Retirement Portfolio Overhaul - Guidance on Proposed Revised Allocations

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kmanjir
Posts: 15
Joined: Fri Mar 27, 2020 8:45 pm

Retirement Portfolio Overhaul - Guidance on Proposed Revised Allocations

Post by kmanjir » Thu May 21, 2020 5:36 pm

I have been following the advice from the resident experts here and reading up on some of the basic Bogleheads principles, including keeping things simple, considering 3-fund/lazy portfolios to simplify and lower overall risk, and tax-efficient placements of funds depending on the nature of the account the funds are placed in.

After reviewing a lot of the guidance and information provided to other folks in similar and dissimilar situations, I have swiftly realized that my portfolio is not only all over the place, but has also missed out on many years of potentially better growth because of the lack of focus and thought put into the overall asset allocation.

As I have gone from job to job and moved through various phases of life, I have accumulated different collections of funds and stocks at different places and have never really thought of it collectively as the retirement portfolio. Due to the organic accumulation, the overall picture is a mess and I am working actively to clean this up, simplify and move towards a three/four fund portfolio.

You might be able to tell from the current retirements asset picture below, as to which allocations were done before/after I became aware of the Bogleheads forum and the guidance provided here. :)

Thanks a lot in advance for your review and insight.


Emergency funds: Yes, eight months of expenses

Debt: Yes, remaining mortgage of $280K at 4% (I have been putting in ~$1K extra as additional principal each month to pay it off faster).

Tax Filing Status: MFJ (with one child)

Tax Rate: 24% Federal

State of Residence: WA

Age: 38

Desired Asset allocation: 55% domestic stocks / 25% international stocks / 20% bonds
Current size of portfolio is low six-figures

Proposed Desired Asset Allocation (using existing funds in retirement portfolio)
  • Traditional IRA - 7% of overall portfolio - VTSAX - Vanguard Total Stock Market Index (.08)
  • Roth IRA - 4% - VTSAX - Vanguard Total Stock Market Index (.08)
  • HSA - 10% - FFOPX - Fidelity Freedom Index 2050 Inst Prem (.08)
  • 401k (Employer 1) - 16% - FFOPX - Fidelity Freedom Index 2050 Inst Prem (.08)
  • 401k (Employer 2) - 49% - VTSAX (40%) | VTIAX (35%) | VBTLX (25%)
  • Taxable Brokerage - 11% - VTSAX - Vanguard Total Stock Market Index (.08)
  • Taxable Brokerage - 3% - Collection of Individual Stocks (since this is only 3%, I'll just let it be for now)
New contributions - Adjust domestic/international/bonds ratios appropriately to stick as close to the desired 55/25/20 allocation

Current retirement assets

Taxable
  • 11% Vanguard Total Stock Market Index (VTSAX) (0.08)
  • Individual stocks - not listing these out individually since they comprise only 3% of the overall portfolio
401k (Employer 1)
  • 7% Vanguard Institutional 500 Index Trust (VFFSX) (.01)
  • 6% Vanguard Mid Cap Index Fund (VMCPX) (.03)
  • 3% Vanguard Inst Total International Stk Mkt Index Trust (.08)
  • 0.1% PIMCO Total Return Fund (PTTRX) (.71)
401k (Employer 2 - Current Employer)
  • 12% FIAM Index Target Date 2045 Commingled Pool (.07)
  • 10% DFA US Small Cap I (DFSTX) (.35)
  • 9% AllianzGI Technology Institutional (DRGTX) (1.21)
  • 7% FIAM Index Target Date 2050 Commingled Pool (.07)
  • 2% FIAM Index Target Date 2065 Commingled Pool (.07)
  • 2% FIAM Index Target Date 2060 Commingled Pool (.07)
  • 2% FIAM Index Target Date 2055 Commingled Pool (.07)
  • 2% FIAM Index Target Date 2030 Commingled Pool (.07)
  • 2% Fidelity Total Bond Fund (FTFBX) (.45)
  • 2% Vanguard Total Intl Stock Index I (VTSNX) (0.08)
  • 0.9% FIAM Index Target Date 2015 Commingled Pool (.07)
Roth IRA
  • 4% Vanguard Total Stock Market Index (VTSAX) (0.08)
Traditional IRA
  • 6% American Century Strategic Allocation Aggressive Class A (ACVAX) (1.13)
  • 1% American Funds Fundamental Invs F1 (AFIFX) (.65)
  • 1% American Funds Capital Income Builder F1 (CIBFX) (.65)
HSA Account
  • 10% Fidelity Freedom Index 2050 Inst Prem (FFOPX) (.08)

Contributions

New annual Contributions
  • $19.5K to 401k (employer matches up to 3%), at the very least, will look to put in more into the 401k Roth if possible
  • Up to $6K to Roth IRA (will depend on AGI for the year) / or $12K (depending on answer to question below)
  • $40K taxable (to be dedicated towards retirement accounts, not short term goals)
Questions:

1. I am requesting some guidance and insight on whether the cleaned-up proposed reallocation makes sound sense from your perspective and/or changes/tweaks I should consider. I am looking to get this revised reallocation in place step-by-step by account over the next several months.
2. If I am MFJ, and my income for the year does not allow me to fund a Roth IRA this year, does the same restriction apply to my non-working spouse as well? In other words, which of the below scenarios hold true?
(a) Neither of us can contribute anything to the Roth IRA this year, or
(b) I can fund $0 out of a possible $6000 for my Roth IRA, but spouse can put $6000 in for the spousal Roth IRA?

lakpr
Posts: 5071
Joined: Fri Mar 18, 2011 9:59 am

Re: Retirement Portfolio Overhaul - Guidance on Proposed Revised Allocations

Post by lakpr » Thu May 21, 2020 6:29 pm

To answer your last question: if you are truly in the 24% tax bracket (with adjusted gross income > $206k), NEITHER of you is eligible to contribute to a Roth IRA directly.

