How to automate deductions from paycheck for investments while maintaining balanced portfolio?

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Topic Author
adelvest
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Joined: Sun May 03, 2020 1:17 pm

How to automate deductions from paycheck for investments while maintaining balanced portfolio?

Post by adelvest »

I had a similar post about this last week (viewtopic.php?f=1&t=314436) about this last week but had a lot of misunderstandings back then. I've since re-read some basics, fixed and confirmed my previous understandings, and taken a summary of my current portfolio.

I am trying to figure out the "cleanest" way to setup automatic deductions from my paycheck for investments while still maintaining my asset allocation percentages and wanted to double check some understandings I have. Below is some info on my situation:

Tax filing status: Single
Tax rate: 32% federal, 9.3% state (California)
Age: Late 20s
Asset allocation (taken from the wiki and The Bogleheads Guide to Investing):
- 50% US, 33% Intl, 17% bonds
- Size: low-mid six figures

Current portfolio percentages:
Taxable:
- Cash 6%
- SWTSX (Schwab Total Stock Market Index) 18%
- SWISX (Schwab International Index) 27%
- FSKAX (Fidelity Total Market Index) 8.7%

Rollover IRA (rolled over from previous employer 401K):
- SWTSX 3.4%
- SWAGX (Schwab US Aggregate Bond Index) 19%

Another previous employer 401K (still in previous employer's 401K program):
- S&P 500 (couldn't find stock ticker) 16.9%

HSA:
- Vanguard 500 1%

No 401K plan offered at current employer.

Questions:
1. I currently have some cash sitting around un-invested as I don't have automatic deductions setup yet. After some reading it sounds like while I am not allowed to contribute to a Roth IRA, I should still contribute to a Traditional IRA. Moreover because my employer does not have a 401K, I can take the full deduction up to my contribution limit (https://www.irs.gov/retirement-plans/pl ... an-at-work). Total contributions for this year for a tIRA and Roth IRA is $6000, so should I just create a tIRA account now and dump $6000 into it? How is this affected if my employer later this year decides to offer a 401K plan?

2. When folks deduct from their paycheck for investing, do you mirror your asset allocation plan (e.g. X% to domestic, Y% to intl, Z% to bonds) or just dump it all into say, domestic and then re-balance later?

3. My understanding of the impact of capital-gains tax is you want to hold onto funds for > 12mo. Given that we are constantly investing (e.g. deductions of paycheck) I assume when it comes time to re-balance firms will use the "oldest" purchases when selling portions of a fund to avoid short-term capital gains? Is that even a sensible way to think about things?

4. Besides leveraging a tIRA, another trick I've seen is the use of a Backdoor Roth, but that trick seems only plausible with the absence of other IRAs. Given I have no current employer 401K to move my Rollover IRA to, it seems this is infeasible for me at the moment?
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FiveK
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Re: How to automate deductions from paycheck for investments while maintaining balanced portfolio?

Post by FiveK »

1a. Yes.
1b. Then, if you participate in the 401k, your tIRA contribution becomes non-deductible.

2. Different people do things differently. Seems attempting to match the desired AA from the start would be easier but either way works.

3. Don't assume. Do make sure that your account is set up to use "specific lot identification" for the cost basis.

4. Yes.

Good luck!
tashnewbie
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Joined: Thu Apr 23, 2020 12:44 pm

Re: How to automate deductions from paycheck for investments while maintaining balanced portfolio?

Post by tashnewbie »

I try to think of my portfolio as a whole across all the accounts (401k, IRAs, taxable) and want to maintain AA across all of them. That means no one account has to hold my entire bond/fixed income allocation for example. It’s generally preferred to hold bonds in tax-deferred accounts (401k and tIRA) with stocks in Roth and taxable.

Sounds like it makes sense for you to take tIRA deductions now while you have no employer plan. If you get an employer plan in the future, if it accepts rollovers, you could rollover your tIRA and Rollover IRA into it, assuming the fund options and fees were reasonable.

I would do a rough calculation of how much $ you need in each asset class to get your desired AA. Then automate contributions based on those numbers. There will generally be some drift in the AA because of market fluctuations but I’ve heard it doesn’t really help to rebalance more than once or so a year.
retiredjg
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Re: How to automate deductions from paycheck for investments while maintaining balanced portfolio?

