Portfolio advice, early 20s

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bluebutter
Posts: 9
Joined: Sun Oct 07, 2018 3:13 am

Portfolio advice, early 20s

Post by bluebutter » Thu Oct 11, 2018 12:45 am

General Info

Emergency funds: 4-5 months of expenses
Tax filling status: Single
Tax rate:
13.5% Federal, 5.4% State (after maximum retirement contributions)
17.7% Federal, 7.2% State (before any retirement contributions)
Tax bracket: 24%
State of Residence: CA
Age: early 20s
Desired Asset allocation: 80% stocks, 20% bonds
Desired International allocation: not sure

Current retirement assets

Total: $82,719

Taxable
24.77% cash
5.67% VFINX (Vanguard 500 Index Fund Investor Shares) (0.14%)
5.1% ALLY, COST, MSFT, SQ, TEAM, TSLA (on Robinhood)
Total: $28,228

Traditional IRA
18.75% VTTSX (Vanguard Target Retirement 2060 Fund Investor Shares) (0.15%)
1.24% VOO (Vanguard S&P 500 ETF) (0.04%)
Total: $16,677

Traditional 401k
45.71% VTSAX (Vanguard Total Stock Market Index Fund Admiral Shares) (0.04%)
Total: $37,813

Contributions

New annual contributions
$5,500 in traditional IRA
$18,500 in traditional 401(k) (50% of the first 4%)
$60,000 taxable

Available funds

Funds available in 401k

Code: Select all

VLXVX (Vanguard Target Retirement 2065 Inv)         (0.15%)
VTTSX (Vanguard Target Retirement 2060 Inv)         (0.15%)
VFFVX (Vanguard Target Retirement 2055 Inv)         (0.15%)
VFIFX (Vanguard Target Retirement 2050 Inv)         (0.15%)
VTIVX (Vanguard Target Retirement 2045 Inv)         (0.15%)
VFORX (Vanguard Target Retirement 2040 Inv)         (0.15%)
VTTHX (Vanguard Target Retirement 2035 Inv)         (0.14%)
VTHRX (Vanguard Target Retirement 2030 Inv)         (0.14%)
VTTVX (Vanguard Target Retirement 2025 Inv)         (0.14%)
VTWNX (Vanguard Target Retirement 2020 Inv)         (0.13%)
VTXVX (Vanguard Target Retirement 2015 Inv)         (0.13%)
VTINX (Vanguard Target Retirement Income Inv)       (0.13%)
VEVIX (Victory Sycamore Established Value I)        (0.62%)
GOBIX (BrandywineGLOBAL Global Opport Bond I)       (0.69%)
MADVX (BlackRock Equity Dividend Instl)             (0.73%)
PRRIX (PIMCO Real Return Instl)                     (0.88%)
VMMXX (Vanguard Prime Money Market Inv)             (0.16%)
PRRSX (PIMCO Real Estate Real Ret  Strat Instl)     (1.26%)
RNGGX (American Funds New Economy R6)               (0.46%)
POAGX (PrimeCap Odyssey Aggressive Growth Fund)     (0.64%)
RERGX (American Funds EuroPacific Gr R6)            (0.49%)
DFFVX (DFA U.S. Targeted Value Portfolio I          (0.37%)
HSIIX (Carillon Eagle Small Cap Growth I)           (0.78%)
MDISX (Franklin Mutual Global Discovery Z)          (0.96%)
BRHYX (BlackRock High Yield Bnd Portfolio K)        (0.54%)
VEMAX (Vanguard Emerging Mkt Stk Index Adm)         (0.14%)
VIMAX (Vanguard Mid Cap Index Adm)                  (0.05%)
VTIAX (Vanguard Total Intl Stock Index Adm)         (0.11%)
VBTLX (Vanguard Total Bond Market Index Adm)        (0.05%)
VTSAX (Vanguard Total Stock Mkt Index Adm)          (0.04%)
VSMAX (Vanguard Small Cap Index Adm)                (0.05%)
VFIAX (Vanguard 500 Index Adm)                      (0.04%)
PTRQX (PGIM Total Return Bond CL R6)                (0.41%)
Questions:
I've been maxing out my IRA and 401(k) accounts for the last two years and recently started contributing to personal taxable accounts. I started with Wealthfront and eventually created a Vanguard account and decided to create my own portfolio, so I moved all of my funds from the Wealthfront account (all ETFs) and sold them. Here are questions:

