36 yr old BH Newbie with substantial savings- Help!!!

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ElmoHongZito
Posts: 66
Joined: Tue Mar 27, 2018 9:17 am

36 yr old BH Newbie with substantial savings- Help!!!

Post by ElmoHongZito » Sun Apr 08, 2018 11:05 am

Newbie to the BH forum and so fortunate that I found you guys. This is exactly what I needed to build some structure around my current and future financial wealth.

I am posting this simultaneously as I am reading through all the beginners reading material on the site starting with the “Bogleheads investment philosophy”. Luckily we have been living below our means for some time so thankfully we have that foundation in place. We just have been lousy about figuring out how to best allocate our savings.

I thought it would be super resourceful to layout my current situation and see if you guys would be willing to comment on what you would do (step 1, step 2, ect) if you were in my shoes. I need a roadmap. I am soooo grateful for any and all feedback you can provide and thank all of you in advance...

Me 36 (sales), wife 34 (teacher)

Emergency funds: we have almost all of our assets in our banking accounts (close to 700k) which is not smart and reason why I am here.

Debt: No credit card debt
Student loans $7800 @ 2.125%
Mortgage balance 150k @ 4.375% (we have approx 180k in equity)

Tax Filing Status: Married filing jointly with 2 dependent children

State of Residence: Florida

Tax rate: Fluctuates because I am in sales but I think Federal tax was around 25% last 2 years because of high commissions/performance in my sales job. I think we do not pay income tax in Florida.

Income: this was our gross W-2 income for the past few years

2017
Me 341k
Wife 45k

2016
Me 307k
Wife 43k

2015
Me 173k
Wife 42k

2014
Me 197k
Wife 44k

2013
Me 140k
Wife 42k

2012
Me 122k
Wife 40k

2010
Me 101k
Wife 40k

2009
Taxable combined 129k

401k: 72k (all allocated in TRP Retirement 2045...symbol is TRRKX)
* We have never looked into contributing to the 403b offered through my wifes job (county public school system)

IRA: 55k
60% allocated among 9 mutual funds
30% allocated to ETP’s
10% allocated to Alternative Investments
*This is managed by an advisor and rolled over from 401k’s from previous employers. I have never contributed to an IRA

Managed Account: 200k
As of 12/31/17...
65% allocated to 3 ETP’s
35% allocated among 46 individual stocks
* Also managed by same advisor as my IRA. His fee is 1.55% which I already found out on another topic I posted is outrageous. I plan on dropping him as soon as I figure out how do do that with limited loss.

Florida College Prepaid Plans:
My 10 year old has 17k in hers right now
My 7 year old has 13k in hers right now

Desired Asset Allocation: Based on what I have read so far my age in bond % is a good rule of thumb. Please comment if you think my situation suggests different split.

Goals:
I don’t have set goals other than making sure my wife and 2 daughters are taken care of and I would like to being financially independent one day. My job is highly stressful and job insecurity is extremely high as you are only as good as your last quarter in my field and landing a comparable job is very difficult and can take a very long time specially if you are unemployed

I would like my household to reach a net worth of 2 million by the time I turn 40. I am at 1.24 million now if you include 401k, IRA, College Saving plans, and equity in home.

Thanking you all again in advance.
Last edited by ElmoHongZito on Mon Apr 09, 2018 7:23 am, edited 1 time in total.

spth
Posts: 130
Joined: Fri Aug 09, 2013 8:31 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by spth » Sun Apr 08, 2018 11:28 am

Do you have low expense ratio 401k options, especially total bond fund? How about your wife? Does your 401k accept IRA transfers? Do you have an HSA?

If you have low ER options in 401k, then transfer IRA to your 401k. Max out your 401k and wife’s 403b.

Once IRA is cleared, do Backdoor Roth for you and your wife

Max out HSA if available and invest in low cost fund

Transfer taxable funds/stocks to Fidelity or Vanguard or similar

Read up on tax effiecent placement of funds in Wiki. Try to keep bonds in 401k/403b and stocks in taxable

I like IBonds to augment bond fund if extra space is needed, others don’t

Stop automatically reinvesting dividends from taxable holdings

Consider increasing college funds

ElmoHongZito
Posts: 66
Joined: Tue Mar 27, 2018 9:17 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by ElmoHongZito » Sun Apr 08, 2018 11:42 am

spth wrote:
Sun Apr 08, 2018 11:28 am
Do you have low expense ratio 401k options, especially total bond fund? How about your wife? Does your 401k accept IRA transfers? Do you have an HSA?

If you have low ER options in 401k, then transfer IRA to your 401k. Max out your 401k and wife’s 403b.

Once IRA is cleared, do Backdoor Roth for you and your wife

Max out HSA if available and invest in low cost fund

Transfer taxable funds/stocks to Fidelity or Vanguard or similar

Read up on tax effiecent placement of funds in Wiki. Try to keep bonds in 401k/403b and stocks in taxable

I like IBonds to augment bond fund if extra space is needed, others don’t

Stop automatically reinvesting dividends from taxable holdings

Consider increasing college funds
You cannot put a dollar value on this level of un-biased advise. Thanks so much @spth. I will read up this week to understand a few of your suggestions that I am not fully up to speed on.



Open to all feedback. Keep ‘me coming :happy

ElmoHongZito
Posts: 66
Joined: Tue Mar 27, 2018 9:17 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by ElmoHongZito » Sun Apr 08, 2018 11:46 am

ElmoHongZito wrote:
Sun Apr 08, 2018 11:42 am
spth wrote:
Sun Apr 08, 2018 11:28 am
Do you have low expense ratio 401k options, especially total bond fund? How about your wife? Does your 401k accept IRA transfers? Do you have an HSA?

If you have low ER options in 401k, then transfer IRA to your 401k. Max out your 401k and wife’s 403b.

Once IRA is cleared, do Backdoor Roth for you and your wife

Max out HSA if available and invest in low cost fund

Transfer taxable funds/stocks to Fidelity or Vanguard or similar

Read up on tax effiecent placement of funds in Wiki. Try to keep bonds in 401k/403b and stocks in taxable

I like IBonds to augment bond fund if extra space is needed, others don’t

Stop automatically reinvesting dividends from taxable holdings

Consider increasing college funds
You cannot put a dollar value on this level of un-biased advise. Thanks so much @spth. I will read up this week to understand a few of your suggestions that I am not fully up to speed on.



Open to all feedback. Keep ‘me coming :happy
By the way I am participating this year in an HSA and plan to fund it to the max. I will find out if my 401k has low ER options as well as whether I can roll my IRA into it. Also have to look into enrolling my wife into her 403b plan.

When you say max out my 401k, are you referring to the annual max amount allowed to be contributed or only up to the match my employer offers?

spth
Posts: 130
Joined: Fri Aug 09, 2013 8:31 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by spth » Sun Apr 08, 2018 11:48 am

You could still contribute to non deductible IRA for 2017 and convert to Roth once you transfer your other IRA to your 401k, if that is possible. You could then add addition $5500 for 2018 for you and your wife.

That would give you:

401k/403b: $164,000 ($72+55+18.5+18.5), invest in total bond fund with low ER

Roth: $22,000, suggest more aggressive allocation, such as emerging market index

Consider purchasing total US index index and total international index with $700,000 cash, with 20-40% of allocated to international

You will also need to have some taxable bond holdings. IBonds and munis could be considered.

Consider opening DAF to donate stock holding that have appreciated significantly. You could sell any that currently have a loss or no gain. Again, stop reinvesting dividends.

spth
Posts: 130
Joined: Fri Aug 09, 2013 8:31 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by spth » Sun Apr 08, 2018 11:53 am

[/quote]

By the way I am participating this year in an HSA and plan to fund it to the max. I will find out if my 401k has low ER options as well as whether I can roll my IRA into it. Also have to look into enrolling my wife into her 403b plan.

When you say max out my 401k, are you referring to the annual max amount allowed to be contributed or only up to the match my employer offers?
[/quote]

If you have low ER 401k then max out to $18,500 for both you and your wife.