Post by retiredjg »

You've made a lot of progress quickly. :happy

1. I currently have some cash sitting around un-invested as I don't have automatic deductions setup yet. After some reading it sounds like while I am not allowed to contribute to a Roth IRA, I should still contribute to a Traditional IRA. Moreover because my employer does not have a 401K, I can take the full deduction up to my contribution limit (https://www.irs.gov/retirement-plans/pl ... an-at-work). Total contributions for this year for a tIRA and Roth IRA is $6000, so should I just create a tIRA account now and dump $6000 into it? How is this affected if my employer later this year decides to offer a 401K plan?
You mention not having a 401k, but that does not rule out having some other kind of plan at work or being covered by a pension plan. If you have no plan at work and no pension plan, yes...you can contribute $6k to a traditional IRA this year and deduct that from your taxable income.

It is not impossible that your employer will add a work plan during the year, but it is unlikely. Also, if that happens, you can have your custodian return your IRA contribution as if it never happened.

2. When folks deduct from their paycheck for investing, do you mirror your asset allocation plan (e.g. X% to domestic, Y% to intl, Z% to bonds) or just dump it all into say, domestic and then re-balance later?
This depends entirely on the situation. If you want help with this, you need to be more specific about what accounts you are putting money into and how much is going into each account.

3. My understanding of the impact of capital-gains tax is you want to hold onto funds for > 12mo. Given that we are constantly investing (e.g. deductions of paycheck) I assume when it comes time to re-balance firms will use the "oldest" purchases when selling portions of a fund to avoid short-term capital gains? Is that even a sensible way to think about things?
First, you do not want to rebalance in a taxable account except by changing where the new money goes. Rebalancing should occur in your other accounts.

Second, if you do sell shares in taxable, you get to decide what shares are sold.

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

4. Besides leveraging a tIRA, another trick I've seen is the use of a Backdoor Roth, but that trick seems only plausible with the absence of other IRAs. Given I have no current employer 401K to move my Rollover IRA to, it seems this is infeasible for me at the moment?
Backdoor Roth is out of the picture for you at this time. You can consider it when you have a 401k or similar plan to roll your rollover IRA into.

Besides that, you need to use your IRA allotment for a deductible contribution to tIRA, not to Roth. Do not be concerned about this if you are putting money into taxable. Taxable is almost as good as Roth.
Topic Author
adelvest
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Joined: Sun May 03, 2020 1:17 pm

Re: How to automate deductions from paycheck for investments while maintaining balanced portfolio?

Post by adelvest »

You've made a lot of progress quickly.
Thank you! Your advice to revisit the basics was good, after some reading and revisiting my old thread I realized how non-sensical a lot of my questions/assumptions were :oops:
You mention not having a 401k, but that does not rule out having some other kind of plan at work or being covered by a pension plan. If you have no plan at work and no pension plan
Ah yes fair. We do not, so sounds like tIRA is the way to go for now.
This depends entirely on the situation. If you want help with this, you need to be more specific about what accounts you are putting money into and how much is going into each account.
So here is my current thinking: my current asset allocation is 50% US, 33% Intl, 17% bonds per the wiki's advice for a starting point. I'm taking it for each say, month's worth of paycheck (I get paid twice monthly) I'd take 50% and put it into US, 33% and put it into Intl, and 17% into bonds. However due to the tax inefficiency of bonds I'd want to have my bonds allocation either in the Rollover IRA, the aforementioned tIRA, my previous employer's 401K (though I'm probably going to roll this over into the Rollover IRA soon), or my HSA. Then does that mean each month instead of directly investing the above percentages in their respective assets, I would figure out what 17% of my paycheck is, move the appropriate amount of money in one of my above tax-deferred accounts from say, my domestic funds to bond funds, and then compensate for the move accordingly in a taxable account I contribute to?

For example if each month I got paid $X I would do the following each month:

1. Transfer 0.17 * X of SWTSX to SWAGX from my Rollover IRA (this would have to be manually done right?)
2. Buy 0.33 * X of SWISX in my taxable.
3. Buy 0.67 * X (0.50X + 0.17X) of SWTSX in taxable.
retiredjg
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Re: How to automate deductions from paycheck for investments while maintaining balanced portfolio?

Post by retiredjg »

In an ideal situation, you would add money each paycheck at the 50/33/17% ratios that you want. But you do not need to be nearly that precise. In fact, investing is not precise at all and trying to make it that way will drive you nuts...

You can put the bonds in the traditional IRA that you will be starting.

This is not as hard to do as it seems unless I just don't understand your situation.

First, tell me how many dollars you have sitting around uninvested. We'll get that "invested" before moving on.

Then tell me how you intend to invest the new money. Do you plan to invest the entire $6k IRA at one time? Or some per paycheck? How many dollars do you intend to invest in taxable each year? And how many dollars do you intend to invest in any other account each year?
Doctor Rhythm
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Re: How to automate deductions from paycheck for investments while maintaining balanced portfolio?

