Suggestions/Advice Needed

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Topic Author
beingzero
Posts: 8
Joined: Wed Dec 14, 2016 10:46 am

Suggestions/Advice Needed

Post by beingzero » Tue Jun 30, 2020 11:00 am

Hi All,

I have been on this site for a number of years and while I fully understood the philosophy and benefits of indexing and keeping things simple, I never took the plunge and became a true boglehead. After years of doing stupid things, day trading, options trading and losing a lot, I had the AHA moment yesterday that more than the money I lost, I lost a lot of time that I could have spent with my kids and family. So I did a lumpsum investment of over 100k cash yesterday in my IRA that was on the sidelines for 2 weeks which I was planning on DCA. I am excited about the time saving and the amount of time I spend reading and following financial news and blogs. I know I am late to the game and blew some great years of investment returns but I am committed starting today and moving forward for good.

So here is my story:
Fed marginal Tax Rate: 22%
State Tax Rate: 5.75%
Filing Status: Married Filing Jointly
Desired Allocation: 90% Stocks and 10% Bonds for the next 10 years or so.
Soon to be 39 Yrs, Married with 2 kids (8 & 5). Wife is a stay at home mom.
living in a not so low, not so high COL city

His Income: 200k
Business Income: 10K/year but could be more or less
His Rollover IRA:161000 (VTI 60%, VGT 20%, VXUS 10%, BND 10%)
Her Traditional IRA:15000 (VTI 60%, VGT 20%, VXUS 10%, BND 10%) Maxed out for 2019 & 2020
His 401k: 44000 (VFIAX 75%, VTIAX 10%, VBTLX 15%) No company match but I max out every year
Taxable Brokerage: 20500 Uninvested Cash 20k (Planning to do VTI 60%, VGT 30% and BND 10% but open to suggestions). I will add 500-1000 each month to this account starting July 3rd.
HSA:10000 (All 10k is in cash and I contribute the max each year, started doing HSA only since 2018)
529: 55000 (Combined balance of 2 accounts. Will do 8k per year for the next 7-8 yrs and then do a lumpsum if I end up making more money in the future)
Emergency Fund: 25000 (4 months of living expenses in capital one Savings. Planning to start adding 1000/mo to this account starting July 3rd. WIll work on getting this upto 8 months worth of living expenses
No Credit Card debt as I pay it off monthly.

Primary Home
Current Mortgage Balance: 349908
Estimated Home Value: 515000
Interest Rate: 2.625 Fixed
Remaining Term: 15 Years (Just refinanced from a 20 yr fixed)

Rental Home 4.375 29 Years
Current Mortgage Balance: 198190.78
Estimated Home Value: 295000
Interest Rate: 4.375 Fixed
Remaining Term: 29 Years
Cash Flow: 200-300 Per Month

Cars
Personal Car Lease (Will purchase a car after the lease expires)
Monthly payment: 450
No. of Months remaining: 15

Business Car Lease (This is completely paid off by the business income and doesn't affect my personal finances)
Monthly payment: 405
No. of Months remaining: 19

Having said all of that, What can I do better overall? Am I eligible to contribute to a Roth IRA since I am already maxing out my 401k? I chose VGT over VXUS purely based on the last 20 yr performance and the influence of tech moving forward.

Please provide your input and suggestions and I will be happy to add more details if needed.
Last edited by beingzero on Tue Jun 30, 2020 1:23 pm, edited 1 time in total.

tashnewbie
Posts: 347
Joined: Thu Apr 23, 2020 12:44 pm

Re: Suggestions/Advice Needed

Post by tashnewbie » Tue Jun 30, 2020 11:14 am

Welcome!

Looks like you're in the 22% marginal federal tax bracket. I think you and your spouse can contribute directly to Roth IRAs ($6/year each). I would open a Roth IRA and make those contributions now for 2019 (have until 7/15 to do it), if possible.

Are the current IRAs Roth or Traditional/Rollover/etc? If they are the latter and your income continues to grow in the future, then the IRAs could make contributing to a Roth IRA more complicated because of pro rata taxes with backdoor conversions. I would transfer his IRA into his 401k, assuming the expense ratios are good and the plan allows the transfer.

I would not include any bonds in the taxable brokerage account. Put your bond allocation in his 401k as a preference, and then the IRAs if you need more space.

I would go ahead and invest the $10k in the HSA. Is the money in the 529 invested?

How many months of expenses is the $25k EF? I think general recommendations are to have anywhere from 6-12 months, but this is a personal decision that you will have to make for your family. Given that you are a one-income household, it wouldn't be unreasonable to have a heftier EF, especially if your job security isn't rock solid.

Why are you tilting so heavily to tech (VGT)? As you know, past performance is no guarantee of future performance. You're already getting lots of exposure to tech in VTI and VFIAX.