Who is the owner of the Traditional IRA? If it is you, can you roll that Traditional IRA into your workplace 401k plan? Most importantly, can you do that before July 10th at least?

The reason I ask is that you can use Backdoor Roth process. In this process, you will contribute $6000 to a Non-deductible Traditional IRA first (there is no income limit to do so), then after the transaction settles (usually takes 2 business days), you can turn around and convert that to a Roth IRA. But the BIGGEST catch here is that ... you should have $0 in all pre-tax Traditional IRAs (money on which you took a tax deduction in the years prior).

All the gory details in the Wiki entry: Backdoor Roth

To get your pre-tax Traditional IRA amount to be $0, you need to roll it over into the 401k plan. Most 401k plans do accept such incoming rollovers, but some may not. Find out which type is your own employer plan. Call your plan administrator tomorrow during business hours.

That spouse who does NOT have the Traditional IRA, can immediately put that above process in motion.

If it is your NON-WORKING SPOUSE that is the owner of the Traditional IRA, unfortunately you are stuck. You may have to convert the entire amount to Roth IRA prior to contributing the additional $6000 to n-d-tIRA / convert to R-IRA. Depending on the amount in the Traditional IRA, it may not be palatable tax wise. It may be better to contribute to a taxable account instead. If it is something < $25k, I'd say go ahead and convert it, it's a small price to pay now to have 20 years more of Roth IRA space available. If you have something like $100k in it already, then clearly taxable account is better. If it's something in between, well, it could be a toss-up between backdoor Roth process vs. taxable investing.

===============================================

You also said "$19.5K to 401k (employer matches up to 3%), at the very least, will look to put in more into the 401k Roth if possible". Note that the limit of $19.5k is for COMBINED amounts to both pre-tax 401k and Roth 401k. In a 24% tax bracket (and higher brackets), the tax-deduction is worth more than the ability to contribute to Roth 401k. Hence you must maximize the full $19.5k only as a pre-tax 401k. $0 to Roth 401k.

Your plan may offer the ability to contribute to After-tax 401k that you can later convert to Roth 401k within the plan. Either get a Summary Plan Description (SPD) document and scan it for the words "after tax" or "after-tax", or check with your plan administrator if that's a feature of your plan. If that feature is available, you may be able to defer more money into first to after-tax 401k, then convert within the plan to Roth 401k. Since you are contributing the money "after-tax", there is no tax due when you convert to Roth 401k. You are liable for taxes only if there are gains between your contribution and conversion.

==================================================
Now for the feedback on your proposed allocation. It makes sense only if you are intending to stick to your proposed 55:25:20 allocation ratio. But by holding the VTSAX in your taxable and Roth IRA and 401k, you are preventing yourself from being able to do tax-loss harvesting in your taxable account. Ideally, those mutual funds you intend to hold in your taxable account (both your current holding, and pre-identified tax-loss harvesting partners), will NOT be held in either 401k or Roth IRA. Especially the Roth IRA, the 401k angle is very much fuzzy (for the record, I am in the camp that 401k accounts do not count, but there are folks on this forum who strongly believe otherwise. IRS has not released much guidance).

Can you buy Fidelity Total Stock Market Index through the Vanguard Brokerage platform? If you can, I suggest you do that with your Roth IRA. You might also want to stick with a FIAM Index Target Date fund in your 401k plan (current employer) that closely matches a 75:25 stocks-to-bonds allocation, or even a 80:20 stocks-to-bonds allocation.

This will leave your taxable brokerage account strictly with VTSAX, you will not have the same mutual fund in either your Roth IRA or 401k, so if the mutual fund drops in value in the future you can conceivably exchange it to other tax-loss-harvesting partner funds without being out of the market.

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Duckie
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Re: Retirement Portfolio Overhaul - Guidance on Proposed Revised Allocations

Post by Duckie » Thu May 21, 2020 6:37 pm

kmanjir wrote:Proposed Desired Asset Allocation (using existing funds in retirement portfolio)
  • Traditional IRA - 7% of overall portfolio - VTSAX - Vanguard Total Stock Market Index (.08)
  • Roth IRA - 4% - VTSAX - Vanguard Total Stock Market Index (.08)
  • HSA - 10% - FFOPX - Fidelity Freedom Index 2050 Inst Prem (.08)
  • 401k (Employer 1) - 16% - FFOPX - Fidelity Freedom Index 2050 Inst Prem (.08)
  • 401k (Employer 2) - 49% - VTSAX (40%) | VTIAX (35%) | VBTLX (25%)
  • Taxable Brokerage - 11% - VTSAX - Vanguard Total Stock Market Index (.08)
  • Taxable Brokerage - 3% - Collection of Individual Stocks (since this is only 3%, I'll just let it be for now)
Because of the wash sale rule it's usually better to NOT hold the same funds in tax-sheltered as in taxable.
401k (Employer 1)
  • 7% Vanguard Institutional 500 Index Trust (VFFSX) (.01)
  • 6% Vanguard Mid Cap Index Fund (VMCPX) (.03)
  • 3% Vanguard Inst Total International Stk Mkt Index Trust (.08)
  • 0.1% PIMCO Total Return Fund (PTTRX) (.71)
Of the options listed, holding 500 Index and/or Total International in this account would be better than your proposed Freedom Index. What are the other options?
401k (Employer 2 - Current Employer)
  • 12% FIAM Index Target Date 2045 Commingled Pool (.07)
  • 10% DFA US Small Cap I (DFSTX) (.35)
  • 9% AllianzGI Technology Institutional (DRGTX) (1.21)
  • 7% FIAM Index Target Date 2050 Commingled Pool (.07)
  • 2% FIAM Index Target Date 2065 Commingled Pool (.07)
  • 2% FIAM Index Target Date 2060 Commingled Pool (.07)
  • 2% FIAM Index Target Date 2055 Commingled Pool (.07)
  • 2% FIAM Index Target Date 2030 Commingled Pool (.07)
  • 2% Fidelity Total Bond Fund (FTFBX) (.45)
  • 2% Vanguard Total Intl Stock Index I (VTSNX) (0.08)
  • 0.9% FIAM Index Target Date 2015 Commingled Pool (.07)
Why in the world are you holding seven target-date funds in this account??? I realize you're going to change this but why did you do it in the first place?

