Portfolio Check-up and Taxed Account Advice

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Topic Author
hazard
Posts: 4
Joined: Sun May 06, 2018 12:49 pm

Portfolio Check-up and Taxed Account Advice

Post by hazard »

Hi everyone:

Long time reader, first time poster. I am hoping to get advice regarding mutual funds vs ETFs in a taxable account when I intend to take money out in the future to buy property. And of course, to see how I am doing. Here it goes...

EMERGENCY FUND
$20,000 – This covers 2 months of expenses for me. I have the emergency funds divided into 4 treasury bills (4-week) that are set to automatic reinvestment. This gives me access to 25% of my emergency fund every week and I am getting a better return than a high-yield online savings account.

DEBT
Auto loan - $20,500 @ 1.99%
Mortgage – $750,000 @3.625% My mortgage is for a duplex. I live in one unit and rent the other unit.
No additional loans or CC debt

TAX FILING STATUS: Single
TAX RATE: 33% Federal, 9.3% California
STATE OF RESIDENCE: California
AGE: 35

DESIRED ASSET ALLOCATION: 95% Stocks / 5% Bonds – I intend to adjust my allocation at 5 year intervals to increase my percentage of bonds. I understand this is a very aggressive allocation. I was invested in 2008 through my 457(B) and continued my regular contributions. In retirement I will also have a pension.

DESIRED INTERNATIONAL ALLOCATION: 40% of stocks

His Roth 457 and HSA portfolio breakdown (attempting 95% stocks; 40% International allocation; VTSAX is not available, so using 81% VFIAX, 4% VIMAX, and 15% VSMAX to approximate VTSAX per another BH wiki):

45% VFIAX (500 Index)
3% VIMAX (Mid-Cap Index)
9% VSMAX (Small-Cap Index)
38% VTIAX (Total International Stock Index)
5% VBTLX (Total Bond Market Index)

His Vanguard (Roth IRA and taxable brokerage account) breakdown (attempting 95% stocks, 40% international allocation, 25% of US stock Small-Cap Value tilt) I consider my Vanguard as a total combined portfolio to try and keep my least tax-efficient investments (BND ETF) in the Roth account.

43% VTSAX (and VTI ETFs) (Total Stock Market Index)
14% VBR (Small Cap Value ETF)
38% VXUS (Total International Stock Index ETF)
5% BND (Total Bond Market Index ETF)

CURRENT TOTAL PORTFOLIO: mid six-figures

CURRENT RETIREMENT ASSETS:
74% Roth 457 (tax advantaged)
14% Health Savings Account (tax advantaged)
3% Vanguard Roth IRA (tax advantaged)
9% Vanguard Individual Brokerage (taxed account)

NEW ANNUAL CONTRIBUTIONS
$18,500 Roth 457
Max to HSA (unknown what it is, deducted by employer per contractual agreement)
$5,500 Roth IRA

QUESTIONS:

1. How am I doing? I intend to retire in 22 years at the age of 57. I am trying to model my portfolio after the Vanguard target retirement funds with a more aggressive stock/bond ratio.

2. Currently I intend to invest any additional money into my Vanguard taxable brokerage. At any point I may want to sell some of that account and use the money to buy a rental property. I have read the articles and posts regarding Vanguard mutual funds vs ETFs. Is one better than another (mutual fund vs ETF) when I sell if I intend to take money out at some point for a real estate purchase?

3. Should I continue to purchase ETFs in my taxable brokerage rather than wait until I have the $10,000 minimum for admiral shares? I don’t like the idea of holding investor shares with the ETF option available.

I have about $30,000 that I am getting ready to put into the taxable brokerage, which is why I have so many questions relating to it.

Thanks for your time and help!

Hazard
ShowMeTheER
Posts: 511
Joined: Mon May 24, 2010 9:12 am

Re: Portfolio Check-up and Taxed Account Advice

Post by ShowMeTheER »

Some of my thoughts:

- how are you doing? Mid-six figures at age 35 is great. Mortgage size is concerning but yu appear to make a nice living at the 33% bracket... just can't tell exactly how high that income might be based on facts given. How stable is your income? $10K/mo expenses is a lot, but again back to the income situation.

- ETF vs mutual: I'm no deep expert but I don't think it's a world of difference. i can't imagine your wait would be long to get to the $10K for admiral. In any case, don't lose sleep over this stuff.

- other: why Roth contributions to 457?
Topic Author
hazard
Posts: 4
Joined: Sun May 06, 2018 12:49 pm

Re: Portfolio Check-up and Taxed Account Advice

Post by hazard »

Thank you for the reply ShowMeTheER.

My income is at the very low end of the 33% federal tax. I consider my income to be stable. I have been employed with the same employer since my early 20's and my job doesn't have a high turnover or layoff/termination rate.

Although my mortgage size may be concerning, it is for a duplex. My monthly rental income helps to offset that expense.

My tax advisor has suggested that I contribute to the Roth 457 option instead of the salary reduction option because his strategy is to reduce my taxable income in retirement. I haven't been successful in finding ways to take advantage of pre-tax accounts (such as a standard 457(b) or traditional IRA) that I could later convert to a Roth option without being taxed at the time of conversion.

Thanks again,

Hazard
livesoft
Posts: 85972
Joined: Thu Mar 01, 2007 7:00 pm

Re: Portfolio Check-up and Taxed Account Advice

Post by livesoft »

Your tax advisor? They didn't suggest that you use a California tax-exempt muni bond fund in your taxable account instead of BND? I think that would be incompetent on their part if they did not make that suggestion.

