Portfolio Advice: Check Up / Future Planning

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Topic Author
CJ_Punk
Posts: 19
Joined: Mon Jan 12, 2015 12:52 pm

Portfolio Advice: Check Up / Future Planning

Post by CJ_Punk » Thu Feb 13, 2020 12:36 pm

Emergency funds: Yes (not included below)

Debt: None

Tax Filing Status: Single

Tax Rate: 12% Federal, 0% State

State of Residence: Florida

Age: 29

Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: 5-15% of stocks?


Current retirement assets

Total amount: Very low 6 figure

Taxable Brokerage Account #1
3% cash (for investing)
3% Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) (0.05%)
6.7% Vanguard Total International Stock Index Fund Admiral Shares (0.11%)
6.2% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.04%)


Taxable Brokerage Account #2
20.7% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.04%)


Roth IRA at Vanguard
54% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.04%)
6.1% Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) (0.05%)



Contributions

New annual Contributions
IRA Max contribution



Questions:

1. Overall, just looking for a general check up. Thoughts?

2. This year, I might slip into the 22% federal tax rate, but I'm a freelancer/independent contractor with a great accountant and am really good at writing things off. So I'm on the fence about starting a regular IRA to contribute to vs my current Roth IRA.

3. I originally set aside the money in Taxable Brokerage Account #1 for something with a potentially super short time horizon (I decided I wanted to live life and backpack/travel full time). I started living abroad in the spring of 2017, and came back stateside October of 2019 for a new, major client I always wanted to work for. Over that timespan, I never ended up needing to touch that money (I'm really good at traveling). Because of that, this year I started treating most of the funds in that account as part of my portfolio and invested as indicated above. Now... there's about a 50/50 chance I'm going to go back to traveling full time at the end of this year, potentially with no income. Although I'm a freelancer, I think I'll have a pretty steady stream of income until then and great saving rate, so I feel like I'll be in a similar situation if I do chose to travel full time again. My question is: Should I put that 3% cash for investing in something like a VWITX, in case I need it in a few years? And is it naive to think that, in a catastrophic event or even just things not going as I hope, I can dip a little into whatever is up in my Taxable Account #1 then rebalance accordingly? Or should I allocate some funds into something more stable? I'm pretty strongly disciplined, so I'm not worried about falling into a pattern or relying on that.


Thanks!

lakpr
Posts: 3864
Joined: Fri Mar 18, 2011 9:59 am

Re: Portfolio Advice: Check Up / Future Planning

Post by lakpr » Thu Feb 13, 2020 1:50 pm

1. You have bonds in your Roth IRA, remove them from there. I repeat this in almost every post ... the defining feature of a Roth account is that all future growth is tax free (subject only to age 59.5 rule; and for the pedantic, I specifically am referring only to the 'growth' or 'earnings', not contributions). As such, it is in your best interest to maximize the growth. Stated in other words, you should pack your Roth accounts with those asset classes that provide you with the highest expected returns, = Stocks. Not bonds, not blended funds, not Target Retirement funds, not target-risk funds like "Lifestrategy funds", etc. Pure, unadulterated, stocks.

2. Given that you said you are a freelancer / independent contractor, you should really take the time to open up a Solo 401k plan. With the Solo 401k plan, you can shelter up to $19,500 (same limit as a regular 401k plan) as an employEE; and in addition, you pay a match to yourself as an employER, worth 20% of (business income - half self employment taxes). So say you earn $50k per year as a freelancer, you can shelter $19,500 as employee; one-half of self-employment taxes is 7.65% * 50k = $3825, so your employER contribution can be 0.2 * ($50k - $19.5k - $3825) = $5335. And this does NOT prevent you from making the Roth IRA contribution either! Voila, your "22% tax bracket problem" is solved.

3. Given your third paragraph question, I would suggest putting it in intermediate term treasuries fund. That fund invests exclusively in US treasuries, so the risk of default is near zero; the only risk you would be undertaking is the interest rate risk (if the interest rates rise, your fund would lose value). But given the political and economic environment, I think at least in the near term, that risk is minimal.

In general, I would advise you to max out all the tax-advantaged avenues available to you first, before investing in taxable. Also as a general thumb rule, if you are in a 12% bracket, you should be heavily investing everything into Roth accounts, and therefore only stocks. Just keep an emergency fund equal to about 6 months of expenses.

Topic Author
CJ_Punk
Posts: 19
Joined: Mon Jan 12, 2015 12:52 pm

Re: Portfolio Advice: Check Up / Future Planning

Post by CJ_Punk » Thu Feb 13, 2020 2:47 pm

Lakpr, thank you very much for your reply.

1. I'm now very genuinely confused about this. I thought the same way you did about having bonds in my IRA-- they grow the least (compared to the stock allocation, anyway), and to me, having bonds accessible made much more sense in a worst case scenario event. Then I spent a lot of time last month lurking on this forum and kept come across people and posts talking about tax efficiency (including the Boglehead wiki here ), and everything I researched suggested putting the more tax inefficient bonds in a tax advantaged account. Do you have any resources you could recommend me about this?

2. Ok, my next financial goal will be to look into that more. I don't currently have a business set up, and I think when I started to wonder about going that route, I ended up traveling and had no real income. I'm not sure I'm going to be able to contribute more than my IRA contributions, but thank you for the push to look into this more!