I’d recommend investing HSA in equities because of favorable tax treatment and potential for growth. Don’t use HSA to pay current medical expenses

spth
Posts: 130
Joined: Fri Aug 09, 2013 8:31 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by spth » Sun Apr 08, 2018 12:08 pm

Also, you could consider paying off mortgage. That’s an automatic 4.3% return. It also reduces cost with your variable income.

Make sure you have low cost term life insurance and disability insurance with your significant income difference between you and your wife and with the young children. I’ve been looking at additional term life and havenlife.com has caught my attention. Term4life is often recommended as well. This sounds like a sales pitch. I have no skin in the game.

ElmoHongZito
Posts: 66
Joined: Tue Mar 27, 2018 9:17 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by ElmoHongZito » Sun Apr 08, 2018 12:14 pm

spth wrote:
Sun Apr 08, 2018 11:53 am
By the way I am participating this year in an HSA and plan to fund it to the max. I will find out if my 401k has low ER options as well as whether I can roll my IRA into it. Also have to look into enrolling my wife into her 403b plan.

When you say max out my 401k, are you referring to the annual max amount allowed to be contributed or only up to the match my employer offers?
[/quote]

If you have low ER 401k then max out to $18,500 for both you and your wife.

I’d recommend investing HSA in equities because of favorable tax treatment and potential for growth. Don’t use HSA to pay current medical expenses
[/quote]

So you are suggesting to pay current medical expenses in cash from checking account and let the HSA grow to use those funds in my golden years towards medical expenses?

Do those funds have to be used towards MY medical expenses in the future? If not who else’s expenses can I pay for?

delamer
Posts: 4790
Joined: Tue Feb 08, 2011 6:13 pm

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by delamer » Sun Apr 08, 2018 12:16 pm

I see about $550K in assets, including home equity.

I don’t see $1.24 million.

Did you leave something out?

spth
Posts: 130
Joined: Fri Aug 09, 2013 8:31 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by spth » Sun Apr 08, 2018 12:20 pm

You can read up on HSAs, but save your receipts every year. You can use them anytime in the future.

@delamer, my understanding is that he and his wife have 700k cash too

Lafder
Posts: 3719
Joined: Sat Aug 03, 2013 7:56 pm
Location: East of the Rio Grande

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by Lafder » Sun Apr 08, 2018 12:38 pm

I would consider paying off your home and loan. You still have a big chunk to invest and it increases your monthly income you can invest and trickle into the market.

At your age we were at 80/20, 30% International stocks.

Though the recs for International stocks has gone up a bit since then to 30-50% of stock holdings.

I prefer a 3 fund portfolio. But the all in one funds are simple and easy to manage.

I agree with maxing retirement accounts.

Welcome here!

lafder

krow36
Posts: 1771
Joined: Fri Jan 30, 2015 6:05 pm
Location: WA

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by krow36 » Sun Apr 08, 2018 1:37 pm

If you tell us which county school district your wife works in, we can look up the 403b and 457 vendors that she is allowed to use and help her choose the best one. Or you can look up the list and post it for us. This Wiki article will give you some background on K-12 403b plans.
https://www.bogleheads.org/wiki/403b_pl ... _employees

The 403b and 457 plans each allow contributions of 18.5k pre year and this would be a very good way to reduce your present taxable income. The 457 plan allows penalty-free distribution at any age, after she separates from the school district. The 403b and 401k require age 59.5 before penalty-free distribution, although the plan may allow distribution at age 55 after separation. The 457 plan is a favorite of folks working towards early retirement.

ElmoHongZito
Posts: 66
Joined: Tue Mar 27, 2018 9:17 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by ElmoHongZito » Sun Apr 08, 2018 2:20 pm

krow36 wrote:
Sun Apr 08, 2018 1:37 pm
If you tell us which county school district your wife works in, we can look up the 403b and 457 vendors that she is allowed to use and help her choose the best one. Or you can look up the list and post it for us. This Wiki article will give you some background on K-12 403b plans.
https://www.bogleheads.org/wiki/403b_pl ... _employees

The 403b and 457 plans each allow contributions of 18.5k pre year and this would be a very good way to reduce your present taxable income. The 457 plan allows penalty-free distribution at any age, after she separates from the school district. The 403b and 401k require age 59.5 before penalty-free distribution, although the plan may allow distribution at age 55 after separation. The 457 plan is a favorite of folks working towards early retirement.
I can’t express how grateful I am for all your guys input. I am going to be all over this within the next few days.

@krow36 my wife works for dade county public schools. I am not sure where to find the vendors she can select. If you know where please let me know.
Last edited by ElmoHongZito on Mon Apr 09, 2018 7:25 am, edited 1 time in total.

drk
Posts: 522
Joined: Mon Jul 24, 2017 10:33 pm
Location: Seattle

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by drk » Sun Apr 08, 2018 2:34 pm

delamer wrote:
Sun Apr 08, 2018 12:16 pm
I see about $550K in assets, including home equity.

I don’t see $1.24 million.

Did you leave something out?
Did you count the "close to 700k" of emergency funds in bank accounts?

ElmoHongZito
Posts: 66
Joined: Tue Mar 27, 2018 9:17 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by ElmoHongZito » Sun Apr 08, 2018 2:41 pm

drk wrote:
Sun Apr 08, 2018 2:34 pm
delamer wrote:
Sun Apr 08, 2018 12:16 pm
I see about $550K in assets, including home equity.

I don’t see $1.24 million.

Did you leave something out?
Did you count the "close to 700k" of emergency funds in bank accounts?
Correct...

Around 700k in the bank
72k in 401k
55k in IRA
200k in managed account
29k in 529’s
180k in home equity

krow36
Posts: 1771
Joined: Fri Jan 30, 2015 6:05 pm
Location: WA

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by krow36 » Sun Apr 08, 2018 3:00 pm

ElmoHongZito wrote:
Sun Apr 08, 2018 2:20 pm
@krow36 my wife works for miami-dade public schools. I am not sure where to find the vendors she can select. If you know where please let me know.
Here's the list of 403b vendors: https://www.tsacg.com/individual/plan-s ... c-schools/
The lowest cost plan would be the Security Benefit NEA Direct Invest 403b. This plan is internet based rather than local sales rep based. https://www.securitybenefit.com/individ ... nvest.aspx
Boglehead poster Ed La Fave has written about his experience setting up Direct Invest with the Orange County School District for his wife and you'll find it informative. The same 3 Vanguard Admiral class mutual funds Ed used make an excellent 3 fund portfolio.
https://educatorsfightingforfairness.wo ... .com/blog/

krow36
Posts: 1771
Joined: Fri Jan 30, 2015 6:05 pm
Location: WA

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by krow36 » Sun Apr 08, 2018 3:25 pm

I can't find any evidence that Miami Dade SD offers a 457 plan. You'll have to ask HR about it. PlanMember Services does offer a 457 plan, but the school district has to approve it and OMNI has to administer it. OMNI is a Third Party Administrator, hired by the district to administer their 403b plan (and 457??). With the 403b, you'll be dealing with the TPA as well as with Security Benefit and the school district. The NEA Direct Invest plan is only a 403b plan.

ElmoHongZito
Posts: 66
Joined: Tue Mar 27, 2018 9:17 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by ElmoHongZito » Sun Apr 08, 2018 3:36 pm

spth wrote:
Sun Apr 08, 2018 11:28 am
Do you have low expense ratio 401k options, especially total bond fund? How about your wife? Does your 401k accept IRA transfers? Do you have an HSA?

If you have low ER options in 401k, then transfer IRA to your 401k. Max out your 401k and wife’s 403b.

Once IRA is cleared, do Backdoor Roth for you and your wife

Max out HSA if available and invest in low cost fund

Transfer taxable funds/stocks to Fidelity or Vanguard or similar

Read up on tax effiecent placement of funds in Wiki. Try to keep bonds in 401k/403b and stocks in taxable

I like IBonds to augment bond fund if extra space is needed, others don’t

Stop automatically reinvesting dividends from taxable holdings

Consider increasing college funds
Ok. I looked at the available bond funds I can chose from in my current 401k through Fidelity and this is what I found. Please let me know what you think. This is all new to me...

