Portfolio adjustment help

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
gndibot
Posts: 11
Joined: Mon Nov 11, 2019 8:44 pm

Portfolio adjustment help

Post by gndibot » Mon Nov 11, 2019 8:46 pm

Can you please critique our portfolio and suggest how we could achieve an AA of 80% stock and 20% bond? Ideally, we would want to setup a simple 3-4 fund portfolio with proper distribution in taxable, tax deferred and tax sheltered accounts and need advise and direction. It’s all over the place and we would like to centralize and bring everything into Vanguard.

Emergency funds: We have 9 months of EM in a high yield savings account, earning 1.7%.

Debt: No debt other than our house. We have $500,00 left on our 30 year mortgage @ 3.875%. Just refinanced from something higher.

Tax Filing Status:: Single, Married Filing Jointly 3 Dependent Children)

Tax Rate: 28% Federal, 10% State

State of Residence: California

Age: 30, DW-32

Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 30% of stocks

Cash : 52.18%

His

His Taxable
Individual Stock : 1.19%

His Current retirement assets

His 401k at Vanguard
Just started to contribute , so it is currently 0% relative to the entire portfolio. The % below are just allocation percentages -
45% Vanguard Institutional Index Fund Institutional Shares (VINIX) (ER - 0.035%)
24% Vanguard Total International Stock Index Fund Institutional Shares (VTSNX) (ER - 0.08%)
20% Vanguard Total Bond Market Index Fund Admiral Shares(VBTLX) (ER - 0.05%)
11% Vanguard Extended Market Index Fund Institutional Shares(VIEIX) (ER - 0.06%)
Employer Match - $5,000

His Roth IRA

No ROTH 401k

His Rollover IRA at Fidelity
This is currently a 401K account at Fidelity, it is in the process of a roll over to Vanguard.
18.28% FID Freedom 2050 (FFFHX) (ER - 0.75%)



Her

Her Taxable
Individual Stock : 5.77%

Her Rollover IRA at Fidelity
DW 3 rollover IRAs

1. 12.62% Freedom 2050 K (FNSBX) (ER - 0.64%)
2. 1.96% Freedom 2050 (FFFHX) (ER - 0.75%)
3. 7%, consists of the following(totaling 100% of just this IRA)

22.3% American Century Mid Cap Value (ACMVX) = (ER- 0.98%)
7.5% AMG GW&K Core Bond ESG Fund (MBDFX) = (ER - 0.56%)
36.1% Vanguard S&P 500 ETF (VOO) = (ER -0.03%)
16.1% Vanguard Small-Cap Index Fund Admiral Shares (VSMAX) = 16.1% (ER - 0.05%)
18% Technology Select Sector SPDR Fund (XLK) = (ER - 0.13%)

Her 401K at Fidelity
1% FID Freedom 2050(FFFHX) (ER - 0.75%)
Employer Match - $2,000


Questions:
1. What do we do with the large pile of cash we have? After maxing out on 401k i think we could pursue a ROTH 401k? One of our employers is going to start supporting backdoor ROTH starting next year, so we likely give it a shot after we get our advise here. Should we pay down the mortgage, invest all of it one time or DCA over a period of 1 year? Investing all of it at once makes my stomach churn especially since we are in a Bull market.

2. Should we multi tier our 9 months of EM? 3 months completely liquid in a HYS account(1.7% rate), 3 months in Vanguard Prime Money Market Fund (VMMXX) and 3 months in Vanguard Wellesley Income Fund Investor Shares(VWINX). Perhaps a slight chance at beating inflation by employing such a combo?

Thank you very much for patiently reading. If I missed mentioning something, please let me know and I can edit my original post.

User avatar
Watty
Posts: 17608
Joined: Wed Oct 10, 2007 3:55 pm

Re: Portfolio adjustment help

Post by Watty » Mon Nov 11, 2019 10:01 pm

gndibot wrote:
Mon Nov 11, 2019 8:46 pm
1. What do we do with the large pile of cash we have? After maxing out on 401k i think we could pursue a ROTH 401k? One of our employers is going to start supporting backdoor ROTH starting next year, so we likely give it a shot after we get our advise here. Should we pay down the mortgage, invest all of it one time or DCA over a period of 1 year? Investing all of it at once makes my stomach churn especially since we are in a Bull market.
The contribution limits for your traditional and Roth 401k are combined so if you have have maxed out your traditional IRA then you would not be be able to contribute any more to a Roth 401k.

There are all sorts of opinions about paying down a mortage or not but if you decide to pay it down then you should call your lender and ask if they will "recast your mortage"(Google this) if you make a large prepayment. They are not required to do this but they often will for processing fee of a few hundred dollars, if that. The way that it works is that if you pay your mortage down by 25%(or whatever) then your required monthly payment will be reduced by the same percentage. The interest rate and length of the mortage stay the same. This can be important in case something happens like you are laid off or interest rates go up a lot.

User avatar
Duckie
Posts: 6886
Joined: Thu Mar 08, 2007 2:55 pm
Location: California Bay Area

Re: Portfolio adjustment help

Post by Duckie » Mon Nov 11, 2019 10:09 pm

gndibot, welcome to the forum.
gndibot wrote:Tax Filing Status:: Single, Married Filing Jointly 3 Dependent Children)
I am assuming you are "Married Filing Jointly" and the "Single" is a typo.
Age: 30, DW-32

Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 30% of stocks
This is reasonable.
Cash: 52.18%
Why are you holding so much in cash?
His 401k at Vanguard
Just started to contribute , so it is currently 0% relative to the entire portfolio. The % below are just allocation percentages -
45% Vanguard Institutional Index Fund Institutional Shares (VINIX) (ER - 0.035%)
24% Vanguard Total International Stock Index Fund Institutional Shares (VTSNX) (ER - 0.08%)
20% Vanguard Total Bond Market Index Fund Admiral Shares(VBTLX) (ER - 0.05%)
11% Vanguard Extended Market Index Fund Institutional Shares(VIEIX) (ER - 0.06%)
The percentages would be fine if this were your only account. Since it's not, the percentages will probably change.
His Rollover IRA at Fidelity
This is currently a 401K account at Fidelity, it is in the process of a roll over to Vanguard.
At your income you cannot contribute directly to a Roth IRA or deduct TIRA contributions. In order to use the Backdoor Roth method you cannot have anything in any non-Roth IRA (Traditional IRA, Rollover IRA, SEP IRA, SIMPLE IRA). Rolling this 401k into a rollover IRA and attempting the backdoor method will trigger the pro-rata rule.

