Investing Basics - Portfolio Help!

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BoglesRazor
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Investing Basics - Portfolio Help!

Post by BoglesRazor » Fri Jan 03, 2020 9:55 pm

Hello Everyone!

I just joined and literally just finished the Three Fund Portfolio book today. However, since the book was published in 2018, there has been some changes to the brokerage industry (mainly that Schwab and TD have merged and today it was announced that there are 0 trading fees for Vanguard!). I initially opened Vanguard last year (invested almost nothing), but then free trades came out at Schwab and TD so I jumped ship (plus, their customer service is much better). This year I want to get my finances in order and I need your help since I suffer from analysis paralysis.

Basic questions:

1. If you can buy the Vanguard funds at nearly any brokerage, what difference does it make whether you are with Vangaurd, Schwab, Fidelity, or TD? Do you get a discount on the funds or are the funds exclusive to that brokerage, meaning you can only buy them if you have an account there? I asusmed the expense ratios are all the same for the funds regardless of the brokerage.

2. Vanguard recently dropped its expense ratios for several funds at the end of December. How likely is it that expense ratios will increase? Does this ever happen?

3. What happens if you transfer in kind from another brokerage and they don't send the cost basis? I was with several robo-advisors and found it to be unhelpful since the amount I had in there was too little and it was over diversified. I called the brokerages several times and they said they are not responsible for providing Roth IRA cost basis - they only provide info for taxable accounts (but some of that is still missing or I need to calculate myself). Fine, it doesn't matter since I don't pay tax in Roths, but it still helps me see how much my money grew. Since I rolled mulitple brokerages (3 robo-advisors) into one final brokerage all at the same time, the cost basis is incomplete. I noticed there was overlap in funds, but if one broker sent the cost basis and the other did not for the same fund (but I cannot see cost respectively), then how should I calculate the cost basis? I assume I have to manually calculate the combined purchase? If I'm wrong with my calculation, how will the IRS know how to tax me I sell and pay capital gains? This is my mental barrier as I don't know how to calculate it manually with previous purchases and because some of the fractional shares cannot be transferred in kind - I have to cash out. I waitied until 2020 since I don't want to complicate my 2019 tax return. Now I want to clean up this consolidation since there are too many funds. Is this even something I should be worrying about? Disregarding my Roth, my taxable account now has a value roughly $14,000. I don't consider this to be significant - should I even be worrying about this?

4. I set aside my $6000 into two Roth IRAs: one at vanguard and one at Schwab. I invested the Schwab into Reits (which are now poorly performing) and I still have $1000 left uninvested in Vanguard. This can still count for 2019 even though its sitting in cash at a Roth account right? It doesn't count towards the 2020 max of $6,000?

Furthermore, I will be creating several posts following the steps (and asking for your advice) provided in the book. I'm sort of a beginner investor, but my money is too spread out and right now I want to consolidate to simplify everything.

Thank you in advance!
Last edited by BoglesRazor on Sat Jan 11, 2020 4:02 pm, edited 3 times in total.

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Re: Investing Basics

Post by LadyGeek » Fri Jan 03, 2020 10:01 pm

BoglesRazor wrote:
Fri Jan 03, 2020 9:55 pm
Furthermore, I will be creating several posts following the steps (and asking for your advice) provided in the book. I'm sort of a beginner investor, but my money is too spread out and right now I want to consolidate to simplify everything.
Welcome! Instead of creating separate posts, may I recommend you post your portfolio information in this thread using the Asking Portfolio Questions format? It will make you think about the "big picture" while giving us the information we need to point you in the right direction.

While your questions may seem separate, they're all about your portfolio. It's important to keep all of the information in one spot, as the advice we give depends on knowing your complete situation.

If you get stuck, just do the best you can. Don't hesitate to ask for help. If you don't understand something, let us know and we'll try again.
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Re: Investing Basics

Post by livesoft » Fri Jan 03, 2020 10:06 pm

BoglesRazor wrote:
Fri Jan 03, 2020 9:55 pm
1. If you can buy the Vanguard funds at nearly any brokerage, what difference does it make whether you are with Vangaurd, Schwab, Fidelity, or TD? Do you get a discount on the funds or are the funds exclusive to that brokerage, meaning you can only buy them if you have an account there? I asusmed the expense ratios are all the same for the funds regardless of the brokerage.
No difference.. You do not get any discounts. Expense ratios of ETFs are the same everywhere.

2. Vanguard recently dropped its expense ratios for several funds at the end of December. How likely is it that expense ratios will increase? Does this ever happen?
Expense ratios dropped because fund prices went up 20% to 30% while costs remained the same. If the market tanks and fund prices drop then expense ratios will go up unless the fund sponsors cut costs by laying off employees. There is no magic here.

3. What happens if you transfer in kind from another brokerage and they don't send the cost basis?
The investor is responsible for keeping their statements to show cost basis and dates acquired. This has been a rule since about 1940 even before computers were common.


4. I set aside my $6000 into two Roth IRAs: one at vanguard and one at Schwab. I invested the Schwab into Reits (which are now poorly performing) and I still have $1000 left uninvested in Vanguard. This can still count for 2019 even though its sitting in cash at a Roth account right? It doesn't count towards the 2020 max of $6,000?
When you contribute to a Roth IRA, you tell the custodian which tax year the contribution is for. Your custodian and you should have this in your records, so you can check. Once contributed, then you can move the money around and buy/sell all you want without changing its contribution tax year.
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Re: Investing Basics

Post by LadyGeek » Fri Jan 03, 2020 10:16 pm

Your question regarding cost basis in a Roth IRA is a bit confusing.

Cost basis is a term that's only used in a taxable account.* The basis (what you paid for it) is used to determine how much tax you will pay when the stock or fund is sold. That's it.

Since distributions (withdrawals) from a Roth IRA are not taxed, you don't use cost basis. If you want to know your gains and losses, all you need is the starting and ending stock (or fund) price.

We can help you better when you post your portfolio info in the requested format.

