Please wrap your Boglehead around this

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Topic Author
Villanelle
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Please wrap your Boglehead around this

Post by Villanelle » Thu Apr 11, 2019 7:12 am

Long-time reader. First time poster. I will try to be as concise as I can.

EF: Six months of expenses ($12K)
Debt: None. House paid off. Car paid off. No credit card debt.
Tax Filing Status: Single, no dependents
Tax Rate: 12% Federal, 5.5% State
State of Residence: NC
Age: 51
Desired Asset Allocation: 60/40 to 50/50
Desired International Allocation: 15-20%
Current Portfolio: ~$160K

Retirement Assets:

Taxable
16% ($26K) VSMGX (Vanguard LifeStrategy Moderate 60/40)

401K
70% ($110K) NC funds for state & local government employees (No tickers)

70/30 allocation: 35% Large Cap Index/15% Small-Mid Cap Index/20% International Index/30% Intermediate Bond Index (Average expense ratio around 0.06)

Currently contribute 20%, Employer match: 100% up to 1%

Roth 401K is available

Roth IRA
7% ($10.5K) VTSAX (Vanguard Total Stock) Max-out yearly

Traditional IRA
2% ($3200) VBILX (Vanguard Intermediate Bond) Opened to rollover 401K after retirement

Health Savings Account
5% ($7700) in CU account earning 2.50% (Max-out yearly)

I am a long-time local government employee earning $40K annually. I am planning to retire in five and a half years at age 57. I will receive an annual pension of around $24K which should cover my monthly bills. I would like to withdraw $15-$20K a year from my investments for discretionary expenditures. Health insurance premiums will be 100% paid for by my employer, and I will continue to contribute the maximum to HSA until eligible for Medicare.

I will be receiving an inheritance this year of around $500-550K. I am so grateful for my dear parents and wish to honor them by taking great care with their lifetime savings. I will also receive around $175K after selling their house in a few years. My S.O. and I would like to buy or build a new home within 5-7 years or so. We will use the money from the sale of our house and my parents’ house to do this, but I do need some liquidity for purchase of land or down payment if an opportunity arises.

I have done my best to educate myself about investing since The Great Recession, and I feel comfortable managing my own investments. I do prefer simplicity to uber efficiency and would be content with only the LifeStrategy Moderate (60/40) fund held in taxable forever. I am not a fan of having to rebalance my accounts, especially as I age. However, I realize doing so may create larger than necessary tax bills down the road. I have read the Bogelheads Wiki info extensively, but I would greatly appreciate some advice on how to allocate this new money.

My plan so far is to fund my taxable account with VTSAX (Total US Stock) and VTIAX (Total Int’l). I will probably cash out the LifeStrategy fund (sigh) and consolidate that money into these two funds as well or hold in Vanguard Prime MM. Since my taxable account will be much larger than my tax-deferred accounts, this will make my portfolio too heavy in equities for my risk tolerance. After retirement, I will rollover my 401K to my IRA at Vanguard and begin partial Roth conversions. My questions:

Should I just add a bond fund to my taxable account and call it a day? Or…

Should I use some of this money for living expenses, max-out my 401K and change my 401K allocation to all bonds?

Should I contribute to the Roth 401K instead of traditional for the remainder of my employment? My tax rate will probably increase (slightly) later in retirement…especially after Social Security and RMDs kick in.

Thank y’all for taking your valuable time to consider this!
Last edited by Villanelle on Fri Apr 12, 2019 7:55 pm, edited 1 time in total.

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David Jay
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Re: Please wrap your Boglehead around this

Post by David Jay » Thu Apr 11, 2019 8:22 am

Welcome to the forum! Sorry for your loss, your folks left you a nice legacy.

A few thoughts:

1. You are making good choices with your fund selections, your instincts are pretty good.

2. View all of your accounts as a single portfolio. This comes into play with things like bond allocation. It is OK to hold all your bonds in your 401K and all your stocks in taxable, there is no need to hold 60/40 in each individual account.

3. While working (and showing income), I would absolutely max-out all tax-advantaged space and take money from taxable (inheritance) for living expenses if necessary to max-out the tax advantaged space. You only have a few more years of work income which is necessary for contributions to 401K/IRA accounts.