How far "in the process" is the rollover? Can you stop it? Does your current 401k at Vanguard allow incoming rollovers? Getting a rollover IRA into a 401k plan avoids the pro-rata rule.
Her Rollover IRA at Fidelity
This has the same issue as his rollover IRA. Does her current 401k at Fidelity allow incoming rollovers?
Her 401K at Fidelity
FFFHX is expensive. What are the options in this plan? List the fund names, ticker symbols, and plan expense ratios.
What do we do with the large pile of cash we have? After maxing out on 401k i think we could pursue a ROTH 401k?
You are allowed to contribute up to $19K to a pre-tax or Roth 401k plan, total. So if you max the pre-tax 401k you cannot contribute to the Roth 401k.
One of our employers is going to start supporting backdoor ROTH starting next year, so we likely give it a shot after we get our advise here.
If you mean the Mega Backdoor Roth, that is fine if you can make the after-tax contributions and reasonably quickly roll it in-service to a Roth IRA or in-plan to a Roth 401k. Some after-tax accounts can't be rolled which isn't really an advantage. You have to read the fine-print on this.
Should we pay down the mortgage, invest all of it one time or DCA over a period of 1 year? Investing all of it at once makes my stomach churn especially since we are in a Bull market.
Your mortgage is currently $500K. Do you really have the cash to pay it off now? Is that what the 52.18% cash is?
Should we multi tier our 9 months of EM? 3 months completely liquid in a HYS account(1.7% rate), 3 months in Vanguard Prime Money Market Fund (VMMXX) and 3 months in Vanguard Wellesley Income Fund Investor Shares(VWINX). Perhaps a slight chance at beating inflation by employing such a combo?
Wellesley is a bit iffy, but overall it looks fine.

Topic Author
gndibot
Posts: 11
Joined: Mon Nov 11, 2019 8:44 pm

Re: Portfolio adjustment help

Post by gndibot » Mon Nov 11, 2019 10:24 pm

Watty wrote:
Mon Nov 11, 2019 10:01 pm
gndibot wrote:
Mon Nov 11, 2019 8:46 pm
1. What do we do with the large pile of cash we have? After maxing out on 401k i think we could pursue a ROTH 401k? One of our employers is going to start supporting backdoor ROTH starting next year, so we likely give it a shot after we get our advise here. Should we pay down the mortgage, invest all of it one time or DCA over a period of 1 year? Investing all of it at once makes my stomach churn especially since we are in a Bull market.
The contribution limits for your traditional and Roth 401k are combined so if you have have maxed out your traditional IRA then you would not be be able to contribute any more to a Roth 401k.

There are all sorts of opinions about paying down a mortage or not but if you decide to pay it down then you should call your lender and ask if they will "recast your mortage"(Google this) if you make a large prepayment. They are not required to do this but they often will for processing fee of a few hundred dollars, if that. The way that it works is that if you pay your mortage down by 25%(or whatever) then your required monthly payment will be reduced by the same percentage. The interest rate and length of the mortage stay the same. This can be important in case something happens like you are laid off or interest rates go up a lot.
Thank you for the tip regarding the recast. I will check with my bank. However my mind debates if the power of compounding would be better off than paying off the mortgage. :confused

Topic Author
gndibot
Posts: 11
Joined: Mon Nov 11, 2019 8:44 pm

Re: Portfolio adjustment help

Post by gndibot » Mon Nov 11, 2019 11:13 pm

gndibot wrote:Tax Filing Status:: Single, Married Filing Jointly 3 Dependent Children)
I am assuming you are "Married Filing Jointly" and the "Single" is a typo.

That is correct, it's a typo!
Why are you holding so much in cash?
A recent windfall.
His 401k at Vanguard
Just started to contribute , so it is currently 0% relative to the entire portfolio. The % below are just allocation percentages -
45% Vanguard Institutional Index Fund Institutional Shares (VINIX) (ER - 0.035%)
24% Vanguard Total International Stock Index Fund Institutional Shares (VTSNX) (ER - 0.08%)
20% Vanguard Total Bond Market Index Fund Admiral Shares(VBTLX) (ER - 0.05%)
11% Vanguard Extended Market Index Fund Institutional Shares(VIEIX) (ER - 0.06%)
The percentages would be fine if this were your only account. Since it's not, the percentages will probably change.
Yes, I need to understand how to split Total Stock, Total international and bond into this.


At your income you cannot contribute directly to a Roth IRA or deduct TIRA contributions. In order to use the Backdoor Roth method you cannot have anything in any non-Roth IRA (Traditional IRA, Rollover IRA, SEP IRA, SIMPLE IRA). Rolling this 401k into a rollover IRA and attempting the backdoor method will trigger the pro-rata rule.


How far "in the process" is the rollover? Can you stop it? Does your current 401k at Vanguard allow incoming rollovers? Getting a rollover IRA into a 401k plan avoids the pro-rata rule.
That is a good question, I will ask HR.

Her Rollover IRA at Fidelity
This has the same issue as his rollover IRA. Does her current 401k at Fidelity allow incoming rollovers?
Does a Rollover IRA(401k from previous employer) have any substantial disadvantages when compared to having it all sitting in a 401k as you keep switching employers over your lifetime?

