Portfolio question

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Joined: Sat Oct 17, 2020 10:16 am

Portfolio question

Post by intendi »

Hello! I've been coming here for over 10 years and I'm so very grateful for all I've learned. I hope you can see that I've applied the Boglehead principles to my investment strategy and I'm always happy to direct folks to this site. I feel awkward that my first post is in the form of asking a question but my level of knowledge is better suited for lurking/listening/learning status!

Briefly, I recently started investing in a taxable account and fund selection has introduced a future problem with tax loss harvesting. I also finally started learning more about the backdoor Roth process and realized I'd have to make changes to facilitate that. Most of my portfolio is in a SEP-IRA (was an independent contractor and had a LLC/S-corp up until last year when I opted to become an employee) and I have two rollover IRAs to deal with before I can do a backdoor Roth.

I'm at an impasse as I try to decide what to do next so I appreciate any and all input!

Emergency funds: Yes 12+ months
Debt: Mortgage 360K Recently refinanced to 15 year/2.375%

Tax Filing Status: Single, head of household

Tax Rate: 24% Federal, 0% State

State of Residence: WA

Age: 47

Desired Asset allocation: 75% stocks 25% bonds/fixed income
Desired International allocation: 30-40% of stocks

Portfolio size: Borderline between 6/7 figures

Current retirement assets:
Taxable at Fidelity
5.3% Vanguard Total Stock Index VTI (.03)
3.4% Vanguard Total International Stock Index VXUS (.08)

401k at Principal
1.5% Vanguard 500 Index Admiral Fund VFIAX (.04)
0.7% iShares MSCI EAFE International Index K Fund BTMKX (.03)
0.7% Vanguard Intermediate Term Bond Index Admiral Fund VBILX (.07)
Company match? No

SEP-IRA at Vanguard
38.2% Vanguard Total Stock Market Index Fund Admiral VTSAX (.04)
16.2% Vanguard Total International Stock Index Fund Admiral VTIAX (.11)
6.5% Vanguard Total Bond Index VBTLX (.05)

Roth IRA at Vanguard
1.0% Vanguard Total World Stock Index (VTWAX) (.10)

Rollover IRA at Vanguard
1.0% Medtronic MDT (0)

Rollover IRA at Fidelity
2.2% Fidelity ZERO Total Market Index Fund FZROX (0)
1.0% Fidelity ZERO International Index Fund FZILX (0)
1.3% Fidelity U.S. Bond Index Fund FXNAX (.025)

HSA at Fidelity
1.0% Fidelity ZERO Total Market Index Fund FZROX (0)
0.4% Fidelity ZERO International Index Fund FZILX (0)

HSA at Discovery Benefits
0.6% Vanguard Total World Stock Index (VTWAX) (.10)

6.0% High yield savings account (rate currently 0.6%)

13.0% No penalty CD (rate 1.55%)

529 at Vanguard for 2 kids (aggressive age based plan): Not included in retirement investment portfolio above and currently around 90K for each kid (age 14 and 12).



New annual Contributions
$19.5K to 401k (no employer match)
Goal is to put at least $25K per year in taxable moving forward (for retirement, not short term goals)
Backdoor Roth?

Funds available in his 401(k):
Vanguard Treasury Money Market Investor Fund VUSXX (.09)
DFA Inflation Protection Series I fund DIPSX (.11)
Vanguard Intermediate Term Bond Index Admiral Fund VBILX (.07)
Vanguard Intermediate Term Treasury Index Admiral Fund VSIGX (.07)
JP Morgan SmartRetirement Blend Income R6 Fund JIYBX (.67)
JP Morgan SmartRetirement Blend 2020-2060 R6 Fund (Range: 0.62-1.27)
Vanguard Balanced Index Admiral Fund VBIAX (.07)
Vanguard Growth Index Admiral Fund VIGAX (.05)
Vanguard Value Index Admiral Fund VVIAX (.05)
Vanguard 500 Index Admiral Fund VFIAX (.04)
Vanguard Mid Cap Index Admiral Fund VIMAX (.05)
Vanguard Mid Cap Value Index Admiral Fund VMVAX (.07)
Vanguard Real Estate Index Admiral Fund VGSLX (.12)
Vanguard Small Cap Growth Index Admiral Fund VSGAX (.07)
Vanguard Small Cap Value Index Admiral Fund VSIAX (.07)
iShares MSCI EAFE International Index K Fund BTMKX (.03)

1. As I noted above, I've relatively recently started investing in a taxable account and couldn't resist VTI/VXUS. I now have matching funds in my taxable and Vanguard SEP-IRA accounts and this poses a challenge for tax loss harvesting down the road. As I started to think about ways to remedy this I came up with some options:
A: Roll both the Vanguard and Fidelity IRAs over to the Principal 401K so that I can start to backdoor Roth (and also tax loss harvest).
B: Roll over the Vanguard IRAs to Fidelity and convert to equivalent Fidelity funds.
C: Keep the Vanguard SEP-IRA at Vanguard, turn off VTSAX and VTIAX dividend re-investment and invest the dividends in the bond fund within my SEP-IRA.
D: Keep the IRAs at Vanguard and convert VTSAX and VTIAX in the SEP-IRA into VTWAX.
E: Keep the IRAs at Vanguard and convert everything to Lifestrategy Growth

On the surface, option A seems like the best choice but the 401K options at Principal aren't ideal for what is the majority of my portfolio. Some downsides of the 401K as I see it: I'd have to construct a total US market fund (not a big deal), the only international fund doesn't include emerging markets and the target date funds are pricey. I'm also not sure what fees Principal charges - I've spent some time on the site and the fee structure isn't obvious which is troubling.

