Portfolio Checkup (please tell me we're boring) (with an ISO question)

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Portfolio Checkup (please tell me we're boring) (with an ISO question)

Post by crit » Sun Aug 05, 2018 12:47 pm

We reached a milestone this month, so I thought I'd check in.

Emergency funds: Yes
Debt: Mortgage ~200k at 3.4% (probably $100k + of equity).
Tax Filing Status: Married Filing Jointly. No offspring.
Tax Rate: 24% Federal, 3% State
Age: mid & late 40s
Asset allocation: 80/20 (we're aware that this is on the riskier side for our ages)

Portfolio: 0.75M. I have us at 78.8% stocks (14% international), 18.3% bonds + 2.9% TIAA Real estate

Taxable: at Vanguard
Single stock, 2.8% (legacy, ~50% long-term gains, will sell once in a lower bracket)
Total market VTSAX 26.2% (ER 0.05)
Developed International index, VFWAX, 11.4% (ER 0.13)
Large-cap index, VLCAX, 1.7% (ER 0.08) (tax-loss harvest partner)
Total International index, VTIAX, 1.8% (ER 0.19) (tax-loss harvest partner)

Spouse 1 403b, at TIAA
Vanguard Institutional index, VINIX 11.9% (ER 0.04)
Vanguard Extended index, VIEIX, 4.5% (ER 0.07)
TIAA traditional, mix of GRSA and RA, 9.4%
TIAA real estate, QREARX, 2.9%, (ER 0.89)

Spouse 1 old 403bs, at TIAA/Vanguard so no big motivation to roll
TIAA international index 0.3% (ER 0.06)
Vanguard total bond, VTBLX, 1.1% (ER 0.2)

Spouse 1 Roth, at Vanguard
Vanguard 500 index, VFIAX, 3.9% (ER 0.05)

Spouse 2 401k, at Fidelity
Vanguard Balanced index, VBINX (allocation 60/40), 19.5% (ER 0.07)

Spouse 2 Roth, at Vanguard
Vanguard 500 index, VFIAX, 2.7% (ER 0.05)

$11k to Roth via backdoor
$18.5k to Spouse 2 401k, no match
$18.5k to Spouse 1 403b, $11k match.
we have been averaging $80-100k to taxable for a few years, but view this as temporary as Spouse 2's job is in a volatile market.

Available funds:
-- in the Roths and taxable, all of the Vanguard options.
-- more-expensive managed funds in Spouse 1 403b, and a low-cost Vanguard total bond fund if needed.
-- there is no large-cap in Spouse 2 401k; thus the Balanced index. Fidelity target-date funds are also available at low cost.

We have no plans to retire early. Spouse 2's job is in a very volatile market, and so we don't expect to be in the 24% bracket long; Spouse 1's income alone would bring us to the top of 12% after deductions, at which point we would harvest some of the taxable gains. We'd also use some taxable to make sure the 403b contribution stays maxxed if necessary, effectively shifting that investment to tax-protected, but can easily live within Spouse 1's income generally.

HSAs are not available.

I've considered paying down and recasting the mortgage due to the SALT deduction limits, but I'm not very driven by the emotional arguments of paying off a mortgage, and personally I expect the SALT to reappear.

Advanced questions: Spouse 2 is exercising some ISOs that are currently valued at ~$120k of gain over purchase price in a privately-held company (this is not counted in our portfolio, obvs!).
Do I need to worry about the AMT (we just barely had to pay it 2017, and are just at the top of 24%)?
Should we get a CPA (I have always used Turbotax) at some point because of those?

Thanks in advance for your feedback or thoughts on what we should be addressing.
Last edited by crit on Thu Aug 09, 2018 1:35 pm, edited 1 time in total.

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Re: Portfolio Checkup (please tell me we're boring) (with an ISO question)

Post by bloom2708 » Mon Aug 06, 2018 8:21 am

Looks good to me.

If you can stow $80k to $100k additional in taxable in a year, then you are a good candidate to just pay off the mortgage.

Your rate is pretty good, but there is nothing like paying that last debt off and fully owning your home. It is a lifestyle decision, but a good one.

I would head toward 70/30. With your savings rate, there just isn't much reason to be 80/20 closing in on 50. Only my opinion. :wink:

Hopefully others can chime in on the ISO and AMT question. With the new tax rules I am not up to date on how those will interact.

Good milestones to cross!
"A Stoic believes they don’t control the world around them, only how they respond--and that they must always respond with courage, temperance, wisdom, and justice." --Daily Stoic

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Re: Portfolio Checkup (please tell me we're boring) (with an ISO question)

Post by Tamarind » Mon Aug 06, 2018 8:39 am

You need to run the numbers, but I don't think a CPA is necessary.

Fill out a sample tax return with best guesses and then fill out form 6251 to forecast your AMT (form and instructions in results here: http://lmgtfy.com/?q=Form+6251).

You can use the 2017 forms, just know that when you subtract the exemption (the amount you enter on line 29), it's going to be $109,500 for a married couple. Here's more info on changes for 2018: https://www.google.com/amp/s/www.fool.c ... n-201.aspx

If you are well up in the 24% bracket and then add $120k in ISO preferments, I'm pretty sure you are going to pay some AMT. Especially if you have enough deductions that you still expect to itemize in 2018. But you won't be paying all that much AMT if you do have to.

Are you selling the ISOs in addition to exercising them?

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Re: Portfolio Checkup (please tell me we're boring) (with an ISO question)

Post by crit » Mon Aug 06, 2018 9:21 am

Thanks for the direction. I'll be doing a lot of reading on ISOs! Should we be paying estimated taxes because of the ISO exercise?

Our 2017 AGI was $320k. I am unsure about itemizing in 2018 -- our big deductions were mortgage interest + SALT (we have a 1% local tax as well as 3% state) but no kids, no education or business expenses to speak of.

We plan to hold the shares for now, and the options were granted in 2015/2016 so as long as we manage to hold for at least a year we'll be in LTCG, as I understand it.

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Re: Portfolio Checkup (please tell me we're boring) (with an ISO question)

Post by crit » Thu Aug 09, 2018 1:28 pm

midweek bump for the portfolio eyeballs ...

By filling out Form 6251, it appears** that we will owe ~$25k in additional AMT tax on the ~$120k 'bargain' of ISO exercise. To me this feels like we're just getting straight-up taxed on the (fictional!) gain. Is this because we're right on the AMT boundary? We owed $1430 in AMT for 2017. Or does that seem like my calculations were incorrect?

**That said, this was from a late-night pencil fill of 6251, which is a bit complicated. I only used TT Premier last year because we had no investment sales, so it wasn't a good resource here. I will get a hold of TT Deluxe 2017 so I can use it to see whether I did the calculations correctly.

If we continue to owe a small amount of AMT after this year, then the forward AMT credit won't help us, correct?

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