Help with investing in my ROTH IRA

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KuMotif
Posts: 3
Joined: Wed May 03, 2017 2:22 pm

Help with investing in my ROTH IRA

Post by KuMotif » Wed May 03, 2017 2:28 pm

Hello!

I have been listening to a lot of Vanguard investing videos and would now like to implement the index-fund based investing concepts.

Background:
I am a late bloomer. I am 42 and would like to start investing. I know I am late to the game - have had ups and downs, but hoping that now life will be stable. My wife is 31 and has more investing time she could use. We both do not have 401Ks, and only about 200K in savings, out if which I would like to invest about 100K.

I would like to open a ROTH IRA for myself and my wife and use a slightly aggressive investing strategy, at least for a few years and at least in my wife's ROTH. We plan to max out ROTH with $5500 every year.

I do not have a mortgage or any other debt. I have enough emergency funds.

Can someone provide any suggestions what funds I could go with for my and my spouse's Roth?

It is important to add that I am looking for a job where I can get a 401K, so that I can contribute to that too and have some tax-diversification.

As I have a lot of cash, I am also thinking about having an online savings account with Vanguard and thinking about investing about 15K in:
1. Tax-managed Capital appreciation fund (VTCLX)
2. Some kind of tax-exempt State bond fund.
3. 70% stocks/ 30% bonds asset allocation

Can you guys also give your opinions about whether I should go ahead with the above online account in addition to the ROTH?

Appreciate all your inputs in advance.

Thank you!!

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Tyler Aspect
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Re: Help with investing in my ROTH IRA

Post by Tyler Aspect » Wed May 03, 2017 5:58 pm

KuMotif wrote:Hello!

I have been listening to a lot of Vanguard investing videos and would now like to implement the index-fund based investing concepts.

Background:
I am a late bloomer. I am 42 and would like to start investing. I know I am late to the game - have had ups and downs, but hoping that now life will be stable. My wife is 31 and has more investing time she could use. We both do not have 401Ks, and only about 200K in savings, out if which I would like to invest about 100K.

I would like to open a ROTH IRA for myself and my wife and use a slightly aggressive investing strategy, at least for a few years and at least in my wife's ROTH. We plan to max out ROTH with $5500 every year.

I do not have a mortgage or any other debt. I have enough emergency funds.

Can someone provide any suggestions what funds I could go with for my and my spouse's Roth?

It is important to add that I am looking for a job where I can get a 401K, so that I can contribute to that too and have some tax-diversification.

As I have a lot of cash, I am also thinking about having an online savings account with Vanguard and thinking about investing about 15K in:
1. Tax-managed Capital appreciation fund (VTCLX)
2. Some kind of tax-exempt State bond fund.
3. 70% stocks/ 30% bonds asset allocation

Can you guys also give your opinions about whether I should go ahead with the above online account in addition to the ROTH?

Appreciate all your inputs in advance.

Thank you!!
I agree that you should open a taxable investment account. I feel the tax exempt bond fund may be pre-mature. When you are able to put money into a 401k your tax bracket is likely to drop, and it could change the viability of the tax exempt bond fund. For now you can put the bond portion in Roth IRA. Total bond market index with a sprinkling of intermediate term corporate index should be fine.

Generally keeping a six month worth of expense as emergency cash is enough. Mutual fund investments in a taxable account are very liquid; fund exchange out to a money market fund can be made on the same day or next day.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

lazylarry
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Re: Help with investing in my ROTH IRA

Post by lazylarry » Wed May 03, 2017 7:32 pm

-Why that random fund? You miss small caps. consider VTSMX.
-You should do Roths and max for you and wife
-kids? 529?
-could do bonds in Roth (they are better in a 401k though) or tax-exempt in taxable is fine also
-Yes you can put your money in a taxable. Look at:
https://www.bogleheads.org/wiki/Getting_started
viewtopic.php?f=1&t=6211
https://www.bogleheads.org/wiki/Three-fund_portfolio
Asking questions: https://www.bogleheads.org/forum/viewtopic.php?f=1&t=6212 | My profile: https://www.bogleheads.org/forum/memberlist.php?mode=viewprofile&u=86026

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grabiner
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Location: Columbia, MD

Re: Help with investing in my ROTH IRA

Post by grabiner » Wed May 03, 2017 9:04 pm

Welcome to the forum!
KuMotif wrote:I would like to open a ROTH IRA for myself and my wife and use a slightly aggressive investing strategy, at least for a few years and at least in my wife's ROTH. We plan to max out ROTH with $5500 every year.

I do not have a mortgage or any other debt. I have enough emergency funds.

Can someone provide any suggestions what funds I could go with for my and my spouse's Roth?

It is important to add that I am looking for a job where I can get a 401K, so that I can contribute to that too and have some tax-diversification.

As I have a lot of cash, I am also thinking about having an online savings account with Vanguard and thinking about investing about 15K in:
1. Tax-managed Capital appreciation fund (VTCLX)
2. Some kind of tax-exempt State bond fund.
3. 70% stocks/ 30% bonds asset allocation.
What state are you in, and what is your tax bracket?

In most brackets, Tax-Managed Capital Appreciation isn't worth it; Total Stock Market is tax-efficient enough on its own that it makes up for the slight tax difference with lower costs.

Also, how much money are you planning to invest? You mentioned that you wanted to invest $100K, but you also said that you wanted to invest only $15K outside the IRAs.

70% stock and 30% bonds is reasonable, for whatever amount you choose to invest. Since you don't know how you will react to market risk, I would recommend dollar-cost averaging into the market; start with 20% of your investable money in stock, and add another 10% every month.

