Portfolio review

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Topic Author
TheDogFather
Posts: 7
Joined: Sun Jul 14, 2019 11:02 am

Portfolio review

Post by TheDogFather » Mon Dec 02, 2019 7:00 pm

Emergency funds:
8 months in savings account paying 2%

Debt:
No debt.
$650k home – no mortgage.
Cars purchased this year, no loans.

Tax Filing Status:
Married Filing Jointly

Tax Rate:
24% Federal, 5.75% State

State of Residence:
Virginia

Age:
56 (him), 59 (her)

Desired Asset allocation:
60% stocks / 40% bonds
Desired International allocation: 35% of stocks

Current retirement assets
~$4M

Taxable
37.2% VTSAX - Vanguard Total Stock Market Index (0.04%)
23.9% VTIAX - Vanguard Total International Stock Index Fund Admiral Shares (0.11%)
8.8% VBTLX - Vanguard Total Bond Market Index Fund Admiral Shares (0.05%)
3.7% VTABX - Vanguard Total International Bond Index Fund Admiral Shares (0.11%)

His 401k at Fidelity
15.4% FTBFX - Fidelity Total Bond Fund (0.45%)

His Roth IRA at Vanguard
0.3% VTSAX - Vanguard Total Stock Market Index (0.04%)

His Rollover IRA at Vanguard
7.3% VBTLX - Vanguard Total Bond Market Index Fund Admiral Shares (0.05%
2.8% VTABX - Vanguard Total International Bond Index Fund Admiral Shares (0.11%)

Her Traditional IRA at Vanguard
0.2% VBTLX - Vanguard Total Bond Market Index Fund Admiral Shares (0.05%)
_______________________________________________________________

Contributions

New annual Contributions
$25,000 his 401k (+ $10k or more company match, dependent on profit share)
$7,000 her IRA VBTLX - Vanguard Total Bond Market Index Fund Admiral Shares (0.05%)
$52,000 taxable annually invested at $1,000 per week in the same four Vanguard Domestic and International Stock and Bond Total Market Index funds to maintain 60/40 allocation overall.

Available funds

Funds available in his 401(k)
Misc Fidelity Funds including:
Fidelity Total Market Index Fund (FSKAX) (0.015%)
Fidelity Total Bond Fund (FTBFX) (0.45%)

[c]Funds available in her IRA[/b]
All Vanguard Funds

Questions/Comments:
1. Retirement accounts are all bonds to get the desired allocation while reducing unwanted taxed dividend income. Any thoughts on whether I should have more stocks in non-taxable accounts?

2. With UK state and some work pensions available to us in stages once we hit 60 and later ages, we have a “guaranteed” income (much like Social Security) that will cover most of our living expenses in retirement. Given that, is a 60/40 stock/bond allocation overly conservative?

3. The Fidelity Total Bond Fund expense ratio is higher than I would like, but there are not any alternatives that would give me the allocation I want. Not a question, just an observation.

lakpr
Posts: 3064
Joined: Fri Mar 18, 2011 9:59 am

Re: Portfolio review

Post by lakpr » Mon Dec 02, 2019 7:13 pm

First change I would do is to remove the allocation to Total International Bond fund, and move it to Total Domestic Bond fund in "His Rollover IRA". The international bond fund is dominated by European bonds, and as we know, Europe is having negative interest rates now. Yield is not good. In addition, when those European bonds are made available to American investors, they are dollar hedged. All this, trying to say that you are not getting any benefit from investing in the Total International Bond fund.

The second change I would do is to move the bond allocation in Taxable account completely to VTSAX and/or VTIAX. Bonds are not tax efficient in taxable accounts, and especially so at the 24% + 5.75% tax bracket. You will be far better served through investing everything in taxable in stock market -- keep at least 12 months of expenses in Emergency Funds, even if earning only 12% -- and pay a long term capital gains tax rate of 15% + possibly 3.8% NIIT surcharge. Much better than paying ordinary income taxes (29.75%!!) on the non-qualified dividends from the bond funds.