Post by Doctor Rhythm »

adelvest wrote: Sat May 16, 2020 3:14 pm
No 401K plan offered at current employer.

---

2. When folks deduct from their paycheck for investing, do you mirror your asset allocation plan (e.g. X% to domestic, Y% to intl, Z% to bonds) or just dump it all into say, domestic and then re-balance later?
If the automatic deductions from your paychecks must be invested in a taxable account, rebalancing within that account would incur capital gain taxes (assuming you're fortunate enough to have a gain). However, you do have a fair amount of "old" tax-advantaged space in the form of your previous employers' plans. So one option is rebalance your total portfolio by changing the allocations in the rollover IRA and old 401k while avoiding taxable transactions in your taxable account. There may be tax-saving reasons to fill the taxable account with equities, and keep your fixed income in the rollover IRA and old 401k. See https://www.bogleheads.org/wiki/Tax-eff ... _placement. Same situation applies if you open a new traditional IRA.
Last edited by Doctor Rhythm on Sun May 17, 2020 2:48 pm, edited 1 time in total.
Topic Author
adelvest
Posts: 13
Joined: Sun May 03, 2020 1:17 pm

Re: How to automate deductions from paycheck for investments while maintaining balanced portfolio?

Post by adelvest »

First, tell me how many dollars you have sitting around uninvested. We'll get that "invested" before moving on.
I have enough uninvested to comfortably fill the $6k IRA "right now" which was my intention.
Then tell me how you intend to invest the new money. Do you plan to invest the entire $6k IRA at one time? Or some per paycheck? How many dollars do you intend to invest in taxable each year? And how many dollars do you intend to invest in any other account each year?
For future paychecks, I don't think I can invest in any tax-advantaged accounts if I fill the IRA with $6k in one go - I believe any contribution to the Rollover IRA is part of the $6k annual limit, I can't invest in my past employer's 401K because I don't work there anymore, I can't contribute to my HSA as I am not in an HSA plan at the moment (that was from my past employer), and my current employer does not offer anything at the moment. So assuming I fill the $6k in the IRA in one go, any future money has to go in taxable right? If so, I guess my question is should I bother with the small dance I described above or just do the straightforward allocations all in taxable, including bonds, which is very simple and can be fully automated.
To clarify, are the automatic deductions from your paychecks being invested in a taxable account, without the option to put it in a tax-advantaged account?
That is the plan as I have no options to contribute to a tax-advantaged account atm (see above), save for an IRA which I can hit the limit on easily right now.
However, you do seem to have a fair amount of "old" tax-advantaged space in the form of your previous employers' plans. So one option is rebalance your total portfolio by changing the allocations in the rollover IRA and old 401k while avoiding taxable transactions in your taxable account.
Yeah this is what I was thinking and what I believe my post before this is describing. Downside is it is not automated and will require me being a bit more hands-on to do the re-balancing inside the tax-deferred accounts.
Doctor Rhythm
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Re: How to automate deductions from paycheck for investments while maintaining balanced portfolio?

Post by Doctor Rhythm »

adelvest wrote: Sun May 17, 2020 2:47 pm
However, you do seem to have a fair amount of "old" tax-advantaged space in the form of your previous employers' plans. So one option is rebalance your total portfolio by changing the allocations in the rollover IRA and old 401k while avoiding taxable transactions in your taxable account.
Yeah this is what I was thinking and what I believe my post before this is describing. Downside is it is not automated and will require me being a bit more hands-on to do the re-balancing inside the tax-deferred accounts.
Apologies, I tweaked my prior reply after you responded to it, but I think you got my point. Another option, if available to you is to invest your paycheck in a target date fund or some other self-balancing fund. This automates the process and lets you be almost entirely hands-off. You could do the same within the tax-deferred accounts as well. You lose the tax-optimization advantages of the do-it-yourself approach, though.
retiredjg
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Re: How to automate deductions from paycheck for investments while maintaining balanced portfolio?

Post by retiredjg »

adelvest, I think this is really easier than you think, but you are not giving me the information I need to tell you how to do this. So I'll just try to give instructions in the blind.

Is the 6% cash in taxable the money you have ready to put into your IRA?
Topic Author
adelvest
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Joined: Sun May 03, 2020 1:17 pm

Re: How to automate deductions from paycheck for investments while maintaining balanced portfolio?

Post by adelvest »

Is the 6% cash in taxable the money you have ready to put into your IRA?
Yep, it is enough to fill the $6k contribution limit with some cash leftover.
retiredjg
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Re: How to automate deductions from paycheck for investments while maintaining balanced portfolio?