Edited: fixed typo

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LadyGeek
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Re: Suggestions/Advice Needed

Post by LadyGeek » Tue Jun 30, 2020 12:00 pm

This thread is now in the Personal Investments forum (help with investments).
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

HomeStretch
Posts: 4616
Joined: Thu Dec 27, 2018 3:06 pm

Re: Suggestions/Advice Needed

Post by HomeStretch » Tue Jun 30, 2020 12:35 pm

You likely will get better feedback if you edit your original post using the pencil icon to use the "Asking Portfolio Questions" format found here:
https://www.bogleheads.org/wiki/Asking_ ... _questions.
Specifically, please add:
1) your Federal and state marginal tax rates
2) your state
3) filing status ("Married Filing Jointly" or "Married Filing Separately"?)
4) your desired overall asset allocation for your retirement portfolio
5) revise your accounts to show each holding as a % of your total retirement portfolio $ (exclude the 529 account and, if not for retirement, the HSA account)
6) list your projected 2020 contributions by account

Some items to consider/add to your post:

1) do you have a self-employed retirement plan (such as a Solo 401k, SEP-IRA, etc.) to make retirement contributions from business income?

2) does your 401k offer a mega back door Roth? If yes, consider adding the $500-$1000 there or Roth IRAs rather than your Taxable account as Roth accounts grow tax free.

3) you don't need to replicate the 3-fund portfolio in each account. It may be more tax efficient for you, for example, to not hold BND in a Taxable account but rather to hold your entire bond allocation in a tax deferred account like your 401k

4) your and spouse's IRAs - are these Traditional pretax balances?

5) are you using your HSA as a long-term retirement savings account or are you using it for your current healthcare expenses?

6) Do you have one 529 account or do you have one for each of your 2 children?

7) How many months of expenses does your emergency fund of $25k cover? How many months are you planning to build it up to by adding $1k/mo?

The answer to your Roth IRA question is dependent on some of your edits/answers, above. In general, if you and spouse are eligible to contribute to a Roth IRA directly based on your filing status and modified adjusted gross income, consider prioritizing contributing to Roth IRAs for each of you over a Taxable account as Roth accounts grow tax free. If you are over the IRS limit for a full Roth contribution, there is the backdoor Roth but whether or not it is advantageous for you and spouse depends on whether your IRA balances are pretax or not.

Topic Author
beingzero
Posts: 8
Joined: Wed Dec 14, 2016 10:46 am

Re: Suggestions/Advice Needed

Post by beingzero » Tue Jun 30, 2020 1:27 pm

HomeStretch wrote:
Tue Jun 30, 2020 12:35 pm
You likely will get better feedback if you edit your original post using the pencil icon to use the "Asking Portfolio Questions" format found here:
https://www.bogleheads.org/wiki/Asking_ ... _questions.
Specifically, please add:
1) your Federal and state marginal tax rates
2) your state
3) filing status ("Married Filing Jointly" or "Married Filing Separately"?)
4) your desired overall asset allocation for your retirement portfolio
5) revise your accounts to show each holding as a % of your total retirement portfolio $ (exclude the 529 account and, if not for retirement, the HSA account)
6) list your projected 2020 contributions by account

Some items to consider/add to your post:

1) do you have a self-employed retirement plan (such as a Solo 401k, SEP-IRA, etc.) to make retirement contributions from business income?
The business is a weird setup and I am not eligible for a retirement plan per my CPA.

2) does your 401k offer a mega back door Roth? If yes, consider adding the $500-$1000 there or Roth IRAs rather than your Taxable account as Roth accounts grow tax free.
My plan doesn't allow this.

3) you don't need to replicate the 3-fund portfolio in each account. It may be more tax efficient for you, for example, to not hold BND in a Taxable account but rather to hold your entire bond allocation in a tax deferred account like your 401k
Awesome. I will make that change immediately

4) your and spouse's IRAs - are these Traditional pretax balances?
Yes, Pretax Balances

5) are you using your HSA as a long-term retirement savings account or are you using it for your current healthcare expenses?
Combination of both. I think I can comfortably invest 8k to begin with as I can keep using the monthly contributions for medical expenses.

6) Do you have one 529 account or do you have one for each of your 2 children?
1 for each child but I listed the combined balance

7) How many months of expenses does your emergency fund of $25k cover? How many months are you planning to build it up to by adding $1k/mo?
Right now 4 months but ideally want it to be around 8 months.

The answer to your Roth IRA question is dependent on some of your edits/answers, above. In general, if you and spouse are eligible to contribute to a Roth IRA directly based on your filing status and modified adjusted gross income, consider prioritizing contributing to Roth IRAs for each of you over a Taxable account as Roth accounts grow tax free. If you are over the IRS limit for a full Roth contribution, there is the backdoor Roth but whether or not it is advantageous for you and spouse depends on whether your IRA balances are pretax or not.
Thank you so much for the quick response, I made some quick edits to the original post but will repost the format when I get a chance.

Topic Author
beingzero
Posts: 8
Joined: Wed Dec 14, 2016 10:46 am

Re: Suggestions/Advice Needed

Post by beingzero » Tue Jun 30, 2020 1:36 pm

tashnewbie wrote:
Tue Jun 30, 2020 11:14 am
Welcome!