1. What bonds should I get for my 401(k) considering my options?
2. I want to have majority of my holdings in VTSAX (Vanguard Total Stock Market Index Fund Admiral Shares) (0.04%) but I'm not sure about the allocation % and what the rest of the stocks should be. For example, what international fund I should get (if I should get one at all, for diversity it would be great, but would it make any sense for me to minimize potential loses in expense of better gains considering my age)? I was also considering VHCIX (Vanguard Health Care Index Fund Admiral Shares) but I don't know have much experience with sector based investing and again, I am not sure what % allocation I would choose.
3. How should I allocate my stock funds across multiple accounts? For example, if I would also have some of the VGTSX (Vanguard Total International Stock Index Fund Investor Shares), should I have them on IRA or taxable account?
4. I am in my early 20s and I am still very much unsure about my personal and financial goals, so I'm not sure if that would be a smart decision for me to invest everything instead of saving a portion of my money into savings account for potential short-term goals? (This question probably belongs to "Personal Finance" but I assume it would really affect my portfolio allocation decision).
5. Generally, is there anything that I should look out for while manually exchanging funds in retirement accounts?

Thank you very much!
Last edited by bluebutter on Thu Oct 11, 2018 11:59 am, edited 4 times in total.

retiredjg
Posts: 34372
Joined: Thu Jan 10, 2008 12:56 pm

Re: Portfolio advice

Post by retiredjg » Thu Oct 11, 2018 9:23 am

bluebutter wrote:
Thu Oct 11, 2018 12:45 am
1. What bonds should I get for my 401(k) considering my options?
VBTLX (Vanguard Total Bond Market Index Adm) (0.05%)

2. I want to have majority of my holdings in VTSAX (Vanguard Total Stock Market Index Fund Admiral Shares) (0.04%) but I'm not sure about the allocation % and what the rest of the stocks should be. For example, what international fund I should get (if I should get one at all, for diversity it would be great, but would it make any sense for me to minimize potential loses in expense of better gains considering my age)? I was also considering VHCIX (Vanguard Health Care Index Fund Admiral Shares) but I don't know have much experience with sector based investing and again, I am not sure what % allocation I would choose.
Holding international stocks is a philosophical decision. Most people think it is a good idea. You'll have to decide on your own. Suggestions range from 0% of your stocks to about half of your stocks.

Health care stocks are already included in the total stock market. Another little slice is not going to ruin your portfolio but is not going to help that much either.

3. How should I allocate my stock funds across multiple accounts? For example, if I would also have some of the VGTSX (Vanguard Total International Stock Index Fund Investor Shares), should I have them on IRA or taxable account?
There is plenty of room in your taxable account to hold international - all that cash. If you decide to use your taxable account for short term goals, you can hold the international in an IRA or the 401k.

4. I am in my early 20s and I am still very much unsure about my personal and financial goals, so I'm not sure if that would be a smart decision for me to invest everything instead of saving a portion of my money into savings account for potential short-term goals? (This question probably belongs to "Personal Fiance" but I assume it would really affect my portfolio allocation decision).
Well, you do need an emergency fund. And some people want to save for their next car or a house. It's a decision you have to make yourself.

I would avoid holding the exact same thing in taxable and in your IRAs because it can cause a wash sale. For example, hold total stock in one and 500 index + extended market in the other. Then you don't have to worry about keeping up with it.

lessismoreinvestor
Posts: 29
Joined: Thu Sep 27, 2018 1:05 pm
Location: MIdwest
Contact:

Re: Portfolio advice

Post by lessismoreinvestor » Thu Oct 11, 2018 9:32 am

Excellent job! You are doing an amazing job. I have a couple of suggestions.

1st excellent job on contribution to traditional 401k. I think that tax break is an excellent idea.

2nd I would like to see you do backdoor roth IRAs instead. I am assuming your income is pretty high given you are saving 80k a year. I am not sure you are even getting a tax deduction for the traditional IRA because your income is to high. The cutoff is 73k Adjust gross income. In order to start doing backdoor roth IRAs there will be a couple of steps because you have to move your traditional IRAs accounts otherwise the pro-rata rule. My overall suggestion is to just convert it all to a Roth IRA. At 17k in traditional IRA account it will only cost you 4k in taxes. Also you could try to roll it over into your 401k, but just converting it is ideal. From then on every year you should do a backdoor roth ira.

3rd. do you have access to an HSA? Health savings account.

4th would invest the remainder in your taxable account.

5th. A little more cash isn't a bad idea if you are planning a down payment for a house.

