Help with American Funds 401k Plan

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mindmaniac
Posts: 1
Joined: Thu Aug 03, 2017 5:40 pm

Help with American Funds 401k Plan

Post by mindmaniac »

About myself (34 y/o), I recently graduated from dental school and have a great career ahead of me. Prior to dental school I worked for 6 years and saved a modest $90,000 held in a 403b Fidelity plan with another $30,000 in a Vanguard Roth IRA with 100% VTSAX. My wife (39 y/o)is a much better saver than me, and is diligent about saving to her 401k through IBM and Roth IRA contributions prior to me graduating from dental school. I recently partnered into the practice I have been at for 1.5 years and joined the retirement plan they have through American Funds. I was disheartened since I have read through the forums and the various Boglehead books and appreciate the philosophy of low fees and passive investing to index funds.

Due to the size of our practice, I qualify for R-3 shares. My question would be what is the best mix of American Funds to replicate a balanced Boglehead type passive investing method. I assume I should max our my 401k contributions yearly first, before investing into taxable IRA accounts. My income this year is expected to be around $240,000 and my wife's salary is $65,000. While that sounds like a lot on paper, I still have large student loan payments to pay off.

Since I don't qualify for a standard Roth IRA would it be advisable to a backdoor Roth IRA and should I consider a Roth 401k vs std 401k? I've got $15,000 sitting a in std IRA and don't have an accountant yet to explain the tax implications if I do a backdoor Roth IRA.

American Funds Choices
Fund Exp Ratio
American Funds EuroPacific 1.13
Am Funds Growth Fund of Am 0.98
Am Funds New Perspective Fund 1.09
Am Funds New World Fund 1.30
Am Funds SmallCap World Fund 1.35
Am Fund Cap World Growth Income 1.09
Am Funds Investment Co of Amer 0.95
Am Funds Washington Mut Inv Fun 0.94
Am Funds Capital Income Builder 0.94
Am Funds American Balanced 0.93
Am Fund Bond Fund of Amer 0.91
Am Funds US Govt Money Mkt 0.98
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Tyler Aspect
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Location: California
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Re: Help with American Funds 401k Plan

Post by Tyler Aspect »

mindmaniac wrote: Tue Oct 09, 2018 11:22 am About myself (34 y/o), I recently graduated from dental school and have a great career ahead of me. Prior to dental school I worked for 6 years and saved a modest $90,000 held in a 403b Fidelity plan with another $30,000 in a Vanguard Roth IRA with 100% VTSAX. My wife (39 y/o)is a much better saver than me, and is diligent about saving to her 401k through IBM and Roth IRA contributions prior to me graduating from dental school. I recently partnered into the practice I have been at for 1.5 years and joined the retirement plan they have through American Funds. I was disheartened since I have read through the forums and the various Boglehead books and appreciate the philosophy of low fees and passive investing to index funds.

Due to the size of our practice, I qualify for R-3 shares. My question would be what is the best mix of American Funds to replicate a balanced Boglehead type passive investing method. I assume I should max our my 401k contributions yearly first, before investing into taxable IRA accounts. My income this year is expected to be around $240,000 and my wife's salary is $65,000. While that sounds like a lot on paper, I still have large student loan payments to pay off.

Since I don't qualify for a standard Roth IRA would it be advisable to a backdoor Roth IRA and should I consider a Roth 401k vs std 401k? I've got $15,000 sitting a in std IRA and don't have an accountant yet to explain the tax implications if I do a backdoor Roth IRA.