Will this current 401k take incoming rollovers? Can the TIRA be rolled into here? Can the Employer1 401k (if former) be rolled here?
Traditional IRA
  • 6% American Century Strategic Allocation Aggressive Class A (ACVAX) (1.13)
  • 1% American Funds Fundamental Invs F1 (AFIFX) (.65)
  • 1% American Funds Capital Income Builder F1 (CIBFX) (.65)
Are you planning to roll this TIRA to Vanguard?
HSA Account
  • 10% Fidelity Freedom Index 2050 Inst Prem (FFOPX) (.08)
What are the other HSA options?
1. I am requesting some guidance and insight on whether the cleaned-up proposed reallocation makes sound sense from your perspective and/or changes/tweaks I should consider. I am looking to get this revised reallocation in place step-by-step by account over the next several months.
Your plan is reasonable. I have some nitpicks, but nothing major.
2. If I am MFJ, and my income for the year does not allow me to fund a Roth IRA this year, does the same restriction apply to my non-working spouse as well? In other words, which of the below scenarios hold true?
(a) Neither of us can contribute anything to the Roth IRA this year, or
(b) I can fund $0 out of a possible $6000 for my Roth IRA, but spouse can put $6000 in for the spousal Roth IRA?
If MFJ neither can contribute to a Roth IRA directly. But the person without the TIRA can contribute using the Backdoor Roth method. And the person with the TIRA can contribute using the backdoor method if the TIRA can be rolled into the current 401k.
Last edited by Duckie on Thu May 21, 2020 8:13 pm, edited 1 time in total.

sycamore
Posts: 459
Joined: Tue May 08, 2018 12:06 pm

Re: Retirement Portfolio Overhaul - Guidance on Proposed Revised Allocations

Post by sycamore » Thu May 21, 2020 7:08 pm

kmanjir wrote:
Thu May 21, 2020 5:36 pm
...
Questions:
1. I am requesting some guidance and insight on whether the cleaned-up proposed reallocation makes sound sense from your perspective and/or changes/tweaks I should consider. I am looking to get this revised reallocation in place step-by-step by account over the next several months.
2. If I am MFJ, and my income for the year does not allow me to fund a Roth IRA this year, does the same restriction apply to my non-working spouse as well? In other words, which of the below scenarios hold true?
(a) Neither of us can contribute anything to the Roth IRA this year, or
(b) I can fund $0 out of a possible $6000 for my Roth IRA, but spouse can put $6000 in for the spousal Roth IRA?
Overall, I think your proposal looks good. Way to go on getting it cleaned up. And I concur with Duckie's and lakpr's posts about the Roth question and the issue of VTSAX in the IRAs because you've got it taxable (want to avoid wash sale issues).

What about taking some of the $40k intended for taxable and putting it in a 529 program for your child?

lakpr
Posts: 5071
Joined: Fri Mar 18, 2011 9:59 am

Re: Retirement Portfolio Overhaul - Guidance on Proposed Revised Allocations

Post by lakpr » Thu May 21, 2020 7:15 pm

That mortgage interest rate at 4% is also quite high. I bet you are using Standard Deduction on your tax returns (the interest even at 4% on $280k balance is not enough to overcome a $14,400 deficit between standard deduction amount and $10k cap on SALT).

In other words, carrying the mortgage at 4% is an effective 4% after-tax interest rate. Conversely, rather than taking risks in the stock market with your $40k per year additional investment, put that money towards mortgage instead. A 4% after-tax interest rate, at your tax bracket of 24% (no state tax in WA), is really equivalent to a 4%/(1 - 0.24) = 5.26% return. You are approaching stock-market like returns, with a LOT LESS risk and guaranteed payout.

HomeStretch
Posts: 4397
Joined: Thu Dec 27, 2018 3:06 pm

Re: Retirement Portfolio Overhaul - Guidance on Proposed Revised Allocations

Post by HomeStretch » Thu May 21, 2020 8:18 pm

Good suggestions, above.

Consider refinancing your mortgage. Mortgage rates are even better for a 15-year mortgage vs.a 30-year mortgage.

Agree that the individual stocks at 3% of your portfolio don’t need to be addressed immediately. In the meantime, turn off automatic dividend reinvestment (to avoid buying more) and sell any tax lots with a loss or little gain. Use any dividends/sale proceeds to buy more VTSAX. Also consider transferring the stocks in-kind to your Vanguard(?) Taxable account to simplify a bit.

Topic Author
kmanjir
Posts: 15
Joined: Fri Mar 27, 2020 8:45 pm

Re: Retirement Portfolio Overhaul - Guidance on Proposed Revised Allocations

Post by kmanjir » Fri May 22, 2020 10:10 pm

Who is the owner of the Traditional IRA? If it is you, can you roll that Traditional IRA into your workplace 401k plan? Most importantly, can you do that before July 10th at least?

