Portfolio help - particularly with dilemma of Roth conversion

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Elzax
Posts: 3
Joined: Wed Jul 11, 2018 12:36 pm

Portfolio help - particularly with dilemma of Roth conversion

Post by Elzax » Wed Jul 11, 2018 2:59 pm

Because of the nature of my question, I'm going to include actual dollar amounts here.

Background: I am 32 years old and have historically made $70-80k a year and have taken a new job that is liable to at least triple that income starting next month. Thus far in 2018, I have made a taxable gross of ~$60,000 (final paychecks for work done in June not yet in yet) and anticipate to make on the order of $90k for the remainder of the year. My wife (same age) is employed and makes on the order of $55k, so a total anticipated taxable income for 2018 of just over $200,000, then for 2019 and later > $300k. When my wife finishes training in 3-6 years, anticipate total household income of $600k and higher.

We are currently DINK but that will likely change in 1-2 years as my wife's schedule becomes less insane.

Emergency funds: We have ready access to approximately $35k in cash, which is our emergency fund, vacation slush fund, and savings for a car (which we'll need within the next year or two, as both of our vehicles are getting up there in age, particularly my wife's). The sign on bonus for my new job (included in the $90k expected above) will be on the order of $15k, which I plan to throw into this bucket as well.

Debt:
$142,000 mortgage @ 3.625% with 14 years left on the 15 year note.
No revolving credit card debt (we pay them monthly). No student loans (we're both quite lucky). No car loans.

Tax Filing Status: Married filing jointly

Tax Rate: 24% federal, 4.24% State
State of Residence: AZ
Age: 32 & 32
Desired Asset allocation: For me, I am comfortable with 100% stock *for now*, especially when the vast majority of our assets left are our human capital and we're carrying a mortgage. My wife is much less "into" it and has historically picked whatever sounds appropriate at the time, we have not done as much coordination as we probably should have (with philosophy being the savings rate is probably most important right now)

Desired International allocation: 20-30% overall. I honestly haven't paid as much attention as this as I should have.

I like the idea of a small cap tilt, but have yet to decide how much of it I want.

Current retirement assets

Taxable
Her Vanguard brokerage account - ~$15k in VMRGX (Vanguard Morgan Growth Fund Investor Shares, ER 0.38%). My main goal with this one was moving it away from Edward Jones, which we did a few years back. She chose the fund as most similar to what she was previously invested in (but a much lower ER)

I emptied out my brokerage account when we bought our condo last year and our joint brokerage account is currently empty as well.

Pre-Tax - these are all accounts with prior employers and coincidentally all happen to be with Fidelity
His 403b #1 - $22,000. 50% in an institutional Russel 3000 index (ER 0.005%) and 50% in Vanguard Small Cap Institutional shares (VSCPX, ER 0.04%)
His 401a #1 - $17,000. 100% in an institutional Russel 3000 index (ER 0.005%)
His 401a #2 - $11,000. 100% Fidelity® 500 Index Fund - Institutional Class (FXSIX, ER 0.03%)

My wife has no pre-tax accounts.

Post-Tax
His 403b #2 (all contributions are Roth) - $14,000. 100% Fidelity® 500 Index Fund - Institutional Class (FXSIX, ER 0.03%)
His Vanguard Roth IRA - $45k. 70% in Vanguard Total Stock Market (VTSAX, 0.04%), 30% in Vanguard Total International (VTIAX, 0.11%)
Her Vanguard Roth IRA - Vanguard Target Retirement 2050 (VFIFX, 0.15%)

Both Roth IRAs had maximum contributions for 2018 put in in January through the "backdoor" method.

Contributions

New annual Contributions

New employer 401k - ~$13k this year, maximum thereafter ($18.5). Plan for pretax contribution
After-tax contribution to new employer 401k - maximum 10% of income, anticipate ~$7k this year and ~$25-27k thereafter. I have unlimited ability for in-service rollovers of after-tax contributions.

From the summary document, I should have access to Fidelity target date funds, 19x "Extended choice funds" (various indexes, no details provided), and if the indexes there are inadequate, I have access to brokeragelink with presumably all Fidelity options available.

For her, she will enroll in her employers 457b. Does not appear to have access to a 401k or 403b (unfortunately confirmed). Plan for as much as we can put in this year (Probably on the order of ~$13-15k) and the maximum therafter. Options include but are not limited to - American Funds target date funds (ER ~0.45%) and a number of indexes including Vanguard Institutional Fund shares for both large cap (VINIX, 0.035%) and small cap (VSCIX, 0.04%).