Your portfolio otherwise looks good!

livesoft
Posts: 68579
Joined: Thu Mar 01, 2007 8:00 pm

Re: Portfolio review

Post by livesoft » Mon Dec 02, 2019 7:14 pm

Looks fine to me, but perhaps a tax-exempt muni bond fund in taxable is a better choice for you? Or a treasury bond fund. The former would save you on federal taxes and the latter on state taxes, so maybe some of each instead of those 2 bond funds that you are using now.

What is to stop you from converting her smallish traditional IRA to a Roth IRA?
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Topic Author
TheDogFather
Posts: 7
Joined: Sun Jul 14, 2019 11:02 am

Re: Portfolio review

Post by TheDogFather » Mon Dec 02, 2019 7:19 pm

livesoft wrote:
Mon Dec 02, 2019 7:14 pm
What is to stop you from converting her smallish traditional IRA to a Roth IRA?
Our joint income makes us ineligible for ROTH IRA contributions.

lakpr
Posts: 3064
Joined: Fri Mar 18, 2011 9:59 am

Re: Portfolio review

Post by lakpr » Mon Dec 02, 2019 7:23 pm

TheDogFather wrote:
Mon Dec 02, 2019 7:19 pm
livesoft wrote:
Mon Dec 02, 2019 7:14 pm
What is to stop you from converting her smallish traditional IRA to a Roth IRA?
Our joint income makes us ineligible for ROTH IRA contributions.
But Roth *conversions* have no income limit. Anyone can do it.
If you convert your wife's traditional IRA to Roth IRA, you can opt to do backdoor Roth for her every year (contribute to Traditional IRA, it's non-deductible but there's no income limit to contribute; 2 days later, before there is any significant growth, convert to Roth IRA, again no income limits to convert. Net result is $7000 in Roth IRA every year). But you must first convert all existing Traditional IRAs to Roth IRAs before you embark on this process.

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

Topic Author
TheDogFather
Posts: 7
Joined: Sun Jul 14, 2019 11:02 am

Re: Portfolio review

Post by TheDogFather » Mon Dec 02, 2019 7:28 pm

lakpr wrote:
Mon Dec 02, 2019 7:13 pm
The second change I would do is to move the bond allocation in Taxable account completely to VTSAX and/or VTIAX. Bonds are not tax efficient in taxable accounts, and especially so at the 24% + 5.75% tax bracket. You will be far better served through investing everything in taxable in stock market -- keep at least 12 months of expenses in Emergency Funds, even if earning only 12% -- and pay a long term capital gains tax rate of 15% + possibly 3.8% NIIT surcharge. Much better than paying ordinary income taxes (29.75%!!) on the non-qualified dividends from the bond funds.
I don't want to pay more taxes than required to but doesn't allocation take priority?

lakpr
Posts: 3064
Joined: Fri Mar 18, 2011 9:59 am

Re: Portfolio review

Post by lakpr » Mon Dec 02, 2019 7:31 pm

TheDogFather wrote:
Mon Dec 02, 2019 7:28 pm
lakpr wrote:
Mon Dec 02, 2019 7:13 pm
The second change I would do is to move the bond allocation in Taxable account completely to VTSAX and/or VTIAX. Bonds are not tax efficient in taxable accounts, and especially so at the 24% + 5.75% tax bracket. You will be far better served through investing everything in taxable in stock market -- keep at least 12 months of expenses in Emergency Funds, even if earning only 12% -- and pay a long term capital gains tax rate of 15% + possibly 3.8% NIIT surcharge. Much better than paying ordinary income taxes (29.75%!!) on the non-qualified dividends from the bond funds.
I don't want to pay more taxes than required to but doesn't allocation take priority?
If allocation is important, perhaps you might want to consider livesoft's suggestion to hold either treasury funds or muni funds in taxable account, whose after-tax yield might be better than the Total Bond Market Index fund.