4. It is difficult to give specific advice about housing with just one set of numbers when the home will be a joint project.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

livesoft
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Re: Please wrap your Boglehead around this

Post by livesoft » Thu Apr 11, 2019 8:30 am

All looks great to me.
Should I use some of this money for living expenses, max-out my 401K and change my 401K allocation to all bonds?
That's what I would do.

You hinted at some sentimentalism about the inheritance. I would not be sentimental about the inheritance.

Your mention of a SO makes me think of some other things, but I'm giving you a break on that.
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Sandtrap
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Re: Please wrap your Boglehead around this

Post by Sandtrap » Thu Apr 11, 2019 8:39 am

Congratulations on a well thought out plan.
And, reading the Wiki extensively.

Randoms.
1. Excellent that health care is taken care of from age 57 to Medicare eligibility. This gap can be a hazard for many that retire early.
2. You mention home or new home construction on raw land in the future after the sale of 2 homes, and an SO.
Cautionary note on commingling of finances here. (but not asked for in your post so will go no further).
3. There is a Wiki on funding order/priority which you likely have already read. If not, check that.
4. With the upcoming life transitions, it is always a good idea to keep a larger EF to weather any potential storms and inevitable setbacks.
5. Though not mentioned nor asked, some pondering on future estate planning may be in order as you head into retirement.
6. Congratulations on keeping your portfolio simple.
Condolences on the loss of your parents.
j

Topic Author
Villanelle
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Re: Please wrap your Boglehead around this

Post by Villanelle » Thu Apr 11, 2019 8:43 am

Thanks for your replies.

If I max out my 401K and switch allocation to all bonds, I will still be too heavy in stocks for a while. Should I add a bond fund to taxable also? And should I begin contributing to the Roth 401K or stick with the traditional?

Lou354
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Re: Please wrap your Boglehead around this

Post by Lou354 » Thu Apr 11, 2019 10:29 am

Villanelle wrote:
Thu Apr 11, 2019 8:43 am
Thanks for your replies.

If I max out my 401K and switch allocation to all bonds, I will still be too heavy in stocks for a while. Should I add a bond fund to taxable also?
Yes.
And should I begin contributing to the Roth 401K or stick with the traditional?
Probably stick with traditional. After retiring you’ll have at least a few years before SS and RMDs, during which your tax bracket will be the same or lower than it is now. You can do Roth conversions then.

Topic Author
Villanelle
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Re: Please wrap your Boglehead around this

Post by Villanelle » Thu Apr 11, 2019 10:47 am

Thank you for your advice! It is extremely helpful to have knowledgeable people answer my questions. Much appreciated!

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mhadden1
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Re: Please wrap your Boglehead around this

Post by mhadden1 » Thu Apr 11, 2019 11:07 am

David Jay wrote:
Thu Apr 11, 2019 8:22 am

3. While working (and showing income), I would absolutely max-out all tax-advantaged space and take money from taxable (inheritance) for living expenses if necessary to max-out the tax advantaged space.
As noted above, I think what you would really like to do in the next six years is to contribute your whole paycheck, if possible, to tax-advantaged plans, while using your inheritance for your expenses. You can allocate the new contributions to bonds to help move toward holding all your bond allocation in tax-advantaged. After you retire, it may make sense to convert some of your tax-deferred holdings to Roth.

As a local government employee, do you have any access to other tax-advantaged space, besides your 401k? Like, a 457 plan? Sometimes these are available but are not well-promoted and not many take advantage.

You might think about using I-bonds as some of your fixed-income in taxable, which would defer federal taxes until you cash them out. You can buy up to 10k electronically per year, and up to 5k with your tax refund. There are limits and penalties for early cash outs which won't matter if you intend to hold for several years, while you are building up your tax-advantaged space for your bond holdings.
Oh I can't, can I? That's what they said to Thomas Edison, mighty inventor, Thomas Lindberg, mighty flyer,and Thomas Shefsky, mighty like a rose.

