Portfolio Advice, 30 yr old couple

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AnthonyD8
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Joined: Mon Nov 07, 2016 12:07 pm

Portfolio Advice, 30 yr old couple

Post by AnthonyD8 » Thu Oct 18, 2018 10:33 am

Hi all! I have been on this forum before, but quickly realized I needed to do much more of my own research. I read a few books (including A Beginner's Guide to Investing) as someone on the Forum suggested to me. I think I am ready to try again. Seeking some advice for my wife and I, as our situation has become more complicated in the past 2 years. See info below and a few questions at the bottom. Thanks in advance for any time & consideration.

Emergency funds: 6+ months of expenses/spending in cash savings
Debt: Mortgage Debt: $400,000 at 3.75% - 27 years left
College Loans (both spouse and I): $26,000 at 4.75%, $16,000 at 5.33%, $4,800 at 7%,
Tax Filing Status: Married Filing Jointly
Federal Tax Rate: 24%
State Tax Rate: 4.95%, Illinois
Age: 30
Desired Asset allocation: 85% stocks / 15% bonds
Desired International allocation: 10% of stocks

Current Retirement Assets

Total: $228,500

His 401k
10% T Rowe Price Retire 2050 TR B (TRRMX) (0.40%)
$24,000
Cannot contribute, has a $40 Annual Maintenance Fee (past employer, current employer does not offer 401k)

His Roth IRA at USAA
18% USAA S&P 500 Index Fund (USSPX) (0.25%)
$40,000
Cannot contribute, exceed income limits

Her 401k
70% T Rowe Price Retire 2050 TR B (TRRMX) (0.40%)
$159,000
Maxing out $18500 employee contribution, Company match of 5% of Salary per year ($9,800 last year)

Her Traditional IRA (intention to convert to Roth, ineligible for tax deduction due to income limit)
2% Vanguard Total Stock Market Index Fund (VTSMX) (0.14%)
$5,500
Opened very recently with intention of Backdoor Roth - may have made an error in the process.

Neither Him nor Her are eligible for HSA, do not have qualifying High Deductible health plans at work.

Contributions

Immediate One-time Contribution
$7,500 - My plan is to open a taxable account with this

New annual Contributions
$18,500 to Her 401k
$5,500 to Her Traditional IRA (Or hopefully Roth IRA, assuming I can Backdoor)
$18,500 available for New Taxable Account to be opened (assuming I cannot convert His Roth IRA and continue to contribute, otherwise I would do that first then have $13,000 for Taxable Account)


Available Funds

For His & Her 401k (Same)

American Beacon LGE Cap Value (AADEX) .60%
Blue Chip Growth Fund (TRBCX) .70%
Dreyfus/Boston SM Cap Val FD (STSVX) 1.03%
Ivy Intl Core Equity I (ICEIX) .79%
Vanguard Dvldp Mrkts Ind ADM (VTMGX) .07%
Vanguard INST Index (VINIX) .03%
Vanguard Mid Cap Ind Admiral (VIMAX) .05%
Vanguard Sm Cap GR Index, INST (VSGIX) .06%
Vanguard Small Cap Index, Adm (VSMAX) .05%

Dodge & Cox Income (DODIX) .43%

TRP Stable Value Fund - N (SVF-N) .20%

T Rowe Price Retire 2005 TR B (RB2) 0.40%
T Rowe Price Retire 2010 TR B (RC2) 0.40%
T Rowe Price Retire 2015 TR B (RD2) 0.40%
T Rowe Price Retire 2020 TR B (RE2) 0.40%
T Rowe Price Retire 2025 TR B (RG2) 0.40%
T Rowe Price Retire 2030 TR B (RH2) 0.40%
T Rowe Price Retire 2035 TR B (RI2) 0.40%
T Rowe Price Retire 2040 TR B (RJ2) 0.40%
T Rowe Price Retire 2045 TR B (RK2) 0.40%
T Rowe Price Retire 2050 TR B (RL2) 0.40%
T Rowe Price Retire 2055 TR B (RM2) 0.40%
T Rowe Price Retire 2060 TR B (RN2) 0.40%
T Rowe Price Retire Bal TR B (RA2) 0.40%


Questions:

1. What should I do with His 401k that cannot be contributed to and His Roth IRA that cannot be contributed to? Can I make either of them a Backdoor Roth for Him? I am unclear in my research if I can turn an existing Roth IRA into a Backdoor Roth IRA. This would be the preferred option over a Taxable Account. If I leave both of these stagnant with no contributions, then all $18,500 available would simply go to the Taxable Account I will open. If I can turn His Roth IRA into a Backdoor Roth IRA, then I will likely choose to leave His 401k where it is and roll over to a new employer plan when the time comes.

