds to achieve a 70/30 stock/bond mix?
If you're going to be rolling the IRA into the 401k then the easiest choice is a mix of (VTTVX) Vanguard Target Retirement 2025 Fund (0.17%) and (VTTHX) Vanguard Target Retirement 2035 Fund (0.18%). Between the two of them you should be able to keep your 70/30 AA for years.
Indeed this seems like the way to go in my situation. I was going to ask "why do you recommend this" but I read a few other similar threads and I'm now fairly convinced I should just stick with a simple mix of the TRFs since they are offered. And now that I can unexpectedly contribute to a Roth, my plans to have a taxable account are somewhat postponed. (I lean more toward the Dave Ramsey philosophy of having zero debt, so I'm going to focus on paying off my mortgage after fully funding all my tax advantaged accounts.)

Thanks all :sharebeer
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