* You can also have a basis from a non-deductible IRA, but that's a completely different animal and not relevant for the OP.
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BoglesRazor
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Re: Investing Basics

Post by BoglesRazor » Fri Jan 03, 2020 11:17 pm

Actually, I want to take a few steps back as I haven't gotten to my portfolio just yet. I'm just trying to follow the steps in the book:

1. Decide Which Funds
2. Asset Allocation
3. Mutual Fund vs. ETF
4. Taxable vs. Tax-Advantaged Account

I was going to create a post for each step as there are various funds for the 3 fund portfolio that may be better than the traditional Vanguard options that most people follow. These are still very general questions. Once I get to the Asset Allocation step, I suppose it would make more sense to go into the Portfolios forum as suggested.

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Re: Investing Basics

Post by dbr » Sat Jan 04, 2020 10:04 am

BoglesRazor wrote:
Fri Jan 03, 2020 11:17 pm
Actually, I want to take a few steps back as I haven't gotten to my portfolio just yet. I'm just trying to follow the steps in the book:

1. Decide Which Funds
2. Asset Allocation
3. Mutual Fund vs. ETF
4. Taxable vs. Tax-Advantaged Account

I was going to create a post for each step as there are various funds for the 3 fund portfolio that may be better than the traditional Vanguard options that most people follow. These are still very general questions. Once I get to the Asset Allocation step, I suppose it would make more sense to go into the Portfolios forum as suggested.
I think a better order for the above would be 2-4-1-3

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Re: Investing Basics

Post by BoglesRazor » Sat Jan 04, 2020 12:36 pm

I'm just following the book for now, but I do agree with you. Since the amount of time left before retirement is the most important, asset allocation would be the most important. And most people have multiple investment accounts so it makes more sense to map that out first. Overall, it shouldn't take much time to determine since a three fund portfolio is so simple so maybe it doesn't matter?

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Re: Investing Basics

Post by LadyGeek » Sat Jan 04, 2020 12:58 pm

Reading the book is good, but I recommend you switch to the wiki and use the book as a supplement.

Start here: Getting started

If you have any questions on any of the content, just ask. Use this thread as your one-stop discussion for everything related to your portfolio. It's actually much easier for us to help you when we can see what was discussed before - regardless of your question.

You're at this step (under the Investing start-up kit section): Bogleheads® investing start-up kit (Educate yourself) and note the next 2 steps you should take.
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Re: Investing Basics

Post by ruralavalon » Sat Jan 04, 2020 1:04 pm

1. If you can buy the Vanguard funds at nearly any brokerage, what difference does it make whether you are with Vangaurd, Schwab, Fidelity, or TD? Do you get a discount on the funds or are the funds exclusive to that brokerage, meaning you can only buy them if you have an account there? I asusmed the expense ratios are all the same for the funds regardless of the brokerage.
You can buy Vanguard ETFs, but not traditional mutual funds, without transaction fees at many brokerage firms.
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Re: Investing Basics

Post by BoglesRazor » Thu Jan 09, 2020 12:52 am

LadyGeek wrote:
Fri Jan 03, 2020 10:01 pm
BoglesRazor wrote:
Fri Jan 03, 2020 9:55 pm
Furthermore, I will be creating several posts following the steps (and asking for your advice) provided in the book. I'm sort of a beginner investor, but my money is too spread out and right now I want to consolidate to simplify everything.
Welcome! Instead of creating separate posts, may I recommend you post your portfolio information in this thread using the Asking Portfolio Questions format? It will make you think about the "big picture" while giving us the information we need to point you in the right direction.

While your questions may seem separate, they're all about your portfolio. It's important to keep all of the information in one spot, as the advice we give depends on knowing your complete situation.

If you get stuck, just do the best you can. Don't hesitate to ask for help. If you don't understand something, let us know and we'll try again.

OK. I just filled out my information in the format you suggested for the portfolio. You want me to keep replying to this thread with all the portfolio information? It's pretty long and I want more views on the post so should I start a brand new thread with a "Evalutae my portfolio" title?

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Re: Investing Basics

Post by LadyGeek » Thu Jan 09, 2020 4:28 pm

Yes, please post the portfolio info in this thread. We expect new investors to ask lots of questions, so it's important to keep everything in one thread.
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Re: Investing Basics - Help with Portfolio Rebalance

Post by BoglesRazor » Fri Jan 10, 2020 12:31 am

Emergency funds: ~6 months

Debt: 0

Tax Filing Status: Single

Tax Rate: ~24% Federal, ~5% NY State

**NOTE: I am a non-resident NY state tax filer and I haven't filed my 2019 tax return yet so my rates are estimates.

State of Residence: PA

Age: 35

Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 0-20% of stocks (I don't know yet, considering 2-Fund Portfolio vs. 3-Fund Portfolio)

My total current portfolio is relatively small (~50K), but I have a lump sum to invest from my savings/CDs
NOTE: I have NO traditional retirement accounts (IRA or 401K). I ONLY have Roth accounts.

Current Accounts:
Taxable
Roth IRA#1
Roth IRA#2
Roth 401K

Current retirement assets

**NOTE: I am starting with my Roth accounts (both 401K and IRA maxed out) and then my taxable accounts. My Roth 401K is the largest account I have so far and it's only 6 months old. After doing some research, I have decided to distribute 100% stock into both my Roth 401K and Roth IRA Accounts. I will then create a Stock/Bond portfolio separate in a taxable account. This is becuase my Roth accounts are low value and have contribution limits so I need it to grow and because I have no traditional retirement accounts so the bonds have to go to taxable. I will post each subsequent account based on the value inside so as not to confuse anyone.
==============================================================================================================================

Roth 401k
Current: 80/20% AA with $19K value ($17,200 invested for 2019)
Desire: 100% Stocks with 2020 max contribution of $19,500 to be added

3% Company Match (I only get 20% of the 3% match each year I am at the company; I'm only at year 1 right now). Please let me know if I have read this wrong?
Image

Here are the 401K options and the fund's performance (as of Dec. 31, 2019):

Image
Image
Image

Here are my actual contributions, asset allocation, ER, % return, and benchmarks:
Image
Image
Image


NOTE: This 401K only started 6 months ago so the data is not necessarily representative of an actual long term investment. However, since it is Roth, I want to focus on growth in stocks rather than bonds. Now that I have read The 3-Fund Portfolio, I think my best option here is to invest in either 80% in TransAmerica Partner Stock Index / 20% American Funds New Perspective or 100% TransAmerica Partner Stock due to the lower ER over VTSM. Here is what I am considering:

1. 100% TA Vanguard Total Stock Market Index (ER: 0.79%)
2. 100% TransAmerica Partner Stock Index (ER 0.58%)
3. 80% TransAmerica Partner Stock, 10% Pioneer Select Mid Cap Growth (ER:1.18%), 10% Victory RS Small Cap Growth (ER: 1.60%)
4. Repeat above, but include 20% of International stock (American Funds New Perspective, ER: 1.09%).

