Help With Taxable Account

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chilidawg
Posts: 17
Joined: Thu Dec 05, 2013 5:45 pm

Help With Taxable Account

Post by chilidawg »

Hello everyone. My wife and I just finished paying off our student loans, and that event calls for a re-evaluation of our IPS, as we will now have to decide on starting a taxable account, or paying down our mortgage. My wife and I are 35 and 37 years old, and our household income is around $550k/year and fairly stable. Marginal federal tax rate is 39.6%, and 5% for Ohio. I estimate we'll have around $40-50k per quarter to invest now.

We have around $150k in equity in our $700k house, with a mortgage for $550k left. We have 29 years left on a 15/1 ARM, and are locked at 3.00% APR for the next 14 years. No other debt.

We have a 7 year old son with around $20k in his 529 plan, and we have $17k in HSA plans which we have left out of investments for now. We also have around $500k in relatively illiquid assets - real estate, shares of small businesses. We have a 6 month emergency fund in a high yield savings account.

We currently have about $500k in retirement savings, with $100k in Roth and $400k in 401k. We continue to maximize our backdoor Roth IRAs and HSAs yearly, and end up with around $75k/year total in 401k contributions/match/profit sharing. We also started contributing $25k/yr to a cash balance plan this year. The cash balance money is around a 50/50 split in stocks/bonds. We have good access to Vanguard index funds in our 401ks, and use them almost exclusively. We count Roth money as 15% more valuable than 401k money.

Our current asset allocation is below:
S&P 500 = 35%
Extended Market = 12.5%
US Small cap Value = 7.5%
US REIT = 5%
Total International / Developed International = 25%
International Small Cap Value = 5%
Emerging Markets = 5%
US Bonds (Total Bond and Intermediate Bond Index) = 5%

Our goal is to get to around $3 million in today's dollars with no debt as soon as possible, then decide if we want to continue to work. We are planning to transition toward 20% bonds over the next year or two, and use mostly tax exempt bond funds.

Questions:

1. Any reason to pay down the mortgage other than feeling more secure? It's locked at 3% for 14 more years.

2. All our 401k and Roth investments are with Ascensus/Vanguard brokers. Should we continue with Vanguard brokerage for taxable, or start the taxable with a more user-friendly interface (Fidelity, Scottrade, TD Ameritrade, etc)?

3. How does one value money in taxable accounts vs Roth vs tax-deferred?

4. Any reason to use any bond funds besides fed tax exempt and Vanguard Ohio tax exempt funds? Any reason to start using TIPS, EEs, or Ibonds?
PFInterest
Posts: 2684
Joined: Sun Jan 08, 2017 12:25 pm

Re: Help With Taxable Account

Post by PFInterest »

chilidawg wrote: Questions:

1. Any reason to pay down the mortgage other than feeling more secure? It's locked at 3% for 14 more years.

2. All our 401k and Roth investments are with Ascensus/Vanguard brokers. Should we continue with Vanguard brokerage for taxable, or start the taxable with a more user-friendly interface (Fidelity, Scottrade, TD Ameritrade, etc)?

3. How does one value money in taxable accounts vs Roth vs tax-deferred?

4. Any reason to use any bond funds besides fed tax exempt and Vanguard Ohio tax exempt funds? Any reason to start using TIPS, EEs, or Ibonds?
1. probably not from a mathematical line of reasoning. but if you want to thats fine.

2. whatever you like. i think fidelity is also a great choice. you can also avoid "all eggs in 1 basket" syndrome.

3. the same. most people dont adjust for taxes as the future is unknown.

4. ibonds yes, they are limited (10k/person/year) and favorable tax treatment. can also use for edu in future (although you prob wont qualify). otherwise, nope. Would limit amount in single state fund just for diversification sake.

good luck and congrats!
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Peter Foley
Posts: 5205
Joined: Fri Nov 23, 2007 10:34 am
Location: Lake Wobegon

Re: Help With Taxable Account

Post by Peter Foley »

If I'm understanding your current AA correctly you are 95% stocks. At your age I would dial that back to 80% maximum. I like the idea of maxing out your I-bond purchase. You can defer taxes and maintain purchasing power with no risk. I think it is a fine addition to a bond fund as part of your non equities allocation. If you had access to a stable value fund in a 401k or 403b, that would be a good option as well.
Dandy
Posts: 6428
Joined: Sun Apr 25, 2010 7:42 pm

Re: Help With Taxable Account

Post by Dandy »

1. Any reason to pay down the mortgage other than feeling more secure? It's locked at 3% for 14 more years.
I think the goal should be to pay off the mortgage by the end of the 14 years at a minimum. I would pay down a smaller amount now to maximize you investments and increase the pay down each year so that at or earlier than 14 years you will be mortgage free.
2. All our 401k and Roth investments are with Ascensus/Vanguard brokers. Should we continue with Vanguard brokerage for taxable, or start the taxable with a more user-friendly interface (Fidelity, Scottrade, TD Ameritrade, etc)?
The first priority is the quality and expense of the funds you are considering. I have almost everything at Vanguard and once the accounts are set up it seems pretty simple to buy, sell and exchange or move money to or from Vanguard on line. So, while not as user friendly it seems fine to me.
3. How does one value money in taxable accounts vs Roth vs tax-deferred?
I value Roth money the highest. No tax on withdrawals, no tax on gains, no requirement to withdraw a la TIRA, and limited amount of dollars you can add each year (excluding conversions that incur tax). Also tax free to heirs.

However, you are in the highest tax bracket and you might be better off maximizing the 401k contributions at least while in such a high tax bracket. The "problem" is that you may continue to be in that high tax bracket once you start taking RMDs through the rest of your life. So, is there a window where you will likely be in a much lower tax bracket? e.g. say from age 60 to age 70. If so, you may max out the TIRA now and then do Roth conversions during that low tax bracket time. When in doubt tax take the tax deduction. :happy

4. Any reason to use any bond funds besides fed tax exempt and Vanguard Ohio tax exempt funds? Any reason to start using TIPS, EEs, or Ibonds?
As far as I am concerned a decent allocation to fixed income is a sound policy. I would consider bond funds in your 401k and as mentioned not put all your tax exempt eggs in Ohio tax exempt funds. Almost all states have fiscal issues especially under funded pension liabilities. So, it is prudent to diversify. I bonds are good. Tips in your 401k are fine. EE bonds can be problematic if they mature while you are in a high tax bracket unless you can use them for qualified education expenses.
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