Looking for advice as to how to invest in a taxable account

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TentativeScot
Posts: 8
Joined: Sat Nov 11, 2017 1:23 pm

Looking for advice as to how to invest in a taxable account

Post by TentativeScot » Mon Nov 13, 2017 10:14 am

Hi all,

We've only just been turned on to Boglehead's and I am interested in getting your take on our circumstance. I hope I've provided enough information for you all.


Emergency funds: Three months of expenses covered in cash in a savings account – in a credit union, I guess we should move this to somewhere that will give us at least a little return
Debt:
Mortgage on house, 430K at 4.125% 30 year fixed, estimated (Zillow) current house price 900K – we are also paying an additional $600 per month towards principle at that rate pay off should be in 2036.
One car left to be paid off, approx. 24K at 2.3%, current required payment per month is approx. $800, plan going forward is to pay approx. $1200 per month to retire this quicker
Tax Filing Status: Married Filing Jointly
Tax Rate: 33% Marginal Tax Bracket
State of Residence: Washington
Age: Me, 44 Spouse, 42, we also have two kids – 12 and 7
Hopeful Retirement age, 60 for her so 62 for me (Currently I'm a stay at home dad if spouse works to 60 she will have full Social Security contributions i.e. 35 years)

Current retirement assets

Taxable – all at Fidelity
3.8% ($16K) cash (for investing – not included in emergency funds)
16.8% ($70K) Large market cap Tech Stock - how to handle this is the main reason for this post

His Rollover IRA at Vanguard
2.5% ($10.5) Vanguard Target Retirement 2040 Fund (VFORX) (0.16%)

Her 401K at Fidelity
38.4% ($160K) LifePath® Index 2030 Fund O (0.08%)
38.4% ($160K) LifePath® Index 2040 Fund O (0.08%)

Split as spouse considered the 2040 a little too much risk, I thought the 2030 a little too safe so we split the difference 😊 A good compromise leaves everyone mad 😊

529 plans both at Fidelity:
26K in one New Hampshire plan dated for 2024 ($350 per month going in)
21K in one New Hampshire plan dated for 2027 ($200 per month going in)

Contributions

New annual Contributions
$18000 401k – pre-tax payroll deduction
$9000 401K as a company match
$6000 into 401K as an after-tax contribution

$45-50K on average in Stock awards, awarded quarterly over a 5-year term
$40K annual bonus

Funds available in her 401(k)

Expense Ratio Shareholder Fees
BTC LIFEPATH 2020 O 07/29/2005 0.08% No additional fees apply.
BTC LIFEPATH 2030 O 07/29/2005 0.08% No additional fees apply.
BTC LIFEPATH 2040 O 07/29/2005 0.08% No additional fees apply.
BTC LIFEPATH 2050 O 09/28/2007 0.08% No additional fees apply.
BTC LIFEPATH 2060 O 05/15/2014 0.08% No additional fees apply.
BTC LIFEPATH RET O 07/29/2005 0.08% No additional fees apply.
FID CONTRA POOL CL 2 01/17/2014 0.38% No additional fees apply.
FID GR CO POOL CL 2 12/13/2013 0.38% No additional fees apply.
VANG RUS 1000 GR TR 10/02/2007 0.02% No additional fees apply.
VANG RUS 1000 VAL TR 09/29/2015 0.02% No additional fees apply.
VANG S&P 500 IDX TR 09/29/2015 0.01% No additional fees apply.
ARTISAN MID CAP 01/16/2008 0.50% No additional fees apply.
DFA SM/MD CAP VAL 10/09/2013 0.26% No additional fees apply.
VANG RUS 2000 GR TR 09/29/2015 0.01% No additional fees apply.
INTL GROWTH ACCOUNT 10/31/2007 0.57% No additional fees apply.
INTL VALUE ACCOUNT 10/10/2008 0.57% No additional fees apply.
PIM ALL A ALL AUTH I (PAUIX) 10/31/2003 1.99% No additional fees apply.
PIM INFL RESP MA IS (PIRMX) 08/31/2011 1.06% No additional fees apply.
PIMCO TOTAL RETURN 01/16/2008 0.27% No additional fees apply.
VANG ST BD IDX IS PL (VBIPX) 03/01/1994 0.04% No additional fees apply