Since The TransAmerica Partner Stock only mirrors the S&P, do I need to supplement with Mid/Small Cap funds (or even REITs)? In addition, I'm not sure if I should invest in international because of recent global events (although I don't know if the benchmark is impacted at all by the Middle East, but with Brexit coming up, the European market may be affected). Moreover, the rate of return so far for US vs. International stock is comparable at 7% (but again, this is based on 6 months of data). Since John Bogle and Warren Buffet both can live without International, I am also willing to just go 100% US stock.

Do you all agree based on the information above? Please check the math as I am not sure if I'm calculating things correctly. The company match confuses me - is there an error above? This is my first 401K and I know these options are not the best, but my company is small and this is the first time they are offering a 401K so I'm just working with what I've got. I'll show you my Roth IRA once we have this account squared away.

Thank you all in advance!
Last edited by BoglesRazor on Fri Jan 10, 2020 10:42 am, edited 2 times in total.

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Re: Investing Basics

Post by LadyGeek » Fri Jan 10, 2020 8:21 am

BoglesRazor wrote:
Fri Jan 10, 2020 12:31 am
My total current portfolio is relatively small (~50K), but I have a lump sum to invest from my savings/CDs
How much do you have in savings/CDs? Before using this money for investments, it is important that you have a cash reserve to handle the unexpected.

See the wiki: Emergency fund

Anything above 6 months of living expenses (or so) is for investing. The rest should stay in savings/CDs.

(This is why we wanted you to post the info in the Asking Portfolio Questions format. It helps us flag areas important areas you may not realize are important.)
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Re: Investing Basics

Post by BoglesRazor » Fri Jan 10, 2020 9:39 am

I tried to do the post in that format, but my understanding is that cash and savings don’t count as part of the portfolio. Plus, I have already a very long post so I thought I should break it up piece by piece. I have roughly $150k in savings/CDs (yes, I know it’s bad). My goal is to make both Roth accounts high growth so that’s why I want 100% equities. The VTSM fund is rated 3 stars by MorningStar and the TransAmerica is 4 stars (although the description says it only covers 75% of S&P). After some thinking, I probably should remove the international fund since the ER is high and I could buy it in my Roth IRA for cheaper. Would you invest in international right now?

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Re: Investing Basics

Post by dbr » Fri Jan 10, 2020 9:48 am

BoglesRazor wrote:
Fri Jan 10, 2020 9:39 am
I tried to do the post in that format, but my understanding is that cash and savings don’t count as part of the portfolio.

Cash and savings are part of your portfolio unless you are talking about a temporary amount to be spent in a short time. An example of that would be down payment on a house you are going to buy in a year or two. There can be a lot of discussion whether an emergency fund is part of a portfolio or short term savings. I argue it is part of the portfolio because it is unlikely to be used and one should understand what the prospective risk and return of all one's assets really is. That means young people with emergency funds and not much else invested are usually and should be conservatively invested all in. Cash being held for the long run is certainly part of "the portfolio." People who ask about DCA vs lump sum investing often forget that the cash they are talking about is invested and the question is just what it is invested in.

Plus, I have already a very long post so I thought I should break it up piece by piece. I have roughly $150k in savings/CDs (yes, I know it’s bad).

It is or isn't bad depending on how the risk and return of your portfolio lines up with your objectives.

My goal is to make both Roth accounts high growth so that’s why I want 100% equities.

That is reasonable. Low cost total stock funds, US and/or international are appropriate in general.


The VTSM fund is rated 3 stars by MorningStar and the TransAmerica is 4 stars (although the description says it only covers 75% of S&P). After some thinking, I probably should remove the international fund since the ER is high and I could buy it in my Roth IRA for cheaper. Would you invest in international right now?

Star ratings are not a way to select funds. Look for low cost index funds with low turnover. Vanguard funds are a good model for that but many other funds are fine as well

I do invest something in international. That decision is not based on "now."

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Re: Investing Basics

Post by BoglesRazor » Fri Jan 10, 2020 11:14 am

It looks like I only have one fund that models after Vanguard, but ER is higher than TransAmerica Partner Stock. Is it worth it to pay a little more in ER to get total stock market over just S&P just because it is Vangaurd?

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Re: Investing Basics

Post by ruralavalon » Fri Jan 10, 2020 3:58 pm

It's good to see that are debt free, have an emergency fund, and are making the annual maximum contributions to your 401k and IRA.

Unfortunately all of the funds offered in your employer's 401k plan have pretty high expense ratios, the range is 0.82% - 1.59%.

Asset allocation.
BoglesRazor wrote:
Fri Jan 10, 2020 12:31 am
Age: 35

Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 0-20% of stocks (I don't know yet, considering 2-Fund Portfolio vs. 3-Fund Portfolio)
In my opinion your desired asset allocation is within the range of what is reasonable.



Fund selection and placement.
The best domestic stock fund to consider in your employer's 401k plan is TransAmerica Partner Stock Index (ER 0.58%), an S&P 500 index fund.
Since The TransAmerica Partner Stock only mirrors the S&P, do I need to supplement with Mid/Small Cap funds (or even REITs)?
In my opinion it is unnecessary to add more mid-cap and small-cap.

For domestic stocks I suggest using a total stock market index fund where available with the same expense. Here the total stock market fund has significantly higher expense, by an extra 0.21%. In my opinion the little extra diversification will probably NOT be worth that extra expense.

"In a 401(k) plan with limited choices one might very well opt for an S&P 500 index fund to serve as the domestic stock component of a three-fund portfolio." Wiki article, Three-fund portfolio, "Other considerations".