Her 401K at Fidelity
FFFHX is expensive. What are the options in this plan? List the fund names, ticker symbols, and plan expense ratios.
I made a mistake, her 401k is a Vanguard Target Retirement 2050 VFIFX (ER - 0.15%)
What do we do with the large pile of cash we have? After maxing out on 401k i think we could pursue a ROTH 401k?
You are allowed to contribute up to $19K to a pre-tax or Roth 401k plan, total. So if you max the pre-tax 401k you cannot contribute to the Roth 401k.
If you mean the Mega Backdoor Roth, that is fine if you can make the after-tax contributions and reasonably quickly roll it in-service to a Roth IRA or in-plan to a Roth 401k. Some after-tax accounts can't be rolled which isn't really an advantage. You have to read the fine-print on this.
Yes, a mega backdoor ROTH is what I was alluding to. It's quite a bit of runway after the 19K cap, all the way to 54k.
Your mortgage is currently $500K. Do you really have the cash to pay it off now? Is that what the 52.18% cash is?
I meant to pay off a good chunk of the 500k not in entirety.
Should we multi tier our 9 months of EM? 3 months completely liquid in a HYS account(1.7% rate), 3 months in Vanguard Prime Money Market Fund (VMMXX) and 3 months in Vanguard Wellesley Income Fund Investor Shares(VWINX). Perhaps a slight chance at beating inflation by employing such a combo?
Wellesley is a bit iffy, but overall it looks fine.
[/quote]


I understand the 3 fund strategy but how do I allocate say for example, Total Stock(VTI), Total International Stock(VXUS) and Total Bond(BND) [all ETFs btw with low ERs] into the taxable, tax deferred and potentially tax protected accounts(we will definitely be investing after tax dollars into non deductible IRA, which will convert to ROTH IRA, starting next year)? I am afraid I am going to make a mistake because I don't believe I completely understand when something is tax efficient, given it's context.

retired@50
Posts: 633
Joined: Tue Oct 01, 2019 2:36 pm

Re: Portfolio adjustment help

Post by retired@50 » Tue Nov 12, 2019 12:42 am

gndibot wrote:
Mon Nov 11, 2019 11:13 pm

Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 30% of stocks

I understand the 3 fund strategy but how do I allocate say for example, Total Stock(VTI), Total International Stock(VXUS) and Total Bond(BND) [all ETFs btw with low ERs] into the taxable, tax deferred and potentially tax protected accounts(we will definitely be investing after tax dollars into non deductible IRA, which will convert to ROTH IRA, starting next year)? I am afraid I am going to make a mistake because I don't believe I completely understand when something is tax efficient, given it's context.
Given your desired asset allocation and your desire for tax efficiency, you should locate the 20% of your portfolio devoted to bonds in his or her (or both) 401k plans that have a decent low expense ratio bond fund.

With regard to the taxable space, you can use that for stocks like VTI or VXUS.

With regard to allocating the proper percentage to international, the math is as follows.

30% of stocks in international, but stocks are 80% of total, so: .3 x .8 = .24 which means 24% of overall portfolio is international stocks.
This leaves 56% for U.S. stocks and 20% for bonds.

The reason bonds aren't tax-efficient is because of the type of income they generate. It's taxed as ordinary income. If you must use bonds in the taxable space, you would likely consider a municipal bond fund from Vanguard. They have two dedicated to CA muni bonds.

Broadly diversified Total Stock ETFs (VTI & VXUS) are easier on taxes because they generate "qualified dividends" which are taxed at a lower rate. They also don't do much trading since they are basically a "buy and hold" type of fund. This low turnover also helps lead to lower tax consequences.

Regards,

User avatar
Duckie
Posts: 6886
Joined: Thu Mar 08, 2007 2:55 pm
Location: California Bay Area

Re: Portfolio adjustment help

Post by Duckie » Tue Nov 12, 2019 7:16 pm

gndibot wrote:Does a Rollover IRA (401k from previous employer) have any substantial disadvantages when compared to having it all sitting in a 401k as you keep switching employers over your lifetime?
A rollover IRA gets is the way of the backdoor Roth method which you are planning to do.
I made a mistake, her 401k is a Vanguard Target Retirement 2050 VFIFX (ER - 0.15%)
That's better but we still need to know what her 401k options are.
Your mortgage is currently $500K. Do you really have the cash to pay it off now? Is that what the 52.18% cash is?
I meant to pay off a good chunk of the 500k not in entirety.
How much of the 52% will be left after paying down the mortgage? Will the remainder be used for long-term taxable investing?
I understand the 3 fund strategy but how do I allocate say for example, Total Stock(VTI), Total International Stock(VXUS) and Total Bond(BND) [all ETFs btw with low ERs] into the taxable, tax deferred and potentially tax protected accounts
You try to put all bonds in the pre-tax tax-sheltered accounts and just stocks in taxable and Roth accounts. See below.
we will definitely be investing after tax dollars into non deductible IRA, which will convert to ROTH IRA, starting next year?
In order to do this you both need to "hide" your pre-tax rollover IRAs by moving them to your employer 401k plans.
I am afraid I am going to make a mistake because I don't believe I completely understand when something is tax efficient, given it's context.
VTI and VXUS are tax-efficient. BND and all target-date funds are not.
___________________

The following hypothetical example has an AA of 56% US stocks, 24% international stocks, and 20% bonds. The rollover IRAs are rolled into the 401k plans, the cash is reduced for just investing, and percentages refigured. A lot of this is guesswork so don't take it literally, but this shows how to invest efficiently across several accounts. By the end of the year you could have something like:

His taxable at Fidelity -- 11%
11% (VTI) Vanguard Total Stock Market ETF (0.03%)

