Rebalancing out of target funds?

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XDark_FenixX
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Rebalancing out of target funds?

Post by XDark_FenixX » Fri Jan 12, 2018 11:31 am

Hi all,

I recently changed jobs and just rolled over my 401ks to vanguard. I had initially had a rollover IRA and Roth IRA of about $1000 but now have about $17k in each. Would now be a good time to move to admiral share indexes? I also have a brokerage account with vanguard containing about $25k VTIAX and $58k VTSAX.

If yes, which ones should I buy and through which account?

Short relevant summary,
25yo, 108k income, single, no debt, have $41k in savings for potential home purpose and $10k emergency fund (I'm in a lower cost of living area)

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grabiner
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Re: Rebalancing out of target funds?

Post by grabiner » Fri Jan 12, 2018 10:28 pm

Since you have a taxable brokerage account, the target funds don't make much sense for you anyway. The purpose of target funds is to automatically manage your allocation, but if you have substantial assets outside the target funds, this won't happen and you will have to rebalance on your own.

So, you should decide on an asset allocation. If you want 20% bonds, then 20% of your portfolio, in one or both of the IRAs, should be in Total Bond Market Index (or in your new employer's 401(k) if it has a good bond fund). The rest can be in Total International Index and Total Stock Market Index to get your desired US/international ratio.

You write, "I had initially had a rollover IRA and Roth IRA of about $1000"; have you made your 2017 and 2018 IRA contributions yet? If not, you should contribute to a Roth IRA now, so that you get more money growing tax-deferred.
David Grabiner

lazylarry
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Re: Rebalancing out of target funds?

Post by lazylarry » Sat Jan 13, 2018 12:26 am

+1 grabiner
XDark_FenixX wrote:
Fri Jan 12, 2018 11:31 am
Hi all,

I recently changed jobs and just rolled over my 401ks to vanguard. I had initially had a rollover IRA and Roth IRA of about $1000 but now have about $17k in each. Would now be a good time to move to admiral share indexes? I also have a brokerage account with vanguard containing about $25k VTIAX and $58k VTSAX.I never would move to admiral specifically to prioritize "admiralizing" over maintaining AA. I personally thinking maintaining appropriate AA is more helpful. The difference between the two is minimal over the short term (<~.1%)

If yes, which ones should I buy and through which account?Bonds in the tax-advantaged accounts. It is hard to predict which VTIAX or VTSAX will end up having a greater amount of gains, which would matter because you will be taxed when you withdraw from IRA. It is a bit of a random pick. You could put both funds in both IRA and Roth IRA to minimize losses secondary to taxes.

Short relevant summary,
25yo, 108k income, single, no debt, have $41k in savings for potential home purpose and $10k emergency fund (I'm in a lower cost of living area)Are you buying soon? If not, you might consider putting home funds in a CD or short term bond fund (~$820/year at 2% interest).
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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oncorhynchus
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Re: Rebalancing out of target funds?

Post by oncorhynchus » Sat Jan 13, 2018 12:44 am

Hold international fund in taxable account to potentially take advantage of foreign income tax credit/deduction.

The wiki does a great job of explaining this.

o
-- Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime. --

UpperNwGuy
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Re: Rebalancing out of target funds?

Post by UpperNwGuy » Sat Jan 13, 2018 11:04 am

Ha! A new word whose meaning is immediately clear.... ADMIRALIZING. Thanks, lazylarry!

sambb
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Re: Rebalancing out of target funds?

Post by sambb » Sat Jan 13, 2018 11:22 am

i would stay exclusively in target funds in your tax deferred. it will prevent major tinkering, its simple, and the funds do well, and autobalance. taxable may be a different story. If all you hold is target in your tax deferred until retirement, you'll be just fine.

XDark_FenixX
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Re: Rebalancing out of target funds?

Post by XDark_FenixX » Sat Jan 13, 2018 11:56 am

Hi guys and thank you for your responses.