We have been passive with our investments for several years, pretty much only really looking when some stock vests. We have sold some company stock on a yearly basis to pay for home improvements etc (new roof for example), all stock was sold as long-term hold after being in the account at least a year. This past year or so we feel like we are in a place where we need to look more closely at our accounts. We have spoken to a Fidelity financial planner who gave the following advice.
1. 401K looks to be good
2. Need to get out of having as much assests in a single company stock
a. Sell Company Stock as it vests as there will be no gain so no (or very little) taxable income
b. Invest money from sale of stock into a Fidelity PAS plan – breakdown shown below

Fund name Fidelity PAS Fees

Fidelity SAI U.S. Quality Index Fund 4.950% 0.15
iShares Core S&P 500 ETF 24.800% 0.04
iShares Russell 1000 Value ETF 6.200% 0.2
Fidelity SAI Small-Mid Cap 500 Index Fund 5.200% 0.15
iShares Core S&P Small-Cap ETF 3.500% 0.07
Energy Select Sector SPDR ETF 1.450% 0.14
Fidelity SAI U.S. Momentum Index Fund 4.950% 0.15
AQR Managed Futures Strategy N 1.400% 1.5
Fidelity SAI International Index Fund 15.400% 0.045
iShares Core MSCI Emerging Markets ETF 3.700% 0.14
Fidelity SAI Emerging Markets Index Fund 2.500% 0.082
iShares MSCI EAFE Growth ETF 0.850% 0.4
iShares MSCI EAFE Small-Cap ETF 0.850% 0.4
iShares National Muni Bond ETF 10.600% 0.25
SPDR Nuveen Blmbg Barclays Muni Bd ETF 8.600% 0.23
SPDR Nuveen S&P High Yield Muni Bd ETF 2.100% 0.45
Fidelity Conservative Income Municipal Bond Fund - Institutional Class 1.350% 0.25
Fidelity Government Cash Reserves 1.000% 0.37
Eaton Vance Glbl Macro Abs Ret Advtg I 0.600% 1.12

For this service Fidelity is wanting to charge 1.06% per annum on top of the fund fees

A co-worker of my spouse turned us on to the whole Boglehead community and now we have found you I am reading through “The Little Book of Common Sense Investing” and have “The Bogleheads guide to Investing” on my nightstand. As we are just entering into this I know that we know just enough to be dangerous with our choices so wanted to tap the wisdom of the group.

The Fidelity PAS feels like a non-starter due to the management fee alone.
I looked inside the Vanguard 2040 fund – VFORX - (my rollover IRA) and am wondering if the correct choice is to do the sell and invest but try to match the contents of the VFORX individually rather than as a single bundle. Based off my calculations we can get the average fee structure down to 0.083% outside the fund compared to 0.15% within the fund.
Suggested proposal (Vanguard):

Fund name Fees Suggested Blend
Total Stock Market Index (VTSAX) 0.04% 50.00%
Total International Stock Index (VTIAX) 0.11% 30.00%
Vanguard Total Bond Market Index Fund (VBMFX) 0.15% 12.50%
Total International Bond Index (VBTIX) 0.15% 7.50%
Suggested Blend 0.083% 100%

Mix of Investor and Admiralty Shares is due to initial available investment amount
There is also a similar Three fund plan that we could make available through Fidelity

Fund name Symbol Fees Suggested Blend
Fidelity® Total Market Index Fund - Investor Class FSTVX 0.035% 50.00%
Fidelity Series Global ex U.S. Index Fund FSGDX 0.10% 30.00%
Fidelity U.S. Bond Index Fund FBIDX 0.14% 20.00%
Fidelity 2040 Fund Investor fund FBIFX 0.15%
Simple Fund Fees 0.072%

Questions about this proposal:
• Is there a need for the International Bond fund? This is a too little knowledge issue on my end, I only left it in here because it was part of the VFORX bundle?
o If the International Bond fund is dropped then the fee structure goes down on average to 0.078%
• Is there a huge difference between the two proposals?
• Is the general concept of selling Stock options as they vest to boost taxable account the right way to go? Plan would be quarterly to sell and use funds to rebalance proposal
o Based on current rates of Stock awards we would be looking to add $30-40K per year to the taxable account
• I left the desired stock to bond ratio as well as the international stock intentionally blank I would be on the more aggressive side compared to spouse but is 80:20 too aggressive for the taxable account?
o If so would the recommendation be 70:30?

