New Investor- Need guidance- High Income Investment Options

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IrishDad
Posts: 3
Joined: Sun May 07, 2017 10:08 am

New Investor- Need guidance- High Income Investment Options

Post by IrishDad » Sun May 07, 2017 10:39 am

Hello!

I'm very excited to be joining the Boggleheads forum.
The books have truly been inspiring, life changing, and have helped me discover a passion I never knew I had- financial planning.
Hoping that you wouldn't mind giving me, a new investor, some suggestions/advice.

I've read, "Millionaire Teacher", "Simple Path to Wealth", and "The Boggleheads Guide to Retirement Planning".
They have all taught me more than I've ever known or understood about retirement investments.
I started an account with Vanguard where I have admiral share investments in the VTSAX in a back door Roth IRA, investor shares of VTSAX in a joint brokerage account with my wife, and I also contribute for an employer 401K.

I'm having trouble understanding where I should be putting most of our investments- with the 401K or the Vanguard accounts. Here is why...

Just to give you background, my wife and I are both 29. We have been in our house for 3 years. We have a 7 month old daughter. This past year we paid off over $60,000 I had in student loans, and we don't have any car debt, credit card debt, etc. We just have our mortgage.

1. My employer only matches 3% of the first 6% I contribute to my 401K. I'm grateful for the 401K, but it is not a very high match, and it is handled by a popular firm that has high ERs/costs. The money that I put into this account is only what my employer will match, and I have most of it in a S&P500 Fund since that is the closest thing they offered to the VTSAX, and I have roughly 10% in a Total Stock Market Bond Fund, which I believe is the only Vanguard Fund offered in our options. I've tried to get them to push for more Vanguard options, but it's not going to happen right now. My wife is offered a 401K with an employer match of 2%, but they offer Vanguard Funds so all of her's are going to a life cycle Vanguard retirement fund.

2. My wife and I both make an income where we are blessed enough to be comfortable financially, but it puts us in a "disadvantage" when it comes to tax efficient retirement accounts. We make too much money since we file jointly to be able to put money into a traditional IRA and a Roth IRA. The Roth IRA I accomplished by putting money in a Non-Traditional IRA, and then converted it immediately backdoor to the Roth IRA. This is where I have our admiral shares I stated above. I've checked with several accountants and they all advise my wife and I continue filing jointly, and do not file separately.

3. We have money in a checking and savings account. We put 20% of every paycheck into our savings account, the rest goes into our checking account, but we are not big spenders. The money in our checking accumulates, and we put it into our savings account when we hit our 6 month safety net in case something were to happen. We have our accounts with a well known bank. We are not over the FDIC insured limit yet, but I'm concerned we have more money in our checking and savings then we should have, and it should be somewhere else working for us whether that's our 401K's or Vanguard. But I'm afraid of being too aggressive, and losing money in a down market, or putting it into bonds where our money is not worth as much due to inflation when we get it back.

4. When our daughter was born I started a monthly automatic withdrawal into a 529 college fund for her.

5. My company offers both HSA or PPO plans, and I know HSA has been a popular thing for investors looking for more tax efficient accounts, but my concern here is that I see a doctor a pretty fair amount of time during the year, and it makes me nervous having a new child not having good health care insurance for her. My company offers great health insurance, and my wife's is not very good which is why we don't want to put our daughter on her's and just let me do the HSA. I do have a FSA account in my PPO though, but as you know that is very limited as to what you can put in there and I am maxing it out.

I feel like my wife and I should be maxing out our 401K because of our situation so that it drops us in taxable income, but I look at the costs of the funds offered to me, and it concerns me, and it makes me feel like I should only do the employer match, and the rest of the 12% of our investments should be going to Vanguard. Even if we both max out our 401K I believe we will still be just over the income threshold to be able to do a traditional IRA and Roth IRA filing jointly. Again, I do realize we are in a very blessed position, and there is nothing to complain about, but I would like to find out what others would advise or suggest we invest what we can- max out both 401Ks, or continue to feed our Vanguard money market fund accounts putting it into total stock market index funds and total bond market index funds, and maxing out the $5500 contribution limits each year on the IRA's?

If you could help guide me, point me in the right direction or provide me with some resources that would help me discover the avenues we should take I would greatly appreciate it. I'm trying hard not to go to a financial advisor so that we don't get hit by more fees/costs, and that is why I have been trying to educate myself on this, but with work and family, etc it's getting difficult to dive into the complicated matters to figure out what plan to take. As I've seen from most Boggleheads, the more simple the plan the better.

I appreciate anyone who has advise, and I look forward to responses.

Artisan
Posts: 324
Joined: Sat Oct 01, 2016 8:30 am

Re: New Investor- Need guidance- High Income Investment Options

Post by Artisan » Sun May 07, 2017 12:46 pm

Welcome.

I would suggest you edit your post and include the information in the format recommended in this post:
viewtopic.php?f=1&t=6212


We need to see what that actual expense ratios of your choices are in your work retirement accounts. Even when fees are higher then desired it is "usually" the better option to fund those accounts first for the tax deferral benefit.