3. So VFITX is what you're suggesting for that 3% cash, correct?

Thanks again!

lakpr
Posts: 3864
Joined: Fri Mar 18, 2011 9:59 am

Re: Portfolio Advice: Check Up / Future Planning

Post by lakpr » Thu Feb 13, 2020 2:53 pm

CJ_Punk wrote:
Thu Feb 13, 2020 2:47 pm
Lakpr, thank you very much for your reply.

1. I'm now very genuinely confused about this. I thought the same way you did about having bonds in my IRA-- they grow the least (compared to the stock allocation, anyway), and to me, having bonds accessible made much more sense in a worst case scenario event. Then I spent a lot of time last month lurking on this forum and kept come across people and posts talking about tax efficiency (including the Boglehead wiki here ), and everything I researched suggested putting the more tax inefficient bonds in a tax advantaged account. Do you have any resources you could recommend me about this?

2. Ok, my next financial goal will be to look into that more. I don't currently have a business set up, and I think when I started to wonder about going that route, I ended up traveling and had no real income. I'm not sure I'm going to be able to contribute more than my IRA contributions, but thank you for the push to look into this more!

3. So VFITX is what you're suggesting for that 3% cash, correct?
3: Yes, VFITX. FUAMX at Fidelity

1: Putting Bonds in tax-advantaged account ==> The Bogleheads wiki is actually talking about Traditional IRAs and Traditional 401ks. Not Roth accounts. Especially for some one in a 12% bracket, putting bonds in Roth accounts is absolutely bad idea.

If you think about this a bit more ... comparing the investment of bond funds in taxable vs. tax advantaged. The "growth" is taxed as ordinary income in taxable on bond funds whereas EVERYTHING is taxed as ordinary income from the tIRA/t-401k accounts. Thus, on the "growth" portion, either alternative is effectively tax-neutral. The main (and only) advantage of putting a bond fund in tIRA/t-401k is that you escape taxes on the principal being contributed, in exchange for being taxed when it can be withdrawn in retirement, which can be done in smaller pieces instead of all at once.

User avatar
BolderBoy
Posts: 4632
Joined: Wed Apr 07, 2010 12:16 pm
Location: Colorado

Re: Portfolio Advice: Check Up / Future Planning

Post by BolderBoy » Thu Feb 13, 2020 3:00 pm

lakpr wrote:
Thu Feb 13, 2020 1:50 pm
1. You have bonds in your Roth IRA, remove them from there. I repeat this in almost every post ...
I agree with this, if you can. Stocks only in Roth accounts.

Why do you not have a solo 401k retirement plan? It could have a traditional & a Roth component. The bonds could go in the traditional part.

Also, you have bonds in your taxable brokerage. Taxable bonds are not tax efficient and shouldn't go there.

Rather than use your accountant to find evermore clever deductions, set up a solo 401k and contribute to it and still get a deduction.

These are idealize recommendations and you may have reasons you can't do these.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

Topic Author
CJ_Punk
Posts: 19
Joined: Mon Jan 12, 2015 12:52 pm

Re: Portfolio Advice: Check Up / Future Planning

Post by CJ_Punk » Thu Feb 13, 2020 3:34 pm

BolderBoy wrote:
Thu Feb 13, 2020 3:00 pm
Also, you have bonds in your taxable brokerage. Taxable bonds are not tax efficient and shouldn't go there.
See, this is what I'm confused about. My options (right now, anyway) are in my Roth IRA or a taxable brokerage account, and you're saying to not put them in my taxable brokerage, so that leaves my Roth IRA. Am I understanding this wrong? And I feel like a ton of what I've read on this forum says bond funds are not tax efficient and should be put in IRAs, as well, which is why I did that (last month, so I haven't missed out on a ton yet).

The only reason I can think of for not having set up a Solo 401k was because I never set up myself up in a business, and it not making sense for me to set myself up that way when I started to look into it. But looking into that now is going to be my next major task, since that was a few years ago and I'm sure things have changed.


Lakpr, that explanation makes a lot of sense to me. And personally, I prefer to pay taxes up front all at once and be done with it... especially when I'm at a low tax rate now. Next week I'll sit down and flip all the bond funds to my taxable.


Thanks guys!

perikleez
Posts: 32
Joined: Sun Jan 05, 2020 2:47 am

Re: Portfolio Advice: Check Up / Future Planning

Post by perikleez » Thu Feb 13, 2020 4:55 pm

lakpr wrote:
Thu Feb 13, 2020 1:50 pm
1. You have bonds in your Roth IRA, remove them from there. I repeat this in almost every post ...
I keep a share of 10yr Treasury EFT (BIV) and Gold EFT (IAU) in my Roth IRA along with my de jour Vanguard Mutual Fund (>90% IRA holdings) as a reminder of where I can jump and park my funds out of the equities market to limit potential loses. helps the jitters knowing that they are there when needed.

Topic Author
CJ_Punk
Posts: 19
Joined: Mon Jan 12, 2015 12:52 pm

Re: Portfolio Advice: Check Up / Future Planning

Post by CJ_Punk » Sat Feb 15, 2020 10:08 am

perikleez, so you keep those funds in your IRA... just so you can switch funds into it if you get nervous? I'm guessing you don't have a lot of funds in taxable accounts or anything, then?

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