American Funds Choices
Fund Exp Ratio
American Funds EuroPacific 1.13
Am Funds Growth Fund of Am 0.98
Am Funds New Perspective Fund 1.09
Am Funds New World Fund 1.30
Am Funds SmallCap World Fund 1.35
Am Fund Cap World Growth Income 1.09
Am Funds Investment Co of Amer 0.95
Am Funds Washington Mut Inv Fun 0.94
Am Funds Capital Income Builder 0.94
Am Funds American Balanced 0.93
Am Fund Bond Fund of Amer 0.91
Am Funds US Govt Money Mkt 0.98
A simple allocation would be 60% The Investment Company of America, and 40% The Bond Fund of America.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.
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Duckie
Posts: 9767
Joined: Thu Mar 08, 2007 1:55 pm

Re: Help with American Funds 401k Plan

Post by Duckie »

mindmaniac, welcome to the forum.
mindmaniac wrote:Since I don't qualify for a standard Roth IRA would it be advisable to a backdoor Roth IRA and should I consider a Roth 401k vs std 401k? I've got $15,000 sitting a in std IRA and don't have an accountant yet to explain the tax implications if I do a backdoor Roth IRA.
In order to use the Backdoor Roth IRA method properly you will have to get rid of that $15K Traditional IRA either by rolling it into your current pre-401k or by converting it to a Roth IRA and paying the taxes. Find out if your 401k allows incoming rollovers.
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goingup
Posts: 4901
Joined: Tue Jan 26, 2010 12:02 pm

Re: Help with American Funds 401k Plan

Post by goingup »

Tyler Aspect wrote: Tue Oct 09, 2018 5:14 pm
mindmaniac wrote: Tue Oct 09, 2018 11:22 am About myself (34 y/o), I recently graduated from dental school and have a great career ahead of me. Prior to dental school I worked for 6 years and saved a modest $90,000 held in a 403b Fidelity plan with another $30,000 in a Vanguard Roth IRA with 100% VTSAX. My wife (39 y/o)is a much better saver than me, and is diligent about saving to her 401k through IBM and Roth IRA contributions prior to me graduating from dental school. I recently partnered into the practice I have been at for 1.5 years and joined the retirement plan they have through American Funds. I was disheartened since I have read through the forums and the various Boglehead books and appreciate the philosophy of low fees and passive investing to index funds.

Due to the size of our practice, I qualify for R-3 shares. My question would be what is the best mix of American Funds to replicate a balanced Boglehead type passive investing method. I assume I should max our my 401k contributions yearly first, before investing into taxable IRA accounts. My income this year is expected to be around $240,000 and my wife's salary is $65,000. While that sounds like a lot on paper, I still have large student loan payments to pay off.

Since I don't qualify for a standard Roth IRA would it be advisable to a backdoor Roth IRA and should I consider a Roth 401k vs std 401k? I've got $15,000 sitting a in std IRA and don't have an accountant yet to explain the tax implications if I do a backdoor Roth IRA.

American Funds Choices
Fund Exp Ratio
American Funds EuroPacific 1.13
Am Funds Growth Fund of Am 0.98
Am Funds New Perspective Fund 1.09
Am Funds New World Fund 1.30
Am Funds SmallCap World Fund 1.35
Am Fund Cap World Growth Income 1.09
Am Funds Investment Co of Amer 0.95
Am Funds Washington Mut Inv Fun 0.94
Am Funds Capital Income Builder 0.94
Am Funds American Balanced 0.93
Am Fund Bond Fund of Amer 0.91
Am Funds US Govt Money Mkt 0.98
A simple allocation would be 60% The Investment Company of America, and 40% The Bond Fund of America.
^that's a good suggestion. We have had the American Balanced fund (R6 shares) in a 401K for 10+ years. It's around 65/35 stock/bonds. It's an easy one-fund solution. The OP should absolutely max out 401K--to lower income and because the ERs aren't horrible just not very good.
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ruralavalon
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Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: Help with American Funds 401k Plan

Post by ruralavalon »

Welcome to the forum :) .

Congratulations on your graduation and achieving partnership in your practice.

Some additional information might be useful.

What is the amount and interest rate on your student debt?

Do you have any other debt, if so what types, amounts and interest rates?

What is your tax bracket, both federal and state? What is your tax filing status?

Will your old 403b with Fidelity accept a rollover from your traditional IRA?