Her taxable at Fidelity -- 16%
3% (VTI) Vanguard Total Stock Market ETF (0.03%)
13% (VXUS) Vanguard Total International Stock ETF (0.09%)

His 401k at Vanguard -- 31%
11% (VTSNX) Vanguard Total International Stock Index Fund Institutional Shares (0.08%)
20% (VBTLX) Vanguard Total Bond Market Index Fund Admiral Shares (0.05%)

Her 401k at Fidelity -- 40%
40% US stock index funds (either total market or 500 Index w/ or w/out extended market)

His Roth IRA at Fidelity (via backdoor) -- 1%
1% (VTI) Vanguard Total Stock Market ETF (0.03%)

Her Roth IRA at Fidelity (via backdoor) -- 1%
1% (VTI) Vanguard Total Stock Market ETF (0.03%)

My comments:
  • You will also have TIRAs at Fidelity but they are used strictly for the backdoor method and will be $0 as of 12/31/19. When used they will hold a money market or settlement fund for the brief period you have cash in them. This minimizes gains and avoids losses before the conversion.
  • I don't know where the windfall came from or whose it is so I'm splitting the remainder (after paying down mortgage) in both taxable accounts. The example has 10% left over before refiguring.
Something to think about.

Topic Author
gndibot
Posts: 11
Joined: Mon Nov 11, 2019 8:44 pm

Re: Portfolio adjustment help

Post by gndibot » Tue Nov 12, 2019 10:35 pm

Thank you for helping me unravel this, duckie!
How much of the 52% will be left after paying down the mortgage? Will the remainder be used for long-term taxable investing?
We would have about 60% left in our mortgage if we end up using all of 52%. The dilemma really for us is - do we use that cash that we have to invest long term or do we pay some of our mortgage down, so our monthly expenses are lower. I am leaning towards the prior but DW is leaning towards the latter. What is your opinion on this?
The following hypothetical example has an AA of 56% US stocks, 24% international stocks, and 20% bonds. The rollover IRAs are rolled into the 401k plans, the cash is reduced for just investing, and percentages refigured.
You mean combine all rollover IRAs from his/her and put the respective amounts in the respective employer sponsored 401k? I am sure you meant that, but just double checking to make sure. Also the portfolio split that you suggested, is that the scenario where we are employing all of the cash that we have on hand(52% of our portfolio)? I am leaning towards that anyway(meaning using all the cash to invest LT) but a little worried about investing all of it at once vs DCA.

His taxable at Fidelity -- 11%
11% (VTI) Vanguard Total Stock Market ETF (0.03%)

Her taxable at Fidelity -- 16%
3% (VTI) Vanguard Total Stock Market ETF (0.03%)
13% (VXUS) Vanguard Total International Stock ETF (0.09%)

His 401k at Vanguard -- 31%
11% (VTSNX) Vanguard Total International Stock Index Fund Institutional Shares (0.08%)
20% (VBTLX) Vanguard Total Bond Market Index Fund Admiral Shares (0.05%)

Her 401k at Fidelity -- 40%
40% US stock index funds (either total market or 500 Index w/ or w/out extended market)

His Roth IRA at Fidelity (via backdoor) -- 1%
1% (VTI) Vanguard Total Stock Market ETF (0.03%)

Her Roth IRA at Fidelity (via backdoor) -- 1%
1% (VTI) Vanguard Total Stock Market ETF (0.03%)
Thank you for showing me how to do this.
Her 401k at Fidelity -- 40%
40% US stock index funds (either total market or 500 Index w/ or w/out extended market)
Is it okay to use VTI here(or something equivalent), in case her employer has some options? Also, why do S & P 500 if one picks VTI? What's the logic? I have to ask basic questions, sorry.
My comments:
You will also have TIRAs at Fidelity but they are used strictly for the backdoor method and will be $0 as of 12/31/19. When used they will hold a money market or settlement fund for the brief period you have cash in them. This minimizes gains and avoids losses before the conversion.
Our plan is to move everything out of Fidelity and move that into Vanguard, so we centralize all in once place. We don't have any TIRAs, its all rollover IRAs.

User avatar
Duckie
Posts: 6886
Joined: Thu Mar 08, 2007 2:55 pm
Location: California Bay Area

Re: Portfolio adjustment help

Post by Duckie » Wed Nov 13, 2019 8:12 pm

gndibot wrote:We would have about 60% left in our mortgage if we end up using all of 52%. The dilemma really for us is - do we use that cash that we have to invest long term or do we pay some of our mortgage down, so our monthly expenses are lower. I am leaning towards the prior but DW is leaning towards the latter. What is your opinion on this?
Paying down your mortgage doesn't mean your monthly expenses will be lower. It just means you'll pay it off sooner. But you can "recast" the mortgage which will lower your monthly expenses.
You mean combine all rollover IRAs from his/her and put the respective amounts in the respective employer sponsored 401k?
Yes, if allowed.
Also the portfolio split that you suggested, is that the scenario where we are employing all of the cash that we have on hand(52% of our portfolio)?
No. In my example roughly 40% was used to pay down the mortgage and therefore removed from the portfolio. The other roughly 10% (~5% each before refiguring percentages) went into the two taxable accounts.
Is it okay to use VTI here(or something equivalent), in case her employer has some options?
It depends on what her 401k options are. If VTI or equivalent is an option then that's fine.
Also, why do S & P 500 if one picks VTI? What's the logic?
Many employer plans (including his 401k at Vanguard) do not offer a total US market fund but do offer a 500 Index fund.
Our plan is to move everything out of Fidelity and move that into Vanguard, so we centralize all in once place. We don't have any TIRAs, its all rollover IRAs.
Whichever custodian you choose for your IRAs, if you use the backdoor method you will each have to have a TIRA to contribute to, before converting to Roth IRAs. Once the conversion happens the TIRAs will sit empty until the next year's contributions.