Also plan on backdoor Roth IRA for each of us in 01/2019 and moving forward.

That's a total of (starting in 2019 and moving forward) ~$72,000 in various tax advantaged savings between us, depending on how much 10% of my income ends up being and what the yearly caps are, split roughly 50/50 Roth and Traditional. Our spending is fairly low, so any excess may go into taxable brokerage accounts vs cash savings for upcoming expenses (cars, children, whatever).

My plan right now is to primarily put further money into whatever the best large-cap index funds available are in the various accounts, with the possibility of a more formal international allocation/small cap tilt.

Questions:
1. My biggest dilemma is what to do with the current ~$50,000 in my pre-tax accounts. I can leave them the same, roll them over into my new 401k, or roll them over to an IRA and convert them to Roth. This is the one year I'll have space within the 24% tax bracket, with the next few year likely being right at the top of 24% or in the 32% zone and (once my wife finishes her training) likely in the 35% bracket or higher. In addition, we are currently living in AZ, with tax rates significantly below CA (where we are possibly going to end up in the long run). I anticipate our marginal tax bracket in retirement to be in at least the current 22-24% tax brackets, and who knows if tax brackets are higher 20-30 years from now. Would it be worth spending the ~$14k now?
2. Suggestions for a better small cap or value tilt?? What accounts would be worth doing it in?

ExitStageLeft
Posts: 982
Joined: Sat Jan 20, 2018 4:02 pm

Re: Portfolio help - particularly with dilemma of Roth conversion

Post by ExitStageLeft » Wed Jul 11, 2018 4:09 pm

Welcome to the forum and congratulations on the new job!

I'm incredulous at the expense ratio of your 403b institutional fund. Wow. As long as that fund is consistent with your current investing goals I would leave those accounts where they are.

There is however a lot to be said for simplicity, and converting them to Roth would be nice. It sounds like the $14k tax hit won't be too much of a burden. I think in the purely economic analysis there may be an argument to do a Roth conversion on your pre-tax accounts. But you probably won't find anything with expense ratios so low.

The deciding factor would of course be what you expect your tax rate to be in retirement. Even if you build up a substantial portfolio, most of that will be in taxable or Roth accounts. You might want to work through a few simple extrapolations and calculate what your income sources will be when you retire. Assuming no pensions but both getting social security, I expect you will see 22%, maybe 24%.

If that's the case, a Roth conversion this year is pretty much a wash. Do whichever feels right. But if you are going to convert this is definitely the year to do it.

Elzax
Posts: 3
Joined: Wed Jul 11, 2018 12:36 pm

Re: Portfolio help - particularly with dilemma of Roth conversion

Post by Elzax » Wed Jul 11, 2018 11:36 pm

That set of accounts with access to the super nice institutional fund was originally through a very large university system. That said, I'm not sure how different 0.005% is from 0.04% that I'd get just rolling it over (I mean yes, it's an order of magnitude difference, but on the amount we're talking about it's something like $14/year).

Whether to Roth convert or not is still my major hangup. I have 6 months left to decide I suppose.

Fishing50
Posts: 264
Joined: Tue Sep 27, 2016 1:18 am

Re: Portfolio help - particularly with dilemma of Roth conversion

Post by Fishing50 » Fri Jul 13, 2018 12:47 am

Do the Roth conversion, 24% tax bracket is a bagain with your expected income.
It's perfectly legal, go ask the IRS, they'll say the same thing. I actually feel stupid telling you this, I'm sure you would've investigated the matter yourself. Andy Dufresne

Dottie57
Posts: 4671
Joined: Thu May 19, 2016 5:43 pm

Re: Portfolio help - particularly with dilemma of Roth conversion

Post by Dottie57 » Fri Jul 13, 2018 10:16 pm

Fishing50 wrote:
Fri Jul 13, 2018 12:47 am
Do the Roth conversion, 24% tax bracket is a bagain with your expected income.
+1

airstreamer2008
Posts: 2
Joined: Fri Jul 13, 2018 10:12 pm

Re: Portfolio help - particularly with dilemma of Roth conversion

Post by airstreamer2008 » Fri Jul 13, 2018 10:27 pm

Any chance one of you might become self-employed in the future. I did IT consulting for many years. I started an SEP and saved much more :moneybag than I could with an IRA. Just a thought .... 8-)