As far as allocation 80 stocks/ 20 bonds is good. Remember to view all your accounts as one whole account. IF everything is at vanguard you can get away with using just 3 funds most likely.

I would recommend vtsax or voo for your us stocks.
vtiax for international stocks
vbtlx for bonds in your 401k or IRA. IF you carry bonds in your taxable account I would use consider using muni bonds.

Lastly, I think 50/30/20 is a decent allocation with international. 50 us stocks/ 30 international/ 20 bonds.

I am proud of you for asking such amazing questions for your 20s. You will do very well in life. Keep up the good work!

retiredjg
Posts: 34372
Joined: Thu Jan 10, 2008 12:56 pm

Re: Portfolio advice

Post by retiredjg » Thu Oct 11, 2018 9:53 am

Good catch, lessismore, on the traditional IRA - it may not be deductible. I'm not sure the back door is needed for Roth IRA though.

bluebutter, what do you know about your contributions to the IRA? Are you aware there are income limits that determine if you can deduct or not?

bluebutter
Posts: 9
Joined: Sun Oct 07, 2018 3:13 am

Re: Portfolio advice

Post by bluebutter » Thu Oct 11, 2018 10:59 am

retiredjg wrote:
Thu Oct 11, 2018 9:23 am
Holding international stocks is a philosophical decision. Most people think it is a good idea. You'll have to decide on your own. Suggestions range from 0% of your stocks to about half of your stocks.
Got it, I will read more about international stocks and different opinion and will decide for myself what my allocation should be for international stocks, if any!

retiredjg wrote:
Thu Oct 11, 2018 9:23 am
Health care stocks are already included in the total stock market. Another little slice is not going to ruin your portfolio but is not going to help that much either.
Oh, I didn’t know that the health care sector is part of it. I just looked at the portfolio composition of the VTSAX on Vanguard website and I see that the fund is diversified by different sectors but it doesn’t mention exact stocks. Is it possible to view the exact allocations of the fund, just out of curiosity?

retiredjg wrote:
Thu Oct 11, 2018 9:23 am
I would avoid holding the exact same thing in taxable and in your IRAs because it can cause a wash sale. For example, hold total stock in one and 500 index + extended market in the other. Then you don't have to worry about keeping up with it.
That seems reasonable! But just to be clear, there’s no tax advantage from holding international stocks in the tax-deferred accounts vs taxable account, correct?

Thank you very much for the feedback!

Flyer24
Posts: 449
Joined: Sun Apr 08, 2018 4:21 pm

Re: Portfolio advice, early 20s

Post by Flyer24 » Thu Oct 11, 2018 11:20 am

Roth IRA would be a better choice than tIRA.

bluebutter
Posts: 9
Joined: Sun Oct 07, 2018 3:13 am

Re: Portfolio advice

Post by bluebutter » Thu Oct 11, 2018 11:23 am

lessismoreinvestor wrote:
Thu Oct 11, 2018 9:32 am
2nd I would like to see you do backdoor roth IRAs instead. I am assuming your income is pretty high given you are saving 80k a year. I am not sure you are even getting a tax deduction for the traditional IRA because your income is to high. The cutoff is 73k Adjust gross income. In order to start doing backdoor roth IRAs there will be a couple of steps because you have to move your traditional IRAs accounts otherwise the pro-rata rule. My overall suggestion is to just convert it all to a Roth IRA. At 17k in traditional IRA account it will only cost you 4k in taxes. Also you could try to roll it over into your 401k, but just converting it is ideal. From then on every year you should do a backdoor roth ira.
I definitely would like to do backdoor Roth IRA conversion. I only have single traditional IRA account which I suppose simplifies things. Indeed, I cannot contribute to Roth IRA because my income is too high, according to irs.gov. From here I have couple of questions:
1. I’m expecting my income to grow by 3-5% yearly. So I guess if I want to spend less money on taxes I should start doing conversion as soon as possible, correct?
2. I've read the Backdoor Roth: A Complete How-To article, and as you mentioned I can also do a rollover from IRA to 401k but I don’t quite understand the advantage of doing so. Is it simply to make the contributions more clear…?
lessismoreinvestor wrote:
Thu Oct 11, 2018 9:32 am
3rd. do you have access to an HSA? Health savings account.
My employer offers HSA plan with 50% matching of the total contribution!! Unfortunately, I didn’t consider it at the beginning of the year, but I will definitely keep it mind next year while choosing my health plan!