Topic Author
Villanelle
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Re: Please wrap your Boglehead around this

Post by Villanelle » Thu Apr 11, 2019 3:02 pm

Thank you, mhadden1!
As a local government employee, do you have any access to other tax-advantaged space, besides your 401k? Like, a 457 plan? Sometimes these are available but are not well-promoted and not many take advantage.
This is something I need to investigate. I know that a 457 plan is available, but I assumed it was an either/or proposition and I chose 401k. I never thought to question this. If I can contribute to both, brilliant! I owe you many thanks!

I will look into I-bonds also. Another great idea to look into.

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Duckie
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Re: Please wrap your Boglehead around this

Post by Duckie » Thu Apr 11, 2019 5:25 pm

Villanelle wrote:Taxable
16% ($26K) VSMGX (Vanguard LifeStrategy Moderate 60/40)
This does not belong in a taxable account because of the taxable bond component. Consider selling, and at least don't buy more (don't reinvest dividends).
401K
70% ($110K) NC funds for state & local government employees (No tickers)
Put your bonds in this account.
Traditional IRA
2% ($3200) VBILX (Vanguard Intermediate Bond) Opened to rollover 401K after retirement
Why did you open this now? You aren't retiring for years. I would convert this to your Roth IRA.
Should I just add a bond fund to my taxable account and call it a day? Or…
Maybe. If you do, use a muni fund like (VWITX) Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (0.19%).
Should I use some of this money for living expenses, max-out my 401K and change my 401K allocation to all bonds?
Yes, yes, and yes.
Should I contribute to the Roth 401K instead of traditional for the remainder of my employment? My tax rate will probably increase (slightly) later in retirement…especially after Social Security and RMDs kick in.
I wouldn't. But if you really want to, just contribute partly to the Roth 401k and the rest to pre-tax.

Topic Author
Villanelle
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Re: Please wrap your Boglehead around this

Post by Villanelle » Thu Apr 11, 2019 5:44 pm

Duckie wrote:
Thu Apr 11, 2019 5:25 pm
Should I just add a bond fund to my taxable account and call it a day? Or…
Maybe. If you do, use a muni fund like (VWITX) Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (0.19%).
Was wondering about this. I wasn't sure if I should go with the tax-exempt fund because of my low tax rate. I know it may
increase in the future though.

Thanks for your thoughts on this. Very appreciated!

NMBob
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Re: Please wrap your Boglehead around this

Post by NMBob » Thu Apr 11, 2019 6:04 pm

I would consider the posts about deferred bond dividends etc and the taxes. It likely is not that hard to kick you up from that low tax bracket as that happened to me this year. Also that has a whammy of increasing my percentage of your social security getting taxed. I now have some muni bond funds and the ETF MNA for tax considerations and reduction of stock volatility.

Topic Author
Villanelle
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Re: Please wrap your Boglehead around this

Post by Villanelle » Thu Apr 11, 2019 6:14 pm

NMBob wrote:
Thu Apr 11, 2019 6:04 pm
I would consider the posts about deferred bond dividends etc and the taxes. It likely is not that hard to kick you up from that low tax bracket as that happened to me this year. Also that has a whammy of increasing my percentage of your social security getting taxed. I now have some muni bond funds and the ETF MNA for tax considerations and reduction of stock volatility.
That makes sense to me. Thanks for steering me in the right direction!

BarbBrooklyn
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Re: Please wrap your Boglehead around this

Post by BarbBrooklyn » Thu Apr 11, 2019 6:29 pm

As a local government employee, do you have any access to other tax-advantaged space, besides your 401k? Like, a 457 plan? Sometimes these are available but are not well-promoted and not many take advantage.

+1
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CyclingDuo
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Re: Please wrap your Boglehead around this

Post by CyclingDuo » Thu Apr 11, 2019 6:39 pm

Villanelle wrote:
Thu Apr 11, 2019 7:12 am
Long-time reader. First time poster. I will try to be as concise as I can. Give me a break...I'm a woman!