Bond Investments - Stable Value:

Managed Income Portfolio Class I
Expense Ratio: 0.77% of gross
Management fee: 0.55%


Bond Investments - Income

Fidelity® Intermediate Government Income Fund
FSTGX
Expense Ratio: 0.45% of gross
Management fee: 0.31%

Fidelity® Strategic Income Fund
FSICX
Expense Ratio: 0.69% of gross
Management fee: 0.56%

Metropolitan West Total Return Bond Fund Class M
MWTRX
Expense Ratio: 0.67% of gross
Management fee: 0.35%
Distribution and/or service fee(12b-1) Fees: 0.21%

Also I want to note that when I go into the Fidelity site to adjust contributions it gives me the option to contribute with pre-taxed dollars or as a Roth (which I had never heard of). My wifes cousin who is a financial advisor for Prudential suggested at the beginning of this year that I make my contributions as a Roth (I don’t remember why). I think his reasoning may had something to do something with dollar cost averaging (I really can’t remember).
Last edited by ElmoHongZito on Sun Apr 08, 2018 4:11 pm, edited 2 times in total.

delamer
Posts: 4790
Joined: Tue Feb 08, 2011 6:13 pm

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by delamer » Sun Apr 08, 2018 3:39 pm

ElmoHongZito wrote:
Sun Apr 08, 2018 2:41 pm
drk wrote:
Sun Apr 08, 2018 2:34 pm
delamer wrote:
Sun Apr 08, 2018 12:16 pm
I see about $550K in assets, including home equity.

I don’t see $1.24 million.

Did you leave something out?
Did you count the "close to 700k" of emergency funds in bank accounts?
Correct...

Around 700k in the bank
72k in 401k
55k in IRA
200k in managed account
29k in 529’s
180k in home equity
Yes, sorry, that is what I missed.

I’d keep at least a year of expenses in your savings, given what you said about your income insecurity.

Also, seconding the suggestion to pay off your mortgage and student loan with part of the $700K. My guess is that paying off the house will make it less tempting to “move up” which will help keep your expenses under control (see below).

I also agree with the advice to check out the retirement savings plans through your wife’s job. Tax deferred savings are a great opportunity for you.

I would not look at the 529 plans as part of your overall asset allocation. They are for a specific purpose and will need to be spent much sooner than the retirement funds.

The age in bonds in pretty conservative when you are so far from retirement. As long as you are keeping your lifestyle expenses under control (not letting them creep up with your income), then you can comfortably do 75% or 80% in stocks if you believe that you can withstand the volatility. You might find these charts helpful in making that decision, since they show the direct correlation between stock exposure, returns, and volatility:

https://personal.vanguard.com/us/insigh ... llocations

spth
Posts: 130
Joined: Fri Aug 09, 2013 8:31 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by spth » Sun Apr 08, 2018 4:23 pm

Do you have lower cost options in 401k, even if they are equity mutual funds? It might make sense to just choose the lowest cost fund. Otherwise, I think that intermediate duration treasuries perform similarly to total bond, so that might be your option. Let’s hope someone with more expertise is able to comment as well. Regarding Roth 401k option, with your income, I would think you’d want to tax defer.

If you keep a year of expenses in CDs, pay off your mortgage, and put tax deferred (401k,403b) in bonds, then you probably have enough bonds. Most people count emergency fund towards bond/fixed income allocation. That would allow you to invest remainder of cash in total US and total international index funds. Very tax efficient. I’d also recommend Roth IRAs in emerging market index fund for a slight tilt. I’d invest HSA in lowest cost equity index, usually most venders have an SP 500 index.

Great advice from others, I usually don’t post in these forums, but I have some time and we are in similar situation. Therefore take my recommendations with this in mind.

ElmoHongZito
Posts: 66
Joined: Tue Mar 27, 2018 9:17 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by ElmoHongZito » Sun Apr 08, 2018 5:11 pm

spth wrote:
Sun Apr 08, 2018 4:23 pm
Do you have lower cost options in 401k, even if they are equity mutual funds? It might make sense to just choose the lowest cost fund. Otherwise, I think that intermediate duration treasuries perform similarly to total bond, so that might be your option. Let’s hope someone with more expertise is able to comment as well. Regarding Roth 401k option, with your income, I would think you’d want to tax defer.

If you keep a year of expenses in CDs, pay off your mortgage, and put tax deferred (401k,403b) in bonds, then you probably have enough bonds. Most people count emergency fund towards bond/fixed income allocation. That would allow you to invest remainder of cash in total US and total international index funds. Very tax efficient. I’d also recommend Roth IRAs in emerging market index fund for a slight tilt. I’d invest HSA in lowest cost equity index, usually most venders have an SP 500 index.

Great advice from others, I usually don’t post in these forums, but I have some time and we are in similar situation. Therefore take my recommendations with this in mind.
Thanks @ spth.

Question- are the bond funds I posted not low cost? I have no idea because I have not read up on that yet.

spth
Posts: 130
Joined: Fri Aug 09, 2013 8:31 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by spth » Sun Apr 08, 2018 6:43 pm

The total bond fund in my 401k has an ER of 0.04 which is 10 times lower than yours. That said, an ER of 0.45 is still relatively low cost. It’s the addition of the management fee that really increases the cost. Is there a way to avoid the management fee?

ElmoHongZito
Posts: 66
Joined: Tue Mar 27, 2018 9:17 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by ElmoHongZito » Sun Apr 08, 2018 7:36 pm

The company I work for was recently acquired by a much larger company. Our benefits will be changing in the next few weeks so i will look at this again once that happens. Hopefully they have negotiated better rates being as large as they are.

ElmoHongZito
Posts: 66
Joined: Tue Mar 27, 2018 9:17 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by ElmoHongZito » Sun Apr 08, 2018 10:56 pm

spth wrote:
Sun Apr 08, 2018 6:43 pm
The total bond fund in my 401k has an ER of 0.04 which is 10 times lower than yours. That said, an ER of 0.45 is still relatively low cost. It’s the addition of the management fee that really increases the cost. Is there a way to avoid the management fee?
The only option I see that is low in pricing like yours (but not bonds) is this one

Fidelity® 500 Index Fund - Premium Class
FUSVX
Expense Ratio: 0.035%
Management fee: 0.015%

On another note, after reading the first reply from @spth I noticed that the deadline to participate in an IRA for 2017 is April 16. That would be 11K for me and my wife combined. is this something fairly easy I can set up through my Fidelity account? Should I set this up as a Roth IRA? does it matter when I roll the IRA that I have $55,000 into my 401k if my account allows this?

krow36
Posts: 1771
Joined: Fri Jan 30, 2015 6:05 pm
Location: WA

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by krow36 » Mon Apr 09, 2018 12:34 am

ElmoHongZito wrote:
Sun Apr 08, 2018 10:56 pm
On another note, after reading the first reply from @spth I noticed that the deadline to participate in an IRA for 2017 is April 16. That would be 11K for me and my wife combined. is this something fairly easy I can set up through my Fidelity account? Should I set this up as a Roth IRA? does it matter when I roll the IRA that I have $55,000 into my 401k if my account allows this?
The basics of the backdoor Roth: https://www.bogleheads.org/wiki/Backdoor_Roth_IRA

Assuming your work retirement plan will let you roll in your traditional IRA, you need to have done the rollover by Dec 31, 2018 if you do a backdoor Roth during 2018. Otherwise you will owe taxes on a big part of your total traditional IRA holdings because of the pro rata rule.

