Help needed strategizing across TSP, Roth, and taxable

Have a question about your personal investments? No matter how simple or complex, you can ask it here.

Help needed strategizing across TSP, Roth, and taxable

Postby nsburto » Thu Mar 29, 2012 3:16 pm

Hi everyone,

I came up with the following plan and wanted to run it by the group, as well as some questions. Thanks in advance.


Emergency funds = 6 months

Debt: 19,000 student loan at 5.8%

Tax filing status: single

Tax rate: 28% federal, 6% state (Georgia)

Age: 29

Desired asset allocation: 80% stocks/20% bonds (would like a sizable amount of international/emerging stocks)

Current portfolio (total in the mid 5 figures):

Taxable at Vanguard
19% Vanguard Total Stock Market
6% Vanguard Total International

Roth IRA at Vanguard

26% Target Retirement 2045 (63% total stock market, 27% total international, 10% total bond)
I intend to max this account out every year

Thrift Savings Plan (TSP)
- contribute 15% of salary
49% in Lifecycle 2050 fund (allocation at: https://www.tsp.gov/investmentfunds/lfundsheet/fundPerformance_L2050.shtml )



Questions:

1. Should I make paying my student loans off (currently at $19K at 5.8%) my #1 priority or should I pay less on my loans and invest extra in my taxable account? In theory I could pay off my loans this year and be debt free, but I could also pay off at a slower rate and invest the extra $ in my taxable. Not sure which approach makes the most sense.

2. I realize there are some redundancies and tax-inefficiencies in my current portfolio, but I'm not sure how to change this. Ideally, I would like to follow either the Margaritaville portfolio and ultimately the Yale U Unconventional portfolio (once I have enough funds in my accounts to make it worthwhile). My first instinct was to get a muni bond fund to fill out my taxable portfolio - what do people think of this idea?

3. Should I stick with the current funds that I have or should I do something different, such as holding only bonds in my ROTH, stocks in my taxable, and ?? in my TSP? I think this is my major question - how should I allocate across the three accounts (TSP, ROTH, and taxable) in a strategic and tax-efficient way?

4. Should I increase my exposure to emerging markets via VWO in the taxable? Is there another sector that I should be considering?

5. Any other suggestions/advice?
nsburto
 
Posts: 6
Joined: Thu Mar 29, 2012 2:33 pm

Re: Help needed strategizing across TSP, Roth, and taxable

Postby letsgobobby » Thu Mar 29, 2012 4:48 pm

1. you should pay off your student loans first. You cannot find a guaranteed 5.8% return anywhere, especially if the alternative is investing taxably.

2. you create problems by using a TR fund in TSP and Roth IRA. To avoid overlaps, use a combination of stock- and/or bond-only funds in your TSP, and round out your holdings with the Roth IRA.

3. are you maximizing your TSP? You may want to do that first. Between that and the student loan payoff, maybe that will be all the money you can save. Then build around your predominant, core TSP.

I'd even go so far as to advocate selling your taxable holdings and paying off student loans, if you do not have capital gains to pay.

4. As with your other questions, I feel you are putting the cart before the horse. Before pursuing individual corners or sectors of the market, develop a core plan built around 3 funds: total bond, total stock, total international. Tilt from there if you must, but start with the basics (I'm ignoring more esoteric strategies like a barbell approach).

I want to emphasize, in case it wasn't clear from my statements above, that I think you would do well to maximize tax-deferred space such as a TSP rather than using a Roth account. You are in the 34% tax bracket and you should defer all taxes possible.
letsgobobby
 
Posts: 6846
Joined: Fri Sep 18, 2009 2:10 am

Re: Help needed strategizing across TSP, Roth, and taxable

Postby Pennstateclj1 » Thu Mar 29, 2012 5:57 pm

nsburto wrote:Debt: 19,000 student loan at 5.8%

Thrift Savings Plan (TSP)[/b] - contribute 15% of salary


I agree with Bobby. Target the student loan, guaranteed return. Also, I would change your TSP from a percentage to a fixed dollar amount. As you move up, you may hit the $17k limit before the end of the year and thus miss out on agency matching contributions. If you want to max, it's $654 a check (if you started from january 1...). If you remain debt free and pump money into the TSP you'll be pretty well set up, especially since you're starting at a young age.