I really appreciate the feedback and help, thank you very much!

bluebutter
Posts: 9
Joined: Sun Oct 07, 2018 3:13 am

Re: Portfolio advice

Post by bluebutter » Thu Oct 11, 2018 11:25 am

retiredjg wrote:
Thu Oct 11, 2018 9:53 am
bluebutter, what do you know about your contributions to the IRA? Are you aware there are income limits that determine if you can deduct or not?
I do know that there are income limits and in my case I cannot contribute to Roth IRA at all because my income is too high for that. I don't know anything however about deductions for/from IRA contributions... :confused

Flyer24
Posts: 449
Joined: Sun Apr 08, 2018 4:21 pm

Re: Portfolio advice, early 20s

Post by Flyer24 » Thu Oct 11, 2018 11:48 am

What tax bracket are you in?

bluebutter
Posts: 9
Joined: Sun Oct 07, 2018 3:13 am

Re: Portfolio advice, early 20s

Post by bluebutter » Thu Oct 11, 2018 11:52 am

Flyer24 wrote:
Thu Oct 11, 2018 11:48 am
What tax bracket are you in?
17.7% Federal, 7.2% State!

Flyer24
Posts: 449
Joined: Sun Apr 08, 2018 4:21 pm

Re: Portfolio advice, early 20s

Post by Flyer24 » Thu Oct 11, 2018 11:56 am

bluebutter wrote:
Thu Oct 11, 2018 11:52 am
Flyer24 wrote:
Thu Oct 11, 2018 11:48 am
What tax bracket are you in?
17.7% Federal, 7.2% State!
That is not a federal tax bracket.
12%
22%
24%
32%

bluebutter
Posts: 9
Joined: Sun Oct 07, 2018 3:13 am

Re: Portfolio advice, early 20s

Post by bluebutter » Thu Oct 11, 2018 11:58 am

Flyer24 wrote:
Thu Oct 11, 2018 11:56 am
That is not a federal tax bracket.
12%
22%
24%
32%
Oh, got it. 24%! I will update my original post as well.

Flyer24
Posts: 449
Joined: Sun Apr 08, 2018 4:21 pm

Re: Portfolio advice, early 20s

Post by Flyer24 » Thu Oct 11, 2018 11:59 am

For a traditional IRA, the income limit for a tax deduction is $73K. You can contribute to a Roth IRA up to a $133K income limit for a single person.

bluebutter
Posts: 9
Joined: Sun Oct 07, 2018 3:13 am

Re: Portfolio advice, early 20s

Post by bluebutter » Thu Oct 11, 2018 12:03 pm

Flyer24 wrote:
Thu Oct 11, 2018 11:59 am
For a traditional IRA, the income limit for a tax deduction is $73K. You can contribute to a Roth IRA up to a $133K income limit for a single person.
Got it. Unfortunately (or fortunately? :D) my income is higher than $133k.

bluebutter
Posts: 9
Joined: Sun Oct 07, 2018 3:13 am

Re: Portfolio advice, early 20s

Post by bluebutter » Thu Oct 11, 2018 12:27 pm

I'm also doing some contributions to charity organizations (around $1.5 a year) but I doubt that this would reduce my taxable income.

Darth Xanadu
Posts: 496
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Location: Middle Earth

Re: Portfolio advice

Post by Darth Xanadu » Thu Oct 11, 2018 12:38 pm

bluebutter wrote:
Thu Oct 11, 2018 11:23 am


I definitely would like to do backdoor Roth IRA conversion. I only have single traditional IRA account which I suppose simplifies things. Indeed, I cannot contribute to Roth IRA because my income is too high, according to irs.gov. From here I have couple of questions:
1. I’m expecting my income to grow by 3-5% yearly. So I guess if I want to spend less money on taxes I should start doing conversion as soon as possible, correct?
2. I've read the Backdoor Roth: A Complete How-To article, and as you mentioned I can also do a rollover from IRA to 401k but I don’t quite understand the advantage of doing so. Is it simply to make the contributions more clear…?
In order to make Roth IRA "contributions" when above income limits, you would not want to have any Traditional IRA balances. You can convert this to Roth IRA and pay the taxes (assuming you previously deducted these contributions), or roll into a 401k plan if allowable and thus continue to defer the taxes.