Yes, you can set up a non-deductible traditional IRA at Fidelity, probably online. It’s a regular tIRA, for which you will not claim a deduction on your 2017 Form 1040. Most folks put it in a MM fund so it won’t grow much. As soon as it shows up in your account, you convert it to a Roth IRA. :happy

ElmoHongZito
Posts: 66
Joined: Tue Mar 27, 2018 9:17 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by ElmoHongZito » Mon Apr 09, 2018 12:41 pm

krow36 wrote:
Mon Apr 09, 2018 12:34 am
ElmoHongZito wrote:
Sun Apr 08, 2018 10:56 pm
On another note, after reading the first reply from @spth I noticed that the deadline to participate in an IRA for 2017 is April 16. That would be 11K for me and my wife combined. is this something fairly easy I can set up through my Fidelity account? Should I set this up as a Roth IRA? does it matter when I roll the IRA that I have $55,000 into my 401k if my account allows this?
The basics of the backdoor Roth: https://www.bogleheads.org/wiki/Backdoor_Roth_IRA

Assuming your work retirement plan will let you roll in your traditional IRA, you need to have done the rollover by Dec 31, 2018 if you do a backdoor Roth during 2018. Otherwise you will owe taxes on a big part of your total traditional IRA holdings because of the pro rata rule.

Yes, you can set up a non-deductible traditional IRA at Fidelity, probably online. It’s a regular tIRA, for which you will not claim a deduction on your 2017 Form 1040. Most folks put it in a MM fund so it won’t grow much. As soon as it shows up in your account, you convert it to a Roth IRA. :happy
@krow36 Thanks for the guidance on this and the links to better understand this strategy.

Since our combined 2017 income does not allow us to participate in Roth IRA’s for 2017, I am definitely interested in doing 2 backdoor Roth IRA’s. I am guessing that I can do 2 traditional IRA’s before the 2017 deadline (4/16/18) and then wait to do the conversion to Roth since I would have to first roll my current managed traditional IRA into my 401k which apparently could take like 2-5 weeks. Is there anything I am missing that would not allow me to execute this?

spth
Posts: 130
Joined: Fri Aug 09, 2013 8:31 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by spth » Mon Apr 09, 2018 12:59 pm

ElmoHongZito wrote:
Sun Apr 08, 2018 10:56 pm
spth wrote:
Sun Apr 08, 2018 6:43 pm
The total bond fund in my 401k has an ER of 0.04 which is 10 times lower than yours. That said, an ER of 0.45 is still relatively low cost. It’s the addition of the management fee that really increases the cost. Is there a way to avoid the management fee?
The only option I see that is low in pricing like yours (but not bonds) is this one

Fidelity® 500 Index Fund - Premium Class
FUSVX
Expense Ratio: 0.035%
Management fee: 0.015%

On another note, after reading the first reply from @spth I noticed that the deadline to participate in an IRA for 2017 is April 16. That would be 11K for me and my wife combined. is this something fairly easy I can set up through my Fidelity account? Should I set this up as a Roth IRA? does it matter when I roll the IRA that I have $55,000 into my 401k if my account allows this?
I personally would use that fund as it is very low cost. You can “complete” that fund by using an emerging market fund (could place in Roths) to approximate total US index. Details in wiki. Then you can figure out bonds elsewhere, such as wife’s 403b, CDs for emergency fund, IBonds, and munis.

krow36
Posts: 1771
Joined: Fri Jan 30, 2015 6:05 pm
Location: WA

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by krow36 » Mon Apr 09, 2018 1:04 pm

ElmoHongZito wrote:
Mon Apr 09, 2018 12:41 pm
Since our combined 2017 income does not allow us to participate in Roth IRA’s for 2017, I am definitely interested in doing 2 backdoor Roth IRA’s. I am guessing that I can do 2 traditional IRA’s before the 2017 deadline (4/16/18) and then wait to do the conversion to Roth since I would have to first roll my current managed traditional IRA into my 401k which apparently could take like 2-5 weeks. Is there anything I am missing that would not allow me to execute this?
Yes you need to set up the tIRAs for 2017 before the April tax deadline. I wouldn't wait until the last minute. As mentioned in my above post, what matters on the pro rata rule is do you have any traditional type IRAs (that is any non-Roth IRAs) as of Dec 31, 2018?

So you could convert the non-deductible tIRA to a Roth IRA a few days after establishing the account, as long as you roll your current tIRA into your 401k by the end of the year. You do need to be very certain that your 401k plan will accept your current tIRAs.

ElmoHongZito
Posts: 66
Joined: Tue Mar 27, 2018 9:17 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by ElmoHongZito » Mon Apr 09, 2018 1:38 pm

spth wrote:
Sun Apr 08, 2018 11:28 am
Read up on tax effiecent placement of funds in Wiki. Try to keep bonds in 401k/403b and stocks in taxable
I have not come across this suggestion yet in any of my reading. Can you explain why keep bonds in 401k/403b and stocks in taxable?

delamer
Posts: 4790
Joined: Tue Feb 08, 2011 6:13 pm

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by delamer » Mon Apr 09, 2018 1:44 pm

ElmoHongZito wrote:
Mon Apr 09, 2018 1:38 pm
spth wrote:
Sun Apr 08, 2018 11:28 am
Read up on tax effiecent placement of funds in Wiki. Try to keep bonds in 401k/403b and stocks in taxable
I have not come across this suggestion yet in any of my reading. Can you explain why keep bonds in 401k/403b and stocks in taxable?
Here is the link: https://www.bogleheads.org/wiki/Tax-eff ... _placement

MiddleOfTheRoad
Posts: 118
Joined: Fri Jul 21, 2017 11:19 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by MiddleOfTheRoad » Mon Apr 09, 2018 3:45 pm

krow36 wrote:
Mon Apr 09, 2018 1:04 pm
ElmoHongZito wrote:
Mon Apr 09, 2018 12:41 pm
Since our combined 2017 income does not allow us to participate in Roth IRA’s for 2017, I am definitely interested in doing 2 backdoor Roth IRA’s. I am guessing that I can do 2 traditional IRA’s before the 2017 deadline (4/16/18) and then wait to do the conversion to Roth since I would have to first roll my current managed traditional IRA into my 401k which apparently could take like 2-5 weeks. Is there anything I am missing that would not allow me to execute this?
Yes you need to set up the tIRAs for 2017 before the April tax deadline. I wouldn't wait until the last minute. As mentioned in my above post, what matters on the pro rata rule is do you have any traditional type IRAs (that is any non-Roth IRAs) as of Dec 31, 2018?

So you could convert the non-deductible tIRA to a Roth IRA a few days after establishing the account, as long as you roll your current tIRA into your 401k by the end of the year. You do need to be very certain that your 401k plan will accept your current tIRAs.
I do not think that you can do a back door Roth for 2017 without violating the pro rata rule. The balance of your other IRA has to be 0 on Dec31 of 2017 to avoid pro rata.

For 2018, you have until April 2019 to open a traditional IRA then convert - if your other IRA balance is 0 on Dec31 2018.

spth
Posts: 130
Joined: Fri Aug 09, 2013 8:31 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by spth » Mon Apr 09, 2018 6:36 pm

MiddleOfTheRoad wrote:
Mon Apr 09, 2018 3:45 pm
krow36 wrote:
Mon Apr 09, 2018 1:04 pm
ElmoHongZito wrote:
Mon Apr 09, 2018 12:41 pm
Since our combined 2017 income does not allow us to participate in Roth IRA’s for 2017, I am definitely interested in doing 2 backdoor Roth IRA’s. I am guessing that I can do 2 traditional IRA’s before the 2017 deadline (4/16/18) and then wait to do the conversion to Roth since I would have to first roll my current managed traditional IRA into my 401k which apparently could take like 2-5 weeks. Is there anything I am missing that would not allow me to execute this?
Yes you need to set up the tIRAs for 2017 before the April tax deadline. I wouldn't wait until the last minute. As mentioned in my above post, what matters on the pro rata rule is do you have any traditional type IRAs (that is any non-Roth IRAs) as of Dec 31, 2018?

So you could convert the non-deductible tIRA to a Roth IRA a few days after establishing the account, as long as you roll your current tIRA into your 401k by the end of the year. You do need to be very certain that your 401k plan will accept your current tIRAs.
I do not think that you can do a back door Roth for 2017 without violating the pro rata rule. The balance of your other IRA has to be 0 on Dec31 of 2017 to avoid pro rata.