In my opinion a S&P 500 index fund is good enough by itself for a domestic stock allocation. A S&P 500 index fund covers 82% of the U.S. stock market, investing in stocks of selected large-cap and mid-cap U.S. companies. In the 28 years since the creation of the first total stock market index fund the performance (total return with dividends reinvested) of the two types of funds has been almost identical. Morningstar, "growth of $10k" graph (1992 – 2020), VTSAX vs VFIAX. So it seems that adding a little in mid/small cap stocks trying to mimic the holdings of a total stock market fund has historically made little difference in performance.

See also:
1) Allan Roth, CBS Moneywatch (02/03/2010), "John C. Bogle on the S&P 500 vs. the Total Stock Market"; and
2) Wall Street Physician (01/17/2019), "Should You Invest in the S&P 500 or the Total Stock Market?".


BoglesRazor wrote:
Fri Jan 10, 2020 12:31 am
In addition, I'm not sure if I should invest in international because of recent global events (although I don't know if the benchmark is impacted at all by the Middle East, but with Brexit coming up, the European market may be affected). Moreover, the rate of return so far for US vs. International stock is comparable at 7% (but again, this is based on 6 months of data). Since John Bogle and Warren Buffet both can live without International, I am also willing to just go 100% US stock.
I suggest investing in some international stock fund. There is always someplace in the world with troubling news. The international stock fund could be in the taxable account or an IRA.

BoglesRazor wrote:
Fri Jan 10, 2020 12:31 am
After doing some research, I have decided to distribute 100% stock into both my Roth 401K and Roth IRA Accounts. I will then create a Stock/Bond portfolio separate in a taxable account. This is becuase my Roth accounts are low value and have contribution limits so I need it to grow and because I have no traditional retirement accounts so the bonds have to go to taxable. I will post each subsequent account based on the value inside so as not to confuse anyone.
I think this is a mistake.

In a taxable account use very tax-efficient stock index funds. Wiki article "Tax-efficient fund placement". At Vanguard I suggest using Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.04% and Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER 0.11%. Stock index funds are also well suited to any type of account.

Bond funds are not very tax-efficient. Ordinarily a bond fund should be placed in a tax-advantaged account, preferably a tax-deferred account like a traditional IRA. Wiki article "Tax-efficient fund placement".



traditional versus Roth.
BoglesRazor wrote:
Fri Jan 10, 2020 12:31 am
NOTE: I have NO traditional retirement accounts (IRA or 401K). I ONLY have Roth accounts.
For most people traditional deductible 401k contributions and a traditional IRA will likely be better. I suggest that you switch to traditional contributions.

The income tax code is progressive, with a lower tax rate for lower income. Retirement usually means that employment income has ended. Therefore, most people are in a lower tax bracket in retirement and for most people traditional deductible 401k contributions and a traditional deductible IRA will probably be better.

In addition when you withdraw from your 401k or IRA in retirement, the income is not all taxed at the marginal tax rate specified for your tax bracket. TFB blog post, "The case against Roth 401k". "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)." For people without a traditional defined benefit pension plan, it means the majority of the retirement savings should go to a Traditional 401(k), not Roth." "Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k). I note that you currently have nothing in any traditional tax-deferred accounts.

Will you be eligible for a substantial pension? A pension changes that analysis, so that Roth contributions are likely better if you have a significant pension coming in addition to Social Security. TFB blog post, "Most TSP participants should switch to the Roth TSP". That post discussed the effect of a federal pension, but the analysis should hold for other pensions.

What is your profession or occupation?

Wiki article, "Traditional vs Roth".
Last edited by ruralavalon on Fri Jan 10, 2020 4:57 pm, edited 5 times in total.
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Re: Investing Basics

Post by ruralavalon » Fri Jan 10, 2020 4:50 pm

BoglesRazor wrote:
Fri Jan 10, 2020 11:14 am
It looks like I only have one fund that models after Vanguard, but ER is higher than TransAmerica Partner Stock. Is it worth it to pay a little more in ER to get total stock market over just S&P just because it is Vangaurd?
In my opinion the little extra diversification in the total stock market index fund is probably NOT worth extra 0.21% in expense ratio.

How much (in dollars) is the extra savings/maturing CDs which you have available for investing in a taxable account?

I see that you have about:
401k, $16k
IRA $6k
IRA $6k
Total in those 3 accounts = $28k

Is one of those IRAs for your spouse?

Where is each IRA located?

With this additional information we could suggest an example portfolio for you to consider.

With such high expense funds offered in your employer's 401k plan, it is very important to coordinate investments among all accounts, treating all accounts together as a single unified portfolio.

You could put the entire 401k account in the Transamerica Partner Stock Index fund ER 0.58% and then use the taxable account and the IRAs for a international stock index fund and a good bond fund, to complete your desired asset allocation.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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Re: Investing Basics - Portfolio Help!

Post by BoglesRazor » Sat Jan 11, 2020 4:51 pm

traditional versus Roth.
BoglesRazor wrote: ↑Fri Jan 10, 2020 12:31 am
NOTE: I have NO traditional retirement accounts (IRA or 401K). I ONLY have Roth accounts.
For most people traditional deductible 401k contributions and a traditional IRA will likely be better. I suggest that you switch to traditional contributions.

The income tax code is progressive, with a lower tax rate for lower income. Retirement usually means that employment income has ended. Therefore, most people are in a lower tax bracket in retirement and for most people traditional deductible 401k contributions and a traditional deductible IRA will probably be better.

In addition when you withdraw from your 401k or IRA in retirement, the income is not all taxed at the marginal tax rate specified for your tax bracket. TFB blog post, "The case against Roth 401k". "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)." For people without a traditional defined benefit pension plan, it means the majority of the retirement savings should go to a Traditional 401(k), not Roth." "Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k). I note that you currently have nothing in any traditional tax-deferred accounts.