Overall goal for the taxable account would be as a bolster towards retirement funding as well as for potential future expenses (2 Kids, both girls so college and weddings potentially in the future)

Thanks in advance, I look forward to your replies and advice!
Last edited by TentativeScot on Mon Nov 13, 2017 4:14 pm, edited 2 times in total.

mega317
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Joined: Tue Apr 19, 2016 10:55 am

Re: Looking for advice as to how to invest in a taxable account

Post by mega317 » Mon Nov 13, 2017 1:47 pm

Welcome to the forum.

What is your marginal tax bracket? (There is no 22% bracket.)

I think it's too risky to have such a significant portion of your portfolio in a concentrated sector. I would move out of the tech stock. What are your capital gains? Is this your company stock?

I think you and your spouse need to determine together your desired asset allocation. Your portfolio is, in my opinion, unnecessarily complicated with multiple target date funds.

The Fidelity PAS proposal is bonkers. Agree that 1% is too much and unnecessary. What possible benefit could come of holding 19 funds?

I think the easiest thing to do is a three fund portfolio across all accounts. Total US and international stock index funds are likely the best choices to hold in taxable, and bonds should probably be in tax-deferred. You do not have to mirror your allocation in all accounts. If the taxable investments are for retirement or other far-off and/or uncertain goals I think it is reasonable to simply include it in your overall allocation.

I don't think international bonds are necessary. Yes I would sell company stock ASAP.

The 401k looks like it has very good options. I would be helpful if you can add the expense ratios to your original post, but it's almost certain that any of the Vanguard funds are great. Pimco total return may be your best one-stop-shop bond option.

You should be rolling the after-tax 401k contributions into a Roth IRA. If not, you will pay ordinary income tax on the gains (vs nothing in a Roth). If you don't have that option I would probably direct the 6000k to taxable.

If you have access to a high-deductible health plan, the associated HSA could be another way to defer or avoid taxes.

TentativeScot
Posts: 8
Joined: Sat Nov 11, 2017 1:23 pm

Re: Looking for advice as to how to invest in a taxable account

Post by TentativeScot » Mon Nov 13, 2017 4:13 pm

Thank you for the reply, I'll go back and edit the original post for clarity, including the expense ratios on my wife's 401K offerings

Marginal Tax Bracket would be 33% based on Taxable Income

Stock will be being sold off to be reinvested, it is all from my wifes company stock awards. Out of the remaining already vested stock $15K is a long term hold with an unrealized gain of $5K. The remaining is short term hold value of about $55K with an unrealized gain of $8K. The plan is early next year when these short term change to long term to sell them and reinvest with a more sensible stratergy. Going forward as new awards vest sell them immediately and use them to rebalance as needed.

The 4% after tax going into the 401K gets converted quarterly automatically through her plan to a Roth - language on the plan site is "With this election, your After-Tax funds will convert to Roth each quarter and taxes may be due on converted earnings"

TentativeScot
Posts: 8
Joined: Sat Nov 11, 2017 1:23 pm

Re: Looking for advice as to how to invest in a taxable account

Post by TentativeScot » Tue Nov 14, 2017 4:17 pm

Adding more information:

We do have an HSA through wife's work, currently it is being funded to the annual maximum (50% her 50% company match). It's balance is at $15K currently sitting just in the plans Money Market account.

I took a look at the investment options available and the plan listed 104! Mutual funds that could be invested in with expense ratios going from 0.03% up to 2.8%.