Thank y’all for taking your valuable time to consider this!
Only responding because I love your name Villanelle. Probably due to my love of Berlioz's Les nuits d'été of which the first song is indeed entitled Villanelle.
"Everywhere is within walking distance if you have the time." ~ Steven Wright

Topic Author
Villanelle
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Re: Please wrap your Boglehead around this

Post by Villanelle » Thu Apr 11, 2019 6:49 pm

CyclingDuo wrote:
Thu Apr 11, 2019 6:39 pm

Only responding because I love your name Villanelle. Probably due to my love of Berlioz's Les nuits d'été of which the first song is indeed entitled Villanelle.
Thanks!
Summer Nights makes me think of Grease! :D

retire2022
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Re: Please wrap your Boglehead around this

Post by retire2022 » Thu Apr 11, 2019 7:35 pm

Villianelle

If you find out more about your 457b plan please post fund choices, it would be helpful for us to chime in.

Amadis_of_Gaul
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Re: Please wrap your Boglehead around this

Post by Amadis_of_Gaul » Thu Apr 11, 2019 10:51 pm

CyclingDuo wrote:
Thu Apr 11, 2019 6:39 pm
Villanelle wrote:
Thu Apr 11, 2019 7:12 am
Long-time reader. First time poster. I will try to be as concise as I can. Give me a break...I'm a woman!

Thank y’all for taking your valuable time to consider this!
Only responding because I love your name Villanelle. Probably due to my love of Berlioz's Les nuits d'été of which the first song is indeed entitled Villanelle.
I too am responding because i love the screen name, though my associations with it are poetic rather than musical. The villanelle is a demanding form. You need some serious technical chops to pull it off, at least in a rhyme-poor language like English. You have to be even better than that for the result to sound expressive rather than mechanical. I haven't attempted one in a long time, but now that you've brought them to mind, I'm intrigued. . .

Topic Author
Villanelle
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Re: Please wrap your Boglehead around this

Post by Villanelle » Fri Apr 12, 2019 9:48 am

Amadis_of_Gaul wrote:
Thu Apr 11, 2019 10:51 pm

I too am responding because i love the screen name, though my associations with it are poetic rather than musical. The villanelle is a demanding form. You need some serious technical chops to pull it off, at least in a rhyme-poor language's like English. You have to be even better than that for the result to sound expressive rather than mechanical. I haven't attempted one in a long time, but now that you've brought them to mind, I'm intrigued. . .
Posted my investment info on Bogelhead forum...Check

Receiving sound financial advice for free...Check

Inspired someone to write poetry...BUCKET LIST CHECK! :D
retire2022 wrote:
Thu Apr 11, 2019 7:35 pm
Villianelle

If you find out more about your 457b plan please post fund choices, it would be helpful for us to chime in.
For the 457 plan, the only index funds available are the same ones I listed above in my 401K. In addition, there are some other fixed income funds to choose from:

NC Stable Value (ER: 0.33)
NC Inflation Responsive (ER: 1.25)
NC TIPS (ER: 0.06)

Thank you for your help.

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JupiterJones
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Re: Please wrap your Boglehead around this

Post by JupiterJones » Fri Apr 12, 2019 11:27 am

Amadis_of_Gaul wrote:
Thu Apr 11, 2019 10:51 pm
CyclingDuo wrote:
Thu Apr 11, 2019 6:39 pm
Only responding because I love your name Villanelle. Probably due to my love of Berlioz's Les nuits d'été of which the first song is indeed entitled Villanelle.
I too am responding because i love the screen name, though my associations with it are poetic rather than musical. The villanelle is a demanding form.
Here I just figured the OP was a Killing Eve fan. (As am I... it's a great show!)
Stay on target...

Topic Author
Villanelle
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Re: Please wrap your Boglehead around this

Post by Villanelle » Fri Apr 12, 2019 12:07 pm

[
JupiterJones wrote:
Fri Apr 12, 2019 11:27 am
Here I just figured the OP was a Killing Eve fan. (As am I... it's a great show!)
You guessed it! Thanks for the lifeline. I was beginning to feel out of my depth!