Will you be eligible for a substantial pension? A pension changes that analysis, so that Roth contributions are likely better if you have a significant pension coming in addition to Social Security. TFB blog post, "Most TSP participants should switch to the Roth TSP". That post discussed the effect of a federal pension, but the analysis should hold for other pensions.
The reason why I selected a Roth 401K instead was simply that I have enough to live on (outside my salary) so I can afford to contribute post-tax. My belief is that trying to figure out your income tax bracket at age 59.5 is very similar to timing the market. Nobody knows what will happen in a long term investment several decades down the line. Even if you have a high income bracket now, it doesn't mean you cannot have a high income bracket by retirement (at least if you are ambitious). You may even have to work past 59.5 depending on how the US economy changes. For example, social security, health care, and retirement plans could all change by the time I retire (considering the trillion dollar debt the US is carrying) so I would feel more satisfied knowing that I don't have to pay any taxes when I withdraw (except for my employer's match, which is pre-tax). Furthermore, I like to think about 401K like this: Assuming you are able to max out the 401K account at $19,000 (for 2019), you first calculate how much you would have paid to the IRS given your tax bracket. Let's say you are in the 25% bracket to make numbers easy. Therefore, you would "save" $4,750 if you deducted $19,000 from your current income for a traditional 401K and "lost" that amount if you contributed to a Roth 401K. However, given that I have 25 years to go before I hit 59.5, I am confident that my contribution of $19,000 will profit AT LEAST $4,750 in my Roth 401K investments. In other words, I would make that money back by the time I retire so I am better off paying the $4,750 amount to the IRS in present day. Then, when I hit 59.5, all my profit (which I expect to be more than $4,750) will be tax free. I completely disregard the income tax bracket in that sense. However, this only works if you can survive without the $19,000 in present day. In my case, I have enough savings to do that, but I can understand that others need that money in present day.

Secondly, I do not have a pension and I don't know much about them. However, in this day and age, pensions are very rare unless you work for the government (which I do not). You would also have to work for a set number of years to get the pension and since this generation is full of job hoppers, I think it's unlikely for me to rely on that as a retirement option. Moreover, I have no idea how long I will stay at my own company either, which is why I decided to go with the TransAmerica Partner Stock - it was the cheapest ER. If I leave my company, I just roll my 401K into a Roth IRA and pick whatever I want to buy for TSM at a lower ER. (By the way, that fund is based on the Russell 1000 even though the fact profile says its modeled after the S&P. I called my provider yesterday and they don't know why it says that - its very confusing, but whatever, the Russell 1000 is more broad than S&P so it's probably better for me). Consequently, I moved 100% of allocation into that fund.
401k, $16k
IRA $6k
IRA $6k
Total in those 3 accounts = $28k
Actually this is incorrect. I actually have this:
Roth 401K: $19K (present day + expected 2020 max out of $19,500)
Roth IRA #1: $2,700 (Motif)
Roth IRA #2: $19,000 (Schwab)
Taxable: $14,00 (Schwab)

Total: $54,700 portfolio + $150K savings/CDs

I have two Roth IRAs because Motif is a non-traditional brokerage and I cannot combine them with a traditional brokerage like Schwab. Lastly, I should mention that I own a small side business so I can open a SIMPLE, SEP IRA, or a Solo 401K. However, I am leaning towards a Roth Solo 401K for the reasons I mentioned above. Furthermore, I am not married, but by retirement age I hope will be married in which case I expect our combined income to move us up to a higher tax bracket, which is why I favor the Roth 401K.

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ruralavalon
Posts: 17140
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Location: Illinois

Re: Investing Basics - Portfolio Help!

Post by ruralavalon » Sat Jan 11, 2020 5:54 pm

BoglesRazor wrote:
Sat Jan 11, 2020 4:51 pm
traditional versus Roth.
BoglesRazor wrote: ↑Fri Jan 10, 2020 12:31 am
NOTE: I have NO traditional retirement accounts (IRA or 401K). I ONLY have Roth accounts.
For most people traditional deductible 401k contributions and a traditional IRA will likely be better. I suggest that you switch to traditional contributions.

The income tax code is progressive, with a lower tax rate for lower income. Retirement usually means that employment income has ended. Therefore, most people are in a lower tax bracket in retirement and for most people traditional deductible 401k contributions and a traditional deductible IRA will probably be better.

In addition when you withdraw from your 401k or IRA in retirement, the income is not all taxed at the marginal tax rate specified for your tax bracket. TFB blog post, "The case against Roth 401k". "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)." For people without a traditional defined benefit pension plan, it means the majority of the retirement savings should go to a Traditional 401(k), not Roth." "Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k). I note that you currently have nothing in any traditional tax-deferred accounts.

Will you be eligible for a substantial pension? A pension changes that analysis, so that Roth contributions are likely better if you have a significant pension coming in addition to Social Security. TFB blog post, "Most TSP participants should switch to the Roth TSP". That post discussed the effect of a federal pension, but the analysis should hold for other pensions.
The reason why I selected a Roth 401K instead was simply that I have enough to live on (outside my salary) so I can afford to contribute post-tax. My belief is that trying to figure out your income tax bracket at age 59.5 is very similar to timing the market. Nobody knows what will happen in a long term investment several decades down the line. Even if you have a high income bracket now, it doesn't mean you cannot have a high income bracket by retirement (at least if you are ambitious). You may even have to work past 59.5 depending on how the US economy changes. For example, social security, health care, and retirement plans could all change by the time I retire (considering the trillion dollar debt the US is carrying) so I would feel more satisfied knowing that I don't have to pay any taxes when I withdraw (except for my employer's match, which is pre-tax). Furthermore, I like to think about 401K like this: Assuming you are able to max out the 401K account at $19,000 (for 2019), you first calculate how much you would have paid to the IRS given your tax bracket. Let's say you are in the 25% bracket to make numbers easy. Therefore, you would "save" $4,750 if you deducted $19,000 from your current income for a traditional 401K and "lost" that amount if you contributed to a Roth 401K. However, given that I have 25 years to go before I hit 59.5, I am confident that my contribution of $19,000 will profit AT LEAST $4,750 in my Roth 401K investments. In other words, I would make that money back by the time I retire so I am better off paying the $4,750 amount to the IRS in present day. Then, when I hit 59.5, all my profit (which I expect to be more than $4,750) will be tax free. I completely disregard the income tax bracket in that sense. However, this only works if you can survive without the $19,000 in present day. In my case, I have enough savings to do that, but I can understand that others need that money in present day.