I've filter out those with an expense ratio greater than 0.6 (arbitarily picked but needed to whittle the list down somehow), these funds are shown below:

Fund Name Ticker Symbol ER
Schwab S&P 500 Index SWPPX 0.03
Schwab Small Cap Index SWSSX 0.05
Schwab International Index SWISX 0.06
Vanguard Dividend Appreciation Index Inv VDAIX 0.17
Vanguard Growth Index Investor VIGRX 0.18
Vanguard Total Intl Stock Index Inv VGTSX 0.18
Vanguard Balanced Index Inv VBINX 0.19
Vanguard Inflation-Protected Secs Inv VIPSX 0.2
Vanguard Extended Market Index Investor VEXMX 0.21
Vanguard Wellesley Income Inv VWINX 0.22
Vanguard Equity-Income Inv VEIPX 0.26
T. Rowe Price Extended Equity Market Idx PEXMX 0.35
Schwab Target 2015 SWGRX 0.43
Schwab Target 2020 SWCRX 0.45
Schwab Target 2010 SWBRX 0.47
BlackRock Total Return K MPHQX 0.53
Schwab Target 2025 SWHRX 0.54
Columbia Mid Cap Index A NTIAX 0.56

Within an HSA would/ should there be a different approach to investing or should it just be considered another tax advantaged account on the assumption that at sometime in the future we will need the funds entirely for healthcare costs?

Currently in this account the maximum outlay in a year before company covers 100% is at about $6200 so my wife is contributing more annually than would go out in a year so there is always a net increase in value to this account.

Thanks again for any and all comments.

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patrick013
Posts: 1845
Joined: Mon Jul 13, 2015 7:49 pm

Re: Looking for advice as to how to invest in a taxable account

Post by patrick013 » Tue Nov 14, 2017 5:29 pm

TentativeScot wrote:
Mon Nov 13, 2017 10:14 am
Contributions

New annual Contributions
$18000 401k – pre-tax payroll deduction
$9000 401K as a company match
$6000 into 401K as an after-tax contribution
When your estimate of marginal tax rate in retirement is less than your
marginal tax rate when working pre-tax or traditional is desirable, otherwise
a Roth is desirable.

The company match is pre-tax but the additional contribution looks like a
backdoor possibility. Check these out for future reference. You may have
better options in an outside account as well.
Backdoor Roth: A Complete How-To
Mega Backdoor Roth: Convert Within Plan or Out to Roth IRA?
age in bonds, buy-and-hold, 10 year business cycle

TentativeScot
Posts: 8
Joined: Sat Nov 11, 2017 1:23 pm

Re: Looking for advice as to how to invest in a taxable account

Post by TentativeScot » Tue Nov 14, 2017 6:38 pm

Thanks,

I've asked my wife to contact their benefits department about lump sum after tax contributions to her 401K. Looking at the plan literature it appears to me that they only accept payroll contributions.

A quick question about the back door Roth. I've taken a look at this and if I remember correctly we could fund a traditional IRA for her and another one for me as a Spousal IRA. This would then give us two IRA's each maxed out at $5500 for a total of $11,000. These can then be converted to a Roth IRA by this backdoor process. Is that correct?

If so next year if we are in the same case can we do the same again? This would mean that we would have a total of four Roth IRA accounts (2017 her, 2017 me, 2018 her and 2018 me). Is there a mechanism for consolidating these accounts over time?

Thanks again, loving the forum and enjoying finding out how little I know :D

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dratkinson
Posts: 3987
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Looking for advice as to how to invest in a taxable account

Post by dratkinson » Tue Nov 14, 2017 6:48 pm

BH Looking for advice as to how to invest in a taxable account

Retirement investing.

See Wiki topic: https://www.bogleheads.org/wiki/Princip ... _placement

See Wiki topic: https://www.bogleheads.org/wiki/Three-fund_portfolio
See forum discussion: viewtopic.php?f=10&t=88005&newpost=1506953



3-fund portfolio. The 3-fund portfolio is recommended for all account types (self-employed, employer, personal, tax-free, tax-deferred, and taxable). It can be replicated in each account, or spread across all guided by your investment options’ availability/costs. However you get to an age-appropriate 3-fund portfolio is fine: individual funds/ETFs, or an all-in-one fund.



Taxable investing. Use only the most tax-efficient options. As there is no annual contribution limit, it's easy, after populating your limited annual tax-advantaged space with your best options, to rebalance to your desired AA with new money in taxable. This is also the best place to hold emergency funds as it avoids the need to steal eggs from the golden goose sitting on your tax-advantaged retirement nest egg.

All-in-one funds. Do not use an all-in-one fund in your taxable space. Why? Most use taxable bonds that are inappropriate in a taxable account, and you can’t buy/sell only stocks/bonds (must buy both) so it’s more difficult to rebalance and harvest CGs/tax losses (TLH). This is also true of tax-managed funds (using municipal bonds).



