Portfolio review please - [somewhere in the middle]

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Peppasdad
Posts: 2
Joined: Mon Jun 29, 2020 11:27 pm

Portfolio review please - [somewhere in the middle]

Post by Peppasdad » Tue Jun 30, 2020 1:23 am

Hello all,

Thanks for reading this post. This forum and the even the exercise of putting everything together in the proper format have already been very helpful. One conclusion is that my wife is a lot better than me at investing! That aside, we were recently sitting on cash with in hopes of buying a larger house. After (thankfully) getting outbid and now with extended family moving out, we can focus on saving the right way. Most of the future savings will go in a taxable account. This is especially true since my company's 401k exists but is unfortunately not viable for a number of reasons. I have contributed to the SEP-IRA listed below in the past, but those contributions will be small to non-existent in the future. I think the 3 fund portfolio is appealing. Thanks in advance for any comments!

Emergency funds: yes, 12 months of expenses (currently in low yield savings, but planning to move to higher yield savings)

Debt: 550k mortgage at 2.75%

Tax Filing Status: Married Filing Jointly

Tax Rate: 37% Federal, 13.3% State (Effective total rate 40%)

State of Residence: CA

Ages: Him: 45, Her: 39

Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 30% of stocks

Size of your current total portfolio: Low 7 figures

Current retirement assets

Taxable at Vanguard (67.46%)
41.67% cash
25.79% VTI - Vanguard Idx fund (0.03%)

Taxable at TD Ameritrade (0.38%)
0.11% GLD - Spdr gold shares (0.40%)
0.05% CSCO – Cisco Systems
0.07% FLEX – Flex LTD
0.15% QCOM - Qualcomm

His 401k (0%)
0% Company match
Not participating

Her 401k (18.74%)
5% match
1.28% L2050 - 2050 Life Cycle Fund (0.04%)
1.64% L2040 - 2040 Life Cycle Fund (0.04%)
0.03% G Fund – Government Securities (0.04%)
5.34% C Fund - Stocks of large and medium-sized U.S. companies (0.04%)
9.70% S Fund - Stocks of small to medium-sized U.S. companies (0.04%)
0.73% I Fund – International stocks (0.04%)

His Roth IRA at Fidelity (4.46%)
0.55% APL – Apple
0.12% BP – BP
0.16% CAT – Caterpillar
0.01% CPRI – Capri Holdings
0.77% FDSCX - Fidelity stock selector small cap (0.75%)
0.29% FDSVX - Fidelity growth discovery fund (0.77%)
1.09% FLCSX - Fidelity large cap stock (0.63%)
0.04% GE – General electric
0.16% IBM – IBM
0.09% MU – Micron technology
0.01% NOV – National Oilwell
1.02% OAKLX - Oakmark select investor cl (1.07%)
0.01% RIG - Transocean limited
0.03% USO - United sts oil fd (0.79%)
0.002% WAB – Wabtec
0.06% XOM – Exxon mobil

His Rollover IRA at Fidelity (2.91%)
2.42% FFFFX - Fidelity freedom 2040 (0.75%)
0.49% FFFTHX - Fidelity freedom 2035 (0.72%)

His SEP IRA at Fidelity (0.03%) – not likely to add to this in the future
0.03% FBIFX - Fidelity freedom index 2040 (0.12%)

His Traditional IRA at Fidelity (1.06%)
0.16% FCPGX - Fidelity small cap growth (1.05%)
0.43% FLCSX - Fidelity large cap stock (0.63%)
0.18% FLGEX - Fidelity large cap growth enhanced index (0.39%)
0.10% FSMVX - Fidelity mid cap value (0.46%)
0.17% PG – Procter and gamble

Her Roth IRA at Vanguard (4.04%)
4.04% VFIAX - Vanguard 500 Index Fund Admiral Shares (0.04%)

New annual Contributions
$0 his 401k
~$19k her 401k (5% match)
$0 his IRA/Roth IRA
$0 her IRA/Roth IRA
~$400 to 500k taxable

Available funds

Funds available in his 401(k)
n/a – not participating

Funds available in her 401k
Life cycle funds
G Fund – Government Securities (0.04%)
C Fund - Stocks of large and medium-sized U.S. companies (0.04%)
S Fund - Stocks of small to medium-sized U.S. companies (0.04%)
I Fund – International stocks (0.04%)

Other: two 529 plans that we initially superfunded (not counted as part of portfolio)

Questions:

1. I figured I would rearrange my IRAs and use the remaining cash to arrive at the desired AA. First, I would sell the individual stocks/funds in my Roth/non-Roth IRA's. Then, I would put either VTI or VXUS in the Roth and put BND in the non-Roth. That would leave the taxable account to fill out the remainder. However, I would think a muni fund like VCADX would be better in the taxable?

2. This has been discussed in other threads, but would it be prudent to pay off the mortgage? My initial thought is that the tax break is reasonable and given that there are only 7 years left, I should continue at the present rate.

3. Is contributing to a nondeductible IRA worth it? Even without trying a backdoor Roth, it would give some ERISA protection. Also, would backdoor Roths be advisable? Maybe it would be better to try it if our tax rate decreases in the future.