Secondly, I do not have a pension and I don't know much about them. However, in this day and age, pensions are very rare unless you work for the government (which I do not). You would also have to work for a set number of years to get the pension and since this generation is full of job hoppers, I think it's unlikely for me to rely on that as a retirement option. Moreover, I have no idea how long I will stay at my own company either, which is why I decided to go with the TransAmerica Partner Stock - it was the cheapest ER. If I leave my company, I just roll my 401K into a Roth IRA and pick whatever I want to buy for TSM at a lower ER. (By the way, that fund is based on the Russell 1000 even though the fact profile says its modeled after the S&P. I called my provider yesterday and they don't know why it says that - its very confusing, but whatever, the Russell 1000 is more broad than S&P so it's probably better for me). Consequently, I moved 100% of allocation into that fund.
401k, $16k
IRA $6k
IRA $6k
Total in those 3 accounts = $28k
Actually this is incorrect. I actually have this:
Roth 401K: $19K (present day + expected 2020 max out of $19,500)
Roth IRA #1: $2,700 (Motif)
Roth IRA #2: $19,000 (Schwab)
Taxable: $14,00 (Schwab)

Total: $54,700 portfolio + $150K savings/CDs

I have two Roth IRAs because Motif is a non-traditional brokerage and I cannot combine them with a traditional brokerage like Schwab. Lastly, I should mention that I own a small side business so I can open a SIMPLE, SEP IRA, or a Solo 401K. However, I am leaning towards a Roth Solo 401K for the reasons I mentioned above. Furthermore, I am not married, but by retirement age I hope will be married in which case I expect our combined income to move us up to a higher tax bracket, which is why I favor the Roth 401K.
I agree that its hard to estimate your in retirement tax bracket three decades in advance. But it is not market timing, its just difficult. You don't in any sense "make that money back" for the lost $4,750 deduction when you use a Roth. The investments grow and compound without tax in both traditional and Roth accounts. Please think about this some more.

You are right that a lot may change in the next three decades. But I think its certain that we will still have a progressive income tax code, with higher rates for higher income.

Please read this TFB blog post carefully. When you withdraw from your 401k or IRA in retirement, the income is not all taxed at the marginal tax rate specified for your tax bracket. TFB blog post, "The case against Roth 401k". "Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k). I note that you currently have nothing in any traditional tax-deferred accounts. You are not even remotely close to that threshold.

Just because you can afford to pay income tax does not mean that it is a good idea to pay tax you can lawfully avoid with a deduction.

. . . . .

The Russell 1000 is more broad than S&P 500 so it is more diversified than the S&P 500 index.

I believe that you were wise to invest entirely in TransAmerica Partner Stock Index (ER 0.58%), for the lower expense ratio.

. . . . .

What is the purpose of the " $150K savings/CDs"? Is that for long-term/retirement investing?

Wiki article, "Charles Schwab".

Total: $54,700 portfolio + $150K savings/CDs = $204.7k.

. . . . .

Taxable account @ Schwab (06% of total; $14,000)
possibly:
Schwab Total Stock Market Index Fund (SWTSX) ER 0.03%
Schwab International Index Fund (SWISX) ER 0.06%

savings/CDs (73% of total; $150k)

Roth 401K: (19% of total; $19K [present day + expected 2020 max out of $19,500])
TransAmerica Partner Stock Index (ER 0.58%)

Roth IRA #1 @ Motif: (01% of total; $2,700 )

Roth IRA #2 @ Schwab: (09% of total; $19,000)
possibly:
Schwab Total Stock Market Index Fund (SWTSX) ER 0.03%
Schwab International Index Fund (SWISX) ER 0.06%
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Topic Author
BoglesRazor
Posts: 35
Joined: Fri Jan 03, 2020 11:02 am

Re: Investing Basics - Portfolio Help!

Post by BoglesRazor » Sun Jan 12, 2020 5:35 pm

I agree that its hard to estimate your in retirement tax bracket three decades in advance. But it is not market timing, it's just difficult. You don't in any sense "make that money back" for the lost $4,750 deduction when you use a Roth. The investments grow and compound without tax in both traditional and Roth accounts. Please think about this some more.
Ok I see your point. If I took that $19,000 and put it into a traditional 401K or Roth 401K and invested it, the gain would be the same in tax free growth until I withdraw at 59.5 (which is 25 years from now). Assume we invested $19,00 for 100% in the TSM for 25 years with an annual 6% gain (to be conservative). By the year 2045, the money would have compounded to $1,186,516.82 (I used this compound calculator: http://www.moneychimp.com/calculator/co ... ulator.htm). This is assuming you max out every year at $19K for 25 years for a total of $475,000 in actual contribution. That means my gain was $1,186,516.82 - $475,000 = $711, 516.82. By 59.5, let's assume I'm in the lowest tax bracket and I would only have to pay a marginal tax rate of 10% times the 15% capital gains tax for withdrawal. Thus, for a traditional 401K, I would pay 0.10*0.15*$711, 516.82 = $10, 672.75. That is not bad for 25 years of growth, but in a Roth 401K, I wouldn't pay anything so I still feel this is better. Unless my math is wrong - please correct me if I'm wrong.