Municipal bonds. For taxable accounts and if in 25%+ fed tax bracket, a municipal (tax-exempt) bond fund can be used as part of our taxable retirement investment (substituted for TBM in 3-fund portfolio) and do double-duty as one tier of our savings/EFs*. The use of munis is not "all or nothing" as you can mix taxable bonds in your tax-advantaged accounts with munis in your taxable accounts.

See: https://www.bogleheads.org/wiki/Municipal_bonds

* "Daily-accrual" muni funds. Daily accrual muni funds (not ETFs) are exempt from IRS 6mo holding period requirement to protect tax-exempt dividends. Meaning shares are easy to sell (only simple CG reporting required) so can perform multiple duties:
--no-limit bond allocation---to skew tax-advantaged accounts to equities for more tax-sheltered growth,
--to save for short-term goals (home projects, vacation, new car,...) instead of taxable CDs/savings,
--as last tier of our formal EFs---less CG consequence and more immune to market noise than equities,
--as dry powder to use during market correction.

See "Loss on mutual fund shares held 6 months or less": https://www.bogleheads.org/wiki/Tax_los ... harvesting

An intermediate-term (taxable, or national muni) bond fund is reported to be the sweet sport for total return investing (= share price appreciation + distributions (dividends + capital gains)). Vanguard's IT national muni fund is VWITX.

Vanguard also has a municipal mmkt fund: VMSXX.



Taxable accounts configuration---general advice.

Cost basis. Set all taxable account investments to use "specific lot identification" cost basis. Why? To give more control over tax reporting. So you can choose:
--To sell advancing shares with highest cost basis to minimize CG reporting (ST or LT).
--To sell advancing LT shares and benefit from lower LTCG rate (avoid higher STCG rate).
--To sell declining shares with the highest cost basis to maximize TLH (ST or LT).
--To sell declining ST shares and TLH higher STCL benefit (avoid lower LTCL benefit).

Distributions. Set all taxable account investments to NOT automatically reinvest distributions. Why?
--Helps avoid the hassle of small-lot tax reporting.
--Makes it easier to rebalance in large chunks.
--Make TLHing easier by helping to avoid inadvertent purchases of “replacement shares” which trigger a “wash sale”. See: https://www.bogleheads.org/wiki/Tax_loss_harvesting

Instead of automatically reinvesting all distributions, redirect them to a bank/CU checking account or investment mmkt fund. (Bank/CU savings/mmkt accounts have a 6-withdrawals/mo limit; checking accounts and mmkt funds do not. Vanguard has a tax-exempt mmkt fund.)

Own unique funds in taxable, duplicate funds in tax-advantaged. You can only TLH in a taxable account, but reinvested distributions from any duplicate investment in any family account will cause the replacement-shared/wash-sale issue with TLHing. Therefore it makes TLHing easier to own unique (discrete broad-market sectors, not all-in-one) funds in taxable accounts, and any duplicate funds in tax-advantaged accounts.

For ease of management, investments in tax-advantaged accounts can be duplicate all-in-one funds (his/her TDR funds,…) and allowed to automatically reinvest distributions.



International allocation.

Stocks. The recommended additional international allocation is 0-50% of equities. The S&P500 companies (~80% of TSM) earn ~40% of annual income from foreign operations, so you could have a personal additional international allocation of 0%, if you want. The US is ~50% of the world economy---meaning international is the other 50%---so you could have a personal additional international allocation of 50%, if you want. Vanguard seems to favor an additional 30% international allocation. Believe Mr Bogle now accepts an additional 20% international allocation. Bottom line: Your choice. (Disclosure. I have a small international allocation so I have something to buy when I need to buy equities, but the US is high.)

Bonds. Recall from previous old topic. The purpose of bonds is for stability. Unhedged bonds come with an additional currency risk. Hedged bonds are more stable, but come with an additional cost to link them to the stability of US bonds. Bottom line: It's cheaper to own only stable US bonds.



