Only $5000 max for traditional & Roth, how to allocate?

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Topic Author
Nutaboutgolf
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Joined: Wed Jun 08, 2011 9:33 pm

Only $5000 max for traditional & Roth, how to allocate?

Post by Nutaboutgolf »

I'm 32, have no debt, am in the 25% tax bracket. I have contributed $5K into my work 401K. In 2012 I wanted to invest in the Vanguard index funds, $5000 for the Roth and $5000 for the traditional IRA. What I'm noticing is most funds require a $3000 minimum to open, so how would that work if I wanted to do the lazy 3 (VBMFX, VTSMX, VGSIX) or core four (VBMFX, VTSMX, VFWIX, VGSIX)? If the lazy three for the $5000 Roth for example, are you allowed to open let's say VBMFX for $5000, then sell $3334 which leaves $1666 in VBMFX, open VTSMX with $3334, sell $3000, open VGSIX with $3000 and buy and sell until desired allocation?
Default User BR
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Joined: Mon Dec 17, 2007 6:32 pm

Re: Only $5000 max for traditional & Roth, how to allocate?

Post by Default User BR »

1. You should look at the entire portfolio as a whole, that means including the 401(k) in asset allocation. What is the matching situation with that?

2. You mention investing in both traditional IRA and Roth in 2012. Please clarify your plans. You are limited to 5k between the two for each tax year. However, you could make a 2011 contribution to either or both in 2012, although generally it's best to make the contribution as soon as possible.

3. Are you eligible for a deductible IRA?



Brian
Topic Author
Nutaboutgolf
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Joined: Wed Jun 08, 2011 9:33 pm

Re: Only $5000 max for traditional & Roth, how to allocate?

Post by Nutaboutgolf »

Default User BR wrote:1. You should look at the entire portfolio as a whole, that means including the 401(k) in asset allocation. What is the matching situation with that?

2. You mention investing in both traditional IRA and Roth in 2012. Please clarify your plans. You are limited to 5k between the two for each tax year. However, you could make a 2011 contribution to either or both in 2012, although generally it's best to make the contribution as soon as possible.

3. Are you eligible for a deductible IRA?



Brian
1. I get an automatic $1800/year, whether or not I contribute...
2. I did not know it was an either or...All info I've found doesn't mention anything other than the max. Thanks.
3. I just assumed I was, how do I find out?
Default User BR
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Joined: Mon Dec 17, 2007 6:32 pm

Re: Only $5000 max for traditional & Roth, how to allocate?

Post by Default User BR »

Nutaboutgolf wrote:1. I get an automatic $1800/year, whether or not I contribute...
2. I did not know it was an either or...All info I've found doesn't mention anything other than the max. Thanks.
3. I just assumed I was, how do I find out?
http://www.irs.gov/retirement/participa ... 35,00.html

How much are you able to save? Quite likely, in the 25% bracket (what about state?) you should maximize tax-deductible savings. Again, let's get the 401(k) into the mix.



Brian
Topic Author
Nutaboutgolf
Posts: 41
Joined: Wed Jun 08, 2011 9:33 pm

Re: Only $5000 max for traditional & Roth, how to allocate?

Post by Nutaboutgolf »

I will qualify for 2011 and if I invest enough into my 401K in 2012 to lower my AGI, I will be in 2012 as well.

I

6% state tax.

My 401k provider takes .52% off the top...My funds choices are:

RBLSX FMT/RUSSELL LIFEPOINTS BAL STRATEGY 1.08
SSGXX FMT/SSGA TREASURY MONEY MARKET 0.54
DFEQX DFA SHORT-TERM EXTENDED QUALITY 0.57
NO TICK BLACKROCK CAPITAL MGMT 0.65
VIPSX VANGUARD INLFATION PROT SECUIRTYS 0.6
PTTRX PIMCO TOTAL RETURN INSTL 0.81
NO TICK METROPOLITAN WEST LARGE CAP VALUE 0.8
TRVLX T. ROWE PRICE VALUE 1.1
VIVAX VANGUARD VALUE INDEX 0.61
DODGX DODGE AND COX STOCK 0.77
VFINX VANGUARD 500 INDEX 0.53
JANSX JANUS FUND 0.97
RGAGX AMERICAN GROWTH FUND OF AMERICA 0.69
NO TICK ZEVENBERGEN CAP INVESTMENTS LLC 0.85
IWS ISHARES RUSSELL MID-CAP VALUE INDEX EFT 0.6
NO TICK DISCIPLINED GROWTH INVESTORS 0.95
AVFIX AMERICAN BEACON SM CAP VALUE INST 1.2
NO TICK COLUMBUS CIRCLE INVESTORS 0.95
NO TICK BRANDES INVESTMENT PARTNERS, LP 0.85
TGVIX THORNBURG INTERNATIONAL VALUE 1.27
ODMAX OPPENHEIMER DEVELOPING MARKETS 1.18
SGGDX FIRST EAGLE GOLD FUND 1.21
FREAX NUVEEN REAL ESTATE SECURITIES 1.14
XLE SPDR ENERGY SECTOR EFT 0.56
XLV SPDR HEALTH CARE SECTOR EFT 0.56

Edit: I should be able to save $13000/year ($500/per 26 bi-weekly pay checks), in the future should be able to save more but I now am going to spend $5000 for 2011 for a traditional/deductible IRA...
Last edited by Nutaboutgolf on Mon Dec 05, 2011 11:02 am, edited 1 time in total.
Manbaerpig
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Re: Only $5000 max for traditional & Roth, how to allocate?

Post by Manbaerpig »

I think generally speaking you want to use tax deductible investing (401k) prior to Roth/taxable investing.

For next year that means going up to $17k+match in the 401k if possible. You may consider moving part of your e-fund to a Roth and investing that stable-y as Roth withdrawls of contributions are allowed penalty free.

You may be in a lower tax bracket later to convert some/all of the 401k to a Roth at a lower tax rate than you are in now.

edit: saw that you qualify (depending on 401k contribs) for a deductible IRA, IMO that is preferably to a non-deductible Roth in your tax bracket, but not necessarily superior to a straight 401k, however given your 401k options (and 0.52% load up front??) I think I would go the deductable IRA route for sure
Topic Author
Nutaboutgolf
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Joined: Wed Jun 08, 2011 9:33 pm

Re: Only $5000 max for traditional & Roth, how to allocate?

Post by Nutaboutgolf »

Manbaerpig wrote:I think generally speaking you want to use tax deductible investing (401k) prior to Roth/taxable investing.

For next year that means going up to $17k+match in the 401k if possible. You may consider moving part of your e-fund to a Roth and investing that stable-y as Roth withdrawls of contributions are allowed penalty free.

You may be in a lower tax bracket later to convert some/all of the 401k to a Roth at a lower tax rate than you are in now.

edit: saw that you qualify (depending on 401k contribs) for a deductible IRA, IMO that is preferably to a non-deductible Roth in your tax bracket, but not necessarily superior to a straight 401k, however given your 401k options (and 0.52% load up front??) I think I would go the deductable IRA route for sure
I'm not sure if it's referred to as a front load per se, but the bottom line is the provider does take .52%...Even if I maxed out my 401k in 2012 I would not be able to get into the 15% tax bracket...Perhaps if I buy a house and do some heavy donating / charitable contributions which would allow me to itemize I could get there, but I don't see that scenario happening in 2012...Also, that's why I'm only willing to save $500/paycheck, I'd like to save for a house down payment.

So two questions:
1) For the pro 401K guys, how do you recommend I allocate?
2) I can't seem to find the answer, if you are able to max out their 401K for the year, is it correct that they can still contribute up to $5000 in either or a Roth or a traditional IRA?
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kenyan
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Re: Only $5000 max for traditional & Roth, how to allocate?

Post by kenyan »

Yes, you can invest $5k into an IRA even after maxing out your 401k (income restrictions aside, and even then there's the backdoor Roth).