I read the wiki page so what I am getting is this:
Total international stock index is most optimally placed in taxable, total bond index is most optimally placed in pre-tax Ira, and total us stock index is most optimally placed in Roth IRA. Does that about sum it up? I noticed a few of you suggested putting bonds in either IRA. What is the logic for that?

I don't mind moving out of target funds, I don't really intend to tinker much, since I'll be sticking with a simple 3 fund portfolio. I don't really have a hard asset allocation in mind. I'd be comfortable with anything between 70/30 to 90/10. I know a lot of people seem to advocate sticking to one but don't know why.

I'm thinking of putting all my pre-tax IRA money into the admiral total bond fund and I guess putting all the Roth into the admiral total us index. I haven't put in my 2017/2018 contributions yet but plan to. At that point I would have the option of buying some admiral international index but would that be preferred over just converting some of my total us in my taxable to international?

As for the house situation, I initially planned on buying a house this year. Finding an ideal home has proven to be a challenge though (one I was interested in was sold in less than 48 hours!).

rkhusky
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Re: Rebalancing out of target funds?

Post by rkhusky » Sat Jan 13, 2018 12:04 pm

XDark_FenixX wrote:
Sat Jan 13, 2018 11:56 am
I read the wiki page so what I am getting is this:
Total international stock index is most optimally placed in taxable, total bond index is most optimally placed in pre-tax Ira, and total us stock index is most optimally placed in Roth IRA. Does that about sum it up? I noticed a few of you suggested putting bonds in either IRA. What is the logic for that?
Total Stock and Total International can go in any of the accounts. Total Bond is better in pre-tax, but you can also put some in Roth if it aids in rebalancing.

lazylarry
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Re: Rebalancing out of target funds?

Post by lazylarry » Sat Jan 13, 2018 1:04 pm

XDark_FenixX wrote:
Sat Jan 13, 2018 11:56 am
Hi guys and thank you for your responses.

I read the wiki page so what I am getting is this:
Total international stock index is most optimally placed in taxable, total bond index is most optimally placed in pre-tax Ira, and total us stock index is most optimally placed in Roth IRA. Does that about sum it up? I noticed a few of you suggested putting bonds in either IRA. What is the logic for that?
Yes. You pay ordinary income tax on bonds in taxable vs long term capital gains (15%) on equitiies in taxable. Likewise, foreign stocks theoretically do better in taxable due to the tax credit.
I don't mind moving out of target funds, I don't really intend to tinker much, since I'll be sticking with a simple 3 fund portfolio. I don't really have a hard asset allocation in mind. I'd be comfortable with anything between 70/30 to 90/10. I know a lot of people seem to advocate sticking to one but don't know why.
because people change their minds. It's important to stick to plan because if you don't, you will rebalance "incorrectly". Eg. bonds are doing well, so you keep buying them, telling yourself that you're increasing your allocation of this. Likewise, when bonds crash and you are in tears, you sell them telling yourself that you are lowering your allocation of them. This would have done a lot worse compared to just staying the course
I'm thinking of putting all my pre-tax IRA money into the admiral total bond fund and I guess putting all the Roth into the admiral total us index. I haven't put in my 2017/2018 contributions yet but plan to. At that point I would have the option of buying some admiral international index but would that be preferred over just converting some of my total us in my taxable to international?
After you put the money in Roth, you could buy international index. I would not convert (unless you have losses or are in <15%
tax bracket), as you will take long or short terms capital gains tax hit.

As for the house situation, I initially planned on buying a house this year. Finding an ideal home has proven to be a challenge though (one I was interested in was sold in less than 48 hours!).
UpperNwGuy wrote:
Sat Jan 13, 2018 11:04 am
Ha! A new word whose meaning is immediately clear.... ADMIRALIZING. Thanks, lazylarry!
:) I should email Vanguard...they'd probably be able to save money on ink with that one word.
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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