Topic Author
gndibot
Posts: 11
Joined: Mon Nov 11, 2019 8:44 pm

Re: Portfolio adjustment help

Post by gndibot » Thu Nov 14, 2019 12:06 am

No. In my example roughly 40% was used to pay down the mortgage and therefore removed from the portfolio. The other roughly 10% (~5% each before refiguring percentages) went into the two taxable accounts.
Are you suggesting we use roughly 77% of our cash and use that to pay down and probably recast(if allowed) the mortgage and use the rest(23%) to invest in taxable? In the long term and just playing the devil's advocate here, isn't it better to invest the cash for long term and enjoy the compounded appreciation? We would probably save on paying more interest with the early mortgage payoff(probably $200-$300 k) but possibly miss out on a 10 fold appreciation over a period of 30 years?

His taxable at Fidelity -- 11%
11% (VTI) Vanguard Total Stock Market ETF (0.03%)

Her taxable at Fidelity -- 16%
3% (VTI) Vanguard Total Stock Market ETF (0.03%)
13% (VXUS) Vanguard Total International Stock ETF (0.09%)

His 401k at Vanguard -- 31%
11% (VTSNX) Vanguard Total International Stock Index Fund Institutional Shares (0.08%)
20% (VBTLX) Vanguard Total Bond Market Index Fund Admiral Shares (0.05%)

Her 401k at Fidelity -- 40%
40% US stock index funds (either total market or 500 Index w/ or w/out extended market)

His Roth IRA at Fidelity (via backdoor) -- 1%
1% (VTI) Vanguard Total Stock Market ETF (0.03%)

Her Roth IRA at Fidelity (via backdoor) -- 1%
1% (VTI) Vanguard Total Stock Market ETF (0.03%)
Let's say we decide to use majority of the cash to invest long term(20-30 years), would the allocation you so generously laid out for me, still make sense? Let's just say for example my entire portfolio is around $550,000, how would the distributions look like now?
if you use the backdoor method you will each have to have a TIRA to contribute to, before converting to Roth IRAs. Once the conversion happens the TIRAs will sit empty until the next year's contributions.
The backdoor ROTH I was mentioning is a non deductible(after tax) IRA which immediately(same day) gets converted to in plan ROTH IRA. At least this is how we have been been told at my workplace. Although this is part of the 401k plan which my employer supports, I could chose different allocations for pretax 401k and completely different allocations for the after tax ROTH IRA.

User avatar
Duckie
Posts: 6886
Joined: Thu Mar 08, 2007 2:55 pm
Location: California Bay Area

Re: Portfolio adjustment help

Post by Duckie » Thu Nov 14, 2019 7:41 pm

gndibot wrote:Are you suggesting we use roughly 77% of our cash and use that to pay down and probably recast(if allowed) the mortgage and use the rest(23%) to invest in taxable?
You wrote you wanted to "pay off a good chunk". That's what the example showed.

Have you found out what the options are in her 401k plan?
In the long term and just playing the devil's advocate here, isn't it better to invest the cash for long term and enjoy the compounded appreciation?
It's a personal decision. Also, if paying down the mortgage you know the outcome while investing doesn't always go the way you want.
We would probably save on paying more interest with the early mortgage payoff(probably $200-$300 k) but possibly miss out on a 10 fold appreciation over a period of 30 years?
Maybe, maybe not.
if you use the backdoor method you will each have to have a TIRA to contribute to, before converting to Roth IRAs. Once the conversion happens the TIRAs will sit empty until the next year's contributions.
The backdoor ROTH I was mentioning is a non deductible(after tax) IRA which immediately(same day) gets converted to in plan ROTH IRA. At least this is how we have been been told at my workplace. Although this is part of the 401k plan which my employer supports, I could chose different allocations for pretax 401k and completely different allocations for the after tax ROTH IRA.
If you're talking about the Mega Backdoor Roth method it's not exactly the above. You would contribute after-tax to a 401k sub-account, not an IRA, and then either convert/roll in-service to an outside Roth IRA or in-plan to a Roth 401k. The above sounds more like the in-plan Roth 401k.

When I was talking about the backdoor method above I was talking about contributing to a TIRA and converting to a Roth IRA. This has nothing to do with your employer plan.
Let's say we decide to use majority of the cash to invest long term(20-30 years), would the allocation you so generously laid out for me, still make sense? Let's just say for example my entire portfolio is around $550,000, how would the distributions look like now?
All right, let's say your total portfolio is worth $550,000 and 52% of that is cash and you want to invest 100% of the cash in your two taxable accounts. The following example still has the AA of 56% US stocks, 24% international stocks, and 20% bonds. The rollover IRAs are still rolled into the 401k plans and the backdoor Roth method is used. (I didn't include any Mega backdoor Roth contributions because I don't know whose plan gets it and whether it ends up in an inside Roth 401k or an outside Roth IRA.) At the end of the year you could have something like:
Edited to correct numbers below.

His taxable at Vanguard -- $150K -- 27%
27% (VTI) Vanguard Total Stock Market ETF (0.03%)

Her taxable at Vanguard -- $175K -- 31%
7% (VTI) Vanguard Total Stock Market ETF (0.03%)
24% (VXUS) Vanguard Total International Stock ETF (0.09%)

His 401k at Vanguard -- $101K -- 18%
18% (VBTLX) Vanguard Total Bond Market Index Fund Admiral Shares (0.05%)

Her 401k at Fidelity -- $124K -- 22%
20% (VFIAX) Vanguard 500 Index Fund Admiral Shares (0.04%)
2% (VFSUX) Vanguard Short-Term Investment-Grade Fund Admiral Shares (0.10%)

His Roth IRA at Vanguard (via backdoor) -- $6K -- 1%
1% (VTI) Vanguard Total Stock Market ETF (0.03%)

Her Roth IRA at Vanguard (via backdoor) -- $6K -- 1%
1% (VTI) Vanguard Total Stock Market ETF (0.03%)

Just some more possibilities.
Last edited by Duckie on Fri Nov 15, 2019 6:54 pm, edited 1 time in total.