2. Her Traditional IRA. This was just opened days ago. The max of $5,500 was invested into VTSMX. The intention is to execute a Backdoor Roth Contribution. I have been reading about this, but am now confused about the Non-Deductible detail. When the original contribution was made, I did not designate it as Non-Deductible. Did I have to? Or is it automatically Non-deductible simply because of the income limits (which we exceed)? Did I make a mistake? Or can I continue on with the Backdoor process? I read the Bogleheads Wiki page on Backdoor's so I am comfortable doing it - I just don't know if I made a tax error.

3. No matter what happens with the Roth IRA's above, I will still have funds to open a Taxable Account. Here is my allocation plan: 35% Vanguard 500 Index (VFINX), 35% Vanguard Total Stock Market Index (VTSMX), 30% Vanguard Total International Stock Market (VGTSX). I am trying to be as tax-efficient as possible by utilizing US and International Total Stocks. Am I accomplishing this with that allocation plan?

Thank you in advance

b42
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Re: Portfolio Advice, 30 yr old couple

Post by b42 » Thu Oct 18, 2018 11:01 am

I would prioritize paying off your student loans before starting a taxable account, since you can essentially lock in a 4.75%, 5.33%, and 7% return. And then I'd max out your tax-advantaged accounts (401k, IRA, etc.) before starting a taxable account.

Have you considered rolling over your 401k to a Traditional IRA account? Once that is complete, you can do a conversion to your current Roth IRA account.

After the above is done, then you can do backdoor Roth IRA contributions if you want.

tenkuky
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Joined: Sun Dec 14, 2014 4:28 pm

Re: Portfolio Advice, 30 yr old couple

Post by tenkuky » Thu Oct 18, 2018 11:05 am

Just because you can't contribute to a Roth due to income limits does not meet you cannot do backdoor roths.
I would use the space this year for both HIS and HER contributions to Trad IRAs and then immediately backdoor.
Whether you do it to existing Roths or separate Roths is up to you. Just remember that transfers between vendors can incur time out of market and some "transfer out" fees.
That being said, you could transfer current Roth out of USAA (the expense ratio for an S&P is high, you could do better with Fidelity/Schwab/Vanguard).

+1 on b42 regarding loan tackling.

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ruralavalon
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Re: Portfolio Advice, 30 yr old couple

Post by ruralavalon » Thu Oct 18, 2018 11:11 am

There are some nice funds offered in the 401's, you are fortunate.

Rather than start a taxable account with $7,500 I suggest using that money to pay down some of the student debt (all of the $4,800 @ 7%, and some of the $16,000 @ 5.33%).

I suggest paying off all of the $16,000 @ 5
33% as a priority ahead of contributions to a taxable investing account.

You could rollover his Roth IRA from USAA to Vanguard for a lower expense ratio, and access to a broader selection of low expense ratio index funds.

I don't suggest rolling his 401k over into a traditional IRA.

In my opinion in the 401ks the funds to consider using include:
1) Vanguard Institutional Index Fund Institutional (a S&P 500 index fund) (VINIX) ER 0.03%;
2) Vanguard Developed Markets Index Fund Admiral Shares (VTMGX) ER 0.07%; and
3) Dodge & Cox Income Fund (DODIX) ER 0.43%.
Last edited by ruralavalon on Thu Oct 18, 2018 11:14 am, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

AnthonyD8
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Re: Portfolio Advice, 30 yr old couple

Post by AnthonyD8 » Thu Oct 18, 2018 11:13 am

b42 wrote:
Thu Oct 18, 2018 11:01 am
I would prioritize paying off your student loans before starting a taxable account, since you can essentially lock in a 4.75%, 5.33%, and 7% return. And then I'd max out your tax-advantaged accounts (401k, IRA, etc.) before starting a taxable account.

Have you considered rolling over your 401k to a Traditional IRA account? Once that is complete, you can do a conversion to your current Roth IRA account.

After the above is done, then you can do backdoor Roth IRA contributions if you want.