gostars
Posts: 439
Joined: Mon Oct 09, 2017 7:53 pm

Re: Portfolio help - particularly with dilemma of Roth conversion

Post by gostars » Sat Jul 14, 2018 3:22 am

Elzax wrote:
Wed Jul 11, 2018 2:59 pm
For her, she will enroll in her employers 457b. Does not appear to have access to a 401k or 403b (unfortunately confirmed). Plan for as much as we can put in this year (Probably on the order of ~$13-15k) and the maximum therafter. Options include but are not limited to - American Funds target date funds (ER ~0.45%) and a number of indexes including Vanguard Institutional Fund shares for both large cap (VINIX, 0.035%) and small cap (VSCIX, 0.04%).
What's wrong with a 457b? It has all the advantages of a 401k/403b, plus you have the option to pull out the money penalty-free (just taxed as regular income) after leaving the employer, which makes for a great second or third tier emergency fund down the road. Also, if you do end up moving and she changes employers mid-year, contributions to the 457b are under a separate limit from 401k/403b, giving her the option to set aside $37000 in that year if you can afford it. Only downside is if it's not a government plan and the assets might be up for grabs if the employer has problems.

Elzax
Posts: 3
Joined: Wed Jul 11, 2018 12:36 pm

Re: Portfolio help - particularly with dilemma of Roth conversion

Post by Elzax » Sat Jul 14, 2018 10:01 am

gostars wrote:
Sat Jul 14, 2018 3:22 am
Elzax wrote:
Wed Jul 11, 2018 2:59 pm
For her, she will enroll in her employers 457b. Does not appear to have access to a 401k or 403b (unfortunately confirmed). Plan for as much as we can put in this year (Probably on the order of ~$13-15k) and the maximum therafter. Options include but are not limited to - American Funds target date funds (ER ~0.45%) and a number of indexes including Vanguard Institutional Fund shares for both large cap (VINIX, 0.035%) and small cap (VSCIX, 0.04%).
What's wrong with a 457b? It has all the advantages of a 401k/403b, plus you have the option to pull out the money penalty-free (just taxed as regular income) after leaving the employer, which makes for a great second or third tier emergency fund down the road. Also, if you do end up moving and she changes employers mid-year, contributions to the 457b are under a separate limit from 401k/403b, giving her the option to set aside $37000 in that year if you can afford it. Only downside is if it's not a government plan and the assets might be up for grabs if the employer has problems.
Oh nothing is wrong. Just every employer I've had in the past that gave access to a 457b also gave access to a 403b, giving a double limit. I was hoping the same would end true for my wife, but unfortunately it isn't.

megabad
Posts: 663
Joined: Fri Jun 01, 2018 4:00 pm

Re: Portfolio help - particularly with dilemma of Roth conversion

Post by megabad » Sat Jul 14, 2018 1:44 pm

Elzax wrote:
Wed Jul 11, 2018 2:59 pm
1. My biggest dilemma is what to do with the current ~$50,000 in my pre-tax accounts. I can leave them the same, roll them over into my new 401k, or roll them over to an IRA and convert them to Roth. This is the one year I'll have space within the 24% tax bracket, with the next few year likely being right at the top of 24% or in the 32% zone and (once my wife finishes her training) likely in the 35% bracket or higher. In addition, we are currently living in AZ, with tax rates significantly below CA (where we are possibly going to end up in the long run). I anticipate our marginal tax bracket in retirement to be in at least the current 22-24% tax brackets, and who knows if tax brackets are higher 20-30 years from now. Would it be worth spending the ~$14k now?
Agree with prior posters and your logic here. I would rollover 401a and 403b accounts to IRA and convert any pre-tax amounts to Roth while in 24% bracket.
2. Suggestions for a better small cap or value tilt?? What accounts would be worth doing it in?
For now I would use your Roth IRA. After the rollovers it will be large enough for a significant tilt and you will have any fund available you. Eventually your other accounts will dwarf Roth IRA and you will have to find an option in the work plans (or change jobs and rollover) if you want a significant tilt. I have not found my qualified retirement plans have a good small cap/ small cap value option though so personally I would hold most of my small cap tilt in Roth IRA until I had to include some in the other accounts.
As soon as you have kid#1 I would start that 529 and get a fat life insurance and own occ disability policy for both you and wife.

Agree that it stinks she won't have both 403b and 457 but I don't find many doctors that stay with the same hospital forever anyway.

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