Secondly, I think a traditional 401K only benefits you only if you are in the upper income tax brackets (32-37%). If you are not taxed that high, then you are still paying a fair progressive tax. Basically, the higher your income, the less income you bring home because you will contribute more to the US govt. to carry the weight of the lower income citizens. Then the $19K will benefit you because it takes off the top amount in which you will be taxed. I'm not in this income bracket so I suppose the benefit is not enticing enough for me.
Please read this TFB blog post carefully. When you withdraw from your 401k or IRA in retirement, the income is not all taxed at the marginal tax rate specified for your tax bracket. TFB blog post, "The case against Roth 401k". "Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k). I note that you currently have nothing in any traditional tax-deferred accounts. You are not even remotely close to that threshold.
I don't understand the quote from that article. How will you know if you can generate enough income from your Traditional 401K if you are still deciding on which one to open? Why would want to fill the lower income brackets 25 years in advance? You would have to account for inflation and any major changes in economic policy (the changes I mentioned previously). You are saying I have to calculate how much I need in the lower income bracket, open a traditional 401K to get there, then contribute more to traditional? I don't understand this statement. While I realize I just did the math above using the tax rate above, but honestly, I am confused about the article in "The Case Against Roth 401K." The article states the main benefits of a traditional 401K as the following:

1. Fill in lower tax brackets in retirement
2. Avoid high state income tax
3. Leave the option open for Roth conversion in the future
4. Avoid triggering phase-outs and AMT

Let's go through each "benefit" carefully:

1. I understand that your "bucket" places me into the lower income bracket to be taxed because of this quote
Because the way a Traditional 401(k) works, the dollars they contribute come off from the top, in the highest tax bracket for their income. After they retire, the dollars they receive from their Traditional 401(k) pour into an empty or shallow bucket.
However, I still don't understand how this is better than having a Roth in which you aren't taxed at all? Isn't my bucket always empty in that case?

2. If you work in CA or NY with high state income tax, your overall salary would be higher than the same position in a state like Kansas so I feel the higher salary compensates for the high income state tax. Therefore, there really isn't any "dead loss," especially if you retire in a state with no income tax in which you sort of "re-coup" the years of paying state tax in present day.

3. Why would I want to convert my traditional 401K later than the age of 35? I do not feel that I have not peaked in my career, salary wise (I am in the 24% income bracket). Therefore, I assume my tax bracket will be higher if I convert my traditional 401K to a Roth later on in life since my investments would have grown further. The White Coat Investor did this and then realized it was a mistake (although I'm not a physician and my income is no where near his). He did a mega backdoor conversion on his SEP IRA to Roth (https://www.whitecoatinvestor.com/mega-roth-conversion/). His income grew, but I also expect mine to grow. Not because I expect my salary to increase, but because I plan to expand my income streams.

4. I don't know what phase-outs and AMT are. Please explain because I tried to read it online, but don't understand how it applies to Roth 401K. I am currently childless and eligible for the Roth IRA so I don't see any loss in benefits for me in present day. If I left my company, I could roll my Roth 401K into a Roth IRA, which is much more valuable since it is self-directed.

Lastly, the article states that Roth 401K is better for lower income individuals who expect their salary to grow. However, if you are lower income in the first place, you probably cannot live without the $19K after contribution. This seems ironic, doesn't it? Moreover, the bottom of the article links to this article: https://thefinancebuff.com/roth-401k-fo ... e-max.html in which it states that the 10% of people who max out their 401K (like I plan to) actually benefit from the Roth 401K instead.

In addition, the Bogleheads Wiki https://www.bogleheads.org/wiki/Tax-eff ... _placement states under "Criticisms of this tax placement strategy":
Due to higher returns, equities have the potential to expand tax-advantaged space, leading to higher tax savings later on despite higher tax bills in the present. This is particularly true at the presently low bond yields, when the tax penalty from bonds in taxable is not as high as it has been in the past.[3]

The situation may change in retirement, when the funds are withdrawn for income (decumulation phase). It is possible under some combinations of lifetime investment results and lifetime individual tax situations to be better off doing the opposite of the strategy recommended here.[4]

This article may be biased towards investors who can fill tax advantaged space and are looking to invest more. However, some investors (especially those just starting out) are unable to fill all this space. This can make the page confusing and possibly counterproductive if [for example] someone is buying international equities in taxable space without filling tax-advantaged space just to get the foreign tax credit.[5]

This article states that cash and low-yielding bonds are tax efficient, but then contradicts this somewhat by then classifying "most bonds" as tax inefficient. When interest rates are low, bonds are more tax-efficient.[6] If bonds are tax-efficient now, and then yields rise to make them less tax-efficient, you can go from bonds in taxable to bonds in tax-advantaged with little, no, or negative tax cost; therefore, it is reasonable to hold bonds in a taxable account now and switch later if appropriate. In contrast, switching from stocks to bonds in taxable will result in a significant tax cost
This article hasn't been updated in a while, but since the Feds lowered interest rates last Dec, I do believe bond yields are low right now. Thus, this makes them tax efficient since I have maxed out my contributions for my retirement funds. Therefore, I can buy bonds in a taxable account. Once they rise, I can sell them and convert some stock in my Roth accounts to Bonds - right? I am not trying to argue against a traditional 401K, but just trying to understand your logic behind it. My conclusion is that you should really only consider traditional 401K if you think the $19K tax deduction will benefit you in present day and at 59.5. I don't feel my present day income will benefit, but my future income may benefit from the Roth. I do appreciate all the information you are sharing though because I am still learning. If you are older than me, which I think you are, I am always happy to listen to a new point of view (or avoid any mistakes). :D
What is the purpose of the " $150K savings/CDs"? Is that for long-term/retirement investing?
There was no deep reason. I was simply financially illiterate and scared of the stock market. I entered the work force during the 2008 recession so it made me think the best method was to hold cash in a high yield savings account. However, now that I have educated myself a bit, I realize I am just barely beating inflation. I also missed the biggest bull run in history so now I'm kicking myself for not learning about money earlier.
Taxable account @ Schwab (06% of total; $14,000)
possibly:
Schwab Total Stock Market Index Fund (SWTSX) ER 0.03%
Schwab International Index Fund (SWISX) ER 0.06%

savings/CDs (73% of total; $150k)

Roth 401K: (19% of total; $19K [present day + expected 2020 max out of $19,500])
TransAmerica Partner Stock Index (ER 0.58%)

Roth IRA #1 @ Motif: (01% of total; $2,700 )

Roth IRA #2 @ Schwab: (09% of total; $19,000)
possibly:
Schwab Total Stock Market Index Fund (SWTSX) ER 0.03%
Schwab International Index Fund (SWISX) ER 0.06%
You left out bonds...which I assume would have to go into a taxable account. In which case, Taylor suggests the Vanguard Tax Exempt Long Term Intermediate Bond fund. Or I assume any municipal bond would work. Based on the TFB blog, one reason to contribute to traditional 401K is to lower your state income tax (I work in NY so I assume I pay NY state tax? However, I'm a PA resident so I don't know how that works since I haven't filed my 2019 return yet). If I buy a municipal bond, I am reducing both federal and state income tax (assuming the rate of bond return is comparable to the state income tax, which I feel is a comparable). At this point, I see no real difference between a municipal bond vs. High Interest Savings/Cds. It's all taxed as ordinary income, but bonds maybe are even better than CDs because they can be liquid. Do you agree?