Paying off the debt first makes sense now that you put it that way. I will tackle that. Thank you

As for the 401k and current Roth IRA. Am I understanding this correctly: I could roll over the TRowe Price 401k to (for example) a Vanguard Traditional IRA, and then convert my current USAA Roth IRA into that same Vanguard Traditional IRA. Then I will have one bigger Traditional IRA to execute the Backdoor Roth IRA with and be able to make annual Backdoor contributions from here on out?

tenkuky
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Joined: Sun Dec 14, 2014 4:28 pm

Re: Portfolio Advice, 30 yr old couple

Post by tenkuky » Thu Oct 18, 2018 11:15 am

AnthonyD8 wrote:
Thu Oct 18, 2018 11:13 am
b42 wrote:
Thu Oct 18, 2018 11:01 am
I would prioritize paying off your student loans before starting a taxable account, since you can essentially lock in a 4.75%, 5.33%, and 7% return. And then I'd max out your tax-advantaged accounts (401k, IRA, etc.) before starting a taxable account.

Have you considered rolling over your 401k to a Traditional IRA account? Once that is complete, you can do a conversion to your current Roth IRA account.

After the above is done, then you can do backdoor Roth IRA contributions if you want.

Paying off the debt first makes sense now that you put it that way. I will tackle that. Thank you

As for the 401k and current Roth IRA. Am I understanding this correctly: I could roll over the TRowe Price 401k to (for example) a Vanguard Traditional IRA, and then convert my current USAA Roth IRA into that same Vanguard Traditional IRA. Then I will have one bigger Traditional IRA to execute the Backdoor Roth IRA with and be able to make annual Backdoor contributions from here on out?
No,no,no :oops:
USAA Roth IRA to V Roth IRA
Open a V tIRA and fund and immediately backdoor to V Roth IRA
Then, yearly backdoor from empty tIRA to Roth IRA

Unless you want to pay beaucoup tax, don't convert the 401K components. Keep there or move to another employer 401K.

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ruralavalon
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Location: Illinois

Re: Portfolio Advice, 30 yr old couple

Post by ruralavalon » Thu Oct 18, 2018 11:18 am

With the good funds offered in his 401k, I don't see any need to rollover his 401k into a traditional IRA.

Converting a traditional IRA to a Roth IRA will have a high tax cost, given your high tax bracket (24% federal, 5% Illinois).

Rollover your Roth IRA at USAA to a Roth IRA at Vanguard.
Last edited by ruralavalon on Thu Oct 18, 2018 11:20 am, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

tenkuky
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Joined: Sun Dec 14, 2014 4:28 pm

Re: Portfolio Advice, 30 yr old couple

Post by tenkuky » Thu Oct 18, 2018 11:19 am

ruralavalon wrote:
Thu Oct 18, 2018 11:18 am
With the good funds offered in his 401k, I don't see any need to rollover his 401k into a traditional IRA.

Converting a traditional IRA to a Roth IRA will have a high tax cost, given your high tax bracket (24% federal, 5% Illinois).
Agreed
That's why I oopsed the above OP response.

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Hodor
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Re: Portfolio Advice, 30 yr old couple

Post by Hodor » Thu Oct 18, 2018 11:32 am

I think you may be a bit confused about what a backdoor Roth IRA is. The first thing to know is that a backdoor Roth IRA is not a type of account. The "backdoor" is just the process by which you get money into the Roth IRA, but the account your money ends up in is just a Roth IRA. The backdoor process is when you make a nondeductible contribution to a traditional IRA and then convert it to a Roth IRA. The house is still your Roth IRA, you're just going in through the backdoor (non-deductible contribution and conversion) instead of the front door (regular contribution to Roth IRA, which is subject to income limits). You can't convert a Roth IRA to a Backdoor Roth IRA because it's already a Roth IRA.

It sounds like you started the backdoor process with her IRA by making the $5,500 contribution to a traditional IRA. Now you just need to convert it to a Roth IRA, and might as well do this a soon as possible. You will only owe taxes on the portion of the conversion that exceeds $5,500, if any. You did not have to designate the contribution as deductible or non-deductible when you made it. You do that when you file your taxes.

You have a few options with his 401k. You can roll it over to a traditional IRA. The benefit of this would be better fund choices and not having to pay the annual fee or the somewhat high fee for the T. Rowe Price fund. The downside would be that if you wanted to a backdoor Roth for him, it would be mostly taxable. You could also convert the 401k to a Roth IRA, which would preserve your ability to do backdoor Roths, but you would owe tax on the full amount of the conversion. You could also leave the money where it is, pay the higher fee, and preserve your ability to do the backdoor Roth, and hope to be able to roll it into a new 401k in the future.