But with a 10% tax differential on the dividends, I'd be inclined to stake my luck on the market instead of bonds. But that's ME, and I am not YOU.

livesoft
Posts: 68579
Joined: Thu Mar 01, 2007 8:00 pm

Re: Portfolio review

Post by livesoft » Mon Dec 02, 2019 7:40 pm

TheDogFather wrote:
Mon Dec 02, 2019 7:19 pm
Our joint income makes us ineligible for ROTH IRA contributions.
Your income does not make you ineligible for a Roth conversion.
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3funder
Posts: 1082
Joined: Sun Oct 15, 2017 9:35 pm

Re: Portfolio review

Post by 3funder » Mon Dec 02, 2019 9:18 pm

lakpr wrote:
Mon Dec 02, 2019 7:13 pm
First change I would do is to remove the allocation to Total International Bond fund, and move it to Total Domestic Bond fund in "His Rollover IRA". The international bond fund is dominated by European bonds, and as we know, Europe is having negative interest rates now. Yield is not good. In addition, when those European bonds are made available to American investors, they are dollar hedged. All this, trying to say that you are not getting any benefit from investing in the Total International Bond fund.

The second change I would do is to move the bond allocation in Taxable account completely to VTSAX and/or VTIAX. Bonds are not tax efficient in taxable accounts, and especially so at the 24% + 5.75% tax bracket. You will be far better served through investing everything in taxable in stock market -- keep at least 12 months of expenses in Emergency Funds, even if earning only 12% -- and pay a long term capital gains tax rate of 15% + possibly 3.8% NIIT surcharge. Much better than paying ordinary income taxes (29.75%!!) on the non-qualified dividends from the bond funds.

Your portfolio otherwise looks good!
+1

Living Free
Posts: 349
Joined: Thu Jul 19, 2018 7:31 pm

Re: Portfolio review

Post by Living Free » Tue Dec 03, 2019 9:59 am

See if you can roll his traditional/rollover IRA into his 401k to allow him to do the backdoor Roth IRA as well.

HomeStretch
Posts: 2894
Joined: Thu Dec 27, 2018 3:06 pm

Re: Portfolio review

Post by HomeStretch » Tue Dec 03, 2019 10:25 am

You have a high Taxable account balance and are contributing $52k more to the account per year. It is advantageous if you can instead contribute a portion to Roth accounts via backdoor Roths and mega Backdoor. Roth accounts grow tax free whereas income from a Taxable account is generally taxed each year.

In order for each of you to do backdoor Roths (2019 limit is $7k each with catch-up contribution) and avoid the pro rata rule, agree with prior suggestions to (1) convert Her tIRA of ~$8k to a Roth IRA and (2) rollover His tIRA to His 401k if allowed. Link to BH wiki page on Backdoor Roth: https://www.bogleheads.org/wiki/Backdoor_Roth

Check whether His 401k plan allows a “mega Backdoor Roth” which will allow you to contribute up to the $62k limit with catchup (2019). The mega Backdoor Roth involves making after-tax (non Roth) 401k contributions that are converted either to Roth 401k (via in-plan Roth rollovers) or to a Roth IRA (via in-service distributions). Link to BH wiki page on After-Tax 401k:
https://www.bogleheads.org/wiki/After-tax_401(k)

Topic Author
TheDogFather
Posts: 7
Joined: Sun Jul 14, 2019 11:02 am

Re: Portfolio review

Post by TheDogFather » Wed Dec 04, 2019 10:41 pm

I appreciate the feedback. I’ll look into the options for Roth conversion but in the interim may use Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares (VWIUX) in place of the VBTLX Total market bond fund in taxable accounts.

Living Free
Posts: 349
Joined: Thu Jul 19, 2018 7:31 pm

Re: Portfolio review

Post by Living Free » Thu Dec 05, 2019 1:18 pm

Regarding VBTLX vs VXIUX, the total bond fund yield is 2.25%, of which you'd keep 76%, because you're in the 24% federal tax bracket, or 1.71% after tax yield. The current yield on the VXIUX is 1.63%. So not a huge difference either way, but it seems that at this precise moment VBTLX is slightly better.

I presume that there are no virginia state specific muni funds you're looking at so with either of these I'd presume you'll be paying the same state tax rate.

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