Also, don't mix target funds and individual funds, it's hard to see and maintain your desired asset allocation. Prioritize maxing contributions to TSP over taxable.
User avatar
Pennstateclj1
 
Posts: 470
Joined: Sun Apr 03, 2011 3:53 pm
Location: San Antone, TX

Re: Help needed strategizing across TSP, Roth, and taxable

Postby nsburto » Thu Mar 29, 2012 10:25 pm

Thank you both for your suggestions. So, I guess my marching orders are to focus on paying off my student loans and maximize the TSP investment to the extent possible to lower my taxable income.

You both briefly mentioned being concerned about having target retirement accounts in both my TSP and my ROTH. Do you have any suggestions on what funds I should stick with or change? I'm in the L 2050 in TSP and the TR 2045 in my Vanguard ROTH. Should I stick with the L 2050 and change the ROTH fund?
nsburto
 
Posts: 6
Joined: Thu Mar 29, 2012 2:33 pm

Re: Help needed strategizing across TSP, Roth, and taxable

Postby Pennstateclj1 » Fri Mar 30, 2012 12:31 pm

Yeah the TSP lacks some things. Emerging markets, small value I believe, and REITs are at market weight too.
Use a Lifecycle with your desired AA and compliment that with the ROTH. You can almost make the core 3 with the F, C, S and I funds if you wanted to do it yourself. Were you planning to use taxable to pay off the loan? If that account is involved it gets a little more complicated because you'll want to hold international there for the Foreign Tax Credit.
User avatar
Pennstateclj1
 
Posts: 470
Joined: Sun Apr 03, 2011 3:53 pm
Location: San Antone, TX

Re: Help needed strategizing across TSP, Roth, and taxable

Postby nsburto » Fri Mar 30, 2012 1:53 pm

So do you think it would be a good move to convert my TSP into an L 2030 or 2040 and then convert the funds in my ROTH to equal parts REIT, SIPS, and emerging markets?

I still want to hang onto my taxable and, once I have my student loans paid off, supplement the rest of my investments with international/emerging markets exposure and maybe some muni bonds.
nsburto
 
Posts: 6
Joined: Thu Mar 29, 2012 2:33 pm

Re: Help needed strategizing across TSP, Roth, and taxable

Postby Pennstateclj1 » Fri Mar 30, 2012 2:16 pm

That sounds good especially since your desired AA was tilted toward international. You'd be giving it a REIT, small cap, international tilt but still maintaining the core of your money in TSP since you'll be able to contribute more to that one annually than the ROTH. The Lifecycle are basically total bond (f) total stock (c&s) and total international (i) which you'll complete in the Roth with emerging markets. Lifecycle has a little G too which are considered a "free lunch". You can research why in the wiki.

I suggest you read All About Asset Allocation by Rick Ferri. He shows how by having the core funds and these to compliment it increases return and actually reduces volatility over long time periods.


Once the loan is gone-

Max out TSP at 17k (because of 28% bracket)
Max ROTH at 5k to compliment your Lifecycle and add tilt to what you expect to have the greatest long term returns
Leftover in taxable

Then, just stay the course. Re-balance annually or by bands.
User avatar
Pennstateclj1
 
Posts: 470
Joined: Sun Apr 03, 2011 3:53 pm
Location: San Antone, TX

Re: Help needed strategizing across TSP, Roth, and taxable

Postby nsburto » Fri Mar 30, 2012 3:24 pm

Pennstateclj1 wrote:That sounds good especially since your desired AA was tilted toward international. You'd be giving it a REIT, small cap, international tilt but still maintaining the core of your money in TSP since you'll be able to contribute more to that one annually than the ROTH. The Lifecycle are basically total bond (f) total stock (c&s) and total international (i) which you'll complete in the Roth with emerging markets. Lifecycle has a little G too which are considered a "free lunch". You can research why in the wiki.

I suggest you read All About Asset Allocation by Rick Ferri. He shows how by having the core funds and these to compliment it increases return and actually reduces volatility over long time periods.


Once the loan is gone-

Max out TSP at 17k (because of 28% bracket)
Max ROTH at 5k to compliment your Lifecycle and add tilt to what you expect to have the greatest long term returns
Leftover in taxable

Then, just stay the course. Re-balance annually or by bands.


Excellent, thank you. I'll convert my TSP to the 2040 (or should I do 2030?) and my ROTH to equal parts REIT, small cap index, and SIPS. Do you think for the small cap I should use NAESX, VISVX, or VISGX?

Once I've paid off my loans, I will add more emerging markets and international exposure through my taxable account.