Thank you Amadis of Gaul and Cyclingduo for informative lessons in the arts!

fposte
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Re: Please wrap your Boglehead around this

Post by fposte » Fri Apr 12, 2019 12:09 pm

Amadis_of_Gaul wrote:
Thu Apr 11, 2019 10:51 pm
CyclingDuo wrote:
Thu Apr 11, 2019 6:39 pm

Only responding because I love your name Villanelle. Probably due to my love of Berlioz's Les nuits d'été of which the first song is indeed entitled Villanelle.
I too am responding because i love the screen name, though my associations with it are poetic rather than musical.
"The art of losing isn't hard to master" is actually rather Bogleheadish :-).

Thesaints
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Re: Please wrap your Boglehead around this

Post by Thesaints » Fri Apr 12, 2019 12:13 pm

It is basically impossible to give you any advice, since you don’t mention any financial target except for wanting to put all of your money in building a home 5-7 years from now (is that wise ?)
Also, you state
Desired Asset Allocation: 60/40 to 50/50
Desired International Allocation: 15-20%
“Desired” based on what ?

Topic Author
Villanelle
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Re: Please wrap your Boglehead around this

Post by Villanelle » Fri Apr 12, 2019 2:33 pm

Thesaints wrote:
Fri Apr 12, 2019 12:13 pm
It is basically impossible to give you any advice, since you don’t mention any financial target except for wanting to put all of your money in building a home 5-7 years from now (is that wise ?)
No. That is not wise at all. It is also not even close to what I said.
Desired Asset Allocation: 60/40 to 50/50
Desired International Allocation: 15-20%
“Desired” based on what ?
My risk tolerance. My willingness, need, and ability to assume risk.

I believe my main questions have been answered. After purchasing stock index funds in my taxable account, the consensus is that I should max out my 401K and contribute the rest of my paycheck to the 457. I should use these accounts to acquire fixed income to reach my target asset allocation range (yes, I have a range). If I need more fixed income, I should add a muni bond fund to taxable (will also investigate I-bonds). After retirement, I will begin Roth conversions instead of contributing to Roth 401K/457 now.

Thanks to all who helped me sort this out. I am very grateful for your input.

retire2022
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Re: Please wrap your Boglehead around this

Post by retire2022 » Fri Apr 12, 2019 6:50 pm

Villianelle

You should have 25x your expenses worth of assets, which is assumed $24k based on your 6 months of expenses (12K)

24,000x25=600,000 inheritance will take care of that

Any investments will be subject to taxes on withdrawal, therefore 51-70.5(RMD) = 19 years of investing for Traditional IRA or Traditional 457 or 401K

Roth versus Traditional

https://www.schwab.com/public/schwab/in ... raditional

RMD calculator

https://www.schwab.com/public/schwab/in ... lators/rmd

Roth IRA and Roth 457 typically should be withdrawal last, so it depends on whether or not you believe in the Lazy Portfolio edit
you could shelter profits tax free until you need it.

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

Therefore if you are able to use some of your inheritance to max out the legal limits of earned income into Roth Contributions, I would do so. You are under funded in retirement savings.

Compound interest calculator http://www.moneychimp.com/calculator/co ... ulator.htm

put in 19,000 x 6 years at 4% compounded return = $131,067.60

Max out Roth IRA, Roth 401 and 457b if you have earned income, if you desire, that is my recommendation.
good luck
Last edited by retire2022 on Fri Apr 12, 2019 7:46 pm, edited 1 time in total.

crit
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Re: Please wrap your Boglehead around this

Post by crit » Fri Apr 12, 2019 7:38 pm

Now that your questions have been resolved ... I will beseech you to not ever ever hedge your thoughts with "but I'm a woman", ever again.

I'm not sure what stereotype you were working for or against there, but regardless of your own insecurities, you're doing a grave disservice to other women by starting out that way.

Topic Author
Villanelle
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Re: Please wrap your Boglehead around this

Post by Villanelle » Fri Apr 12, 2019 7:54 pm

crit wrote:
Fri Apr 12, 2019 7:38 pm
Now that your questions have been resolved ... I will beseech you to not ever ever hedge your thoughts with "but I'm a woman", ever again.