Topic Author
gndibot
Posts: 11
Joined: Mon Nov 11, 2019 8:44 pm

Re: Portfolio adjustment help

Post by gndibot » Thu Nov 14, 2019 10:29 pm

Appreciate the response!
Have you found out what the options are in her 401k plan?
Yes, pretty much most of are Target funds for different years(2045, 2050, 2055 etc..) The ones that I found interesting were the following and I were

Stock
Vanguard 500 Index Fund Admiral Shares VFIAX - (0.04 %)
Vanguard Mid-Cap Index Fund Admiral Shares VIMAX - (0.05 %)
Vanguard Small-Cap Index Fund Admiral Shares VSMAX - (0.05 %)
Vanguard Developed Markets Index Fund Admiral Shares VTMGX - (0.07 %)

Bond
Vanguard Short Term Invest Grade Fund Admiral Shares VFSUX (0.10 %)
Am Century Inflation-Adj Bond Fund AIANX (0.27%)
PGIM High Yield R6 PHYQX (0.42%)
American Century Government Bond Fund ABTIX (0.27%)

Leaning more towards a combination of VFIAX and bond(s) and based on what we end up doing it would be a combination of the two or just one of them.
His Current retirement assets

His 401k at Vanguard
Just started to contribute , so it is currently 0% relative to the entire portfolio. The % below are just allocation percentages -
45% Vanguard Institutional Index Fund Institutional Shares (VINIX) (ER - 0.035%)
24% Vanguard Total International Stock Index Fund Institutional Shares (VTSNX) (ER - 0.08%)
20% Vanguard Total Bond Market Index Fund Admiral Shares(VBTLX) (ER - 0.05%)
11% Vanguard Extended Market Index Fund Institutional Shares(VIEIX) (ER - 0.06%)
Employer Match - $5,000

His Roth IRA

No ROTH 401k

His Rollover IRA at Fidelity
This is currently a 401K account at Fidelity, it is in the process of a roll over to Vanguard.
18.28% FID Freedom 2050 (FFFHX) (ER - 0.75%)
If you notice, my combination of 401k/rollover IRA is around 18.28% of my portfolio, however you allocated the following %(12%) - :confused
His 401k at Vanguard -- $52K -- 12%
12% (VBTLX) Vanguard Total Bond Market Index Fund Admiral Shares (0.05%)
Where would the difference (18.28 %- 12%) = 6.28% end up going, which is currently in my 401k? Maybe I am not understanding this correctly, but in the scenario of $550,000 portfolio, I have $100,540 in 401k and you are suggesting only using 52K off of it. Should I not be using all of what is in my current 401k?
Her

Her Taxable
Individual Stock : 5.77%

Her Rollover IRA at Fidelity
DW 3 rollover IRAs

1. 12.62% Freedom 2050 K (FNSBX) (ER - 0.64%)
2. 1.96% Freedom 2050 (FFFHX) (ER - 0.75%)
3. 7%, consists of the following(totaling 100% of just this IRA)
Similarly my wife has (12.62 %+ 1.96 %+ 7 %) = 21.58% of our combined portfolio in 401k and you are suggesting 15% :confused

Her 401k at Fidelity -- $65K -- 15%
7% US stock index funds (either total market or 500 Index w/ or w/out extended market)
8% US bond index funds (either total market or intermediate-term)
Should we be not allocating 21.58% instead of 15%?

If you're talking about the Mega Backdoor Roth method it's not exactly the above. You would contribute after-tax to a 401k sub-account, not an IRA, and then either convert/roll in-service to an outside Roth IRA or in-plan to a Roth 401k. The above sounds more like the in-plan Roth 401k.
Yes, that is exactly what I am talking about just as you described. Mega Backdoor ROTH.

User avatar
Duckie
Posts: 6886
Joined: Thu Mar 08, 2007 2:55 pm
Location: California Bay Area

Re: Portfolio adjustment help

Post by Duckie » Fri Nov 15, 2019 6:58 pm

gndibot wrote:If you notice, my combination of 401k/rollover IRA is around 18.28% of my portfolio, however you allocated the following %(12%) - :confused
<snip>
Similarly my wife has (12.62 %+ 1.96 %+ 7 %) = 21.58% of our combined portfolio in 401k and you are suggesting 15% :confused
You're confused because my numbers are wrong. When I figured the 401k accounts I figured them not at roughly half of the portfolio but at roughly two-thirds of half (and I don't remember why). Thank you for catching that. I have corrected the numbers in the above post and added her actual 401k options to the example.

Topic Author
gndibot
Posts: 11
Joined: Mon Nov 11, 2019 8:44 pm

Re: Portfolio adjustment help

Post by gndibot » Sat Nov 16, 2019 3:52 pm

His Roth IRA at Vanguard (via backdoor) -- $6K -- 1%
1% (VTI) Vanguard Total Stock Market ETF (0.03%)

Her Roth IRA at Vanguard (via backdoor) -- $6K -- 1%
1% (VTI) Vanguard Total Stock Market ETF (0.03%)
My wife is not going to have a Megabackdoor ROTH so it would only be me. Also, I probably cannot do VTI and would have to pick what is available in my employer offer 401k. In that case, does a replacement like this sound right?

His Roth IRA at Vanguard (via backdoor) -- 12k -- 2%
2% (VINIX) Vanguard Institutional Index Fund Institutional Shares (0.035%)

As a whole, is the strategy really to first place the most tax inefficient funds in tax deferred account and put what is left in taxable accounts?