4. My understanding is that her 401k offers the option of making contributions as a Roth, traditional, or some variable percentage of the two. For the same reasons as number 3, would it be best to make all the contributions tax deferred for now?

5. Is there another obvious tax deferral retirement vehicle that I am missing? With young kids, I think that changing to an insurance plan which qualifies for an HSA is risky.

The plan is to continue working for another 20 years, but it would be great to slow down as time goes on. We are probably about two thirds of the way to our target, so I'm really glad that we got outbid for that house.

Thanks again for any insights!
Last edited by Peppasdad on Tue Jun 30, 2020 3:08 pm, edited 1 time in total.

tashnewbie
Posts: 348
Joined: Thu Apr 23, 2020 12:44 pm

Re: Portfolio review please - [somewhere in the middle]

Post by tashnewbie » Tue Jun 30, 2020 8:04 am

Why are you not participating in his 401k? That’s another tax-deferred account that’s available to you. Probably worth it especially in your tax bracket.

It’d probably be worth doing at least a backdoor Roth conversion for her; it’d be simpler than doing it for him because she doesn’t have any pretax IRAs. He could do it too but it’d be more complicated - either transfer all IRAs to current 401k, assuming 401k allows it and fund options are decent, or pay pro rata taxes, which might not be horrible because his non-Roth IRAs are less than 5% of total portfolio.

HomeStretch
Posts: 4618
Joined: Thu Dec 27, 2018 3:06 pm

Re: Portfolio review please - [somewhere in the middle]

Post by HomeStretch » Tue Jun 30, 2020 8:08 am

Welcome to the forum!
Peppasdad wrote: 1. I figured I would rearrange my IRAs and use the remaining cash to arrive at the desired AA. First, I would sell the individual stocks/funds in my Roth/non-Roth IRA's. Then, I would put either VTI or VXUS in the Roth and put BND in the non-Roth. That would leave the taxable account to fill out the remainder. However, I would think a muni fund like VCADX would be better in the taxable?
This makes sense to me. Simplify, diversify, lower costs. Agree that munis are better held in a Taxable account.
Peppasdad wrote: 2. This has been discussed in other threads, but would it be prudent to pay off the mortgage? My initial thought is that the tax break is reasonable and given that there are only 7 years left, I should continue at the present rate.
Not paying off your mortgage now makes sense to me. Your after-tax mortgage rate is low enough and the remaining mortgage term is short enough (given your age and plan to work 20 more years) to support not paying it off.
Peppasdad wrote: 3. Is contributing to a nondeductible IRA worth it? Even without trying a backdoor Roth, it would give some ERISA protection. Also, would backdoor Roths be advisable? Maybe it would be better to try it if our tax rate decreases in the future.
Prioritize saving in a Roth IRA (via backdoor Roth) over a Taxable account as Roth accounts grow tax-free. The higher your marginal tax rate, the more valuable tax-free growth is to you.

Consider an annual backdoor Roth for spouse. Your spouse can do a backdoor Roth without pro-rated taxes as spouse does not have any pretax IRA balances. Spouse has until 7/15/20 to contribute for tax year 2019. Before doing a backdoor Roth, review Form 8606.

A backdoor Roth for you is less advantageous as your multiple pretax IRA balances will make your backdoor Roth subject to pro-rated taxes.

BH wiki page on backdoor Roths:
https://www.bogleheads.org/wiki/Backdoor_Roth
Peppasdad wrote: 4. My understanding is that her 401k offers the option of making contributions as a Roth, traditional, or some variable percentage of the two. For the same reasons as number 3, would it be best to make all the contributions tax deferred for now?
Will your marginal tax rates when withdrawing from the 401k in retirement be higher than your current rates (Federal 37% and state 13.3%)? Will you move in retirement to a state with no/lower tax rate?

If your marginal tax rates are lower now, then Roth makes sense. If higher now, Traditional makes sense. With your current high marginal tax rates, likely Traditional makes sense. But that might not be true if you expect very high retirement income from pensions, social security, RMDs, rental income, etc.

See BH wiki page:
https://www.bogleheads.org/wiki/Traditional_versus_Roth
Peppasdad wrote: 5. Is there another obvious tax deferral retirement vehicle that I am missing? With young kids, I think that changing to an insurance plan which qualifies for an HSA is risky.
What is your savings rate as a % of gross income?
-Your planned 2020 contributions to spouse’s 401k and Taxable account totaling $19.5k seem low given your 37% tax bracket. Do you have high expenses for some reason?
-At your income level, I was expecting to see annual savings of six-figures rather than $19.5k.
-20 years seems a long time to need to work (given your high income level) to increase a low 7-figure portfolio by 1/3 more in order to reach your target.
-Would a new bigger house mean you would have to reduce or eliminate 2020 planned contributions to savings due to higher house expenses?

Your spouse can make 401k employee deferrals of $19.5k for tax year 2020 so increase the planned contribution from $19k to $19.5k.

Your spouse can do a backdoor Roth of $6k for each of tax year 2019 (by 7/15/20) and tax year 2020.