The reason I ask is that you can use Backdoor Roth process. In this process, you will contribute $6000 to a Non-deductible Traditional IRA first (there is no income limit to do so), then after the transaction settles (usually takes 2 business days), you can turn around and convert that to a Roth IRA. But the BIGGEST catch here is that ... you should have $0 in all pre-tax Traditional IRAs (money on which you took a tax deduction in the years prior).
Lakpr, Thank you for the quick review and guidance. I am now starting to read up on backdoor Roths. I have definitely been hearing about it and seeing it referenced in multiple places, but am not conversant on the details. Let me go through the Wiki and I'll come back with more clarification questions.
  • However, right off the bat I recall (will have to go back and find the exact details) that not all of the contributions I made to the TIRAs were tax-deducted in the year of contribution.
  • How messy would that make the proposed rollover to the 401k plan (still pending a confirmation from them that they do accept these rollovers)?
  • And, yes, I am the owner of the traditional IRA, so I will need to go through this additional step.
  • Also, what is the importance of needing to do it by July 10th? Is it to be in time for 2019 tax return extended filing deadline? I have already submitted this year's tax return, so don't wish to make changes for 2019 tax year and submit an amended return.
  • I have reached out to the 401k plan administrator about whether they accept incoming pre-tax Trad IRA rollovers into the 401k account.
    If they don't, is a Trad IRA conversion-to-Roth IRA conversion the next best thing to consider?
You also said "$19.5K to 401k (employer matches up to 3%), at the very least, will look to put in more into the 401k Roth if possible". Note that the limit of $19.5k is for COMBINED amounts to both pre-tax 401k and Roth 401k. In a 24% tax bracket (and higher brackets), the tax-deduction is worth more than the ability to contribute to Roth 401k. Hence you must maximize the full $19.5k only as a pre-tax 401k. $0 to Roth 401k.

Your plan may offer the ability to contribute to After-tax 401k that you can later convert to Roth 401k within the plan. Either get a Summary Plan Description (SPD) document and scan it for the words "after tax" or "after-tax", or check with your plan administrator if that's a feature of your plan. If that feature is available, you may be able to defer more money into first to after-tax 401k, then convert within the plan to Roth 401k. Since you are contributing the money "after-tax", there is no tax due when you convert to Roth 401k. You are liable for taxes only if there are gains between your contribution and conversion.
About the 401k, my mistake - I did mean the after-tax 401k and not the 401 Roth, sorry about the confusion.
So, for this one, at my tax bracket, does it make sense to take the after-tax 401k (I usually don't look to do this until after the $19.5K is filled up for the year) funds and transfer them to Roth 401k?
Because of the wash sale rule it's usually better to NOT hold the same funds in tax-sheltered as in taxable.
Lakpr, Duckie - Thanks for the call-out on wash sale rule. I have heard about it, but wasn't aware that this is impacting the way I have proposed the allocation. Let me revisit and revise the proposed allocations with this in mind

For 401k (Employer 1):
Of the options listed, holding 500 Index and/or Total International in this account would be better than your proposed Freedom Index. What are the other options?
For 401k (Employer 1), the other options are listed at the below of my response. Also, I made a mistake and mixed up the availability of FFOPX in this plan. It is not offered.
Why in the world are you holding seven target-date funds in this account??? I realize you're going to change this but why did you do it in the first place?
401k (Employer 2): Duckie, yes, embarrassing as it is, the reason I have so many target date funds is due to a complete misunderstanding I had up until recently, about how the target date funds work. I had not realized that the target date funds change their asset allocation over time as the 'target date' approaches. Instead, I used to think they were more or less static, so to create the appropriate glide/blend of assets, you need to choose multiple target dates!
Will this current 401k take incoming rollovers? Can the TIRA be rolled into here? Can the Employer1 401k (if former) be rolled here?
Are you planning to roll this TIRA to Vanguard?
Researching with the current employer 401k administrator (Fidelity, not Vanguard is the provider) whether they will take in TIRA rollovers as part of the employer-provided plan.
What are the other HSA options?
For the HSA (also with Fidelity), the other available fund options are listed below.
What about taking some of the $40k intended for taxable and putting it in a 529 program for your child?
Sycamore - Good point on the $40K towards 529. However, I have already earmarked some other funds (that are currently in a CD, to mature later this year) to go directly to a 529 and kick-start that fund, baby just born this year.


HSA Available funds

FIXED INCOME
SPAXX - 0.42 - Fidelity Government Money Market
FTBFX - 0.45 - Fidelity Total Bond
FXNAX - 0.025- Fidelity US Bond Index Fund
SSHIX - 0.49 - Wells Fargo Short Term Bond FD-Instit

US EQUITY
LMNSX - 1.00 - Clearbridge Small Cap Fund Class I
FXAIX - 0.015- Fidelity 500 Index Fund
FCNKX - 0.77 - Fidelity Contrafund: Class K
FLPKX - 0.43 - Fidelity Low-Priced Stock Fund: Class K
FSMDX - 0.025- Fidelity Mid Cap Index Fund
FSSNX - 0.025- Fidelity Small Cap Index Fund
HLGEX - 1.01 - JPMorgan Divers Mid Cap Growth Class I
HLIEX - 0.75 - JPMorgan Equity Income Class I
TBCIX - 0.56 - T Rowe Price BlueChip Growth Class I
WFMIX - 0.82 - Wells Fargo Special Mid Cap Class I

INTERNATIONAL EQUITY
FKEMX - 0.80 - Fidelity Emerging Markets Fund: Class K
FPADX - 0.076- Fidelity Emerging Markets Index Fund
FSPSX - 0.035- Fidelity International Index Fund
TROIX - 0.66 - T Rowe PRice Overseas Stock I Class