Your allocation plan seems mostly on track, but why do you want to split your US stock allocation between total market and S&P 500? Are you trying to deliberately overweight large cap stocks? If not, considering reallocating the 500 allocation to Total Market.

AnthonyD8
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Joined: Mon Nov 07, 2016 12:07 pm

Re: Portfolio Advice, 30 yr old couple

Post by AnthonyD8 » Thu Oct 18, 2018 11:49 am

ruralavalon wrote:
Thu Oct 18, 2018 11:11 am
In my opinion in the 401ks the funds to consider using include:
1) Vanguard Institutional Index Fund Institutional (a S&P 500 index fund) (VINIX) ER 0.03%;
2) Vanguard Developed Markets Index Fund Admiral Shares (VTMGX) ER 0.07%; and
3) Dodge & Cox Income Fund (DODIX) ER 0.43%.
Great, thanks for that insight! Attacking the debt seems to be a popular opinion. I'll look into making those 401k allocation changes as well.

Flyer24
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Re: Portfolio Advice, 30 yr old couple

Post by Flyer24 » Thu Oct 18, 2018 11:52 am

Just keep your 401K and put it in Vanguard index funds. You have several that are good. Your wife could also switch to index funds.

AnthonyD8
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Joined: Mon Nov 07, 2016 12:07 pm

Re: Portfolio Advice, 30 yr old couple

Post by AnthonyD8 » Thu Oct 18, 2018 11:54 am

Hodor wrote:
Thu Oct 18, 2018 11:32 am
I think you may be a bit confused about what a backdoor Roth IRA is. The first thing to know is that a backdoor Roth IRA is not a type of account. The "backdoor" is just the process by which you get money into the Roth IRA, but the account your money ends up in is just a Roth IRA. The backdoor process is when you make a nondeductible contribution to a traditional IRA and then convert it to a Roth IRA. The house is still your Roth IRA, you're just going in through the backdoor (non-deductible contribution and conversion) instead of the front door (regular contribution to Roth IRA, which is subject to income limits). You can't convert a Roth IRA to a Backdoor Roth IRA because it's already a Roth IRA.

It sounds like you started the backdoor process with her IRA by making the $5,500 contribution to a traditional IRA. Now you just need to convert it to a Roth IRA, and might as well do this a soon as possible. You will only owe taxes on the portion of the conversion that exceeds $5,500, if any. You did not have to designate the contribution as deductible or non-deductible when you made it. You do that when you file your taxes.

You have a few options with his 401k. You can roll it over to a traditional IRA. The benefit of this would be better fund choices and not having to pay the annual fee or the somewhat high fee for the T. Rowe Price fund. The downside would be that if you wanted to a backdoor Roth for him, it would be mostly taxable. You could also convert the 401k to a Roth IRA, which would preserve your ability to do backdoor Roths, but you would owe tax on the full amount of the conversion. You could also leave the money where it is, pay the higher fee, and preserve your ability to do the backdoor Roth, and hope to be able to roll it into a new 401k in the future.

Your allocation plan seems mostly on track, but why do you want to split your US stock allocation between total market and S&P 500? Are you trying to deliberately overweight large cap stocks? If not, considering reallocating the 500 allocation to Total Market.
Thank you very much for explaining all of that. Makes more sense now. The Backdoor Roth IRA and the rules involved have been giving me fits. Due to my employment status and forecasting into the future, I think it will make sense to go with your last suggestion - Keep 401k where it is for future employer rollover and keep my Backdoor options open.

As for your allocation question, I guess I wanted to try and diversify. Her IRA is all Total Market. I didn't want mine to be all Total Market as well. Maybe I am over thinking that part. Thanks again for your input

AnthonyD8
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Joined: Mon Nov 07, 2016 12:07 pm

Re: Portfolio Advice, 30 yr old couple

Post by AnthonyD8 » Thu Oct 18, 2018 11:54 am

Flyer24 wrote:
Thu Oct 18, 2018 11:52 am
Just keep your 401K and put it in Vanguard index funds. You have several that are good. Your wife could also switch to index funds.
Seems like a popular suggestion - will do. Thank you!

AnthonyD8
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Re: Portfolio Advice, 30 yr old couple

Post by AnthonyD8 » Thu Oct 18, 2018 12:01 pm

tenkuky wrote:
Thu Oct 18, 2018 11:15 am
AnthonyD8 wrote:
Thu Oct 18, 2018 11:13 am
b42 wrote:
Thu Oct 18, 2018 11:01 am
I would prioritize paying off your student loans before starting a taxable account, since you can essentially lock in a 4.75%, 5.33%, and 7% return. And then I'd max out your tax-advantaged accounts (401k, IRA, etc.) before starting a taxable account.

