What do I do now? Maxing out

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Akrasia
Posts: 9
Joined: Fri Jun 03, 2016 8:29 am

What do I do now? Maxing out

Post by Akrasia » Fri Jun 03, 2016 9:04 am

Background
Salary + Bonus for 2016 ~$145k
Monthly Expenses ~ $3,000 that's everything. The family and I live overseas and the company pays for our housing, cell phone etc.
Emergency Funds: $55k in cash in Capital One 360 Account
Debt: None - all student loans have been paid
Personal Property: Two cars - Honda Pilot ($6k) and a VW Golf ($5k)
Credit Cards: Bank of America Travel Rewards & Marriott Visa - paid in full each month
Tax Filing Status: Married - Joint
State of Residence: It was Virginia but we moved overseas and I'm thinking about dropping Virginia taxes (see question below)
Age: Mid 30's
Desired Asset Allocation: Don't know but willing to be fairly aggressive:

Current Retirement Assets

Vanguard Roll Over IRA (Wife's previous Employer) - $46,083.12
VFIAX: Vanguard 500 Index Fund Admiral Class: $18,782.85
VFICX: Vanguard Intermediate-Term Investment-Grade Fund Investor Shares :$7,111.15
VFSTX: Vanguard Short-Term Investment-Grade Fund Investor Shares: $6,959.37
VISGX Vanguard Small Capitalization Growth Index Fund Investor Shares $3,052.55
VISVX Vanguard Small Capitalization Value Index Fund Investor Shares $3,689.33
VMMXX Vanguard Prime Money Market Fund $190.47
VTRIX Vanguard International Value Fund Investor Shares $3,285.28
VWIGX Vanguard International Growth Fund Investor Shares$3,012.12


My Roll over IRA (My Previous Employer) $128,313.09
VFIAX Vanguard 500 Index Fund Admiral Class $56,847.03
VFICX Vanguard Intermediate-Term Investment-Grade Fund Investor Shares $18,792.92
VFSTX Vanguard Short-Term Investment-Grade Fund Investor Shares $17,753.61
VISGX Vanguard Small Capitalization Growth Index Fund Investor Shares $8,507.43
VSIAX Vanguard Small Cap Value Index Fund Admiral Shares $10,770.53
VTRIX Vanguard International Value Fund Investor Shares $8,055.38
VWIGX Vanguard International Growth Fund Investor Shares $7,586.19

House Down Payment Holdings: $117,149.26
House was sold and moved assets here. Will buy a new house when we return to the US in 2 years
VFSUX Vanguard Short Term Investment Grade Fund Admiral Shares: $117,149.26

My Roth IRA: $19,629.62
Maxed out each month
VASGX Life Strategy Growth Fund Investor Shares: $19,629.62

Wife Worth IRA: $14,447.83
Maxed out each month
VASGX Vanguard Life Stategy Growth Fund Investor Shares: $14,447.83

Virginia 529 Child 1:$12,857.23
James River

Virginia 529 Child 2 $6,439.47
James River

Current 401k - $74,948.90
LEGAX Columbia Large Cap Growth Fund Class A $15,515.85
MDGCX BlackRock Global SmallCap Fund Investor A Shares $10,899.69
MDHQX BlackRock Total Return Fund Investor A Shares $11,640.41
MDLOX BlackRock Global Allocation Fund Investor A Shares $11,169.63
NSTRX Columbia Short Term Bond Fund Class A $11,488.73
SLVAX Columbia Select Large-Cap Value Fund Class A $15,234.59
Maxed out at $18k/year not including Employer Match of 4%

Available Investments with 401k

Bond
Blackrock Total Return Portfolio A
Columbia High Yield Bond A
Columbia Inflation Protected Securities A
Columbia Short Term Bond A
Loomis Sayles Strategic Income A

Equity
Blackrock Global Allocation A
Blackrock Global Small Cap A
Blackrock International Index A
Blackrock S&P 500 Index Inst
Columbia Disciplined Core A
Columbia Emerging Markets A
Columbia Large Cap Growth A
Columbia Real Estate Equity A
Columbia Select Large-Cap Value A
Columbia Select Smaller-Cap Value A
Columbia Seligman Communications And Information A
Columbia Small Cap Index A
Delaware Us Growth A
Franklin Templeton Growth Allocation A
Ivy Mid Cap Growth Y
Janus Balanced A
Nationwide Mid Cap Market Index A
Oppenheimer Commodity Strategy Total Return A
Victory Sycamore Established Value A