For investment choices, you need to pick an asset allocation you're comfortable with - stock/bond ratio (and international/domestic if you want to go further). Not worth it at this time to really get into slicing/dicing.

So, if you want 80/20 stocks/bonds, invest 80% in Vanguard 500, 20% in a bond fund, perhaps DFEQX. Many people like PTTRX; though it's actively managed and currently lagging as a result of it, the track record is good. Once you have a substantial amount saved, you could look more seriously into adding international and perhaps other choices - TIPS, small-cap, etc.

However, I would suggest educating yourself further - such as via books on the reading list - before adding too much complexity. You want to understand what you're investing in, and why you're doing so. Simplicity often works just as well, if not better than complexity, and the biggest contributor to your retirement accounts at this point is your contribution rate, not your investment choices.
Retirement investing is a marathon.
Topic Author
Nutaboutgolf
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Joined: Wed Jun 08, 2011 9:33 pm

Re: Only $5000 max for traditional & Roth, how to allocate?

Post by Nutaboutgolf »

Thanks kenyan.

Is this pretty much a good strategy? I'm already going to have $5000 into a deductible traditional IRA for 2011. Contribute another $5000 into a deductible traditional IRA for 2012, that would get me to $10K, then I could go to the admiral class of the total stock market index fund or the admiral class 500 index fund. Then contribute into the 401K for the rest of the year where I predict I'd be able to save around $8000 for 2012...Lastly my ultimate goal would be to get into the 15% tax bracket where I could do the backdoor roth...
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kenyan
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Re: Only $5000 max for traditional & Roth, how to allocate?

Post by kenyan »

Close.

I would favor the traditional IRA in your case over your 401k, due to the investment choices, so your order of investment is sound. Getting to the 15% tax bracket is a worthy goal, though you won't be going for a backdoor Roth in that case. You can't contribute to a backdoor Roth above and beyond a normal IRA contribution; it's for those who are above the income limits for Roth IRAs (which are above the income limits for a deductible traditional IRA). In addition, backdoor Roth IRAs are generally not worthwhile if you have any deductible IRAs due to the IRS's rules on prorating.

If you get to the 15% tax bracket without traditional IRA contributions, you could then just open a regular Roth (which you also do now in lieu of a traditional IRA, if you so desired).
Retirement investing is a marathon.
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kenyan
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Re: Only $5000 max for traditional & Roth, how to allocate?

Post by kenyan »

To clarify:

You can only contribute $5000 ($6000 if over 50) to all non-employer-based IRAs per year.

You can contribute to a traditional IRA regardless of your income. However, if your income is above a certain level, you do not receive a deduction on your taxes.

You cannot contribute directly to a Roth if your income is above the Roth limit. Below that limit, aside from the phaseout range, you can contribute the full amount.

You cannot contribute more than your annual limit by splitting up your contributions among IRAs.

The backdoor Roth IRA is a method of contributing to a traditional IRA (but your contributions were taxed, as you were above the income limit), then converting this contribution immediately to a Roth IRA. Because your contribution was taxed, you do not have to pay any additional taxes upon conversion. This option may not always be available, as there previously was an income restriction on conversions. It only works well if you have no other deductible IRAs, or if you convert your other deductible IRAs to Roth at the same time.

Because you get the backdoor Roth IRA by first contributing to a traditional IRA, you still cannot exceed the $5K/year limit.
Retirement investing is a marathon.
Topic Author
Nutaboutgolf
Posts: 41
Joined: Wed Jun 08, 2011 9:33 pm

Re: Only $5000 max for traditional & Roth, how to allocate?

Post by Nutaboutgolf »

Thanks again kenyan. A couple more questions. The traditional deductible IRA and maybe this is provider (eg Vangaurd) specific, I know you have until 4/15/12 for the 2011 tax year to contribute...If you wait until April 1st to contribute, is it safe to assume that the provider OFTEN has the proper tax documentation available online immediately after you contribute?

You guys believe I should skip the Roth because of being in the 25% tax bracket and the relatively high front load + ERs of my 401K offerings?
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