Have you considered rolling over your 401k to a Traditional IRA account? Once that is complete, you can do a conversion to your current Roth IRA account.

After the above is done, then you can do backdoor Roth IRA contributions if you want.

Paying off the debt first makes sense now that you put it that way. I will tackle that. Thank you

As for the 401k and current Roth IRA. Am I understanding this correctly: I could roll over the TRowe Price 401k to (for example) a Vanguard Traditional IRA, and then convert my current USAA Roth IRA into that same Vanguard Traditional IRA. Then I will have one bigger Traditional IRA to execute the Backdoor Roth IRA with and be able to make annual Backdoor contributions from here on out?
No,no,no :oops:
USAA Roth IRA to V Roth IRA
Open a V tIRA and fund and immediately backdoor to V Roth IRA
Then, yearly backdoor from empty tIRA to Roth IRA

Unless you want to pay beaucoup tax, don't convert the 401K components. Keep there or move to another employer 401K.
Ok, I'm starting to get it. I think :confused

Apologies for the confusion - One last clarification: I will only have one V Roth IRA in the end - the funds from the USAA Roth (now V Roth), and then a V tIRA to make those Backdoor contributions each year to the single V Roth IRA. Correct?

FoolMeOnce
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Re: Portfolio Advice, 30 yr old couple

Post by FoolMeOnce » Thu Oct 18, 2018 12:25 pm

It looks like there is confusion between his and hers.

Hers: Traditional already opened and funded for this year, so you cannot open a new one and fund it with new money. It sounds like she doesn't have a Roth. Open one and move the money from the Traditional into the Roth via the backdoor method. You don't say where her Traditional is. I would first open her Roth with the same brokerage and do the backdoor. Only then would I move the Roth to Vanguard and close the Traditional (then open a new one at Vanguard for next year's and subsequent backdoors). It will get the funds out of Traditional and into Roth quicker than moving to Vanguard first. (Or perhaps her Traditional is already at Vanguard)

His: you already have what I assume are deductible contributions in your Traditional. You need to get these out to make the backdoor method clean and avoid pro-rata taxation issues (IRS assumes conversions come proportionally from deductible and nondeductible contributions and growth). Rolling into an employer plan does not appear to be an option. You could take the tax hit and just convert it all to a Roth at once. I'm sure others here can analyze those numbers here better than I can.

I agree with the responses encouraging you to pay off the high interest student loans before taxable investing.

Flyer24
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Re: Portfolio Advice, 30 yr old couple

Post by Flyer24 » Thu Oct 18, 2018 12:50 pm

FoolMeOnce wrote:
Thu Oct 18, 2018 12:25 pm
It looks like there is confusion between his and hers.

Hers: Traditional already opened and funded for this year, so you cannot open a new one and fund it with new money. It sounds like she doesn't have a Roth. Open one and move the money from the Traditional into the Roth via the backdoor method. You don't say where her Traditional is. I would first open her Roth with the same brokerage and do the backdoor. Only then would I move the Roth to Vanguard and close the Traditional (then open a new one at Vanguard for next year's and subsequent backdoors). It will get the funds out of Traditional and into Roth quicker than moving to Vanguard first. (Or perhaps her Traditional is already at Vanguard)

His: you already have what I assume are deductible contributions in your Traditional. You need to get these out to make the backdoor method clean and avoid pro-rata taxation issues (IRS assumes conversions come proportionally from deductible and nondeductible contributions and growth). Rolling into an employer plan does not appear to be an option. You could take the tax hit and just convert it all to a Roth at once. I'm sure others here can analyze those numbers here better than I can.

I agree with the responses encouraging you to pay off the high interest student loans before taxable investing.
His IRA is a Roth..not Traditional according to the original post.

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Hodor
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Re: Portfolio Advice, 30 yr old couple

Post by Hodor » Thu Oct 18, 2018 1:46 pm

One thing that I missed, since he does not have a retirement plan at work, his income limit for deducting a Traditional IRA is much higher than normal. For a married filing jointly spouse not covered by a retirement plan, the Traditional IRA contribution is fully deductible if the couple's modified AGI is under $189,000. And this modified AGI does not include income that went to her 401k, employee health insurance premiums, or FSA. If your combined income is under this limit it might be better to do the deductible traditional IRA contribution for him and only do the backdoor Roth for her.