Money Market
Blackrock Ready Assets Prime Money

Current Allocation
Intl Bonds: 9.28%
U.S. Bonds: 34.7%
U.S. Stocks: 35.53%
Intl Stock: 9.48%
Cash: 4.32%
Alternatives: 2.11% (Real Estate/Other)
Unclassified 4.58% (529 investments)


Questions

1) I have $3-$4k/month in available cash each month. What do I do with it? New Taxable account?

2) I'm a US citizen expat who will be exempt from a large portion of my income tax. I haven't worked out how much yet but so far I'm paying full taxes and will get the refund at the end of the year. Like $10k-$15k what do I do with that?

3) I was a previous resident of Virginia. We may move back to VA but we may not. Should I consider severing my residency and not paying VA State Tax?

We are extremely blessed with our situation and want to be good stewards. Where do we go from here?

TOJ
Posts: 364
Joined: Wed Mar 02, 2016 9:19 pm

Re: What do I do now? Maxing out

Post by TOJ » Fri Jun 03, 2016 12:03 pm

For starters, you need simplification on your holdings. Read up on the 3 fund portfolio.

You should set an overall asset allocation target.

Then, get to it using the best options across all your accounts. To me, you could use the Vanguard IRAs to hold total bond index fund and satisfy your bond requirements. The remainder in those accounts would go into VTSAX and/or total international.

In your 401k, I would move all assets into the low cost index funds. It looks like you have 3. The S&P, the international, and the mid-cap. All future contributions go in there.

Rebalance in the IRAs as needed to keep overall AA in check.

EDIT: Is the dollar amount next to the cars how much you owe? Pay off if so.
Last edited by TOJ on Fri Jun 03, 2016 12:17 pm, edited 1 time in total.

TOJ
Posts: 364
Joined: Wed Mar 02, 2016 9:19 pm

Re: What do I do now? Maxing out

Post by TOJ » Fri Jun 03, 2016 12:10 pm

Something like this:

IRA 1: $46k VBTLX
IRA 2: $28k VBTLX
IRA 2: $100k VTSAX
RIRA 1: $19k VTSAX
RIRA 2: $14k VTSAX
401k: $28k S&P Index
401k: $7k Mid cap index
401k: $40k intl index


That's a 60/14/26 AA. Adjust as needed.

With the extra cash: fund 529s more, give some to charity if you are inclined, invest in taxable mutual fund account.

I have no idea on the expat/state tax issue.
Last edited by TOJ on Fri Jun 03, 2016 12:15 pm, edited 2 times in total.

basearebelongtous
Posts: 16
Joined: Sat Sep 12, 2015 4:58 pm

Re: What do I do now? Maxing out

Post by basearebelongtous » Fri Jun 03, 2016 12:12 pm

Completely speculating here but also curious: if you are (largely) tax exempt, can you do a large Roth conversion? At the very least see if you can contribute to Roth 401k

Akrasia
Posts: 9
Joined: Fri Jun 03, 2016 8:29 am

Re: What do I do now? Maxing out

Post by Akrasia » Sat Jun 04, 2016 12:34 am

Thanks everyone. Greatly appreciated. I'll see about getting everything adjusted.

The values next to the cars are not loans just how much I think they are worth.

I'll also look into the Roth Conversion. I do know my 401k has a Roth option. How does that work? Does it go against my Roth max for the year?

qui
Posts: 60
Joined: Thu Jan 02, 2014 1:35 pm

Re: What do I do now? Maxing out

Post by qui » Sat Jun 04, 2016 2:11 am

Akrasia wrote:I'll also look into the Roth Conversion. I do know my 401k has a Roth option. How does that work? Does it go against my Roth max for the year?
Roth 401k goes against your total 401k limit for the year. For 2016, you can deduct 18,000 to a traditional 401k, or you can put 18,000 into a Roth 401k, or you can mix and match the two types up to that 18,000 limit (e.g. 9,000 traditional+9,000 Roth).