Does this sound like a good plan to start off with?
nsburto
 
Posts: 6
Joined: Thu Mar 29, 2012 2:33 pm

Re: Help needed strategizing across TSP, Roth, and taxable

Postby YDNAL » Fri Mar 30, 2012 3:49 pm

nsburto wrote:Tax rate: 28% federal, 6% state (Georgia)

Age: 29

Desired asset allocation: 80% stocks/20% bonds (would like a sizable amount of international/emerging stocks)

Current portfolio (total in the mid 5 figures):

Taxable at Vanguard
19% Vanguard Total Stock Market
6% Vanguard Total International

Roth IRA at Vanguard

26% Target Retirement 2045 (63% total stock market, 27% total international, 10% total bond)
I intend to max this account out every year

Thrift Savings Plan (TSP)
- contribute 15% of salary **
49% in Lifecycle 2050 fund (allocation at: https://www.tsp.gov/investmentfunds/lfundsheet/fundPerformance_L2050.shtml )

** We don't know what 15% x $???? equals. If it isn't $17K annually, you should consider maxing TSP first, certainly before Taxable investing and even Roth IRA investing. Everything else is secondary (at best) at this point regarding your retirement savings.
Landy
Be yourself, everyone else is already taken -- Oscar Wilde
YDNAL
 
Posts: 13349
Joined: Tue Apr 10, 2007 5:04 pm
Location: Biscayne Bay

Re: Help needed strategizing across TSP, Roth, and taxable

Postby willwheels » Fri Mar 30, 2012 3:56 pm

nsburto wrote:
Pennstateclj1 wrote:Max out TSP at 17k (because of 28% bracket)
Max ROTH at 5k to compliment your Lifecycle and add tilt to what you expect to have the greatest long term returns
Leftover in taxable

Then, just stay the course. Re-balance annually or by bands.


Excellent, thank you. I'll convert my TSP to the 2040 (or should I do 2030?) and my ROTH to equal parts REIT, small cap index, and SIPS. Do you think for the small cap I should use NAESX, VISVX, or VISGX?

Once I've paid off my loans, I will add more emerging markets and international exposure through my taxable account.

Does this sound like a good plan to start off with?


The TSP doesn't include emerging markets, but it does include REITs and small cap at market weight. I am still catching up, but I prioritize getting exposure to emerging markets to tilting. Tilting is for later.
willwheels
 
Posts: 15
Joined: Thu Feb 23, 2012 11:12 pm

Re: Help needed strategizing across TSP, Roth, and taxable

Postby Pennstateclj1 » Fri Mar 30, 2012 4:06 pm

Check out the discussion here and see what you like among those 3- viewtopic.php?t=34808
User avatar
Pennstateclj1
 
Posts: 470
Joined: Sun Apr 03, 2011 3:53 pm
Location: San Antone, TX

Re: Help needed strategizing across TSP, Roth, and taxable

Postby Pennstateclj1 » Fri Mar 30, 2012 4:09 pm

I'm on my phone so I can't see the AA's of the Lifecycles right now. All of your Roth is considered equities so I'll say 2030 going on that alone because it holds more bonds.
User avatar
Pennstateclj1
 
Posts: 470
Joined: Sun Apr 03, 2011 3:53 pm
Location: San Antone, TX

Re: Help needed strategizing across TSP, Roth, and taxable

Postby Pennstateclj1 » Fri Mar 30, 2012 4:21 pm

willwheels wrote:
nsburto wrote:
Pennstateclj1 wrote:Max out TSP at 17k (because of 28% bracket)
Max ROTH at 5k to compliment your Lifecycle and add tilt to what you expect to have the greatest long term returns
Leftover in taxable

Then, just stay the course. Re-balance annually or by bands.


The TSP doesn't include emerging markets, but it does include REITs and small cap at market weight. I am still catching up, but I prioritize getting exposure to emerging markets to tilting. Tilting is for later.


He is getting exposure really now. 26% of his portfolio to those 3 accounts in the Roth would be about $4300 in each fund on a $50,000 portfolio. He also holds total stock and total international in taxable. His TSP will also grow disproportionally to the Roth and it will dwarf the Roth in a few years. Because of his age, emergency funds and job with the federal government I think those are appropriate risks for him at this point. Thoughts?
User avatar
Pennstateclj1
 
Posts: 470
Joined: Sun Apr 03, 2011 3:53 pm
Location: San Antone, TX

Re: Help needed strategizing across TSP, Roth, and taxable

Postby nsburto » Fri Mar 30, 2012 4:43 pm

nsburto wrote:
Pennstateclj1 wrote:That sounds good especially since your desired AA was tilted toward international. You'd be giving it a REIT, small cap, international tilt but still maintaining the core of your money in TSP since you'll be able to contribute more to that one annually than the ROTH. The Lifecycle are basically total bond (f) total stock (c&s) and total international (i) which you'll complete in the Roth with emerging markets. Lifecycle has a little G too which are considered a "free lunch". You can research why in the wiki.