Once you have zero balance in Trad IRA (as of year-end, check the rules for specific details), you can utilize the backdoor approach (non-deductible IRA contribution, subsequent conversion to Roth IRA). I agree with previous posters, it will serve you well to max Trad 401k and max Roth IRA every year moving forward whenever possible.
"A courageous teacher, failure is."

retiredjg
Posts: 34372
Joined: Thu Jan 10, 2008 12:56 pm

Re: Portfolio advice

Post by retiredjg » Thu Oct 11, 2018 4:19 pm

bluebutter wrote:
Thu Oct 11, 2018 11:25 am
retiredjg wrote:
Thu Oct 11, 2018 9:53 am
bluebutter, what do you know about your contributions to the IRA? Are you aware there are income limits that determine if you can deduct or not?
I do know that there are income limits and in my case I cannot contribute to Roth IRA at all because my income is too high for that. I don't know anything however about deductions for/from IRA contributions... :confused
This will have to be figured out before you do anything else. If these were non-deductible contributions, this IRA cannot be rolled into your 401k. There's more to the story, but that gets you started.

It appears you have contributed to the tIRA at least 3 years, maybe more. You will need to look at your taxes for each of those years and figure out if you deducted your contribution from your taxable income. If you did not deduct, is there a Form 8606 to document your non-deductible contribution?

First, figure out from your records which years you made a contribution to tIRA and how much. Then look on each year's Form 1040, line 32. If you were eligible to take a deduction for that contribution, it should show up there. If you made a contribution and it is not deducted on Line 32, you have made a non-deductible contribution. If you made a non-deductible contribution, it should be documented on a Form 8606 for that year.

Get that far and come back with information. Again, do not do anything with this IRA (roll it anywhere or convert it to Roth) until this part is worked out.

retiredjg
Posts: 34372
Joined: Thu Jan 10, 2008 12:56 pm

Re: Portfolio advice

Post by retiredjg » Thu Oct 11, 2018 4:24 pm

bluebutter wrote:
Thu Oct 11, 2018 10:59 am
Got it, I will read more about international stocks and different opinion and will decide for myself what my allocation should be for international stocks, if any!
Have you found the Wiki? There is information there about whether and how much to invest in international.


Oh, I didn’t know that the health care sector is part of it. I just looked at the portfolio composition of the VTSAX on Vanguard website and I see that the fund is diversified by different sectors but it doesn’t mention exact stocks. Is it possible to view the exact allocations of the fund, just out of curiosity?
There are about 3000 stocks in that fund. It should list the first 10 and then have a link to click to get to the rest. Every stock in the health care sector will not be in the total stock market - they use a representative sample.

A sector is simply part of the total market.

That seems reasonable! But just to be clear, there’s no tax advantage from holding international stocks in the tax-deferred accounts vs taxable account, correct?
Each location has a pro and con but it is about 6 of one and half dozen of the other over the long run.

retiredjg
Posts: 34372
Joined: Thu Jan 10, 2008 12:56 pm

Re: Portfolio advice

Post by retiredjg » Thu Oct 11, 2018 4:27 pm

1. I’m expecting my income to grow by 3-5% yearly. So I guess if I want to spend less money on taxes I should start doing conversion as soon as possible, correct?
There is no rush. Get to it this year or next year.
2. I've read the Backdoor Roth: A Complete How-To article, and as you mentioned I can also do a rollover from IRA to 401k but I don’t quite understand the advantage of doing so. Is it simply to make the contributions more clear…?
That is not why. Read the A complete how to article again. Pay attention to having to pro-rate the back door conversion with the tIRA you already have.

retiredjg
Posts: 34372
Joined: Thu Jan 10, 2008 12:56 pm

Re: Portfolio advice

Post by retiredjg » Thu Oct 11, 2018 4:29 pm

bluebutter wrote:
Thu Oct 11, 2018 11:25 am
I don't know anything however about deductions for/from IRA contributions... :confused
Anyone with income who is not yet 70 can contribute to IRA. Only people under certain income limits can deduct that contribution from their taxable income.

https://www.bogleheads.org/wiki/Traditional_IRA

billfromct
Posts: 800
Joined: Tue Dec 03, 2013 9:05 am

Re: Portfolio advice, early 20s

Post by billfromct » Thu Oct 11, 2018 5:05 pm

Just to clarify the income limits to contribute to a tax deductible & Roth IRA:

-tax deductible IRA:. ability to contribute starts to phase out when your modified adjusted gross income (MAGI) hits $63k, totally phases out at $73k; if single & if "you are covered by a retirement plan at work" but I think it is if the W2 box 13, "Retirement Plan", is checked

-MAGI is basically gross income minus tax deductible 401k contributions plus any investment income

-Roth IRA:. starts to phase out when your MAGI hits $120k & totally phases out when your MAGI hits $135k, if single

bill

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