Additionally, (if your employer allows it) you can contribute to your traditional 401k beyond that 18,000 limit (up to a total of 53,000), but you can no longer deduct the contributions after 18,000. Usually it doesn't make sense because you're 1) contributing with post-tax dollars without a deduction and 2) going to be taxed at the marginal income tax rate when you withdraw the gains later (as opposed to the typically more favorable capital gains/dividend taxes). However, if you're in a situation where your income isn't being taxed, or is being taxed less heavily, it may be worthwhile for you to have that additional money growing in a tax-deferred account. Additionally, when you leave your employer, you can roll those post-tax contributions into a Roth IRA while rolling your pre-tax contributions and gains into a traditional IRA. It might be worth looking into.

Akrasia
Posts: 9
Joined: Fri Jun 03, 2016 8:29 am

Re: What do I do now? Maxing out

Post by Akrasia » Sat Jun 04, 2016 2:55 am

Thank you. Great to know. Very much appreciated. I'll put everything in action and keep you all updated. Thanks again!

canga
Posts: 71
Joined: Thu Nov 26, 2009 7:50 pm

Re: What do I do now? Maxing out

Post by canga » Sat Jun 04, 2016 5:41 am

Fellow expat here, living overseas for almost a decade. I'd like to help, but there are quite a few questions about your situation. I'm also no financial advisor, so get some professional help. Expat taxes are extremely complicated and confusing.

Your car situation is confusing. Do you own cars overseas or in the USA? If you own the cars in the USA then you should just sell them. There is no point in keeping a depreciating asset that you are not using. In addition, having cars in Virginia could make it more difficult to exempt yourself from state tax (or it may not). It's not clear why you would want to pay Virginia tax at all, because there is no benefit to do so that I am aware. When I left the USA I sold everything that could have been used against me to try to get me to pay state tax. You've already sold the house so you might as well sell the cars.

How long is your contract? 2 to 3 years? Remember that flights home, foreign tax payments, and other "expat benefits" paid on behalf of your employer are also included in taxable income.

In your first year, ensure you qualify for the Physical Presence Test (330+ days out of the USA). After you establish residency then you may be able to use the Bona Fide Residency option. For simplicity I just stay out of the USA to qualify for Physical Presence Test. Also note that if you work in the USA or a USA territory during the year then your foreign earned income exclusion will be prorated based on the days worked.

Is your $145k salary for just you or both you and your wife? Does it include housing, flights home and other taxable benefits? You would want to understand if you have any taxable income for the purposes of contributing to a Roth IRA and whether to contribute to a Roth or Traditional 401k.

The foreign earned income exclusion (FEIE) of $101,300 for 2016 is applied to both spouses if both spouses are working. There is also a foreign housing exclusion which is 16% of the FEIE ($16,208 for 2016) unless you live in a high cost of living area such as London, Singapore, Hong Kong, etc., in which case the exemption will be higher and based on your location.

Example: You and your wife make $72,500 (combined $145,000). All of your income is under the FEIE. If your housing costs are under $16,208 for the year, or whatever maximum for your location, then you have no earned income. Therefore you would be unable to contribute to a Roth IRA. You can however, still contribute to a Roth 401k, and if you are in a position that you owe no federal taxes, then you would certainly want to contribute the maximum to the Roth 401k (you get no benefit from contributing to a Traditional 401k if you have no earned income).

Alternatively, if you are the sole wage earner, and we start to add flights, foreign tax assistance, and apartment costs that exceed the foreign housing exclusion, then you are pushing into the 28% tax bracket. In this case you most likely can contribute to a Roth IRA (or backdoor Roth IRA) for you and your spouse. The decision to contribute maximum contributions to a Roth IRA or a Traditional IRA is kind of a toss-up. Some people would say always contribute to a Traditional 401k in the 28% bracket (and some say also the 25% bracket as well), so you probably want to contribute to the Traditional 401k.

One caveat to to the above consideration on whether to contribute to a Roth or Traditional 401k -- In addition to the FEIE and foreign housing exclusion, and assuming you file married filing jointly, then you also have the Standard Deduction and Personal Exemption. This is where I got a tax preparer to help, because it gets complicated. Here's my limited understanding of this issue:

FEIE: $101,300
FHE: $16,208
Standard Deduction: $12,600
Personal Exemption: $8,100 (you and spouse)
TOTAL: $138,000.