Post by retiredjg »

adelvest, sorry about the delay.

This is what you have currently....48% US, 27% International, 27% bonds (includes the cash)

Taxable:
- Cash 6%
- SWTSX (Schwab Total Stock Market Index) 18%
- SWISX (Schwab International Index) 27%
- FSKAX (Fidelity Total Market Index) 8.7%

Traditional IRA 0%

Rollover IRA (rolled over from previous employer 401K):
- SWTSX 3.4%
- SWAGX (Schwab US Aggregate Bond Index) 19%

Another previous employer 401K (still in previous employer's 401K program):
- S&P 500 (couldn't find stock ticker) 16.9%

HSA:
- Vanguard 500 1%

The easiest way to get your portfolio on track is to put $6k of the cash into a new traditional IRA and invest that into international stocks. That will get your portfolio close to your target of 50% US, 33% Intl, 17% bonds. Not exactly on target but close enough.

After that, all your contributions for the rest of the year would be going to taxable and simply be split into that same ratio, using a California tax exempt bond fund for the bond portion in taxable.

There are some problems.

1. I don't know what Schwab offers in terms of CA tax exempt bonds.

2. Using the exact same fund in taxable and in IRA sets your portfolio up for wash sales if you choose to tax loss harvest. You currently have Schwab's Total Stock in both taxable and IRA and doing what I suggested would put Schwab's total International in both taxable and IRA.

Part of this issue is fixable by not using total stock in the IRAs.....use 500 index instead. However, I'm not sure what to do with the international...again, I'm not familiar enough with what Schwab offers but will do a little research on it.
retiredjg
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Re: How to automate deductions from paycheck for investments while maintaining balanced portfolio?

Post by retiredjg »

It appears to me that Schwab is pretty limited in what they offer in low cost mutual funds. You are already using the good stuff and there don't seem to be other mutual funds in similar asset classes. And I did not find a low cost CA tax-exempt bond fund.

They have a nice list of ETFs though. However, I'm not sure you are interested in using ETFs.

Are you also invested at Fidelity? Moving the rest of your taxable account to Fidelity would solve the problem I think.

Another option would be to use target funds in the Rollover IRA and the new traditional IRA.
HomeStretch
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Re: How to automate deductions from paycheck for investments while maintaining balanced portfolio?

Post by HomeStretch »

Does your prior employer 401k plan allow rollovers in by former employees? It’s less common but it’s worth it to check.
cherijoh
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Re: How to automate deductions from paycheck for investments while maintaining balanced portfolio?

Post by cherijoh »

adelvest wrote: Sat May 16, 2020 3:14 pm I had a similar post about this last week (viewtopic.php?f=1&t=314436) about this last week but had a lot of misunderstandings back then. I've since re-read some basics, fixed and confirmed my previous understandings, and taken a summary of my current portfolio.

I am trying to figure out the "cleanest" way to setup automatic deductions from my paycheck for investments while still maintaining my asset allocation percentages and wanted to double check some understandings I have. Below is some info on my situation:

Tax filing status: Single
Tax rate: 32% federal, 9.3% state (California)
Age: Late 20s
Asset allocation (taken from the wiki and The Bogleheads Guide to Investing):
- 50% US, 33% Intl, 17% bonds
- Size: low-mid six figures

Current portfolio percentages:
Taxable:
- Cash 6%
- SWTSX (Schwab Total Stock Market Index) 18%
- SWISX (Schwab International Index) 27%
- FSKAX (Fidelity Total Market Index) 8.7% <--- Why are you invested in two different TSM indexes????

Rollover IRA (rolled over from previous employer 401K):
- SWTSX 3.4%
- SWAGX (Schwab US Aggregate Bond Index) 19%

Another previous employer 401K (still in previous employer's 401K program):
- S&P 500 (couldn't find stock ticker) 16.9%

HSA:
- Vanguard 500 1%

No 401K plan offered at current employer.
I think you are over-thinking this. It looks like you want a 1.5:1 ratio of domestic to international in stocks. So invest 60% of your taxable money each paycheck (or once/month) in TSM and 40% in Int'l stock market index.

Put the entire $6K in bonds in your newly opened tIRA. If you think that is too much in bonds, then move some of the bonds in your Rollover IRA into total stock market.

If the domestic/int'l stock ratio in taxable gets out of whack, modify the ratio for future contributions. But I would check no more than semi-annually or annually.
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Watty
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Re: How to automate deductions from paycheck for investments while maintaining balanced portfolio?