SPECIALTY/INFLATION PROTECTION
FIPDX - 0.05 - Fidelity Inflat-Prot BD Index Fund
PIRMX - 1.33 - PIMCO Infl Rspns Multi-Asset Instl

TARGET DATE
FFGFX - 0.08 - Fidelity Freedom Indx 2005 Instl Prem
FFWTX - 0.08 - Fidelity Freedom Indx 2010 Instl Prem
FIWFX - 0.08 - Fidelity Freedom Indx 2015 Instl Prem
FIWTX - 0.08 - Fidelity Freedom Indx 2020 Instl Prem
FFEDX - 0.08 - Fidelity Freedom Indx 2025 Instl Prem
FFEGX - 0.08 - Fidelity Freedom Indx 2030 Instl Prem
FFEZX - 0.08 - Fidelity Freedom Indx 2035 Instl Prem
FFIZX - 0.08 - Fidelity Freedom Indx 2040 Instl Prem
FFOLX - 0.08 - Fidelity Freedom Indx 2045 Instl Prem
FFOPX - 0.08 - Fidelity Freedom Indx 2050 Instl Prem
FFLDX - 0.08 - Fidelity Freedom Indx 2055 Instl Prem
FFLEX - 0.08 - Fidelity Freedom Indx 2060 Instl Prem
FFIKX - 0.08 - Fidelity Freedom Indx 2065 Instl Prem


401k - Employer 1 - Fund Options

Vanguard Trgt Ret Inc Select - 0.05
Vanguard Trgt Ret 20xx Select (2015 - 2065) - 0.05
Vanguard Treasury Money Market (VUSXX) - 0.09
Vanguard Federal Money Market Fund (VMFXX) - 0.11
PIMCO Stable Value Fund (no ticker available) - 0.34
PIMCO Total Return Fund (PTTRX) - 0.71
Vanguard Institutional Total Bond Market Index Trust - 0.03
Vanguard Inflation Protected Securities (VIPIX) - 0.07
Vanguard Institutional 500 Index Trust - 0.01
Vanguard Value Index (VIVIX) - 0.04
Vanguard Mid Cap Index Fund (VMCPX) - 0.03
Vanguard Small Cap Index Fund (VSCPX) - 0.03
Vanguard Real Estate Index Fund (VGSNX) - 0.10
Fidelity Contrafund Commingled Pool - 0.38
Fidelity OTC Commingled Pool - 0.43
Vanguard Growth Index (VIGIX) - 0.04
Royce Opportunity Collective Trust Fund - 0.87
Capital New Perspective Trust - 0.39
Fidelity Diversified International Commingled Pool - 0.58
Vanguard Emerging Markets Fund (VEMRX) - 0.08
Vanguard Inst Total International Stk Mkt Index Trust - 0.06

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Duckie
Posts: 7314
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Re: Retirement Portfolio Overhaul - Guidance on Proposed Revised Allocations

Post by Duckie » Sat May 23, 2020 6:02 pm

kmanjir wrote:I recall (will have to go back and find the exact details) that not all of the contributions I made to the TIRAs were tax-deducted in the year of contribution.How messy would that make the proposed rollover to the 401k plan (still pending a confirmation from them that they do accept these rollovers)?
You are only allowed to roll in the pre-tax portion. So figure the non-deductible amounts and move them to a different fund in the TIRA. All the pre-tax dollars in fund A and all after-tax dollars in fund B. When/if you roll to the current 401k only roll fund A. Then you will convert fund B with minimal taxes.

If you didn't deduct all the TIRA contributions did you file Form 8606 for each year you made non-deductible contributions? If not you can file those forms on their own without having to amend your old tax returns.
I have reached out to the 401k plan administrator about whether they accept incoming pre-tax Trad IRA rollovers into the 401k account. If they don't, is a Trad IRA conversion-to-Roth IRA conversion the next best thing to consider?
It depends. Your retirement portfolio is low-six figures and the TIRA is 7% of that. Depending on how low your low-six figures are you may end up paying tax on $10,000 to $20,000, some of which is non-deductible. If your current 401k won't allow incoming rollovers check with your old 401k. It's rare but sometimes a former plan will allow it.

If you can't roll the TIRA into a 401k and choose not to convert it, at least move it to a better custodian with better options. Preferably the same place you hold your Roth IRA.
For 401k (Employer 1), the other options are listed at the below of my response.
The best options in the old 401k (if you keep it) are:
  • Vanguard Institutional 500 Index - 0.01 -- Large caps, 80% of US stocks
    Vanguard Inst Total International Stock Market Index - 0.06 -- Complete international stocks
    Vanguard Institutional Total Bond Market Index - 0.03 -- US bonds
Pick just one fund for this account if you don't roll it into the current 401k.
For the HSA (also with Fidelity), the other available fund options are listed below.
The best options in the HSA are:
  • FXAIX - 0.015- Fidelity 500 Index -- Large caps, 80% of US stocks
    FSPSX - 0.035- Fidelity International Index -- Developed markets, 75% of international stocks
    FXNAX - 0.025- Fidelity US Bond Index -- US bonds
Pick just one fund for this account.

Topic Author
kmanjir
Posts: 15
Joined: Fri Mar 27, 2020 8:45 pm

Re: Retirement Portfolio Overhaul - Guidance on Proposed Revised Allocations

Post by kmanjir » Sun May 24, 2020 12:23 pm

Thank you, Duckie, for the suggestions. While my eventual goal is to consolidate the accounts further, my current goal is to consolidate and simplify fund holdings within each of those accounts while adhering to a 55/25/20 allocation roughly.