For 2018, you have until April 2019 to open a traditional IRA then convert - if your other IRA balance is 0 on Dec31 2018.
As long as the money is out in traditional IRA before 2017 deadline, the conversion can happen anytime

MiddleOfTheRoad
Posts: 118
Joined: Fri Jul 21, 2017 11:19 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by MiddleOfTheRoad » Mon Apr 09, 2018 7:31 pm

Got it
👍

Natsdoc
Posts: 58
Joined: Sun Jun 15, 2014 8:53 pm

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by Natsdoc » Mon Apr 09, 2018 7:57 pm

Welcome. Glad you've seen the light. :)
First of all - take a deep breath. Take some time to digest what you are learning here and figure out a plan.

Don't do anything (like backdoor Roth IRAs) that you don't understand - yes the deadline is next week but if you miss the 2017 deadline we are talking less than 1% of your net worth.

It looks like your income has increased dramatically over the last 2 years. Congratulations!
Given the amount you have sitting in cash it looks like your lifestyle hasn't caught up with that increase - double congratulations! To be honest you've been much smarter than you realize by keeping your lifestyle in check and not giving that 700k to your FA. You're ahead of about 99.9% of people your age right now.

Step 1: Please get TERM life insurance for you and your wife ASAP if you don't already have these. Buy these cheaply off the internet as spth said. Do not, I repeat DO NOT, ask your FA about this.

Step 2: Figure out how much you need to keep in a cash (or similarly safe) emergency fund. If you don't have a monthly budget I would first look at your expenses the last few months and figure out how much you need to live modestly if you lost your job for some fairly long duration - maybe 2 years? Given your savings this doesn't have to be a rice and beans budget, but basic living expenses - mortgage, insurance, food, clothing, kid stuff, etc. Keep that in an FDIC insured (ie regular bank savings account) account or a CD. The idea here is that you want to preserve this principal. You won't make any real money off of it, but you won't lose any either.

Step 3: You are probably losing more money to taxes than to your FA at this point. You want as much of your/your wifes 401K, 403b and any 457 plans to be tax deferred - ie non-Roth. This means you pay tax later (when you are retired and not taking in 400K per year in income so we all assume our tax rates will be much lower) You should be putting 18,500 in your 401k and 18,500 in your wifes 403b. You should also max any HSA plan. You don't pay any taxes on investment growth until you take them out in retirement - so you can switch around your funds easily without incurring any tax hits. If you post all the funds, fund names, and expense ratios we can help. Keeping it all in a target date fund until you better understand tax-efficient fund placement (this is like Bogleheads 202) is totally fine.

Step4a: Does your WIFE have any IRA currently? The I is for Individual. If she does not, you can make a backdoor Roth contribution for her for 2017 before 4/17/18. If this seems too complex/overwhelming at this point skip this step. Screenshots here: https://www.physicianonfire.com/backdoor/
Step 4b: Figure out if you can roll your IRA into your 401k. If you can, roll it in by the end of this year and make a backdoor Roth for 2018 (ie not 2017 as mentioned by the last few posters.)
Step4c: FIgure out if your plan allows after tax contributions - you might be eligible for the 'Mega Backdoor Roth IRA' though take some time to figure out if it's your best option given your job security situation. https://www.whitecoatinvestor.com/the-m ... -roth-ira/

Step 5: Figure out what to do about your debt. Your mortgage is at a high enough rate that it might make sense to think about just paying it off with cash on hand. It may not be the absolute best decision, but would make a big difference if you lost your job to not have a mortgage. Also, the rate on your mortgage is presumably higher than the rate on your savings account where you've had 700k parked. It makes more sense to pay that off than to keep it in cash.
Your 7800 in student loans at 2.125% is basically spare change at this point relative to your net worth. It probably isn't the numerically best decision, but I'd consider just paying it off. Again, still a better rate than most bank accounts.

Step 6: Dump your FA. This will take more time and education for you, as you'll probably end up with some capital gains in your taxable managed account. Some people will say "Just call up Vanguard and have them move everything over" but this may incur fees for selling the assorted assets he has you in - we learned this the hard way. If he's churned this account a lot, and with all the fees, this capital gain might actually not be as bad as you think. We also learned this the hard way. :oops:

krow36
Posts: 1771
Joined: Fri Jan 30, 2015 6:05 pm
Location: WA

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by krow36 » Mon Apr 09, 2018 8:09 pm

spth wrote:
Mon Apr 09, 2018 6:36 pm
MiddleOfTheRoad wrote:
Mon Apr 09, 2018 3:45 pm
krow36 wrote:
Mon Apr 09, 2018 1:04 pm
ElmoHongZito wrote:
Mon Apr 09, 2018 12:41 pm
Since our combined 2017 income does not allow us to participate in Roth IRA’s for 2017, I am definitely interested in doing 2 backdoor Roth IRA’s. I am guessing that I can do 2 traditional IRA’s before the 2017 deadline (4/16/18) and then wait to do the conversion to Roth since I would have to first roll my current managed traditional IRA into my 401k which apparently could take like 2-5 weeks. Is there anything I am missing that would not allow me to execute this?
Yes you need to set up the tIRAs for 2017 before the April tax deadline. I wouldn't wait until the last minute. As mentioned in my above post, what matters on the pro rata rule is do you have any traditional type IRAs (that is any non-Roth IRAs) as of Dec 31, 2018?

So you could convert the non-deductible tIRA to a Roth IRA a few days after establishing the account, as long as you roll your current tIRA into your 401k by the end of the year. You do need to be very certain that your 401k plan will accept your current tIRAs.
I do not think that you can do a back door Roth for 2017 without violating the pro rata rule. The balance of your other IRA has to be 0 on Dec31 of 2017 to avoid pro rata.

For 2018, you have until April 2019 to open a traditional IRA then convert - if your other IRA balance is 0 on Dec31 2018.
As long as the money is out in traditional IRA before 2017 deadline, the conversion can happen anytime
The question is, does OP’s tIRA have to be rolled to a 403b by Dec 31 of the year the backdoor Roth was done (2018), or the year the backdoor was for (2017).

I think MiddleOfTheRoad is correct that to make a backdoor Roth IRA contribution for 2017, the Dec 31, 2017 non-Roth IRA balance must be zero to avoid a pro rata complication. That’s because the 2017 Form 8606 will ask for the Dec 31, 2017 non-Roth IRA balance. I'll edit my post's years to 2018.

Good catch MiddleOfTheRoad I think. I have never done a backdoor Roth, in fact Roth IRAs were started after I retired so I've never contributed! I do have a Roth IRA as a result of a conversion.

MiddleOfTheRoad
Posts: 118
Joined: Fri Jul 21, 2017 11:19 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by MiddleOfTheRoad » Mon Apr 09, 2018 8:24 pm

I thought it through and I think spth is right. If the conversion is done for all non-deductible amount in 2018(even if some of that amount is contributed for 2017) and the trad IRA balance is 0 at the end of 2018, the OP should be clear. Please correct me if my thinking is flawed.

ElmoHongZito
Posts: 66
Joined: Tue Mar 27, 2018 9:17 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by ElmoHongZito » Mon Apr 09, 2018 10:18 pm

MiddleOfTheRoad wrote:
Mon Apr 09, 2018 8:24 pm
I thought it through and I think spth is right. If the conversion is done for all non-deductible amount in 2018(even if some of that amount is contributed for 2017) and the trad IRA balance is 0 at the end of 2018, the OP should be clear. Please correct me if my thinking is flawed.
I went to the wiki pge that discusses the back-door IRA and found a link to the following...

Read this comprehensive tutorial: Backdoor Roth: A Complete How-To, by forum member tfb.

In my reading, I cane across the following paragraph that may help clarify how it can be done. Please help me understand...

“Contributions to an IRA can be tagged for the current year or the previous year (if done before April 15 in the following year). Conversions are always tracked to the calendar year in which it actually happened. You report on the tax return your non-deductible contribution to a traditional IRA *for* that year and your converting to Roth *in* that year. If you contribute for the previous year and then convert, you will have to report in two separate years. It’s much simpler if you contribute for the current year are not sure nd then convert before December 31. ”

I think it is clear to me that I can roll over my pretaxed managed trad IRA to my 401k any time in 2018 and purchase any time in 2018 a non-deductable trad IRA and do the back door conversion to roth IRA before the end of 2018.