Post by Watty »

On the question about being able to contribute to a deductible IRA or not one thing to keep in mind is that you might change jobs during the year to an employer that does have a pension plan. Likewise you might get an unexpected bonus that could put you over the income limit.

You can make the IRA contribution at any time up until you file your taxes on on April 15 so you might want to wait to make the IRA contribution until you are doing your taxes after the year ends.
adelvest wrote: Sat May 16, 2020 3:14 pm 2. When folks deduct from their paycheck for investing, do you mirror your asset allocation plan (e.g. X% to domestic, Y% to intl, Z% to bonds) or just dump it all into say, domestic and then re-balance later?
You will virtually never be at your target asset allocation because different asset classes will go up or down, at different rates will cause your asset allocation always be off some.

One way to handle this is that maybe once a quarter you can look at your asset allocation then direct 100% of any new contributions to whichever asset class is under weighted.

You can also set your dividends to not be automatically be reinvested then when you get them you can put them in the under weighted asset class.

If you do this then you will not need to sell investments to rebalance as often so it will be more tax efficient.
retiredjg
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Re: How to automate deductions from paycheck for investments while maintaining balanced portfolio?

Post by retiredjg »

cherijoh wrote: Sat May 23, 2020 8:39 am Put the entire $6K in bonds in your newly opened tIRA. If you think that is too much in bonds, then move some of the bonds in your Rollover IRA into total stock market.
I thought about this approach and actually like it a little better, but it does leave the international allocation low.

That could be made up in taxable contributions but it would not be automatic. It would have to be watched and then changed at the appropriate time.

One of the problems here is we have no idea if the taxable contributions are going to be $1,000 or $50,000.... :(
retiredjg
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Re: How to automate deductions from paycheck for investments while maintaining balanced portfolio?

Post by retiredjg »

Watty wrote: Sat May 23, 2020 8:59 am On the question about being able to contribute to a deductible IRA or not one thing to keep in mind is that you might change jobs during the year to an employer that does have a pension plan. Likewise you might get an unexpected bonus that could put you over the income limit.
Agree on the getting a different job, but a bonus at the same job would not matter since there is no income limit for deducting a tIRA contribution if there is no plan at work.
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Watty
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Re: How to automate deductions from paycheck for investments while maintaining balanced portfolio?

Post by Watty »

retiredjg wrote: Sat May 23, 2020 9:13 am
Watty wrote: Sat May 23, 2020 8:59 am On the question about being able to contribute to a deductible IRA or not one thing to keep in mind is that you might change jobs during the year to an employer that does have a pension plan. Likewise you might get an unexpected bonus that could put you over the income limit.
Agree on the getting a different job, but a bonus at the same job would not matter since there is no income limit for deducting a tIRA contribution if there is no plan at work.
There is if your spouse has a pension plan at work.

The OP is single but could get married during the year.
retiredjg
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Re: How to automate deductions from paycheck for investments while maintaining balanced portfolio?

Post by retiredjg »

Watty wrote: Sat May 23, 2020 9:21 am The OP is single but could get married during the year.
And that could change a lot of things. :D
Topic Author
adelvest
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Re: How to automate deductions from paycheck for investments while maintaining balanced portfolio?

Post by adelvest »

Lots of responses this morning :-) Thanks everybody for the advice!
2. Using the exact same fund in taxable and in IRA sets your portfolio up for wash sales if you choose to tax loss harvest. You currently have Schwab's Total Stock in both taxable and IRA and doing what I suggested would put Schwab's total International in both taxable and IRA.
Ahh I see what you are saying. To that point it sounds like I could take @cherijoh's approach with the tradeoff of a little bit more manual effort and it not being as ideally balanced as I'd like, but I think that's fine. As for solving the TSM problem, I can move my TSM in the IRA to S&P500.
- FSKAX (Fidelity Total Market Index) 8.7% <--- Why are you invested in two different TSM indexes????
This was back at my previous employer when RSUs were granted via Fidelity, so I figured I would just invest any money I got from that in Fidelity as opposed to transferring it to Schwab each time it vested.
I think you are over-thinking this. It looks like you want a 1.5:1 ratio of domestic to international in stocks. So invest 60% of your taxable money each paycheck (or once/month) in TSM and 40% in Int'l stock market index.

Put the entire $6K in bonds in your newly opened tIRA. If you think that is too much in bonds, then move some of the bonds in your Rollover IRA into total stock market.
This sounds good to me, though perhaps with S&P500 in the Rollover instead of TSM for the reasons @retiredjg pointed out - thank you!
The OP is single but could get married during the year.
Hah extremely doubtful, single by relationship too :P
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