Here is what I was thinking:

Taxable account @ Schwab:
Total US Stock Market
Total International Stock Market
Total Bond Market

savings/CDs
Invest $100K, keep $50K for emergencies

Roth 401K:
TransAmerica Partner Stock Index (ER 0.58%)

Roth IRA #1 @ Motif:
Custom ETFs

Roth IRA #2 @ Schwab:
Total US Stock Market

I also have $1000 (cash) in a Vanguard Roth IRA, which I opened right before Schwab announced free trades. Then I opened Schwab to contribute the rest of the 2019 Roth IRA. Thus, I should transfer in kind from Vanguard into either Motif or Schwab. Secondly, if you notice, I only put International Stock and Bonds in taxable since the bond yields are low and you can get foreign tax credit (although I don't know much about this) in a taxable account. I may not invest any TSM in taxable since my whole retirement accounts are all 100% US stock. What do you think?

Topic Author
BoglesRazor
Posts: 35
Joined: Fri Jan 03, 2020 11:02 am

Re: Investing Basics - Portfolio Help!

Post by BoglesRazor » Wed Jan 15, 2020 12:41 am

Am I wrong? Can someone reply?

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LadyGeek
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Re: Investing Basics - Portfolio Help!

Post by LadyGeek » Wed Jan 15, 2020 8:58 am

BoglesRazor wrote:
Sun Jan 12, 2020 5:35 pm
This article hasn't been updated in a while, but since the Feds lowered interest rates last Dec, I do believe bond yields are low right now. Thus, this makes them tax efficient since I have maxed out my contributions for my retirement funds. Therefore, I can buy bonds in a taxable account. Once they rise, I can sell them and convert some stock in my Roth accounts to Bonds - right?
You are referring to the "Criticisms of this tax placement strategy" section of Tax-efficient fund placement.

Let's take a step back. Go to the top of the article and note the big orange warning box (it's important to understand this):
Determination of your asset allocation (% stocks / % bonds), which sets your portfolio's level of acceptable risk, is the single most influential decision you can make on your portfolio's performance. Only consider taxes after you have configured your total portfolio.
You appear to be making your decisions based on taxes. I have no idea how this came to be, but there's a weird saying "Don't let the tax tail wag the investment dog". Get your asset allocation figured out and choose your funds first. Then, decide where to place them.

The only bonds you want in a taxable account are the municipal bonds. Since you're a PA resident (so am I :happy ), this is Vanguard's Pennsylvania Long-Term Tax-Exempt Fund Admiral Shares VPALX. These funds are exempt from Federal and PA state income tax for the fund's dividends (what you pay income tax on).

However, what happens when you buy and sell an investment in a taxable account? You pay taxes on the gains. You'll end up losing more in taxes than you gain.

So, put your bonds in tax-deferred accounts - 401(k), traditional IRA, Roth IRA. You can trade every day and not pay one penny on taxes. (You don't want to trade at all, but I want to make a point.)

=================
Regarding your state income tax - PA has reciprocal agreements with 5 other states, meaning that taxes are withheld like you lived in PA and you don't have to file a state tax return for that state. Unfortunately, NY is not one of those states, so I think you'll have to file both PA and NY income tax returns.

Here's some guidance: How does working in a reciprocal agreement state affect my state income tax?
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

Topic Author
BoglesRazor
Posts: 35
Joined: Fri Jan 03, 2020 11:02 am

Re: Investing Basics - Portfolio Help!

Post by BoglesRazor » Thu Jan 16, 2020 8:55 am

Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 0-20% of stocks (I don't know yet, considering 2-Fund Portfolio vs. 3-Fund Portfolio)
My original post stated my desired allocation of 80/20. Then I focused on asset LOCATION, which is confusing me. I have to re-balance my current portfolio since I did 3 transfer in kinds from robo-advisors, which spread my money all over the place. Therefore, I am trying to assign the best asset location and asset allocation.
The only bonds you want in a taxable account are the municipal bonds. Since you're a PA resident (so am I :happy ), this is Vanguard's Pennsylvania Long-Term Tax-Exempt Fund Admiral Shares VPALX. These funds are exempt from Federal and PA state income tax for the fund's dividends (what you pay income tax on).

However, what happens when you buy and sell an investment in a taxable account? You pay taxes on the gains. You'll end up losing more in taxes than you gain.

So, put your bonds in tax-deferred accounts - 401(k), traditional IRA, Roth IRA. You can trade every day and not pay one penny on taxes. (You don't want to trade at all, but I want to make a point.)
Although I'm currently a PA resident, I likely will change residencies to NY since I work in that state. Also, my brokerage is Schwab, not Vanguard, so I don't know if I can buy Admiral shares?

Secondly, I disagree about putting bonds in tax-advantaged accounts. You have to consider both the rate of return and tax efficiency. If your rate of return is higher, sometimes it's worth putting low interest bonds in the taxable accounts. I read and agree with White Coat Investory who wrote extensively about the matter.

LookinAround
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Re: Investing Basics - Portfolio Help!

Post by LookinAround » Thu Jan 16, 2020 9:18 am

BoglesRazor wrote:
Fri Jan 03, 2020 9:55 pm
1. If you can buy the Vanguard funds at nearly any brokerage, what difference does it make whether you are with Vangaurd, Schwab, Fidelity, or TD? Do you get a discount on the funds or are the funds exclusive to that brokerage, meaning you can only buy them if you have an account there? I asusmed the expense ratios are all the same for the funds regardless of the brokerage.
While I keep 80% of my investment at Vanguard I still keep 20% at Schwab.

Schwab does have one nice advantage especially if you enjoy international travel. Open a free checking account at Schwab and get a Schwab debit card. Use it and never pay an ATM fee for any ATM anywhere in the world.

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