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ruralavalon
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Re: Portfolio Advice, 30 yr old couple

Post by ruralavalon » Thu Oct 18, 2018 2:14 pm

Asset allocation.
AnthonyD8 wrote:Age: 30
Desired Asset allocation: 85% stocks / 15% bonds
Desired International allocation: 10% of stocks
In my opinion your desired asset allocation is within the range of what is reasonable.

At age 30 I usually suggest around 20% in bonds.

I usually suggest around 20-30% of stocks in international stocks.

Asset allocation is a very personal decision. You must decide on an asset allocation that is, comfortable for you based on your own ability, willingness and need to take risk.


Contributions and priority.
AnthonyD8 wrote:Debt: Mortgage Debt: $400,000 at 3.75% - 27 years left
College Loans (both spouse and I): $26,000 at 4.75%, $16,000 at 5.33%, $4,800 at 7%,
. . . . .
Immediate One-time Contribution
$7,500 - My plan is to open a taxable account with this

New annual Contributions
$18,500 to Her 401k
$5,500 to Her Traditional IRA (Or hopefully Roth IRA, assuming I can Backdoor)
$18,500 available for New Taxable Account to be opened (assuming I cannot convert His Roth IRA and continue to contribute, otherwise I would do that first then have $13,000 for Taxable Account)
I suggest paying off the student debt as a priority ahead of opening a taxable investing account.

I suggest rolling his Roth IRA at USAA over to a Roth IRA at Vanguard.

I suggest using two Roth IRAs, funded backdoor, one for each of you.

I suggest leaving his 401k where it is, and not rolling it over to an IRA.

Here is a general account funding priority that usually works well for many people (when there is no HSA use):
1) Contribute to the work-based plans (401k, 403b, 457, TSP, etc.) enough to get the full employer match (the match is like free money, your best possible investment);
2) Pay off high interest debt (a guaranteed high return, the next best thing to free money);
3) Contribute the maximum to an IRA, traditional or Roth (or backdoor Roth technique), depending on eligibility and personal circumstances;
4) Contribute the remainder of the maximum employee contribution to the work-based accounts; and
5) Contribute to a taxable investing account.

Please see the wiki article "Prioritizing investments".

Starting in 2019 the maximum annual employee contribution to a 401k is $19k, and the maximum annual contribution to a Roth IRA is $6k.



Example portfolio.
It is often better coordinate investments across all accounts, in other words treat all accounts together as a single unified portfolio, rather than view each account separately. Select just one or two of the better funds (most diversified + lower expense ratio) in the work-based account (401k, 403b, 457, TSP etc.), where the choices offered are limited. Then complete the rest of the asset allocation using the nearly unlimited or choices available in a taxable account or any IRAs. This approach lets you avoid having to use less diversified funds often found in work-based plans.

To make portfolio management and rebalancing easy it is often better to have at least one large tax-advantaged account which contains all three basic asset types (bonds, international stocks, and domestic stocks). Don’t try to put all components of the asset allocation in every account.

Here is an example portfolio that you could consider. This is a three-fund type portfolio, modified as necessary to accommodate the fund offerings in your 401ks. Current portfolio size = $228.5k. New annual contributions = about $39.3k. The asset allocation is: 15% bonds; 10% international stocks; and 75% domestic stocks. The percentages given are percentages of the total portfolio, not of a given account. The suggestion is to switch both the existing balances and the new contributions to the funds indicated. All percentages and dollar amounts are rounded off, so may not add up exactly. Sometimes I state 00% to indicate funds you might want to add in the future.

His 401k (10% of total; no new contributions)
05%, Vanguard Institutional Index Fund Institutional (a S&P 500 index fund) (VINIX) ER 0.03%;
00%, Vanguard Developed Markets Index Fund Admiral Shares (VTMGX) ER 0.07%; and
05%, Dodge & Cox Income Fund (DODIX) ER 0.43%

His Roth IRA @ Vanguard, formerly @ USAA (18% of total; adds $5.5k/year via backdoor = 14% of new annual contributions)
02%, Emerging Markets Stock Index Fund Admiral Shares (VEMAX) ER 0.14%
16%, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.04%

Her 401k (70% of total; adds $18.5k/year + employer match $9.8k = $28.3k/year total = 71% of new annual contributions)
52%, Vanguard Institutional Index Fund Institutional (a S&P 500 index fund) (VINIX) ER 0.03%;
08%, Vanguard Developed Markets Index Fund Admiral Shares (VTMGX) ER 0.07%; and
10%, Dodge & Cox Income Fund (DODIX) ER 0.43%.