Question regarding the wash-sale concern referenced above:
For the purposes of wash-sale, would FXAIX, VTSAX and VFFSX be considered the same type of funds?
Right now, per the suggestions given, I am thinking VTSAX (and VTIAX) in taxable accounts and FXAIX/VFFSX (and VBTLX) in tax-deferred/tax-advantaged accounts. Would that avoid the wash-sale concern, while also maintaining tax-efficient placement?

With respect to the TIRA, thank you for the suggestion about having 2 different funds in there, one to denote the tax-deducted contributions and the other for the funds that weren't.
I do have Form 8606 filed from the year I had the non-deductible contribution, and I do have the details of the original amounts contributed that were or were not tax-deducted across different years. But how would I know which part of the growth from those contributions belong to which fund?

Sample scenario: Over the course of 2 years, $2500 was contributed to the TIRA.
$1500 was tax-deducted contribution in year 1
$1000 was non-deducted contribution in year 2
Now in Year 6, the value of this TIRA is $8000.
My understanding: Let's say I am now going with the proposal of dividing the $8000 in Fund A (tax-deducted) and Fund B (not deducted) so that Fund A can be rolled over to 401k (if allowed), and opening the way for backdoor Roth contributions to happen in Year 6, up to $6K.

How do I know what dollar amounts to put in Fund A versus Fund B, since I am not sure what proportion of the TIRA growth is coming from the tax-free contribution versus the taxed contribution?

lakpr
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Re: Retirement Portfolio Overhaul - Guidance on Proposed Revised Allocations

Post by lakpr » Sun May 24, 2020 12:34 pm

kmanjir wrote:
Sun May 24, 2020 12:23 pm
Question regarding the wash-sale concern referenced above:
For the purposes of wash-sale, would FXAIX, VTSAX and VFFSX be considered the same type of funds?
Right now, per the suggestions given, I am thinking VTSAX (and VTIAX) in taxable accounts and FXAIX/VFFSX (and VBTLX) in tax-deferred/tax-advantaged accounts. Would that avoid the wash-sale concern, while also maintaining tax-efficient placement?
The answer is may-be :) { really, what did you expect? }
This proposed allocation would temporarily work for you until the first tax-loss harvesting occurs. What are your proposed tax-loss-harvesting partners? If when a loss occurs you are going to sell VTSAX and buy VFIAX, the wash sale might occur on the second time you attempt to tax-loss-harvest, since VFIAX and VFFSX are two different share classes of the same amount.

Of course, the IRS hasn't clarified anything as to what exactly constitutes "substantially identical". They have had 35 years as of 2020, and not a peep from those fine folks at IRS about this term. Even if you hold only FXAIX in your tax-advantaged accounts, some would argue that since it follows the same S&P500 index as VFIAX/VFFSX, a wash-sale would have occurred. [ In fact, if you take the top 100 holdings of both FXAIX and VFIAX, the companies and percentages are identical between the two up to 0.01% accuracy ]. Some others think that since it's offered by different custodians, FXAIX is deemed different enough to VFIAX/VFFSX so as not to be included in wash sale rules. Whose advice are you willing to follow?
kmanjir wrote:
Sun May 24, 2020 12:23 pm
With respect to the TIRA, thank you for the suggestion about having 2 different funds in there, one to denote the tax-deducted contributions and the other for the funds that weren't.
I do have Form 8606 filed from the year I had the non-deductible contribution, and I do have the details of the original amounts contributed that were or were not tax-deducted across different years. But how would I know which part of the growth from those contributions belong to which fund?

Sample scenario: Over the course of 2 years, $2500 was contributed to the TIRA.
$1500 was tax-deducted contribution in year 1
$1000 was non-deducted contribution in year 2
Now in Year 6, the value of this TIRA is $8000.
My understanding: Let's say I am now going with the proposal of dividing the $8000 in Fund A (tax-deducted) and Fund B (not deducted) so that Fund A can be rolled over to 401k (if allowed), and opening the way for backdoor Roth contributions to happen in Year 6, up to $6K.

How do I know what dollar amounts to put in Fund A versus Fund B, since I am not sure what proportion of the TIRA growth is coming from the tax-free contribution versus the taxed contribution?
You are entitled not to be taxed only on the non-deductible CONTRIBUTIONS, not the growth there on. In your example, your basis is only $1000, the remainder $7000 is all pre-tax. Yes, growth on a non-deductible contribution is pre-tax.

Simply divide the amount into two funds, one that would have at least $1000 by the time the rollover to 401k completes, and $7000 that would be rolled over to 401k. Note that "the market ate my basis" is NOT AN EXCUSE. When you eventually convert the remainder into Roth IRA, the amount converted MUST BE greater than the basis. So either leave the $1000 in a money-market fund where it's guaranteed to not lose value, or leave at least $1500 in the second fund (the fund that you intend to convert to Roth IRA later), with the assumption that the markets don't move 33% in the month or so it would take for the rollover to complete.

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Duckie
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Re: Retirement Portfolio Overhaul - Guidance on Proposed Revised Allocations

Post by Duckie » Sun May 24, 2020 4:01 pm

kmanjir wrote:For the purposes of wash-sale, would FXAIX, VTSAX and VFFSX be considered the same type of funds?
FXAIX and VFFSX are both 500 Index funds so they are "substantially identical". VTSAX is a total US stock index fund and is not the same as the 500 Index funds.
Right now, per the suggestions given, I am thinking VTSAX (and VTIAX) in taxable accounts and FXAIX/VFFSX (and VBTLX) in tax-deferred/tax-advantaged accounts. Would that avoid the wash-sale concern, while also maintaining tax-efficient placement?
Yes.
How do I know what dollar amounts to put in Fund A versus Fund B, since I am not sure what proportion of the TIRA growth is coming from the tax-free contribution versus the taxed contribution?
Only the $1000 that was a non-deductible contribution can be converted with no gains. So put just $1000 in fund B (preferably a money market fund to minimize gains and avoid losses) and everything else in fund A. After you roll 100% of fund A into the 401k you can convert 100% of fund B to a Roth IRA. If it's worth a little more than $1000 by that time you will pay taxes on the extra.