Bottom line. Your taxable investing could be as simple as owning two of these four funds:
--VTSMX/VTSAX
--VGTSX/VTIAX or VFWIX/VFWAX (optional, and TLH partners)
--VWITX/VWIUX (retirement investing, extended EF tier, home projects, new car, dry powder fund)
--VMSXX (optional, or redirect monthly distributions to checking/savings)



Welcome.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

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Tyler Aspect
Posts: 483
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Location: California
Contact:

Re: Looking for advice as to how to invest in a taxable account

Post by Tyler Aspect » Tue Nov 14, 2017 7:40 pm

TentativeScot wrote:
Mon Nov 13, 2017 10:14 am
Hi all,

We've only just been turned on to Boglehead's and I am interested in getting your take on our circumstance. I hope I've provided enough information for you all.

Welcome to Bogleheads.
Emergency funds: Three months of expenses covered in cash in a savings account – in a credit union, I guess we should move this to somewhere that will give us at least a little return
Debt:
Mortgage on house, 430K at 4.125% 30 year fixed, estimated (Zillow) current house price 900K – we are also paying an additional $600 per month towards principle at that rate pay off should be in 2036.
One car left to be paid off, approx. 24K at 2.3%, current required payment per month is approx. $800, plan going forward is to pay approx. $1200 per month to retire this quicker
Tax Filing Status: Married Filing Jointly
Tax Rate: 33% Marginal Tax Bracket
State of Residence: Washington
Age: Me, 44 Spouse, 42, we also have two kids – 12 and 7
Hopeful Retirement age, 60 for her so 62 for me (Currently I'm a stay at home dad if spouse works to 60 she will have full Social Security contributions i.e. 35 years)
I did not see you specify your desired asset allocation. There is a rule of thumb to assign an asset allocation according to age. That is let the bond percentage equals to age minus 10. The maximum bond percentage is 50%, while the minimum bond percentage is 20%. The stock percentage is 100% minus the bond percentage. For your case the target asset allocation would be 68% stock / 32% bond.

For stocks, keep it half in a US stock index, with other half in a global stock index. This approach avoids having to deal with funky ratios.


Current retirement assets


Taxable – all at Fidelity
3.8% ($16K) cash (for investing – not included in emergency funds)
16.8% ($70K) Large market cap Tech Stock - how to handle this is the main reason for this post

His Rollover IRA at Vanguard
2.5% ($10.5) Vanguard Target Retirement 2040 Fund (VFORX) (0.16%)

Her 401K at Fidelity
38.4% ($160K) LifePath® Index 2030 Fund O (0.08%)
38.4% ($160K) LifePath® Index 2040 Fund O (0.08%)

Your total asset including HSA is 431.5k. Since you have 32% assigned to bond, then you need 138k of bond.

Selecting investments in 401k is a game of picking the lowest expense options while hitting your allocation target.
$8k HSA Inflation Indexed Bond gives $8k bond.
$7k HSA S&P 500 Index

Her 401k:
$220k LifePath Index Retirement Fund with 59% bond content gives $129.8k bond.
$100k S&P 500 Index

Taxable:
86k Vanguard World Stock Index (VT)


Split as spouse considered the 2040 a little too much risk, I thought the 2030 a little too safe so we split the difference 😊 A good compromise leaves everyone mad 😊

529 plans both at Fidelity:
26K in one New Hampshire plan dated for 2024 ($350 per month going in)
21K in one New Hampshire plan dated for 2027 ($200 per month going in)

Contributions

New annual Contributions
$18000 401k – pre-tax payroll deduction
$9000 401K as a company match
$6000 into 401K as an after-tax contribution

$45-50K on average in Stock awards, awarded quarterly over a 5-year term
$40K annual bonus

Thanks in advance, I look forward to your replies and advice!
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.

TentativeScot
Posts: 8
Joined: Sat Nov 11, 2017 1:23 pm

Re: Looking for advice as to how to invest in a taxable account

Post by TentativeScot » Tue Nov 14, 2017 10:36 pm

Thank you for the detailed advice :D Finding this as a sounding board for investing is a great resource.