What I would like to know is whether I can purchase a non-deductable traditional IRA before Monday of next week (so those contributions count for 2017) and convert it over to a Roth IRA in 2018 while avoiding pro rata rule since I will be rolling that pretaxed trad IRA into my 401k technically in 2018.

krow36
Posts: 1771
Joined: Fri Jan 30, 2015 6:05 pm
Location: WA

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by krow36 » Mon Apr 09, 2018 11:12 pm

ElmoHongZito wrote:
Mon Apr 09, 2018 10:18 pm
I think it is clear to me that I can roll over my pretaxed managed trad IRA to my 401k any time in 2018 and purchase any time in 2018 a non-deductable trad IRA and do the back door conversion to roth IRA before the end of 2018.
It is clear to me as well. :)
What I would like to know is whether I can purchase a non-deductable traditional IRA before Monday of next week (so those contributions count for 2017) and convert it over to a Roth IRA in 2018 while avoiding pro rata rule since I will be rolling that pretaxed trad IRA into my 401k technically in 2018.
“Conversions are always tracked to the calendar year in which it actually happened.” tfb is saying that there is a separate Form 8606 for each year, in this case one for 2017, to be sent in when filing for 2017, and a separate Form 8606 for 2018, to be filed with 2018 tax filing.

The paragraph you quoted is making the point that it’s simpler to contribute and then convert in the current year, before Dec 31. I don’t think this paragraph gives us the answer to our question. The link at the paragraph’s end does discuss our question:
https://thefinancebuff.com/backdoor-rot ... -easy.html
In the example above, the contribution made *for* year X-1 in year X goes on the tax return for year X-1. It has to carry over the tax basis to the return for year X. Its conversion to Roth *in* year X goes on the tax return for year X. The contribution *for* X to be made in X+1 again goes on the tax return for year X but the conversion *in* year X+1 must wait for the tax return for year X+1.
The tax return for year X ends up having a basis carried over from the previous year, a conversion, a contribution (made in the next year), and a basis carried forward to the next year. The Form 8606 ends up looking like this (I’m assuming there was $50 in earnings by the time it was converted):
The "tax return" referred to is the Form 8606. There is a different form for each calendar year. On your 2017 Form 8606, you will indicate on line 6 that you had a tIRA balance on Dec 31, 2017. That will result in a pro rata calculation and partial taxing of that tIRA balance.

MiddleOfTheRoad
Posts: 118
Joined: Fri Jul 21, 2017 11:19 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by MiddleOfTheRoad » Tue Apr 10, 2018 2:08 am

Honestly you should probably take Natsdoc’s recommendation from above and do not do back door for 2017. I have always done a “clean” back door Roth to minimize errors. If you are wrong the tax hit is way more than any tax benefit you gain from one year of back door Roth. Start it for 2018 with a clean slate.

Good luck and hang around!

MiddleOfTheRoad
Posts: 118
Joined: Fri Jul 21, 2017 11:19 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by MiddleOfTheRoad » Tue Apr 10, 2018 3:01 am

To answer your original question, if I were to be in your shoes I would do the following (now that I have a little time on my hands :wink: )
ElmoHongZito wrote:
Sun Apr 08, 2018 11:05 am


401k: 72k (all allocated in TRP Retirement 2045...symbol is TRRKX)
* We have never looked into contributing to the 403b offered through my wifes job (county public school system)

Look into this and max both every year, if funds have ER <.5%. If not, look to see if the plans have "brokerage link" option and buy Vanguard ETF instead. (VTI or VT, BND). Remember every pre-taxed dollar you put in your tax-advantaged account is an instant 20-30% gain (depending on your marginal tax rate), then add in compounding! In retirement you pay lower income tax (or even none if your taxable account is large and you do Roth conversion etc)

IRA: 55k
60% allocated among 9 mutual funds
30% allocated to ETP’s
10% allocated to Alternative Investments
*This is managed by an advisor and rolled over from 401k’s from previous employers. I have never contributed to an IRA

Roll this over to your 401k as discussed by many

Managed Account: 200k
As of 12/31/17...
65% allocated to 3 ETP’s
35% allocated among 46 individual stocks
* Also managed by same advisor as my IRA. His fee is 1.55% which I already found out on another topic I posted is outrageous. I plan on dropping him as soon as I figure out how do do that with limited loss.

What is your cost basis? Remember if these are long term holding (>1yr), the most you get taxed on is 20% of the gains. Better to keep 80% of the gains than to hold on and lose the cost basis too (given this is likely an under-diversified account). Even if you sell at a loss you get to claim against your taxes. If it is me, I would divest this position (any holding >1yr) and diversify per your asset allocation

Florida College Prepaid Plans:
My 10 year old has 17k in hers right now
My 7 year old has 13k in hers right now

Good job! Keep adding

Desired Asset Allocation: Based on what I have read so far my age in bond % is a good rule of thumb. Please comment if you think my situation suggests different split.

80/20? Others have weighted in as well so take your pick. Up to you, probably stick to any where from 80/20 to 50/50. I remember you said you were risk averse so keep that in mind when you pick.

Goals:
I don’t have set goals other than making sure my wife and 2 daughters are taken care of and I would like to being financially independent one day. My job is highly stressful and job insecurity is extremely high as you are only as good as your last quarter in my field and landing a comparable job is very difficult and can take a very long time specially if you are unemployed

This is why I would use part of the cash to payoff the house/student loan in your situation. With the current high standard deduction (large!) you won't really itemize the interest paid on that mortgage. Given your job insecurity and your risk aversion it makes sense to be debt free since you can afford it. This will also help you with investing since you will have better risk tolerance to the market volatility knowing that you "locked in" your gains (in the house). Your cash flow will also be awesome.

I would like my household to reach a net worth of 2 million by the time I turn 40. I am at 1.24 million now if you include 401k, IRA, College Saving plans, and equity in home.

Possible, but will mostly from your contributions. Unlikely to get that much from the market since that is <5 years away.

Other random thoughts:
At your marginal tax bracket, I would only do the back door Roth and NOT the Roth 401k. When you contribute to the Roth 401k you lose the pre-tax contribution space (see above re: tax-advantaged space). In general, I would probably not even think about Roth 401k unless your marginal tax bracket is <15%, but that's just me. The back door Roth will give you some needed tax-free investing space for tax diversification.

Max HSA. Others don't use the money in HSA at all. We use it as we incur charges, then invest the left over each year. To me simplicity is more important and less headache. If the law change in the future I don't have to worry about it.

This is a lot to digest already. Once you understand the framework then execute but always remember to keep it simple. "Complicated" was the reason why you did not do this before and almost get fleeced for life by an IUL. As you gain more confidence in 1-2 years (and keep reading here) you will develop more granularity in your plan.

Best of luck to you!


Thanking you all again in advance.

ElmoHongZito
Posts: 66
Joined: Tue Mar 27, 2018 9:17 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by ElmoHongZito » Tue Apr 10, 2018 7:13 am

Natsdoc wrote:
Mon Apr 09, 2018 7:57 pm
Welcome. Glad you've seen the light. :)
First of all - take a deep breath. Take some time to digest what you are learning here and figure out a plan.

Don't do anything (like backdoor Roth IRAs) that you don't understand - yes the deadline is next week but if you miss the 2017 deadline we are talking less than 1% of your net worth.

It looks like your income has increased dramatically over the last 2 years. Congratulations!
Given the amount you have sitting in cash it looks like your lifestyle hasn't caught up with that increase - double congratulations! To be honest you've been much smarter than you realize by keeping your lifestyle in check and not giving that 700k to your FA. You're ahead of about 99.9% of people your age right now.

Step 1: Please get TERM life insurance for you and your wife ASAP if you don't already have these. Buy these cheaply off the internet as spth said. Do not, I repeat DO NOT, ask your FA about this.