Her Roth IRA @ Vanguard, via backdoor (02% of total; adds $5.5k/year via backdoor = 14% of new annual contributions)
02%, Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) ER 0.14%
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

FoolMeOnce
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Re: Portfolio Advice, 30 yr old couple

Post by FoolMeOnce » Thu Oct 18, 2018 2:47 pm

Flyer24 wrote:
Thu Oct 18, 2018 12:50 pm
FoolMeOnce wrote:
Thu Oct 18, 2018 12:25 pm
It looks like there is confusion between his and hers.

Hers: Traditional already opened and funded for this year, so you cannot open a new one and fund it with new money. It sounds like she doesn't have a Roth. Open one and move the money from the Traditional into the Roth via the backdoor method. You don't say where her Traditional is. I would first open her Roth with the same brokerage and do the backdoor. Only then would I move the Roth to Vanguard and close the Traditional (then open a new one at Vanguard for next year's and subsequent backdoors). It will get the funds out of Traditional and into Roth quicker than moving to Vanguard first. (Or perhaps her Traditional is already at Vanguard)

His: you already have what I assume are deductible contributions in your Traditional. You need to get these out to make the backdoor method clean and avoid pro-rata taxation issues (IRS assumes conversions come proportionally from deductible and nondeductible contributions and growth). Rolling into an employer plan does not appear to be an option. You could take the tax hit and just convert it all to a Roth at once. I'm sure others here can analyze those numbers here better than I can.

I agree with the responses encouraging you to pay off the high interest student loans before taxable investing.
His IRA is a Roth..not Traditional according to the original post.
Whoops! I did say there was confusion; I didn't specify it was mine...

bdpb
Posts: 1534
Joined: Wed Jun 06, 2007 3:14 pm

Re: Portfolio Advice, 30 yr old couple

Post by bdpb » Thu Oct 18, 2018 8:05 pm

tenkuky wrote:
Thu Oct 18, 2018 11:19 am
ruralavalon wrote:
Thu Oct 18, 2018 11:18 am
With the good funds offered in his 401k, I don't see any need to rollover his 401k into a traditional IRA.

Converting a traditional IRA to a Roth IRA will have a high tax cost, given your high tax bracket (24% federal, 5% Illinois).
Agreed
That's why I oopsed the above OP response.
This is not correct for Illinois state tax. There is no state tax in Illinois for IRA withdrawals including for Roth conversions.

So, for a high income high saving rate one might consider rollover IRA and conversion to Roth for 24% (assuming it doesn't affect the fed marginal rate).

I would max backdoor contributions to Roth, then high interest debt, then convert this 401k to Roth.

AnthonyD8
Posts: 18
Joined: Mon Nov 07, 2016 12:07 pm

Re: Portfolio Advice, 30 yr old couple

Post by AnthonyD8 » Thu Oct 18, 2018 9:36 pm

ruralavalon wrote:
Thu Oct 18, 2018 2:14 pm
Asset allocation.
AnthonyD8 wrote:Age: 30
Desired Asset allocation: 85% stocks / 15% bonds
Desired International allocation: 10% of stocks
In my opinion your desired asset allocation is within the range of what is reasonable.

At age 30 I usually suggest around 20% in bonds.

I usually suggest around 20-30% of stocks in international stocks.

Asset allocation is a very personal decision. You must decide on an asset allocation that is, comfortable for you based on your own ability, willingness and need to take risk.


Contributions and priority.
AnthonyD8 wrote:Debt: Mortgage Debt: $400,000 at 3.75% - 27 years left
College Loans (both spouse and I): $26,000 at 4.75%, $16,000 at 5.33%, $4,800 at 7%,
. . . . .
Immediate One-time Contribution
$7,500 - My plan is to open a taxable account with this

New annual Contributions
$18,500 to Her 401k
$5,500 to Her Traditional IRA (Or hopefully Roth IRA, assuming I can Backdoor)
$18,500 available for New Taxable Account to be opened (assuming I cannot convert His Roth IRA and continue to contribute, otherwise I would do that first then have $13,000 for Taxable Account)
I suggest paying off the student debt as a priority ahead of opening a taxable investing account.

I suggest rolling his Roth IRA at USAA over to a Roth IRA at Vanguard.