I forgot an important piece before. We also want to save for 529 so we can save for our kids education. How do I factor that in that and allocate appropriately. I would like to allocate $150,000 in 13, 14 and 16 years respectively, so a total of $450,000. Should I allocate part of our pay checks towards 529 or just sponsor from our taxable accounts? Please advice.

Thank you so much for patiently answering my questions.

User avatar
Duckie
Posts: 6886
Joined: Thu Mar 08, 2007 2:55 pm
Location: California Bay Area

Re: Portfolio adjustment help

Post by Duckie » Sat Nov 16, 2019 7:26 pm

gndibot wrote:
His Roth IRA at Vanguard (via backdoor) -- $6K -- 1%
1% (VTI) Vanguard Total Stock Market ETF (0.03%)

Her Roth IRA at Vanguard (via backdoor) -- $6K -- 1%
1% (VTI) Vanguard Total Stock Market ETF (0.03%)
My wife is not going to have a Megabackdoor ROTH so it would only be me.
The above accounts are using the regular backdoor method which can be done by both of you once your rollover IRAs are "hidden". They are not using the mega backdoor method because I didn't know who had access. Don't mix up regular and mega. They are two totally separate processes.
Also, I probably cannot do VTI and would have to pick what is available in my employer offer 401k. In that case, does a replacement like this sound right?

His Roth IRA at Vanguard (via backdoor) -- 12k -- 2%
2% (VINIX) Vanguard Institutional Index Fund Institutional Shares (0.035%)
You cannot hold VINIX in a personal IRA because the fund minimum is $5MM. The Roth IRA at Vanguard is a personal retirement account. It is separate from your employer retirement account although it can take rollovers from your employer account.

You need to find out if the mega backdoor at your 401k allows you to roll the after-tax contributions into a personal Roth IRA (away from your employer plan) or into a Roth 401k (part of your employer plan) or both.
As a whole, is the strategy really to first place the most tax inefficient funds in tax deferred account and put what is left in taxable accounts?
In general, yes.
We also want to save for 529 so we can save for our kids education. How do I factor that in that and allocate appropriately. I would like to allocate $150,000 in 13, 14 and 16 years respectively, so a total of $450,000. Should I allocate part of our pay checks towards 529 or just sponsor from our taxable accounts?
I would contribute from paychecks if you can afford the ~$35K per year.

Topic Author
gndibot
Posts: 11
Joined: Mon Nov 11, 2019 8:44 pm

Re: Portfolio adjustment help

Post by gndibot » Sat Nov 30, 2019 7:02 pm

Thank you for responding once again. Between discussing paying off a significant portion of our mortgage and investing all in at a 80/20 AA in one lumpsum, my wife and I have come up with a happy alternative which I wanted to run by here to ask if our strategy has some inherent flaws?

Invest in a lumpsum but change AA from 80/20 to 60/40 and slowly work up the stock allocation in our tax deferred accounts every 6 months(increase 5%) until we reach the desired 80/20 allocation.

With the changed AA does this make sense, below?

His taxable at Vanguard -- $150K -- 27%
27% (VTI) Vanguard Total Stock Market ETF (0.03%)

Her taxable at Vanguard -- $175K -- 31%
13% (VTI) Vanguard Total Stock Market ETF (0.03%)
18% (VXUS) Vanguard Total International Stock ETF (0.09%)

His 401k at Vanguard -- $101K -- 18%

18% (VBTLX) Vanguard Total Bond Market Index Fund Admiral Shares (0.05%)

Her 401k at Fidelity -- $124K -- 22%
22% (VFSUX) Vanguard Short-Term Investment-Grade Fund Admiral Shares (0.10%)

His Roth IRA at Vanguard (via backdoor) -- $6K -- 1%
1% (VTI) Vanguard Total Stock Market ETF (0.03%)

Her Roth IRA at Vanguard (via backdoor) -- $6K -- 1%
1% (VTI) Vanguard Total Stock Market ETF (0.03%)

Would rebalancing the 401k from 60% stock to 80% result in any tax events?

HomeStretch
Posts: 2899
Joined: Thu Dec 27, 2018 3:06 pm

Re: Portfolio adjustment help

Post by HomeStretch » Sat Nov 30, 2019 7:50 pm

Your revised portfolio looks good.

There are no tax consequences for rebalancing in the 401k or Roth IRAs. In addition to rebalancing, you can also increase your equity % periodically by investing all new contributions in equity.

User avatar
Duckie
Posts: 6886
Joined: Thu Mar 08, 2007 2:55 pm
Location: California Bay Area

Re: Portfolio adjustment help

Post by Duckie » Sat Nov 30, 2019 7:59 pm

gndibot wrote:With the changed AA does this make sense, below?
Yes.
Would rebalancing the 401k from 60% stock to 80% result in any tax events?
No. Swapping funds inside a tax-sheltered account is not taxable. Think of the account as a bucket. You can do almost anything inside a tax-sheltered bucket and no taxes are triggered. It's only when you withdraw something from the bucket that taxes become involved.

However, raising the stocks from 60% to 80% means raising the international portion from 18% to 24%. If you sell VTI in taxable to buy more VXUS you may have taxable capital gains. Make sure to set your dividends to NOT automatically reinvest in taxable. By funneling the cash to your settlement account you can slowly purchase VXUS, increasing its AA, without having to pay taxes. Either that or make international 24% now since you're planning to get there in two years anyway.

pkcrafter
Posts: 13647
Joined: Sun Mar 04, 2007 12:19 pm
Location: CA
Contact:

Re: Portfolio adjustment help

Post by pkcrafter » Sat Nov 30, 2019 8:53 pm

gndibot, what will your withdrawal rate be (%)?


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

Topic Author
gndibot
Posts: 11
Joined: Mon Nov 11, 2019 8:44 pm

Re: Portfolio adjustment help

Post by gndibot » Sun Dec 01, 2019 2:17 pm

HomeStretch wrote:
Sat Nov 30, 2019 7:50 pm
Your revised portfolio looks good.