Is your wife contributing the annual employee maximum of $18.5k to her 401k?

Could you list each of your accounts, including your wife's accounts? Under each account list which funds are currently being used in that account, giving fund names, tickers and expense ratios.

What funds are offered in your wife's 401k, giving fund names, tickers and expense ratios?

What funds are offered in your old 403b with Fidelity, giving fund names, tickers and expense ratios?

It's often better to coordinate investments among all accounts of a married couple, treating all accounts together as a single unified portfolio, rather than view each account separately.

You can simply add this to your original post using the edit button (the pencil icon near the upper right corner of your post), it helps a lot if all of your information is in one place. Please see the post "asking portfolio questions" for format.


mindmaniac wrote: Tue Oct 09, 2018 11:22 am About myself (34 y/o), I recently graduated from dental school and have a great career ahead of me. Prior to dental school I worked for 6 years and saved a modest $90,000 held in a 403b Fidelity plan with another $30,000 in a Vanguard Roth IRA with 100% VTSAX [emphasis added]. My wife (39 y/o)is a much better saver than me, and is diligent about saving to her 401k through IBM and Roth IRA contributions prior to me graduating from dental school. I recently partnered into the practice I have been at for 1.5 years and joined the retirement plan they have through American Funds. I was disheartened since I have read through the forums and the various Boglehead books and appreciate the philosophy of low fees and passive investing to index funds.

Due to the size of our practice, I qualify for R-3 shares. My question would be what is the best mix of American Funds to replicate a balanced Boglehead type passive investing method. I assume I should max our my 401k contributions yearly first, before investing into taxable IRA accounts. My income this year is expected to be around $240,000 and my wife's salary is $65,000. While that sounds like a lot on paper, I still have large student loan payments to pay off [emphasis added].

Since I don't qualify for a standard Roth IRA would it be advisable to a backdoor Roth IRA and should I consider a Roth 401k vs std 401k? I've got $15,000 sitting a in std IRA [emphasis added] and don't have an accountant yet to explain the tax implications if I do a backdoor Roth IRA.

American Funds Choices
Fund Exp Ratio
American Funds EuroPacific 1.13
Am Funds Growth Fund of Am 0.98
Am Funds New Perspective Fund 1.09
Am Funds New World Fund 1.30
Am Funds SmallCap World Fund 1.35
Am Fund Cap World Growth Income 1.09
Am Funds Investment Co of Amer 0.95
Am Funds Washington Mut Inv Fun 0.94
Am Funds Capital Income Builder 0.94
Am Funds American Balanced 0.93
Am Fund Bond Fund of Amer 0.91
Am Funds US Govt Money Mkt 0.98
In your 401k I suggest using:
1) American Funds Washington Mutual Fund R3 (RWMCX), ER 0.94%; and
2) American Funds Bond Fund of America R3 (RBFCX) ER 0.93%.

In the alternative you could simply use:
American Funds American Balanced Fund R3 (RLBCX) ER 0.93% by itself.

Those are not low expense ratios, but are not so high that you should skip using the 401k. Clearly, given your high tax bracket, you should contribute the maximum $18.5k per year to your 401k.

In addition your wife should be contributing the annual employee maximum of $18.5k to her 401k.

In addition to contributing $18.5k per year to your 401ks, the next priority should probably be to pay off the student debt.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
megabad
Posts: 3638
Joined: Fri Jun 01, 2018 4:00 pm

Re: Help with American Funds 401k Plan

Post by megabad »

I would roll the IRA into your 401k if allowed by your plan. Otherwise I would just pay the taxes on it and convert it to Roth to clear the way for backdoor roth. I would invest in Roth IRA for both you and spouse first ($11000), then $18500 in spouses 401k, then after tax in spouse 401k to max (if they allow you to net her paycheck to zero, I would do it), then if you have money left over I would invest in your 401k. For me, exceptions to this order might be if you have very high interest student loan debt or if your practice offers a 401k match.
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