Regarding the backdoor Roth process in general I have to confess that I'm hesitant to add any complexity tax wise - simplicity is becoming increasingly an overriding goal in life. Does the benefit of the backdoor Roth override these concerns?

One other thing I've learned about is the creditor protection offered by the 401K over the IRAs. I believe that as a resident of the state of Washington that my IRAs have some protection here so I'm hoping that isn't a deciding factor.

2. I'd like to stay at about 25% bonds/fixed income for the next five years and then will begin transitioning to something more conservative. I'm including my emergency fund for now which will be in hysa and/or no penalty CD. If I need to tap into my emergency fund I'll exchange stock for bonds in my tax deferred accounts. Is this reasonable or should I separate the emergency fund from the mix?

3. Not a question here but I'll address an obvious flaw in my portfolio. I'll confess I've held onto the Medtronic rollover IRA for sentimental reasons. It's becoming a smaller and smaller percentage of my portfolio but I know I should get that into an index fund.

Thank you for reading this far! I really appreciate this community and look forward to any advice and feedback.
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Joined: Wed Jul 26, 2017 12:46 pm

Re: Portfolio question

Post by JBTX »

Just to grt things started

TLH - I'll reserve that response for others. My only response it don't get too wrapped up thinking you need to do it.

Bonds - I'd look into ibonds, and possibly eebonds, on treasury direct. They can serve as your bond allocation and your emergency funds, and currently have higher yields than most "risk free" bonds. Ibonds now match inflation, whixh is better than bank accounts and CDS. Eebonds earn basically nothing, but if you hold them 20 years they double, which amounts to about 3.5%, which far exceeds current bond yields. Starting at your age means you start tapping them in your 60s when your income/tax rates should be lower.

Finally if you are self employed often a solo 401k provides for more tax advantaged savings opportunities than SEP.
Topic Author
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Joined: Sat Oct 17, 2020 10:16 am

Re: Portfolio question

Post by intendi »

^Thank you! I will definitely look into I bonds and EE bonds - a much better option than treating a savings account like a bond. I see the rate for I bonds is 1.06% for bonds issued May 2020 - October 2020. Probably should jump on that.

Edit: Picked up an I bond*. Thanks again @JBTX!
Edit#2: You're probably right about the TLH bit. No real urgency there. Maybe it should become more of a point of emphasis if the taxable account grows to a bigger percentage of the overall portfolio.

*Purchasing in November.
Last edited by intendi on Sun Oct 18, 2020 4:36 pm, edited 1 time in total.
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Peter Foley
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Location: Lake Wobegon

Re: Portfolio question

Post by Peter Foley »

Before you move things around I would first take a look at simplification.

For example, you hold an international fund in a number of accounts. You would simplify your holdings considerable by holding your international allocation in one account. You are also holding equivalent bond funds in multiple accounts.
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Joined: Sun Sep 27, 2020 6:20 pm

Re: Portfolio question

Post by ivgrivchuck »

1. Why are carrying a significant amount of money in CDs and savings accounts (which yield 0.6%-1.5%) and at the same time having a mortgage with 2.3% interest? Very simple math shows that putting all your money (excluding emergency fund) from CDs/savings account towards paying the mortgage is a clear win.

2. About tax loss harvesting. There are many good alternatives to VTI/VXUS that you can use in taxable for tax-loss harvesting. See: https://www.bogleheads.org/wiki/Tax_loss_harvesting

For example:

* For U.S. stocks you could use: (make sure that these don't conflict with any other investments you have)

* For internationational stocks you could use: (make sure that these don't conflict with any other investments)
- 70% VEA, SCHF
- 30% VWO, IEMG

3. For your emergency fund: Consider I-bonds (and possibly EE-bonds).
44% VTI | 36% VXUS | 10% I-bonds | 10% EE-bonds
Topic Author
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Joined: Sat Oct 17, 2020 10:16 am

Re: Portfolio question

Post by intendi »

Thank you both for the input!

@Peter Foley: I do need to continue to clean things up. I will try to simplify things - I probably have psychological difficulty treating everything as one portfolio. Eventually I should have everything at one brokerage too. The HSA is keeping me at Fidelity. I'd have a hard time leaving Vanguard and I do like the new 529 they are rolling out. I don't have a choice with Principal while I'm working.

@ivgrivchuck: I have thought about taking a chunk out of the mortgage and that does make the most sense with my fixed income side of things. I may be moving in roughly 6 years so I'm not sure if that is holding me back. Thank you very much for listing the TLH partners as well! Hopefully I won't have to use them!
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