Without knowing your tax situation, I can't tell you what should go where. In most brackets, it would be best to put both IRAs entirely into Total Bond Market, and fill up your asset allocation with Total Stock Market, Total International, and a bond fund as needed in taxable. It's only worth using a state muni fund if Vanguard has one for your state; the extra costs of non-Vanguard funds are more than the tax savings. If you don't have a state muni fund, I prefer Total Bond Market in taxable in a 25% bracket, and Vanguard Intermediate-Term Tax-Exempt in a 28% or higher bracket.
David Grabiner

KuMotif
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Joined: Wed May 03, 2017 2:22 pm

Re: Help with investing in my ROTH IRA

Post by KuMotif » Fri May 19, 2017 3:25 pm

Sorry for the delay in replying...have been busy.

State: I live in PA, and work in OH few days of the week...travel every week. Am looking for jobs in PA. In terms of municipal bond funds, both PA and OH have state bond funds

Tax bracket: I got married in 2016, and filing jointly, I was in the under 15% tax bracket. And I might be in the same bracket for this year when filing 2017 taxes.

Investment amount: Yes, it is true that I have about $100K to invest, but feel it is risky to go in with so much money at one go. So as you mentioned, I will start with about 15K and keep adding more every month.

With the above information, could you guide me as to what funds should probable be allocated to IRAs and what to taxable accounts?

As the ROTH is tax-free growth, I would like to be more aggressive with funds in the ROTH so that the investment grows more. I am also interested in VIGRX (Large-cap growth index fund) - it has provided about 8% growth over last 10 years. Would that be a good fund to have in the portfolio? If yes, should I have it in the ROTH or the taxable account? In the taxable, I can invest more than $10K and get the Admiral shares with lower expense ratios for any fund. I do understand the Total Stock market covers all the cap sizes, and having both Total Stock Market and Vanguard Growth Index (VIGRX), I will have some overlap in the stocks I own.

Appreciate all your guidance.

Thank you so much!

KuMotif
Posts: 3
Joined: Wed May 03, 2017 2:22 pm

Re: Help with investing in my ROTH IRA

Post by KuMotif » Fri May 19, 2017 3:28 pm

lazylarry wrote:-Why that random fund? You miss small caps. consider VTSMX.
-You should do Roths and max for you and wife
-kids? 529?
-could do bonds in Roth (they are better in a 401k though) or tax-exempt in taxable is fine also
-Yes you can put your money in a taxable. Look at:
https://www.bogleheads.org/wiki/Getting_started
viewtopic.php?f=1&t=6211
https://www.bogleheads.org/wiki/Three-fund_portfolio
I did not pick that fund randomly. I want to invest in funds that are specifically created for less taxation, since I want to put money in my taxable account. And that fund seemed to show good growth over last 10 years.

-No kids / 529
-RIght now I do not have a 401K, else definitely I would invest a significant portion into bonds using my 401k.

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grabiner
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Re: Help with investing in my ROTH IRA

Post by grabiner » Fri May 19, 2017 9:17 pm

KuMotif wrote:Sorry for the delay in replying...have been busy.

State: I live in PA, and work in OH few days of the week...travel every week. Am looking for jobs in PA. In terms of municipal bond funds, both PA and OH have state bond funds
Unless you are spending so much time in OH that OH considers you a resident for tax purposes, you will pay only PA tax on your investments.
Tax bracket: I got married in 2016, and filing jointly, I was in the under 15% tax bracket. And I might be in the same bracket for this year when filing 2017 taxes.
In that case, you do not want municipal bonds in your taxable account; they don't make sense in a 15% bracket. And you do not need Tax-Managed Capital Appreciation either; it is managed to reduce dividend yields, but you pay no federal tax on qualified dividends, Your tax cost for Total Stock Market in a taxable account will be near zero, and for Total International may even be negative (you get more from the foreign tax credit than you pay in tax on non-qualified dividends).
With the above information, could you guide me as to what funds should probable be allocated to IRAs and what to taxable accounts?
In the 15% tax bracket, you should hold bonds in your tax-favored accounts (401(k), IRA, Roth IRA). With no federal tax on qualified dividends, you get close to tax-free growth on stocks in your taxable accounts, while you would lose 15% of any bond interest.
As the ROTH is tax-free growth, I would like to be more aggressive with funds in the ROTH so that the investment grows more.
This is an illusion; Tax-adjusted asset allocation on the wiki, If you retire in a 15% bracket and have $4000 in a traditional IRA and $3400 in a Roth IRA, you will get the same after-tax value from either if you invest them the same way; there is no special advantage to holding stocks in the Roth IRA.

There is a theoretical advantage to holding stocks in tax-deferred rather than taxable in order to gain more from the compounding of growth, but for that to be a net benefit takes longer than most investors' time horizons. (And in the 15% tax bracket, with stocks in taxable almost tax-free, even the theoretical benefit essentially disappears.)
I am also interested in VIGRX (Large-cap growth index fund) - it has provided about 8% growth over last 10 years. Would that be a good fund to have in the portfolio?
Growth stocks are not necessarily those stocks which are likely to gain the most; overweighting growth stocks is likely to increase the risk of your portfolio for little benefit. Having a high overall weight in stocks is the best way to get higher expected return (with higher risk).
David Grabiner

aristotelian
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Re: Help with investing in my ROTH IRA

Post by aristotelian » Fri May 19, 2017 9:31 pm

In the 15% tax bracket, you should be sure to periodicially cash in your stock funds and pay 0% on long term capital gains. There is no need for you to be worried about tax efficiency.

You should do a Roth IRA for your spouse as well. You could do Total Bond Market Index in your IRA and Total Stock Market Index in hers since she has a longer horizon than you.

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