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kmanjir
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Re: Retirement Portfolio Overhaul - Guidance on Proposed Revised Allocations

Post by kmanjir » Wed May 27, 2020 1:36 am

Thank you, Lakpr and Duckie.

Firstly, I got some good confirmations from Fidelity today for my current employer 401k plan. They do allow:
  • Rollovers of other plans' 401k into this 401k
  • Rollovers of Traditional IRAs
  • In-plan Roth conversion of after-tax 401k contributions
For the Traditional IRA rollover, thanks for the additional explanations on demarcating the deducted versus non-deducted contributions. This makes it clear for me.
Simply divide the amount into two funds, one that would have at least $1000 by the time the rollover to 401k completes, and $7000 that would be rolled over to 401k. Note that "the market ate my basis" is NOT AN EXCUSE. When you eventually convert the remainder into Roth IRA, the amount converted MUST BE greater than the basis. So either leave the $1000 in a money-market fund where it's guaranteed to not lose value, or leave at least $1500 in the second fund (the fund that you intend to convert to Roth IRA later), with the assumption that the markets don't move 33% in the month or so it would take for the rollover to complete.
This is a good clarification, thank you for pointing out. Money market makes sense for me, since I would look to do a Roth conversion on this soon after the tax-deducted contributions have finished rolling over to the 401k.

Question: For a Roth conversion of the non-tax deducted portion, I shouldn't have to pay taxes on the conversion, since I have already paid taxes on it the first time round, right?



Revised Proposed Desired Asset Allocation (using existing funds in retirement portfolio) (based on tips and guidance collected above)
• Traditional IRA - 7% of overall portfolio - VTSAX - Vanguard Total Stock Market Index (.08)
• Note: Roll-over tax-deducted portion to Employer 2 401k and non-tax deducted portion to Roth IRA, and follow asset allocations set for those accounts
• Roth IRA - 4% - VFFSX - Vanguard Institutional 500 Index Trust (.01)
• HSA - 10% - FXAIX- Fidelity 500 Index (.015)
• 401k (Employer 1) - 16% - VFFSX - Vanguard Institutional 500 Index Trust (.01)
• 401k (Employer 2) - 49% - FIAM Index Target Date 2050 Commingled Pool Class T (70%) (0.07) | VBTLX (30%) (0.05)
• Taxable Brokerage - 11% - VTIAX - Vanguard Total Intl Stock Index Admiral (.11)
• Taxable Brokerage - 3% - Collection of Individual Stocks (since this is only 3%, I'll just let it be for now)

New contributions - Adjust domestic/international/bonds ratios appropriately to stick as close to the desired 55/25/20 allocation

lakpr
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Re: Retirement Portfolio Overhaul - Guidance on Proposed Revised Allocations

Post by lakpr » Wed May 27, 2020 10:28 am

I propose that you make all your tax advantaged accounts repositories for target date funds and bond index funds. The international allocation takes care of itself. This way, your taxable account is free to invest in any mutual fund as long you aren't buying a target date fund in your taxable. Makes tax-loss harvesting so much easier.

See an attempt below. It's not exactly 55:25:20, but comes pretty darn close (52:26:22 approximately). Note that both Vanguard and Fidelity invest in a 60:40 ratio their stock allocation to domestic and international stocks, so the last three columns are calculated, and thus have percentage up to 2 decimals.

I have also assumed that the Traditional IRA will not exist, it will be rolled over in its entirety to 401k-2 plan, so your allocation of 49% to 401k-2 is increased to 56% in the table below.

Note that in the table below I proposed your Roth IRA be implemented in Vanguard 2065 fund. This is assuming that you do not intend to open a new account. If you are open to opening a new Roth IRA account at Fidelity (and perhaps subsequently rollover the Vanguard Roth IRA to Fidelity Roth IRA), I suggest you invest the Roth IRA at Fidelity in FZROX, which follows proprietary index but so far has tracked the US total stock market index very closely. This way, the second row in the table below instead of being 2.16% domestic / 1.8% Intl / 0.04% bonds, will change to 4% to domestic stocks; and therefore will move much closer to your desired 55:25:20 allocation. Fidelity Zero funds are available only if you have a Fidelity brokerage account.

Code: Select all

Account Type   |Your Allocation|Your Fund  Name                  |Proposed Allocation|Proposed  Fund  Name             |Domestic Stocks|Intl. Stocks|Bonds |
===============|===============|=================================|===================|=================================|===============|============|======|
Traditional IRA|       7%      |Vanguard Total Stock Market Index|       0%          |                                 |    0.00%      |  0.00%     | 0.00%|
Roth IRA       |       4%      |Vanguard 500 Index               |       4%          |Vanguard 2065 Target Retirement  |    2.16%      |  1.80%     | 0.04%|
HSA            |      10%      |Fidelity 500 Index               |      10%          |FFIKX Freedom Index 2065         |    5.50%      |  3.50%     | 1.00%|
401k-1         |      16%      |Vanguard Institutional 500 Index |      16%          |Vanguard Total Bond Market Index |    0.00%      |  0.00%     |16.00%|
401k-2         |      35%      |FIAM Index Target Date 2050      |      56%          |FIAM Index Target Date 2065      |   30.00%      | 20.40%     | 5.60%|
               |      14%      |Vanguard Total Bond Market Index |                   |                                 |               |            |      |
Taxable        |      11%      |Vanguard Total Stock Market Index|      11%          |Vanguard Total Stock Market Index|   11.00%      |  0.00%     | 0.00%|
               |       3%      |Individual Stocks                |       3%          |Individual Stocks                |    3.00%      |            |      |
Sanity Check   |     100%      |                                 |     100%          |                                 |   51.66%      | 25.70%     |22.64%|100%