I suggest you read All About Asset Allocation by Rick Ferri. He shows how by having the core funds and these to compliment it increases return and actually reduces volatility over long time periods.


Once the loan is gone-

Max out TSP at 17k (because of 28% bracket)
Max ROTH at 5k to compliment your Lifecycle and add tilt to what you expect to have the greatest long term returns
Leftover in taxable

Then, just stay the course. Re-balance annually or by bands.


Excellent, thank you. I'll convert my TSP to the 2040 (or should I do 2030?) and my ROTH to equal parts REIT, small cap index, and SIPS. Do you think for the small cap I should use NAESX, VISVX, or VISGX?

Once I've paid off my loans, I will add more emerging markets and international exposure through my taxable account.

Does this sound like a good plan to start off with?


And by SIPS, I meant TIPS in the form of VIPSX.
nsburto
 
Posts: 6
Joined: Thu Mar 29, 2012 2:33 pm

Re: Help needed strategizing across TSP, Roth, and taxable

Postby Pennstateclj1 » Fri Mar 30, 2012 5:26 pm

nsburto wrote:And by SIPS, I meant TIPS in the form of VIPSX.


I didn't even notice the mistake when I read it but yes. That combined with the G fund gives you inflation bonds protection and gives you something to re-balance to in the ROTH easily also.
User avatar
Pennstateclj1
 
Posts: 470
Joined: Sun Apr 03, 2011 3:53 pm
Location: San Antone, TX

Re: Help needed strategizing across TSP, Roth, and taxable

Postby Pennstateclj1 » Fri Mar 30, 2012 7:06 pm

nsburto wrote:Emergency funds = 6 months

Debt: 19,000 student loan at 5.8%

Desired asset allocation: 80% stocks/20% bonds (would like a sizable amount of international/emerging stocks)

Current portfolio (total in the mid 5 figures):

Taxable at Vanguard
19% Vanguard Total Stock Market
6% Vanguard Total International

Roth IRA at Vanguard

26% Target Retirement 2045 (63% total stock market, 27% total international, 10% total bond)
I intend to max this account out every year

Thrift Savings Plan (TSP)
- contribute 15% of salary
49% in Lifecycle 2050 fund (allocation at: https://www.tsp.gov/investmentfunds/lfundsheet/fundPerformance_L2050.shtml )


I approximated some of the values- Using the L2030 it comes out to a 76/24 stock bond split with what you wanted in the ROTH, so you could hold off on the TIPS or adjust their percentage for now to get to 80/20. If you just want to add the asset class for now it's not far off from your desired AA. If you want to break it down more to exactly your desired 80/20, you'll have to pick your individual funds and percentages in the TSP vs. using the L2030.

Taxable- 25%
19% Vanguard TSM
6% VTI

Roth IRA- 26%
8.6% REITS
8.6% TIPS
8.6% Small value

TSP- 49%
L2030
~16% bonds
24% Total stock Market
10% International





User avatar
Pennstateclj1
 
Posts: 470
Joined: Sun Apr 03, 2011 3:53 pm
Location: San Antone, TX

Re: Help needed strategizing across TSP, Roth, and taxable

Postby boconnor3 » Fri Mar 30, 2012 8:40 pm

I have read in several other threads regarding AA's with TSP involved that the bond allocation should be largely comprised of G fund (if not all G fund). Could the OP move his entire bond allocation to TSP or is that no longer recommended?
boconnor3
 
Posts: 4
Joined: Sat Aug 20, 2011 10:18 pm

Re: Help needed strategizing across TSP, Roth, and taxable

Postby Pennstateclj1 » Fri Mar 30, 2012 8:58 pm

boconnor3 wrote:I have read in several other threads regarding AA's with TSP involved that the bond allocation should be largely comprised of G fund (if not all G fund). Could the OP move his entire bond allocation to TSP or is that no longer recommended?