Step 2: Figure out how much you need to keep in a cash (or similarly safe) emergency fund. If you don't have a monthly budget I would first look at your expenses the last few months and figure out how much you need to live modestly if you lost your job for some fairly long duration - maybe 2 years? Given your savings this doesn't have to be a rice and beans budget, but basic living expenses - mortgage, insurance, food, clothing, kid stuff, etc. Keep that in an FDIC insured (ie regular bank savings account) account or a CD. The idea here is that you want to preserve this principal. You won't make any real money off of it, but you won't lose any either.

Step 3: You are probably losing more money to taxes than to your FA at this point. You want as much of your/your wifes 401K, 403b and any 457 plans to be tax deferred - ie non-Roth. This means you pay tax later (when you are retired and not taking in 400K per year in income so we all assume our tax rates will be much lower) You should be putting 18,500 in your 401k and 18,500 in your wifes 403b. You should also max any HSA plan. You don't pay any taxes on investment growth until you take them out in retirement - so you can switch around your funds easily without incurring any tax hits. If you post all the funds, fund names, and expense ratios we can help. Keeping it all in a target date fund until you better understand tax-efficient fund placement (this is like Bogleheads 202) is totally fine.

Step4a: Does your WIFE have any IRA currently? The I is for Individual. If she does not, you can make a backdoor Roth contribution for her for 2017 before 4/17/18. If this seems too complex/overwhelming at this point skip this step. Screenshots here: https://www.physicianonfire.com/backdoor/
Step 4b: Figure out if you can roll your IRA into your 401k. If you can, roll it in by the end of this year and make a backdoor Roth for 2018 (ie not 2017 as mentioned by the last few posters.)
Step4c: FIgure out if your plan allows after tax contributions - you might be eligible for the 'Mega Backdoor Roth IRA' though take some time to figure out if it's your best option given your job security situation. https://www.whitecoatinvestor.com/the-m ... -roth-ira/

Step 5: Figure out what to do about your debt. Your mortgage is at a high enough rate that it might make sense to think about just paying it off with cash on hand. It may not be the absolute best decision, but would make a big difference if you lost your job to not have a mortgage. Also, the rate on your mortgage is presumably higher than the rate on your savings account where you've had 700k parked. It makes more sense to pay that off than to keep it in cash.
Your 7800 in student loans at 2.125% is basically spare change at this point relative to your net worth. It probably isn't the numerically best decision, but I'd consider just paying it off. Again, still a better rate than most bank accounts.

Step 6: Dump your FA. This will take more time and education for you, as you'll probably end up with some capital gains in your taxable managed account. Some people will say "Just call up Vanguard and have them move everything over" but this may incur fees for selling the assorted assets he has you in - we learned this the hard way. If he's churned this account a lot, and with all the fees, this capital gain might actually not be as bad as you think. We also learned this the hard way. :oops:
@Natsdoc I just read your reply post and I want to thank you so much for taking the time to break it down like this for me. This is extemely helpful and I am so grateful.

I am going to take that advice and start by doing the back-door 2017 roth IRA for my wife. I already found out that I can roll over my pretaxed managed IRA to the new 401k my employer is offering. It’s managed by Vanguard and the funds have very low Expense Ratios. Is it best I put 100% of it in the following Bond fund with a low 0.03% ER as suggested in one of the earlier posts?

Vanguard Total Bond Market Index Fund Institutional Plus Shares (VBMPX)

Another question I had is about the managed account and IRA that has been managed for me for a few years now by the same person. When we started he was at Wells Fargo, then he moved to Raymond James, now he is at Citibank. Every time I move these accounts as he has moved am I ocurring costs or paying any taxes because of the move?

Also I do have term life insurance. I have it with Northwestern Mutual which is probably one of the more expensive ones. My FA who used to work there and can now sell all other insurances except theirs (only NWM agents can sell their products) still suggests that I do Northwestern Mutual because I can convert any or all of my term to whole life based on my health from when I got the term policies and that they have the best whole life products hands down etc etc. He is a pretty smart dude and the fact that he was pointing me to the only carrier he cannot sell resonated with me.

ElmoHongZito
Posts: 66
Joined: Tue Mar 27, 2018 9:17 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by ElmoHongZito » Tue Apr 10, 2018 7:31 am

MiddleOfTheRoad wrote:
Tue Apr 10, 2018 3:01 am
To answer your original question, if I were to be in your shoes I would do the following (now that I have a little time on my hands :wink: )
ElmoHongZito wrote:
Sun Apr 08, 2018 11:05 am


401k: 72k (all allocated in TRP Retirement 2045...symbol is TRRKX)
* We have never looked into contributing to the 403b offered through my wifes job (county public school system)

Look into this and max both every year, if funds have ER <.5%. If not, look to see if the plans have "brokerage link" option and buy Vanguard ETF instead. (VTI or VT, BND). Remember every pre-taxed dollar you put in your tax-advantaged account is an instant 20-30% gain (depending on your marginal tax rate), then add in compounding! In retirement you pay lower income tax (or even none if your taxable account is large and you do Roth conversion etc)

IRA: 55k
60% allocated among 9 mutual funds
30% allocated to ETP’s
10% allocated to Alternative Investments
*This is managed by an advisor and rolled over from 401k’s from previous employers. I have never contributed to an IRA

Roll this over to your 401k as discussed by many

Managed Account: 200k
As of 12/31/17...
65% allocated to 3 ETP’s
35% allocated among 46 individual stocks
* Also managed by same advisor as my IRA. His fee is 1.55% which I already found out on another topic I posted is outrageous. I plan on dropping him as soon as I figure out how do do that with limited loss.

What is your cost basis? Remember if these are long term holding (>1yr), the most you get taxed on is 20% of the gains. Better to keep 80% of the gains than to hold on and lose the cost basis too (given this is likely an under-diversified account). Even if you sell at a loss you get to claim against your taxes. If it is me, I would divest this position (any holding >1yr) and diversify per your asset allocation

Florida College Prepaid Plans:
My 10 year old has 17k in hers right now
My 7 year old has 13k in hers right now

Good job! Keep adding

Desired Asset Allocation: Based on what I have read so far my age in bond % is a good rule of thumb. Please comment if you think my situation suggests different split.

80/20? Others have weighted in as well so take your pick. Up to you, probably stick to any where from 80/20 to 50/50. I remember you said you were risk averse so keep that in mind when you pick.

Goals:
I don’t have set goals other than making sure my wife and 2 daughters are taken care of and I would like to being financially independent one day. My job is highly stressful and job insecurity is extremely high as you are only as good as your last quarter in my field and landing a comparable job is very difficult and can take a very long time specially if you are unemployed

This is why I would use part of the cash to payoff the house/student loan in your situation. With the current high standard deduction (large!) you won't really itemize the interest paid on that mortgage. Given your job insecurity and your risk aversion it makes sense to be debt free since you can afford it. This will also help you with investing since you will have better risk tolerance to the market volatility knowing that you "locked in" your gains (in the house). Your cash flow will also be awesome.

I would like my household to reach a net worth of 2 million by the time I turn 40. I am at 1.24 million now if you include 401k, IRA, College Saving plans, and equity in home.

Possible, but will mostly from your contributions. Unlikely to get that much from the market since that is <5 years away.

Other random thoughts:
At your marginal tax bracket, I would only do the back door Roth and NOT the Roth 401k. When you contribute to the Roth 401k you lose the pre-tax contribution space (see above re: tax-advantaged space). In general, I would probably not even think about Roth 401k unless your marginal tax bracket is <15%, but that's just me. The back door Roth will give you some needed tax-free investing space for tax diversification.

Max HSA. Others don't use the money in HSA at all. We use it as we incur charges, then invest the left over each year. To me simplicity is more important and less headache. If the law change in the future I don't have to worry about it.

This is a lot to digest already. Once you understand the framework then execute but always remember to keep it simple. "Complicated" was the reason why you did not do this before and almost get fleeced for life by an IUL. As you gain more confidence in 1-2 years (and keep reading here) you will develop more granularity in your plan.

Best of luck to you!


Thanking you all again in advance.
@MiddleOfTheRoad

Solid advice. Thanks so much for your input. This is so great that you are willing to share your knowledge with me.