In your case, you may be able to contribute to the Roth 401k up to your "non-taxed" limit and then contribute to the Traditional 401k for any income that is taxed (i.e above your exclusions, deductions, and exemptions).

In short, get some information prepared and take it to a tax professional. I've found that the IRS website lists out tax preparers overseas, and those firms will know more about expat taxes than any firm within the USA. However, expect to pay around $2,000 per year for tax preparation.

In short, if I were you then I would do the following steps:

1. If your cars are in the USA, then sell them. If your cars are overseas, then pay them off with extra funds.
2. Determine how you can avoid paying Virginia taxes (your state's IRS page may have some guidance).
3. Meet with a tax preparer to clarify your tax situation. In general, order of investment priority is as follows:
- Contribute to Roth/Traditional 401k up to your company match.
- Pay off all debt (including cars).
- Contribute to Roth/Traditional 401k up to the $18,000 limit. If you won't owe taxes, then definitely contribute to the Roth 401k. If you are getting taxed at the 25% or 28% brackets, then you probably want to contribute to the Traditional 401k. In your situation a combination of Traditional and Roth 401k contributions may be best.
- Contribute to a Roth IRA (or backdoor Roth IRA) if you are eligible.
- If you have kids, contribute to a 529 plan.
- Contribute to HSA, if you have it.
- Contribute to a taxable account with whatever is left over.

Some people recommend I bonds for any bonds that end up in a taxable account. However, I have preferred Muni-Bonds due to current rates.

One last suggestion. Check if your credit cards charge a foreign transaction fee (1 to 5%). If you're paying a fee, then get a CapitalOne Visa card, which doesn't charge any foreign transaction fees. Lastly, the Schwab Investor Checking account has an ATM card that reimburses ATM fees world-wide, which is very helpful if you get paid in the USA and need to take out cash locally.

canga
Posts: 71
Joined: Thu Nov 26, 2009 7:50 pm

Re: What do I do now? Maxing out

Post by canga » Sat Jun 04, 2016 5:54 am

One comment regarding your asset allocation. It appears that you have stocks and bonds in all accounts. The general opinion here is to look at your entire portfolio holistically, and there is some guidance in the Bogleheads Wiki. In general, you want to establish an asset allocation and then apply it so you invest in funds in all of your acounts to create the best tax efficiency. For example:

Roth IRA and Roth 401k: Because these accounts grow tax free, and withdrawals are tax free, you want this account to have your least tax efficient funds with the highest expected returns. In my case I use Roth accounts for Small Cap Value and REIT funds. If you've got more room then you can add Total US Stock Market or other funds in your asset allocation.

Traditional IRA and Traditional 401k: These accounts grow tax free but are taxed when you withdrawal. I use Traditional accounts for my Bonds (and also any REIT or Small Cap Value that I can't fit into my Roth IRA). If you've got more room then you can add Total US Stock Market or other funds in your asset allocation.

Taxable Accounts: This space is reserved for the most tax efficient funds: Total Foreign Stock (you get a tax credit if this is in a taxable account, but not if this is in a tax deferred or tax free account), Total US Stock Market. If you need to put bonds in a taxable account, then Muni-Bonds, I Bonds, or CDs can be an option.

Akrasia
Posts: 9
Joined: Fri Jun 03, 2016 8:29 am

Re: What do I do now? Maxing out

Post by Akrasia » Sat Jun 04, 2016 7:15 am

Canga,

Thank you, and everyone else who has responded, for your great input. I sincerely appreciate the time everyone has put in to get me on a better track.

Let me see if I can answer some questions and summarize what I think a path forward will be.

Cars: The cars are overseas with us. The values listed next to each are their estimated values. We'll sell them before returning home. They were paid for in cash and are loan free.

Job: We will likely be overseas through 2017 maybe 2018.

We're doing everything we can from returning to the US and hopefully we can stay out long enough to meet the physical presence test. So far, so good and baring any family medical issue we'll be able to make it.

The $145k salary is just for me. My wife doesn't work. That amount does not include any other expat benefits such as house ($27k/year) - flights home for the entire family ($5k/year). Total $177k. That seems to put me in the case of being able to contribute to the Roth IRA. I expect that I'll be well below the 25% tax bracket with all the exclusions so I think I'll stick with the Traditional 401k right?