If it's within a lifecycle fund, you get the allocation of that particular fund. I know many here herald the G fund, but going back 10 years it has underperformed the total bond index by 1.5%. I'm not a huge fan of 100% G for bonds, especially for a 29 year old. If he were older than yes, because it acts like a long term bond but with no default risk. If you reference here, you can compare each year for the last 10. The F is the total bond index basically. Some years G actually does win, so maybe a better strategy is to split between the too. Others will yell that G is the greatest, but personally I'm not that into it... yet. In this case he gets access to the G, F and TIPS. That's pretty good diversification in bonds.
https://www.tsp.gov/investmentfunds/annual/annualReturns.shtml
User avatar
Pennstateclj1
 
Posts: 470
Joined: Sun Apr 03, 2011 3:53 pm
Location: San Antone, TX

Re: Help needed strategizing across TSP, Roth, and taxable

Postby pc95 » Fri Mar 30, 2012 11:38 pm

Another reason why you should be maximizing your TSP is the funds have the best Fee rates in the country beyond the tax implication. Where else can you find an International fund with a .025% expense percentage? Assuming you're in FERS, and Depending on your salary if you've maxed it out, you should be getting close to $20,000 or more per year tax-deferred.

It will become more complex a decision when ROTH TSP comes in this Spring. Assuming your pension, I believe the ROTH to be the better way to go. Unfortunately I've read they're not permitting converting your current assets from deferred to tax-free, but you do what you can.

PC
pc95
 
Posts: 119
Joined: Sat Sep 17, 2011 10:26 pm

Re: Help needed strategizing across TSP, Roth, and taxable

Postby retiredjg » Sat Mar 31, 2012 5:48 pm

Welcome to the forum! Here's a little different approach.

Taxable at Vanguard 25%
19% Vanguard Total Stock Market
6% Vanguard Total International

Roth IRA at Vanguard 26%
4% REIT or Total Stock Market
22% Vanguard Total International

Thrift Savings Plan (TSP)49%
22% C Fund
7% S Fund
20% G Fund or Combination with F Fund

This idea is 80% stock, 20% bonds with 35% of stocks in international The funds in taxable are tax-efficient and the international fund is eligible for the foreign tax credit (see Wiki, link in upper right corner). If you can sell the Total Stock in taxable without triggering taxes, you could exchange that to the international fund to hold more of your international in taxable.


Debt: 19,000 student loan at 5.8%

We don't know how much money you are saving, but throwing a lot of money at this loan comes WAY before putting any more money in taxable. The loan also is more important than maxing out your TSP and Roth IRA. Paying the loan is the same as a guaranteed 5.8% return on an investment. In other words, it is better than any investment. So if you just put enough money into the TSP to get the match and put all the rest of your money to the loan, that would be a good thing. If you want to put a little toward investment and a lot to the loan, that's OK too. But putting a lot of money into investments with that loan sitting there doesn't make any sense.


2. I realize there are some redundancies and tax-inefficiencies in my current portfolio, but I'm not sure how to change this.

Redundancy is not necessarily a bad thing. I don't see any tax-inefficiencies. Where are they?

Ideally, I would like to follow either the Margaritaville portfolio and ultimately the Yale U Unconventional portfolio (once I have enough funds in my accounts to make it worthwhile). My first instinct was to get a muni bond fund to fill out my taxable portfolio - what do people think of this idea?

You have no need for munis in taxable. All your bonds fit into the TSP. I don't remember Margaritabille, but the idea above has everything you need. If I remember Yale U correctly, it is cumbersome.

3. Should I stick with the current funds that I have or should I do something different, such as holding only bonds in my ROTH, stocks in my taxable, and ?? in my TSP? I think this is my major question - how should I allocate across the three accounts (TSP, ROTH, and taxable) in a strategic and tax-efficient way?

See above.

4. Should I increase my exposure to emerging markets via VWO in the taxable?

The idea above already contains emerging markets. You could add some extra, but it is not really necessary.

Is there another sector that I should be considering?

Not really. There are some others you could use, but if you are asking the question, you don't know enough yet. :D

5. Any other suggestions/advice?

Concentrate on the loan.
retiredjg
 
Posts: 17164
Joined: Thu Jan 10, 2008 1:56 pm

Re: Help needed strategizing across TSP, Roth, and taxable

Postby nsburto » Mon Apr 02, 2012 9:45 pm

Thanks, everyone, for the advice. I'm going to concentrate on paying off my student loan and maxing out the TSP first, while switching up my ROTH investments a little bit to diversify and go from there. I really appreciate all of you taking time to dissect this with me.
nsburto
 
Posts: 6
Joined: Thu Mar 29, 2012 2:33 pm


Return to Investing - Help with Personal Investments

Who is online

Users browsing this forum: BH13, goblue100, jared, jersh, readZinn, sscritic, ulrichw and 61 guests