I'm not sure what stereotype you were working for or against there, but regardless of your own insecurities, you're doing a grave disservice to other women by starting out that way.
Yeah, I can see how that was misinterpreted. Just a poor attempt at humor concerning the length of my post! Not intended to project insecurities or belittle women in any way... especially since I am one! I should go back and edit that out. Peace!

Pigeye Brewster
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Re: Please wrap your Boglehead around this

Post by Pigeye Brewster » Fri Apr 12, 2019 8:29 pm

Villanelle wrote:
Fri Apr 12, 2019 2:33 pm

My risk tolerance. My willingness, need, and ability to assume risk.

I believe my main questions have been answered. After purchasing stock index funds in my taxable account, the consensus is that I should max out my 401K and contribute the rest of my paycheck to the 457. I should use these accounts to acquire fixed income to reach my target asset allocation range (yes, I have a range). If I need more fixed income, I should add a muni bond fund to taxable (will also investigate I-bonds). After retirement, I will begin Roth conversions instead of contributing to Roth 401K/457 now.
Excellent answer and excellent plan. You are doing well. :beer

Lou354
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Re: Please wrap your Boglehead around this

Post by Lou354 » Sat Apr 13, 2019 9:14 pm

Villanelle wrote:
Thu Apr 11, 2019 5:44 pm
Duckie wrote:
Thu Apr 11, 2019 5:25 pm
Should I just add a bond fund to my taxable account and call it a day? Or…
Maybe. If you do, use a muni fund like (VWITX) Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (0.19%).
Was wondering about this. I wasn't sure if I should go with the tax-exempt fund because of my low tax rate. I know it may
increase in the future though.

Thanks for your thoughts on this. Very appreciated!
At your tax rate I wouldn’t use a tax-exempt fund. I’d be interested in learning Duckie’s reasoning.

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Duckie
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Re: Please wrap your Boglehead around this

Post by Duckie » Sun Apr 14, 2019 5:25 pm

Lou354 wrote:I’d be interested in learning Duckie’s reasoning.
Some people wait until things change for the worse to revise their circumstances. I prefer to revise preemptively. Since the OP will be inheriting a chunk of money and plans to put the majority of it in stocks, her taxes are probably going to go up. If she needs to add bonds to her taxable account later (and that may not be necessary with the 457b) going with munis at the start avoids going with taxable, paying taxes at the ordinary rate, and needing to sell later. But that's just me.
Last edited by Duckie on Sun Apr 14, 2019 7:01 pm, edited 1 time in total.

Lou354
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Re: Please wrap your Boglehead around this

Post by Lou354 » Sun Apr 14, 2019 5:49 pm

Duckie wrote:
Sun Apr 14, 2019 5:25 pm
Lou354 wrote:I’d be interested in learning Duckie’s reasoning.
Some people wait until things change for the worse to revise their circumstances. I prefer to revise preemptively. Since the OP will be inheriting a chuck of money and plans to put the majority of it in stocks, her taxes are probably going to go up. If she needs to add bonds to her taxable account later (and that may not be necessary with the 457b) going with munis at the start avoids going with taxable, paying taxes at the ordinary rate, and needing to sell later. But that's just me.
ok, thanks.

retire2022
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Re: Please wrap your Boglehead around this

Post by retire2022 » Sun Apr 14, 2019 6:06 pm

Lou354 wrote:
Sun Apr 14, 2019 5:49 pm
Duckie wrote:
Sun Apr 14, 2019 5:25 pm
Lou354 wrote:I’d be interested in learning Duckie’s reasoning.
Some people wait until things change for the worse to revise their circumstances. I prefer to revise preemptively. Since the OP will be inheriting a chuck of money and plans to put the majority of it in stocks, her taxes are probably going to go up. If she needs to add bonds to her taxable account later (and that may not be necessary with the 457b) going with munis at the start avoids going with taxable, paying taxes at the ordinary rate, and needing to sell later. But that's just me.
ok, thanks.
I know someone who does not want to sell their Vanguard SP500 fund, because the tax hit will be high.

I agree that dividend paying mutual funds should be in tax sheltered investments.

I think Villanelle OP should max out Roth 457b, since there is no tax on profits, rather it is up front, I leave it up to OP to decide.

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