Not sure what the “cost basis” is for the managed account, but I do know that the FA fee is 1.55% which I posted in another discussion on the board and was quickly told by many that I need to get out of that quickly because I am paying way too much for what I am getting.

MiddleOfTheRoad
Posts: 118
Joined: Fri Jul 21, 2017 11:19 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by MiddleOfTheRoad » Tue Apr 10, 2018 9:17 am

“Cost basis” is how much you put in. You need to get away from that FA, and he has to provide you of the records. But do take some time after that and evaluate the tax implication. You can post here and others will chime in.

ElmoHongZito
Posts: 66
Joined: Tue Mar 27, 2018 9:17 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by ElmoHongZito » Tue Apr 10, 2018 11:22 am

MiddleOfTheRoad wrote:
Tue Apr 10, 2018 9:17 am
“Cost basis” is how much you put in. You need to get away from that FA, and he has to provide you of the records. But do take some time after that and evaluate the tax implication. You can post here and others will chime in.
I put in 150 K in one lump sum roughly 2 years ago. I’m wondering if there is a way for me to figure out the tax implications of moving that money out of there to a vanguard Stock index fund without me having to ask the FA

MiddleOfTheRoad
Posts: 118
Joined: Fri Jul 21, 2017 11:19 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by MiddleOfTheRoad » Tue Apr 10, 2018 1:47 pm

ElmoHongZito wrote:
Tue Apr 10, 2018 11:22 am
MiddleOfTheRoad wrote:
Tue Apr 10, 2018 9:17 am
“Cost basis” is how much you put in. You need to get away from that FA, and he has to provide you of the records. But do take some time after that and evaluate the tax implication. You can post here and others will chime in.
I put in 150 K in one lump sum roughly 2 years ago. I’m wondering if there is a way for me to figure out the tax implications of moving that money out of there to a vanguard Stock index fund without me having to ask the FA
Is there an account that you can login? Quarterly statements? Once you have the statements, you can talk to Vanguard (or fidelity/schwab, whereever you decide to put your other cash) to see if they can do an in-kind transfer of assets (no selling involved, no cap gain tax triggered). Once you have the etf/stocks in a brokerage account in your control, you can decide what/when to sell without triggering too much tax liabilities.

blinx77
Posts: 226
Joined: Sat Jan 07, 2012 11:23 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by blinx77 » Tue Apr 10, 2018 7:57 pm

Why stop reinvesting dividends?

krow36
Posts: 1771
Joined: Fri Jan 30, 2015 6:05 pm
Location: WA

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by krow36 » Tue Apr 10, 2018 8:39 pm

Why buy more if you plan to sell soon and invest in diversified index funds? Short-term capital gains are taxed at your income tax bracket rate. Stop reinvestment of dividends and have them put in a MM fund. :happy

Natsdoc
Posts: 58
Joined: Sun Jun 15, 2014 8:53 pm

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by Natsdoc » Tue Apr 10, 2018 8:46 pm

[/quote]

@Natsdoc I just read your reply post and I want to thank you so much for taking the time to break it down like this for me. This is extemely helpful and I am so grateful.

I am going to take that advice and start by doing the back-door 2017 roth IRA for my wife. I already found out that I can roll over my pretaxed managed IRA to the new 401k my employer is offering. It’s managed by Vanguard and the funds have very low Expense Ratios. Is it best I put 100% of it in the following Bond fund with a low 0.03% ER as suggested in one of the earlier posts?

Vanguard Total Bond Market Index Fund Institutional Plus Shares (VBMPX)

Another question I had is about the managed account and IRA that has been managed for me for a few years now by the same person. When we started he was at Wells Fargo, then he moved to Raymond James, now he is at Citibank. Every time I move these accounts as he has moved am I ocurring costs or paying any taxes because of the move?

Also I do have term life insurance. I have it with Northwestern Mutual which is probably one of the more expensive ones. My FA who used to work there and can now sell all other insurances except theirs (only NWM agents can sell their products) still suggests that I do Northwestern Mutual because I can convert any or all of my term to whole life based on my health from when I got the term policies and that they have the best whole life products hands down etc etc. He is a pretty smart dude and the fact that he was pointing me to the only carrier he cannot sell resonated with me.
[/quote]

You are most welcome! You asked for a step by step plan after all! :happy
There are a lot of moving parts here and you're doing really well keeping up!

In terms of your questions - that's great that you can roll over your IRA into your 401k! At this point I think the first step is to get it out of the managed advisory firm. Putting it in the low cost bond fund would be fine, but eventually post your new 401K options here and we can help give some advice it there is a better way to arrange your overall portfolio.

In terms of your FA moving companies - it's hard to say exactly what cost that has had to you without a lot more detail- I would imagine there is some cost that you have likely already paid in terms of transaction fees, loads (percentage of sales charges when you buy a new investment) or capital gains taxes on frequently traded stocks/funds.
If you have prior copies of transfer agreements it may be buried in there somewhere. Ideally this would be disclosed to you in a transparent manner but probably is buried in a ream of paperwork somewhere. If you held non-transferable assets, and agreed to move them you likely already paid for the capital gains that occurred by selling the original asset and buying something different at the new place. (For moving the IRA, this won't be such a big deal, as you can exchange funds without any tax consequences now.) Moving the taxable account is going to be more complicated, as you will probably accrue both short and long term capital gains. However, this is a sunk cost - nothing you do now is going to get that back, so try not to worry to much about it going forward and think of it as valuable tuition dollars spent!

Keep your term life insurance for now. Do NOT convert it to whole life...it's usually not worth it. This is generally a waste of money and a great source of commission for your FA/insurance salesman. You're much better off saving the difference in premiums, getting a financial education from the blog and recommended reading, and figuring out a long term financial plan for getting your family to financial independence. Not sure what your monthly expenses are but I would imagine that with your current savings + life insurance she would be able to get by on that and her salary for a very long time, probably through retirement age. Get all the rest sorted out and you can always reassess later

I agree that your FA is a pretty smart dude! I assume based on your income that you are very, VERY good at your sales job, and he's selling you a lot of products that you don't really need, which is pretty tough when you are familiar with the sales tactics he's probably using. These tend to be very sticky relationships - he's probably a genuinely likable guy and you may feel a lot of loyalty to him. I don't doubt that he probably believes wholeheartedly that he is working overall toward your best interest, but he's currently incentivized in such a way that it's probably difficult to see the other side of things.

ElmoHongZito
Posts: 66
Joined: Tue Mar 27, 2018 9:17 am

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by ElmoHongZito » Thu Apr 12, 2018 8:05 pm

Ok so I opened a Vanguard account for my wife today and did a tIRA in her name to meet the 2017 deadline. It should fund in a day or 2 when they verify the banking info.

Does it matter when I do the backdoor conversion to a Roth IRA? I am assuming that I have to do the conversion before I file my 2017 tax returns since a tIRA is normally tax-deductable.

Can someone please clarify? Thanks so much

delamer
Posts: 4790
Joined: Tue Feb 08, 2011 6:13 pm

Re: 36 yr old BH Newbie with substantial savings- Help!!!

Post by delamer » Thu Apr 12, 2018 8:23 pm

ElmoHongZito wrote:
Thu Apr 12, 2018 8:05 pm
Ok so I opened a Vanguard account for my wife today and did a tIRA in her name to meet the 2017 deadline. It should fund in a day or 2 when they verify the banking info.

Does it matter when I do the backdoor conversion to a Roth IRA? I am assuming that I have to do the conversion before I file my 2017 tax returns since a tIRA is normally tax-deductable.

Can someone please clarify? Thanks so much

As I thought, you will be taxed in 2018. Your 2017 filing is irrelevant. From rothira.com -
When you convert from a Traditional IRA to a Roth IRA, a process also known as creating a “backdoor” Roth IRA, you generally pay income tax on the contributions. The taxable amount that is converted is added to your income taxes and your regular income rate is applied to your total income. If the amount is large enough, it may raise your tax bracket for the year in which you do the conversion.

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