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BeBH65
Posts: 1218
Joined: Sat Jul 04, 2015 7:28 am

Re: New Investor- Need guidance- High Income Investment Options

Post by BeBH65 » Sun May 07, 2017 1:57 pm

Hello irish dad,

Here is an article of our wiki that might help you: Prioritizing_investments.
On this forum there are many people willing to help you; .... if you provide us more info on your situation as requested in the previous post.

Regards,
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

deltaneutral83
Posts: 823
Joined: Tue Mar 07, 2017 4:25 pm

Re: New Investor- Need guidance- High Income Investment Options

Post by deltaneutral83 » Sun May 07, 2017 4:26 pm

1- 401k up to match
2- Roth/TIRA
3- Additional 401k to max
4- Taxable

There are very few scenarios (without knowing your federal tax bracket) where taxable would be preferred before 401k for excess monies to be invested. I'd also be curious as to your company's HSA for your entire family (3). If you go to the doctor a lot or not at all, this is exactly where the HSA comes in better than PPO, the middle zone is where PPO wins. Of course we'd need to see the cost you would bear for all scenarios.

livesoft
Posts: 62282
Joined: Thu Mar 01, 2007 8:00 pm

Re: New Investor- Need guidance- High Income Investment Options

Post by livesoft » Sun May 07, 2017 4:34 pm

If one has high income, then by definition one is able to contribute the maximum legal amounts to 401(k)/403(b) plans, to back-door Roths, to 529 plans, to HSA plans, to everything. There is income left over to pay cash for vehicles and toys. And income for investing tax efficiently in a taxable account, too.
Wiki This signature message sponsored by sscritic: Learn to fish.

retiredjg
Posts: 33537
Joined: Thu Jan 10, 2008 12:56 pm

Re: New Investor- Need guidance- High Income Investment Options

Post by retiredjg » Sun May 07, 2017 4:43 pm

Since you are high income, you should be filling both 401k plans, even if the plans are not as good as you would like. Tax-deferral is a good thing.

As a side note, we frequently have people talking about how bad their work plans are. When we see what is offered, many of these plans are pretty good. In fact, many are excellent.

Consider if you want people here to look at what you have offered for another opinion.

Lou354
Posts: 554
Joined: Sun Apr 03, 2016 10:51 pm

Re: New Investor- Need guidance- High Income Investment Options

Post by Lou354 » Sun May 07, 2017 5:49 pm

One consideration in whether to max out your 401k is how long you expect to be with your current employer. The fewer the number of years, the less of a problem a high expense ratio is. The tax-advantaged space is valuable.

mhalley
Posts: 6010
Joined: Tue Nov 20, 2007 6:02 am

Re: New Investor- Need guidance- High Income Investment Options

Post by mhalley » Sun May 07, 2017 11:35 pm

The wiki states 401k is still better than taxable until fees exceed 1.7%. If you have the s&p 500 stock market fund available, the fees should be far below that. If you don't have other investments you want available in the 401k, then buy those funds in the wife's 401k or your iras. You can use small cap or extended market funds to make up for their lack in your 401k. Even if you don't do that, the 500 is pretty good. Warren buffet recommends only that and a bond fund for his wife.
So I suggest you continue to max out both iras and 401ks.
As to the money you have in taxable, what you do with it depends on when you need it. Any money needed within 5 years should be kept safe, so cd ladder or high yield savings account.

pingo
Posts: 2594
Joined: Sat Sep 19, 2009 8:24 pm

Re: New Investor- Need guidance- High Income Investment Options

Post by pingo » Wed May 10, 2017 12:41 pm

Chances are you should both be maxing your 401ks, but you need to give us plan information (funds, tickers and expense ratios) so we can confirm. Even with lemons, we can usually help you make delicious lemonade.

Before saving any more money outside of the 401ks and (backdoor) Roths, you should look at both 401k plans to see if either or both offer an After-tax 401k feature as well to see if you can maneuver even more money in your Roths, respectively.

Bogleheads Wiki: After-tax 401(k)

The Mega Backdoor Roth

Rollover After-tax to Roth

Convert In-plan or out to Roth?

All of this, of course, really requires us to be able to see the big picture of your financial situation, as recommended and linked by Artisan: Recommended Format for Asking Portfolio Questions.

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goingup
Posts: 3183
Joined: Tue Jan 26, 2010 1:02 pm

Re: New Investor- Need guidance- High Income Investment Options

Post by goingup » Wed May 10, 2017 2:34 pm

retiredjg wrote:Since you are high income, you should be filling both 401k plans, even if the plans are not as good as you would like. Tax-deferral is a good thing.
Exactly right. Fill up those 401Ks!

niceguy7376
Posts: 2102
Joined: Wed Jul 10, 2013 2:59 pm
Location: Metro ATL

Re: New Investor- Need guidance- High Income Investment Options

Post by niceguy7376 » Wed May 10, 2017 2:39 pm

IrishDad wrote: We make too much money since we file jointly to be able to put money into a traditional IRA and a Roth IRA.

Even if we both max out our 401K I believe we will still be just over the income threshold to be able to do a traditional IRA and Roth IRA filing jointly.
Looks like you are assuming that you can contribute 5.5K to Trad AND another 5.5K to Roth IRA.
Each individual has the limit of 5500 that they can put in either roth or trad ira or split across both.

Regarding Health Ins: WOuldnt it make more senses for all 3 of you to be in same plan rather than splitting you and kid on one and spouse on another?

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