If you are going to retire at age 57, then you will most likely have plenty of years to do Roth conversions. I would not use the Roth 457 in that case now. Your tax advisor? I'm skeptical they know about taxes. There is no problem being taxed at conversion if the tax rate will be lower than it is now for you. You wouldn't convert all at once and it would be unlikely that you would be paying 42+% in taxes on the conversion.
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ShowMeTheER
Posts: 511
Joined: Mon May 24, 2010 9:12 am

Re: Portfolio Check-up and Taxed Account Advice

Post by ShowMeTheER »

Hazard -

You are in good shape regardless and congrats on your success, but I'd encourage you to think independently on that 457 regardless of what tax advisor says. Tax free retirement income is great but at your tax rates and anticipated continued steady high income, it would likely be coming at a significant cost to you... that cost being paying those high taxes now thanks to doing Roth contr instead of pre-tax.

Your downside is larger than your upside given your current situation. You can find tax planning flexibility in withdrawal phases down the road.
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dwickenh
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Re: Portfolio Check-up and Taxed Account Advice

Post by dwickenh »

livesoft wrote: Mon May 07, 2018 1:15 am Your tax advisor? They didn't suggest that you use a California tax-exempt muni bond fund in your taxable account instead of BND? I think that would be incompetent on their part if they did not make that suggestion.

If you are going to retire at age 57, then you will most likely have plenty of years to do Roth conversions. I would not use the Roth 457 in that case now. Your tax advisor? I'm skeptical they know about taxes. There is no problem being taxed at conversion if the tax rate will be lower than it is now for you. You wouldn't convert all at once and it would be unlikely that you would be paying 42+% in taxes on the conversion.
I agree 100% with this post and agree that you may want to question your tax adviser(or replace him/her). You should be golden for Roth conversions
after a early retirement that will save you 15-20% on taxes. Saving in Taxable or Roth after maxing out your tax-deferred space would be a great plan.
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett
Topic Author
hazard
Posts: 4
Joined: Sun May 06, 2018 12:49 pm

Re: Portfolio Check-up and Taxed Account Advice

Post by hazard »

livesoft wrote: Mon May 07, 2018 1:15 am Your tax advisor? They didn't suggest that you use a California tax-exempt muni bond fund in your taxable account instead of BND? I think that would be incompetent on their part if they did not make that suggestion.

If you are going to retire at age 57, then you will most likely have plenty of years to do Roth conversions. I would not use the Roth 457 in that case now. Your tax advisor? I'm skeptical they know about taxes. There is no problem being taxed at conversion if the tax rate will be lower than it is now for you. You wouldn't convert all at once and it would be unlikely that you would be paying 42+% in taxes on the conversion.
I should clarify. I do not hold BND (Total Bond Market Index ETF) in any taxable account. For my own accounting, I view my Vanguard taxable brokerage and Vanguard Roth IRA as a whole (meaning my asset allocation is spread across both accounts). All of the 5% BND is held in the Roth IRA. I also have BND in my Roth 457 and HSA. Should I still consider a California tax-exempt bond fund even though all BND is held in tax-advantaged accounts? My understanding is that because I hold BND in my Roth IRA, Roth 457, and HSA I do not need to worry about its relative tax efficiency.

Concerning my contributions to the Roth 457 vs the salary-reduction 457, I am currently in the 33% Federal, 9.3% California tax rate and my filing status is Single. I am currently in a pension system that will provide me with 100% of my current income in retirement. When my tax advisor and I consider my pension, investment property income, and the possibility of increased tax rates in the future, the Roth option seemed most logical. I have done substantial research regarding the Roth 457 vs the salary-reduction 457 and I see advantages to both. I thought that in my case, the pension at 100% of my current income makes the Roth option a clear choice because I will most likely not see a reduction in my federal tax rate.

Livesoft, you mention that if I was participating in the standard 457, I wouldn't convert all at once, and it would be unlikely that I would be paying 42+% in taxes on the conversion. Is the based on an assumption that I would be in a lower tax bracket in retirement?

To Livesoft and all who have replied, thank you for your time and advice!
livesoft
Posts: 85972
Joined: Thu Mar 01, 2007 7:00 pm

Re: Portfolio Check-up and Taxed Account Advice

Post by livesoft »

Details matter. Will you get 100% of your income at age 57? Or will you only get your full pension when reaching age 67?

In your situation, it might be better to have all your bonds in taxable as tax-exempt munis and use equities in your Roth accounts. Or put bonds in a tax-deferred (not Roth) 457.

Also, are you worried about whether the entity that is responsible for paying your pension will be fiscally responsible and able to pay it in the future? And what if you are unable to work to age 57? Or what if you want to retire earlier? Or ...?

I'd have contingency plans and still have some tax-deferred assets.
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Topic Author
hazard
Posts: 4
Joined: Sun May 06, 2018 12:49 pm

Re: Portfolio Check-up and Taxed Account Advice

Post by hazard »

I will receive 100% of my income at age 57.
livesoft wrote: Mon May 07, 2018 8:36 am In your situation, it might be better to have all your bonds in taxable as tax-exempt munis and use equities in your Roth accounts. Or put bonds in a tax-deferred (not Roth) 457.
Why might this be better?

I appreciate the "what ifs" you have provided regarding the pension and my ability to work. Considering these possibilities maybe a combination of salary-reduction and Roth for the 457 will be the more prudent approach.

Thanks Livesoft.
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