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Re: Retirement Portfolio Overhaul - Guidance on Proposed Revised Allocations

Post by Duckie » Wed May 27, 2020 5:01 pm

kmanjir wrote:For a Roth conversion of the non-tax deducted portion, I shouldn't have to pay taxes on the conversion, since I have already paid taxes on it the first time round, right?
You will not pay taxes on the non-deductible amount, but if there are any gains in the account you will pay taxes on them. If your basis is $1000.00 and you convert $1001.00 you will pay taxes on $1.00.
Revised Proposed Desired Asset Allocation (using existing funds in retirement portfolio)[/b] (based on tips and guidance collected above)
• Traditional IRA - 7% of overall portfolio - VTSAX - Vanguard Total Stock Market Index (.08)
• Note: Roll-over tax-deducted portion to Employer 2 401k and non-tax deducted portion to Roth IRA, and follow asset allocations set for those accounts
• Roth IRA - 4% - VFFSX - Vanguard Institutional 500 Index Trust (.01)
• HSA - 10% - FXAIX- Fidelity 500 Index (.015)
• 401k (Employer 1) - 16% - VFFSX - Vanguard Institutional 500 Index Trust (.01)
• 401k (Employer 2) - 49% - FIAM Index Target Date 2050 Commingled Pool Class T (70%) (0.07) | VBTLX (30%) (0.05)
• Taxable Brokerage - 11% - VTIAX - Vanguard Total Intl Stock Index Admiral (.11)
• Taxable Brokerage - 3% - Collection of Individual Stocks (since this is only 3%, I'll just let it be for now)
I see some issues:
  • In your Roth IRA VFFSX would not be available because it is institutional and only held in plans with huge amounts of money. You would instead have (VFIAX) Vanguard 500 Index Fund Admiral Shares (0.04%).
  • In your current 401k (Employer 2), holding the target date fund while holding individual funds everywhere else makes things more complicated. In this account put all your 20% bond AA in VBTLX and the remainder in VTSAX and VTIAX.
  • Holding VTIAX in taxable and in the current 401k may cause a wash sale. There is an argument whether employer plan assets are included in wash sale rules. What are the other options in that 401k? You want 25% international stocks and your taxable space is only 14% so you're going to have to hold some international in the 401k and it should not be the same fund. If VTIAX is the only good international option in the 401k then you should hold a different international fund in taxable. At Vanguard VFWAX/VEU or IXUS are commission-free options.

Topic Author
kmanjir
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Re: Retirement Portfolio Overhaul - Guidance on Proposed Revised Allocations

Post by kmanjir » Sat May 30, 2020 12:27 pm

Thank you both. With your insight and suggestions, I feel more or less set on the approach to achieving my desired allocation. Now, I just need to execute on each of these step-by-step and get it done.
I propose that you make all your tax advantaged accounts repositories for target date funds and bond index funds. The international allocation takes care of itself. This way, your taxable account is free to invest in any mutual fund as long you aren't buying a target date fund in your taxable. Makes tax-loss harvesting so much easier.
Agreed, I like this approach, makes it clean-cut.

Holding VTIAX in taxable and in the current 401k may cause a wash sale. There is an argument whether employer plan assets are included in wash sale rules. What are the other options in that 401k? You want 25% international stocks and your taxable space is only 14% so you're going to have to hold some international in the 401k and it should not be the same fund. If VTIAX is the only good international option in the 401k then you should hold a different international fund in taxable. At Vanguard VFWAX/VEU or IXUS are commission-free options.
The international stock allocation in the target date funds should also help go towards the international allocation in conjunction with the VTIAX in taxable. Not looking to hold VTIAX in both taxable and tax-advantaged.


Few more questions and clarifications:
  • Are you suggesting TD 2065 over TD 2050 purely to get the allocations to the desired 55/25/20, or is there some different reasoning behind it?

I have also assumed that the Traditional IRA will not exist, it will be rolled over in its entirety to 401k-2 plan, so your allocation of 49% to 401k-2 is increased to 56% in the table below.
Yes, the TIRA will go away, however, not all of it will go to the 401k-2, just the tax-deducted portion. The rest will be converted over into the Vanguard Roth IRA (hopefully, it's straightforward to do a Roth conversion of a TIRA from one financial institution into an existing Roth IRA at Vanguard)

In your Roth IRA VFFSX would not be available because it is institutional and only held in plans with huge amounts of money. You would instead have (VFIAX) Vanguard 500 Index Fund Admiral Shares (0.04%).
Good point, you're right. VFIAX it is. The two funds are indistinguishable from an allocation distribution perspective.

lakpr
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Re: Retirement Portfolio Overhaul - Guidance on Proposed Revised Allocations

Post by lakpr » Sat May 30, 2020 2:06 pm

kmanjir wrote:
Sat May 30, 2020 12:27 pm
Few more questions and clarifications:
  • Are you suggesting TD 2065 over TD 2050 purely to get the allocations to the desired 55/25/20, or is there some different reasoning behind it?
Target date funds begin with a 90:10 allocation between stocks and bonds, and begin the glide path when the target date is about 30 years away. With Target date 2050 fund, the glide path is about to begin this year or next. With 2065 fund, the glide path will not begin until 2035. Until then it remains 90:10 stocks to bonds, and 60:40 within the stock portion (essentially 54:36:10 on the overall portfolio).

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