Action Plan as I understand it;

1) Stop paying Virginia taxes. I have no property ties there. This will get me an extra $560/month in cash that can be invested.
2) Credit card doesn't have a foreign transaction fee Bank of America Travel Rewards. I get the cash back often and it works great. I really like the sound of the Schwab Investor Checking account though. ATM fee's internationally kill us as we are living in a predominately cash society. $15 bucks a pop at least
3) Simplify my portfolio as follows:

Traditional IRA #1: Balance: $46k>Convert to VBTLX
Traditional IRA #2: Balance $128k>Convert to $28k VBTLX and $100k VTSAX
Housing Fund: Balance $117k Leave alone unless there's something better you think of?
Roth IRA #1: Balance: $20k > Convert to VTSAX
Roth IRA #2: Balance: $14.5k > Convert to VTSAX
Current 401k: Balance: $74k>Convert to $28k S&P>$7k Mid Cap>$40k International Index. Future contributions to keep this percentage right?

The emergency fund cash of $44k leave that as is? It may seem a bit large for an emergency fund.

Future cash will go towards the Roth IRAs, 529s and a taxable account for VTSAX?

James1
Posts: 45
Joined: Tue Jun 23, 2015 5:59 pm

Re: What do I do now? Maxing out

Post by James1 » Sat Jun 04, 2016 8:06 am

Don't forget that you will be taxed on your marginal rate. Look at the foreign earned income tax worksheet to understand how it works. Here's a simple example.

Foreign income: 175k
Other income (dividends, interest, conversions): 25k

Gross total income: 200k

Standard deduction and exemptions: 30k*
401k contribution: 18k

Taxable Income: 152k (175k + 25k - 30k- 18k)
Tax owed: 30k *

Foreign Earned Income Excluded: 100k
Tax on that amount: 17k *

The difference between the taxes owed: 13k (30k - 17k)

In this example, you would owe 13k in taxes.

*Note: I estimated these numbers since I am typing on my phone. I'm just trying to show that you may end up owing more taxes than you think.

canga
Posts: 71
Joined: Thu Nov 26, 2009 7:50 pm

Re: What do I do now? Maxing out

Post by canga » Sat Jun 04, 2016 8:23 am

James1 wrote:Don't forget that you will be taxed on your marginal rate. Look at the foreign earned income tax worksheet to understand how it works. Here's a simple example.

Foreign income: 175k
Other income (dividends, interest, conversions): 25k

Gross total income: 200k

Standard deduction and exemptions: 30k*
401k contribution: 18k

Taxable Income: 152k (175k + 25k - 30k- 18k)
Tax owed: 30k *

Foreign Earned Income Excluded: 100k
Tax on that amount: 17k *

The difference between the taxes owed: 13k (30k - 17k)

In this example, you would owe 13k in taxes.

*Note: I estimated these numbers since I am typing on my phone. I'm just trying to show that you may end up owing more taxes than you think.
This is correct. The FEIE excludes income off the bottom (lower tax brackets). Deductions and Traditional 401k deduct income off the top (highest tax brackets).

You'll be in the 28% tax bracket, so Traditional 401k probably makes the most sense. Rough guess is that most of the money going into the 401k would have been taxed at 28% (and maybe some at 25%).

You also will likely qualify for a Roth IRA contribution for you and your wife, so that will give you at least some Roth space.

canga
Posts: 71
Joined: Thu Nov 26, 2009 7:50 pm

Re: What do I do now? Maxing out

Post by canga » Sat Jun 04, 2016 9:08 am

Akrasia wrote:Canga,

Thank you, and everyone else who has responded, for your great input. I sincerely appreciate the time everyone has put in to get me on a better track.

Let me see if I can answer some questions and summarize what I think a path forward will be.

Cars: The cars are overseas with us. The values listed next to each are their estimated values. We'll sell them before returning home. They were paid for in cash and are loan free.

Job: We will likely be overseas through 2017 maybe 2018.

We're doing everything we can from returning to the US and hopefully we can stay out long enough to meet the physical presence test. So far, so good and baring any family medical issue we'll be able to make it.