Looks like you're in the 22% marginal federal tax bracket. I think you and your spouse can contribute directly to Roth IRAs ($6/year each). I would open a Roth IRA and make those contributions now for 2019 (have until 7/15 to do it), if possible.
I will have to refile amended tax returns and stuff but a good idea to do for 2019 & 2020.

Are the current IRAs Roth or Traditional/Rollover/etc? If they are the latter and your income continues to grow in the future, then the IRAs could make contributing to a Roth IRA more complicated because of pro rata taxes with backdoor conversions. I would transfer his IRA into his 401k, assuming the expense ratios are good and the plan allows the transfer.
I really like the idea and the plan allows the transfer but it requires authorization etc. from Fidelity and its all a hassle. I might possibly change my job soon and would definitely do it with my next company.

I would not include any bonds in the taxable brokerage account. Put your bond allocation in his 401k as a preference, and then the IRAs if you need more space.
Awesome. Doing that straight away.

I would go ahead and invest the $10k in the HSA. Is the money in the 529 invested?
Will invest the HSA funds and yes 529 is fully invested.

How many months of expenses is the $25k EF? I think general recommendations are to have anywhere from 6-12 months, but this is a personal decision that you will have to make for your family. Given that you are a one-income household, it wouldn't be unreasonable to have a heftier EF, especially if your job security isn't rock solid.
I agree with you. I will work on building this up to 8-12 months. Right now those expenses are good for 4 months.

Why are you tilting so heavily to tech (VGT)? As you know, past performance is no guarantee of future performance. You're already getting lots of exposure to tech in VTI and VFIAX.
I agree with your comment about past performance vs future performance but I hate VXUS and the returns from it. Since 2011 it has returned -0.47 vs 336% for VGT according to yahoo finance

Thanks a ton for your valuable suggestions and advice. I updated a few more details in my post.

Edited: fixed typo

HomeStretch
Posts: 4616
Joined: Thu Dec 27, 2018 3:06 pm

Re: Suggestions/Advice Needed

Post by HomeStretch » Tue Jun 30, 2020 2:21 pm

beingzero wrote:
Tue Jun 30, 2020 1:27 pm
HomeStretch wrote:
Tue Jun 30, 2020 12:35 pm
The answer to your Roth IRA question is dependent on some of your edits/answers, above. In general, if you and spouse are eligible to contribute to a Roth IRA directly based on your filing status and modified adjusted gross income, consider prioritizing contributing to Roth IRAs for each of you over a Taxable account as Roth accounts grow tax free. If you are over the IRS limit for a full Roth contribution, there is the backdoor Roth but whether or not it is advantageous for you and spouse depends on whether your IRA balances are pretax or not.
Thank you so much for the quick response, I made some quick edits to the original post but will repost the format when I get a chance.
Based on your edits, your 2019 filing status is married filing jointly. If per your 2019 tax return your modified adjusted gross income is less than $193,000, you and spouse can each contribute up to the $6k limit to Roth IRAs. Between $193,000 and $203,000, you can each contribute a reduced amount. >= $203,000, you are ineligible to make direct contributions.

A backdoor Roth is an option for you (if ineligible for a direct Roth contribution) if, as suggested by tashnewbie, you rollover your IRA into your 401k. Consider doing it if you will be at your current job for at least 3 months. You may not be immediately eligible for the 401k at your next job assuming the employer offers a 401k at all or with good fund choices, or you may run out of time to have the IRA rollover processed by December 31st. It would be good to get your first Roth IRA open so as to start the 5-year clock. A backdoor Roth is not a desirable option for your spouse as spouse does not have an option right now to rollover the IRA into a retirement plan
beingzero wrote:
Tue Jun 30, 2020 1:36 pm
tashnewbie wrote:
Tue Jun 30, 2020 11:14 am
Looks like you're in the 22% marginal federal tax bracket. I think you and your spouse can contribute directly to Roth IRAs ($6/year each). I would open a Roth IRA and make those contributions now for 2019 (have until 7/15 to do it), if possible.
I will have to refile amended tax returns and stuff but a good idea to do for 2019 & 2020.
If you are eligible to contribute directly to Roth IRAs for tax year 2019, the contributions are not reported on your tax return so no need to amend your 2019 return.

tashnewbie
Posts: 347
Joined: Thu Apr 23, 2020 12:44 pm

Re: Suggestions/Advice Needed

Post by tashnewbie » Tue Jun 30, 2020 2:30 pm

beingzero wrote:
Tue Jun 30, 2020 1:36 pm
tashnewbie wrote:
Tue Jun 30, 2020 11:14 am
Why are you tilting so heavily to tech (VGT)? As you know, past performance is no guarantee of future performance. You're already getting lots of exposure to tech in VTI and VFIAX.
I agree with your comment about past performance vs future performance but I hate VXUS and the returns from it. Since 2011 it has returned -0.47 vs 336% for VGT according to yahoo finance
I don't understand your comment here. VXUS and VGT are completely different. VXUS is an international stock fund, while VGT is a stock fund that targets US tech sector. Whether you want international stock exposure or not is a completely separate issue from whether it's worth tilting toward US tech stock. If you don't want international/VXUS, then just put all of your stock in VTI/VTSAX in your taxable brokerage account.

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