Why isn’t it viable for you to contribute to your 401k?

Why are you only able to save $400-$500 in a Taxable account?

Living Free
Posts: 469
Joined: Thu Jul 19, 2018 7:31 pm

Re: Portfolio review please - [somewhere in the middle]

Post by Living Free » Tue Jun 30, 2020 8:42 am

It's been asked twice above already, but I also feel compelled to ask -- why not use your 401k?

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CyclingDuo
Posts: 3254
Joined: Fri Jan 06, 2017 9:07 am

Re: Portfolio review please - [somewhere in the middle]

Post by CyclingDuo » Tue Jun 30, 2020 1:12 pm

Peppasdad wrote:
Tue Jun 30, 2020 1:23 am
5. Is there another obvious tax deferral retirement vehicle that I am missing? With young kids, I think that changing to an insurance plan which qualifies for an HSA is risky.
At your income level, you should both be maxing out your 401k plans - match or not.
"Everywhere is within walking distance if you have the time." ~ Steven Wright

User avatar
Duckie
Posts: 7374
Joined: Thu Mar 08, 2007 2:55 pm

Re: Portfolio review please - [somewhere in the middle]

Post by Duckie » Tue Jun 30, 2020 5:01 pm

Peppasdad wrote:my company's 401k exists but is unfortunately not viable for a number of reasons.
What reasons?
Ages: Him: 45, Her: 39

Desired Asset allocation: 80% stocks / 20% bonds
That's a little low on bonds for your ages. I'd be at least 25% bonds.
Desired International allocation: 30% of stocks
This is reasonable.
Taxable at Vanguard (67.46%)
<snip>
Taxable at TD Ameritrade (0.38%)
Consider consolidating at one brokerage.
His 401k (0%)
0% Company match
Not participating
You should be maxing this unless the options are absolutely horrid, and maybe even then.
I figured I would rearrange my IRAs and use the remaining cash to arrive at the desired AA. First, I would sell the individual stocks/funds in my Roth/non-Roth IRA's. Then, I would put either VTI or VXUS in the Roth and put BND in the non-Roth. That would leave the taxable account to fill out the remainder. However, I would think a muni fund like VCADX would be better in the taxable?
VCADX would be suitable for some of the taxable bond portion. VWIUX, the national tax-exempt fund would be suitable for the rest.
Is contributing to a nondeductible IRA worth it? Even without trying a backdoor Roth, it would give some ERISA protection. Also, would backdoor Roths be advisable?
Your wife can use the backdoor Roth method. With your non-Roth IRAs it would be a problem for you. However, you might be able to hide the non-Roth IRAs.
  • Does your current 401k take incoming rollovers? If so, you could roll the three IRAs (SEP IRA, Rollover IRA, Traditional IRA) into the current 401k. What are the 401k options? List the fund names, ticker symbols, and plan expense ratios.
  • Did you contribute to the SEP IRA because of a side job? Did you have employees? If the side job is over or if you have no employees you could open a solo 401k and roll the three IRAs into it.
Either way removes the non-Roth IRAs and opens up the backdoor method.
My understanding is that her 401k offers the option of making contributions as a Roth, traditional, or some variable percentage of the two. For the same reasons as number 3, would it be best to make all the contributions tax deferred for now?
She apparently has a TSP, not a 401k, but yes, she should contribute the $19.5K employEE maximum to pre-tax. Since you want 20% bonds in the portfolio and her TSP is almost 19% she should use just the G Fund and F Fund in that account. The G Fund is practically a "free lunch".

Topic Author
Peppasdad
Posts: 2
Joined: Mon Jun 29, 2020 11:27 pm

Re: Portfolio review please - [somewhere in the middle]

Post by Peppasdad » Tue Jun 30, 2020 7:53 pm

Thanks all for the replies this far!

With regards to the 401k, I was told that my participation in it would make the plan top-heavy. Currently, not a lot of employees participate and it seems like the plan would not qualified if it fails the top-heavy test or would be penalized by having to match contributions from everyone. I'm not sure if there is any way to get around this until plan participation rises?

Tashnewbie - thanks for the advice about the Roth. I'll run the numbers and see whether it would come out ahead if by just paying the pro rata taxes.

Homestretch - thanks for the advice on multiple fronts. Oops, the 400-500 was a typo. It should be 400-500k. It will take a hit this year from the coronavirus, but our savings rate is about 45%. The biggest expenses are the mortgage and child care. The bigger house would probably eat up most of the cash as a down payment. After rolling the equity over from the current home, the savings rate would probably go down to 35% and it would reset the mortgage back to 15 years. I figure since more space is no longer urgently needed, we can wait and upsize if it's really needed down the road.

Living Free - thanks, please see above about the 401k.

CyclingDuo - thanks, please also see above.

Duckie - thanks for the advice on the AA, bonds, backdoor Roth strategies. My discussion with HR about my 401k ended with part about failing the top-heavy test, but I'll look into what funds are available. Yes, the SEP-IRA was through a now over side job, so the solo 401k route seems like it would might work best. Good point about the TSP, we hadn't considered changing her AA much

Thanks again all!

PeppasDad

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