There are no tax consequences for rebalancing in the 401k or Roth IRAs. In addition to rebalancing, you can also increase your equity % periodically by investing all new contributions in equity.
Thank you!
In addition to rebalancing(which is my way of DCA to my desired AA over time) every 6 months to get to 80/20 , how do I make sure I allocate additional contributions so they match up to my 60/40 split going forward? I am planning to invest $24k every year(after tax) into taxable and $48k into tax deferred 401k. Just put everything after tax in taxable(VIT/VXUS) and then keep rebalancing the 401k throughout the year so as to maintain the 60/40 split. Is there any way to automate this in Vanguard?

HomeStretch
Posts: 2899
Joined: Thu Dec 27, 2018 3:06 pm

Re: Portfolio adjustment help

Post by HomeStretch » Sun Dec 01, 2019 2:23 pm

gndibot wrote:
Sun Dec 01, 2019 2:17 pm
HomeStretch wrote:
Sat Nov 30, 2019 7:50 pm
Your revised portfolio looks good.

There are no tax consequences for rebalancing in the 401k or Roth IRAs. In addition to rebalancing, you can also increase your equity % periodically by investing all new contributions in equity.
Thank you!
In addition to rebalancing(which is my way of DCA to my desired AA over time) every 6 months to get to 80/20 , how do I make sure I allocate additional contributions so they match up to my 60/40 split going forward? I am planning to invest $24k every year(after tax) into taxable and $48k into tax deferred 401k. Just put everything after tax in taxable(VIT/VXUS) and then keep rebalancing the 401k throughout the year so as to maintain the 60/40 split. Is there any way to automate this in Vanguard?
I don’t know of any way to automate rebalancing at Vanguard. Consider making all contributions into equity as you are planning to increase your asset allocation. Rebalance every 6 months per your plan.
Last edited by HomeStretch on Sun Dec 01, 2019 6:24 pm, edited 1 time in total.

Topic Author
gndibot
Posts: 11
Joined: Mon Nov 11, 2019 8:44 pm

Re: Portfolio adjustment help

Post by gndibot » Sun Dec 01, 2019 2:34 pm

Duckie wrote:
Sat Nov 30, 2019 7:59 pm
gndibot wrote:With the changed AA does this make sense, below?
Yes.
Would rebalancing the 401k from 60% stock to 80% result in any tax events?
No. Swapping funds inside a tax-sheltered account is not taxable. Think of the account as a bucket. You can do almost anything inside a tax-sheltered bucket and no taxes are triggered. It's only when you withdraw something from the bucket that taxes become involved.

However, raising the stocks from 60% to 80% means raising the international portion from 18% to 24%. If you sell VTI in taxable to buy more VXUS you may have taxable capital gains. Make sure to set your dividends to NOT automatically reinvest in taxable. By funneling the cash to your settlement account you can slowly purchase VXUS, increasing its AA, without having to pay taxes. Either that or make international 24% now since you're planning to get there in two years anyway.
Thanks, once again! Nice catch with the VXUS.
Make sure to set your dividends to NOT automatically reinvest in taxable. By funneling the cash to your settlement account you can slowly purchase VXUS, increasing its AA, without having to pay taxes
Wouldn't this take a significant amount of time?
Make sure to set your dividends to NOT automatically reinvest in taxable
By not reinvesting in taxable and making it flow in the sweep account will help me in not paying taxes?

I understand and I know in all likelihood my ending balance will be less than if I used a 80/20 portfolio to start off but my wife and I "feel" there is a correction coming soon and the small amount of expected return we are sacrificing will be worth the gamble and just seems like an attractive proposition by DCA the next 2 years or so. Although, in a nutshell this is trying to time the market, which is against the BH philosophy.

Topic Author
gndibot
Posts: 11
Joined: Mon Nov 11, 2019 8:44 pm

Re: Portfolio adjustment help

Post by gndibot » Sun Dec 01, 2019 2:41 pm

pkcrafter wrote:
Sat Nov 30, 2019 8:53 pm
gndibot, what will your withdrawal rate be (%)?


Paul
Hi Paul, this is a good question. We have never thought about that actually, which brings me to my question - what should an appropriate withdrawal rate be and how does one go about determining that without knowing our actual retirement spending habits. The first number that came to my mind was 4% but it's hard to predict. With a 4% return y-o-y over 30 years, contributing $24k every year, our portfolio would be around $3.4 M.

User avatar
Duckie
Posts: 6886
Joined: Thu Mar 08, 2007 2:55 pm
Location: California Bay Area

Re: Portfolio adjustment help

Post by Duckie » Sun Dec 01, 2019 6:22 pm

gndibot wrote:
Duckie wrote:Make sure to set your dividends to NOT automatically reinvest in taxable. By funneling the cash to your settlement account you can slowly purchase VXUS, increasing its AA, without having to pay taxes
Wouldn't this take a significant amount of time?
No. VTI and VXUS distribute dividends every three months. Buying shares of VXUS from the settlement fund would take about five minutes a quarter.
Make sure to set your dividends to NOT automatically reinvest in taxable
By not reinvesting in taxable and making it flow in the sweep account will help me in not paying taxes?
You will have to pay taxes on the dividends no matter what you do. But if you automatically reinvest dividends in VTI in taxable when you don't want to buy more VTI, then you will have to sell VTI. This can create more taxes. If you set it to NOT automatically reinvest dividends then once they get to the settlement fund you can buy VXUS.

For the next couple of years it doesn't matter so much about not automatically reinvesting VXUS dividends but you should get in the habit of having all taxable dividends go into the settlement fund. At that point you can choose what you want to do with them. Maybe you want to buy something else in taxable. Maybe you need the cash for something other than investing. Not automatically reinvesting in taxable gives you some options.

Post Reply