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patrick013
Posts: 1845
Joined: Mon Jul 13, 2015 7:49 pm

Re: Looking for advice as to how to invest in a taxable account

Post by patrick013 » Wed Nov 15, 2017 3:29 pm

TentativeScot wrote:
Tue Nov 14, 2017 6:38 pm
I've asked my wife to contact their benefits department about lump sum after tax contributions to her 401K. Looking at the plan literature it appears to me that they only accept payroll contributions.
Never hurts to ask but it's very common to accept payroll contributions only. Some allow
Roth conversions anytime, others only at certain times, some into plan Roth accounts,
others into outside accounts. Idea is if you can afford it (pass on the tax deduction) the
Roth will lower RMD's in the future and taxes which is very good if you stay in a high tax
bracket or expect to have a large traditional account balance heading into retirement
which could raise tax expense if the account is needed for more living expenses. It depends
alot on future tax rate.
TentativeScot wrote:
Tue Nov 14, 2017 6:38 pm
A quick question about the back door Roth. I've taken a look at this and if I remember correctly we could fund a traditional IRA for her and another one for me as a Spousal IRA. This would then give us two IRA's each maxed out at $5500 for a total of $11,000. These can then be converted to a Roth IRA by this backdoor process. Is that correct?
Absolutely, might be the best amount you need in Roth, to balance RMD's at a lower tax level.
The tIRA should be zero when each year's conversion is done. Makes it easier.
TentativeScot wrote:
Tue Nov 14, 2017 6:38 pm
If so next year if we are in the same case can we do the same again? This would mean that we would have a total of four Roth IRA accounts (2017 her, 2017 me, 2018 her and 2018 me). Is there a mechanism for consolidating these accounts over time?
You can convert to the same Roth account every year. Most people take advantage of the
backdoor or mega backdoor if available. Find out what your plan allows, traditional vs.
Roth, contributions and conversions. :)
age in bonds, buy-and-hold, 10 year business cycle

TentativeScot
Posts: 8
Joined: Sat Nov 11, 2017 1:23 pm

Re: Looking for advice as to how to invest in a taxable account

Post by TentativeScot » Wed Nov 15, 2017 7:19 pm

Thank you for the information - I had an image in my head of two roth accounts a year for the next 20 years :) As I first mentioned just enough knowledge to end up doing something stupid :D

The post tax contributions that my wife can make into her 401K max out at $20K per year. Those are shown as converting to a Roth on a quarterly basis. Currently we are funding after tax contributions at $5K per year. Our plan is to keep increasing this after tax contribution based on annual raises gained.

It sounds like our action plan for new retirement accounts (not necessarily allocation ;) ) will be
  • Open two tIRA accounts (one for each of us)
    Fund each account fully for 2017 contributions - $5500 per year for a total of $11000
    Convert after an amount of time to rIRA via backdoor conversion
    Rinse and repeat yearly as long as funds are available
Again I cannot thank you all enough for the comments and help

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dratkinson
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Location: Centennial CO

Re: Looking for advice as to how to invest in a taxable account

Post by dratkinson » Wed Nov 15, 2017 8:22 pm

TentativeScot wrote:
Wed Nov 15, 2017 7:19 pm
Thank you for the information - I had an image in my head of two roth accounts a year for the next 20 years :) As I first mentioned just enough knowledge to end up doing something stupid :D

The post tax contributions that my wife can make into her 401K max out at $20K per year. Those are shown as converting to a Roth on a quarterly basis. Currently we are funding after tax contributions at $5K per year. Our plan is to keep increasing this after tax contribution based on annual raises gained.

It sounds like our action plan for new retirement accounts (not necessarily allocation ;) ) will be
  • Open two tIRA accounts (one for each of us)
    Fund each account fully for 2017 contributions - $5500 per year for a total of $11000
    Convert after an amount of time to rIRA via backdoor conversion

    Rinse and repeat yearly as long as funds are available
Again I cannot thank you all enough for the comments and help

Backdoor Roth IRA.

Recall reading this can happen on the same day.
--Step 1. Submit paperwork and fund annual tIRA(s).
--Step 2. Submit paperwork to convert annual tIRA(s) to annual backdoor rIRA(s).

As everything is done on the same day, then no additional time has passed, so there is no additional capital gains esposure/tax-reporting hurdle, and one less task to remember to do on another day. One and done, easy peasy.

Or so I've read.



After-tax 401k. In addition to links above, recall the Wiki also has a topic on this.
See: https://www.bogleheads.org/wiki/After_tax_401k
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

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