I suggest using two Roth IRAs, funded backdoor, one for each of you.

I suggest leaving his 401k where it is, and not rolling it over to an IRA.

Here is a general account funding priority that usually works well for many people (when there is no HSA use):
1) Contribute to the work-based plans (401k, 403b, 457, TSP, etc.) enough to get the full employer match (the match is like free money, your best possible investment);
2) Pay off high interest debt (a guaranteed high return, the next best thing to free money);
3) Contribute the maximum to an IRA, traditional or Roth (or backdoor Roth technique), depending on eligibility and personal circumstances;
4) Contribute the remainder of the maximum employee contribution to the work-based accounts; and
5) Contribute to a taxable investing account.

Please see the wiki article "Prioritizing investments".

Starting in 2019 the maximum annual employee contribution to a 401k is $19k, and the maximum annual contribution to a Roth IRA is $6k.



Example portfolio.
It is often better coordinate investments across all accounts, in other words treat all accounts together as a single unified portfolio, rather than view each account separately. Select just one or two of the better funds (most diversified + lower expense ratio) in the work-based account (401k, 403b, 457, TSP etc.), where the choices offered are limited. Then complete the rest of the asset allocation using the nearly unlimited or choices available in a taxable account or any IRAs. This approach lets you avoid having to use less diversified funds often found in work-based plans.

To make portfolio management and rebalancing easy it is often better to have at least one large tax-advantaged account which contains all three basic asset types (bonds, international stocks, and domestic stocks). Don’t try to put all components of the asset allocation in every account.

Here is an example portfolio that you could consider. This is a three-fund type portfolio, modified as necessary to accommodate the fund offerings in your 401ks. Current portfolio size = $228.5k. New annual contributions = about $39.3k. The asset allocation is: 15% bonds; 10% international stocks; and 75% domestic stocks. The percentages given are percentages of the total portfolio, not of a given account. The suggestion is to switch both the existing balances and the new contributions to the funds indicated. All percentages and dollar amounts are rounded off, so may not add up exactly. Sometimes I state 00% to indicate funds you might want to add in the future.

His 401k (10% of total; no new contributions)
05%, Vanguard Institutional Index Fund Institutional (a S&P 500 index fund) (VINIX) ER 0.03%;
00%, Vanguard Developed Markets Index Fund Admiral Shares (VTMGX) ER 0.07%; and
05%, Dodge & Cox Income Fund (DODIX) ER 0.43%

His Roth IRA @ Vanguard, formerly @ USAA (18% of total; adds $5.5k/year via backdoor = 14% of new annual contributions)
02%, Emerging Markets Stock Index Fund Admiral Shares (VEMAX) ER 0.14%
16%, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.04%

Her 401k (70% of total; adds $18.5k/year + employer match $9.8k = $28.3k/year total = 71% of new annual contributions)
52%, Vanguard Institutional Index Fund Institutional (a S&P 500 index fund) (VINIX) ER 0.03%;
08%, Vanguard Developed Markets Index Fund Admiral Shares (VTMGX) ER 0.07%; and
10%, Dodge & Cox Income Fund (DODIX) ER 0.43%.

Her Roth IRA @ Vanguard, via backdoor (02% of total; adds $5.5k/year via backdoor = 14% of new annual contributions)
02%, Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) ER 0.14%

Thank you, this is extremely helpful. Appreciate all your efforts, I learned a lot today

Carl53
Posts: 1610
Joined: Sun Mar 07, 2010 8:26 pm

Re: Portfolio Advice, 30 yr old couple

Post by Carl53 » Fri Oct 19, 2018 5:33 am

Hodor wrote:
Thu Oct 18, 2018 1:46 pm
One thing that I missed, since he does not have a retirement plan at work, his income limit for deducting a Traditional IRA is much higher than normal. For a married filing jointly spouse not covered by a retirement plan, the Traditional IRA contribution is fully deductible if the couple's modified AGI is under $189,000. And this modified AGI does not include income that went to her 401k, employee health insurance premiums, or FSA. If your combined income is under this limit it might be better to do the deductible traditional IRA contribution for him and only do the backdoor Roth for her.
Her 401k
70% T Rowe Price Retire 2050 TR B (TRRMX) (0.40%)
$159,000
Maxing out $18500 employee contribution, Company match of 5% of Salary per year ($9,800 last year)
She is already making almost $200k (9800/.05) by herself. Her 401k and other potential items would get them under $189k only if he makes very little.

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