The $145k salary is just for me. My wife doesn't work. That amount does not include any other expat benefits such as house ($27k/year) - flights home for the entire family ($5k/year). Total $177k. That seems to put me in the case of being able to contribute to the Roth IRA. I expect that I'll be well below the 25% tax bracket with all the exclusions so I think I'll stick with the Traditional 401k right?

Action Plan as I understand it;

1) Stop paying Virginia taxes. I have no property ties there. This will get me an extra $560/month in cash that can be invested.
2) Credit card doesn't have a foreign transaction fee Bank of America Travel Rewards. I get the cash back often and it works great. I really like the sound of the Schwab Investor Checking account though. ATM fee's internationally kill us as we are living in a predominately cash society. $15 bucks a pop at least
3) Simplify my portfolio as follows:

Traditional IRA #1: Balance: $46k>Convert to VBTLX
Traditional IRA #2: Balance $128k>Convert to $28k VBTLX and $100k VTSAX
Housing Fund: Balance $117k Leave alone unless there's something better you think of?
Roth IRA #1: Balance: $20k > Convert to VTSAX
Roth IRA #2: Balance: $14.5k > Convert to VTSAX
Current 401k: Balance: $74k>Convert to $28k S&P>$7k Mid Cap>$40k International Index. Future contributions to keep this percentage right?

The emergency fund cash of $44k leave that as is? It may seem a bit large for an emergency fund.

Future cash will go towards the Roth IRAs, 529s and a taxable account for VTSAX?
I usually sleep on changes to asset allocation for at least a couple days, but this plan looks reasonable with a few tweaks. Here are a few thoughts.

Another consideration for 401k fund selection is to pick the funds with the lowest expense ratios, which aren't indicated in your post. I don't quite understand the mid-cap stock selection. Here's a few ideas to consider:
https://www.bogleheads.org/wiki/Lazy_portfolios

I'm using a portfolio I developed from William Bernstein's "Four Pillars of Investing" which has been my favorite and most comprehensive book I've read on investing. My only concern with something more complicated is that it may be too complex for my spouse (who has no interest in investing) should something happen to me, or even for myself after I get old.

Read this Wiki. Total International in taxable may have a slight edge over VTSAX due to foreign tax credit:
https://www.bogleheads.org/wiki/Tax-eff ... _placement

You appear have more percent in bonds than your age, which is very conservative (not necessarily a bad thing). Also consider you have the house fund in addition to your emergency fund, which makes you even more cash heavy. Both suggest your emergency fund is quite large. On the other hand, you will likely face large costs in moving back to the USA by 2018 (buying new cars, relocation costs the company doesn't cover, taking some time off to travel or change jobs, job change for your spouse, etc.).

What I did was to gradually reduce my emergency fund once I had built up a larger taxable account. I assume I can sell stocks in taxable during an emergency, and sell bonds in my tax deferred accounts to buy stocks, leaving me with the same asset allocation. Whatever lets you sleep at night. I'm at about 6 months expenses now invested in I Bonds that are over 5 years old (no redemption penalty).

If you plan on moving back to the USA and buying a house within 1 year or so, then I would probably keep the house fund in a 3 to 5 year CD or multiple CDs that I could break with a small penalty. If you think you'll rent and you don't need the money for 5+ years, then I would consider investing some of it. I've got about half of a house fund invested in my normal asset allocation, with the other half in 5 yr CD ladder (I also don't have a definitive date to move back to the States so I'm a ways off from a house purchase).

For future contributions you will want to maintain your asset allocation. Let's assume for simplicity that in the next year you will contribute $51k to taxable, $11k Roth IRA, and $18k Traditional 401k. Total of $80k.

Your 401k will only be 22% of your investments for the year. If you are 35% in bonds, then 100% of 401k contributions would go into bonds, plus another 13%+ into bonds somewhere else. For me I used Muni Bonds in taxable so I could keep the REIT and Small Cap Value stocks, with higher expected returns, in the Roth IRAs.

j0nnyg1984
Posts: 424
Joined: Sun Apr 24, 2016 9:55 am

Re: What do I do now? Maxing out

Post by j0nnyg1984 » Sat Jun 04, 2016 1:50 pm

I'm in a similar situation. I'm just stocking cash, going to pay off my mortgage early 2017, then start saving up another sox figures for a down payment on something else. With maxing out 401k, IRA, and HSA, i really don't have any interest in taxable investing.

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