Help with portfolio investment plan for a couple in their early late 20s/early 30s

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Topic Author
pizzatriscuits
Posts: 6
Joined: Thu Nov 19, 2020 8:08 pm

Help with portfolio investment plan for a couple in their early late 20s/early 30s

Post by pizzatriscuits »

Hi everyone,

This is my first post here after reading as an unregistered user for a little while. Hoping to get some guidance because I am having way too much analysis paralysis. I posted this on the boggleheads reddit sub as well but my post didn't get much traction so I decided to register and post here. I apologize in advance for writing a novel; I wanted to err on the side of including too much information so that you can have a full picture. I am including screenshots showing our retirement plan investment options Empower and Fidelity, and our current assets and liabilities as well.

Editing to add some of the questions that are suggested to answer that I did not include. I apologize for not including them in the first place!
Emergency funds: Yes
Tax Filing Status: Married Filing Jointly
Tax Rate: 24% - Federal (would love help determining this?, I used the calculator here), 4.95% State
State of Residence: IL

Profiles and salaries:

- My husband (32)
  • VP Operations role in a small manufacturing plant; finishing his MBA this December (no debt associated with MBA)
  • Stable job outlook; high earning potential (being explicitly groomed for a CEO role)
  • earns base $135k/year (up to 25% of base bonus based on company performance
- Me (28)
  • internal consultant in mid-sized non-profit
  • Stable job outlook; mid-size earning potential (looking to stay in the non-profit field)
  • earn $60k/year
Expenses/savings profile:
  • Our joint take home after taxes, health care, and 401k contributions is ~$9,500
  • Our monthly expenses are ~$6,000, leaving $3,500 to save/invest
  • We bought our first home this year and the downpayment and some renovations and furnishings have brought our savings down but we’ve built them back up and now that we are $45,000, we want to invest a portion after putting enough for an emergency fund
  • We are relatively risk averse but at the same time, not jumpy about market ebbs and flows and feel confident we can be a set it and forget it type of portfolio owners (except for yearly rebalancing)
Goals:
  • live below our means but not looking to retire early or be extremely wealthy in retirement/pass on a large estate to heirs
  • we are planning on buying a new home in 7 to 10 years and want some relatively easy access to $$ in case we need the money for downpayment
  • save for retirement but also have enough to indulge in trips and experiences (i.e. not looking to keep all our investments in our retirement accounts to maximize nest egg)
So we’ve read a lot about maxing out your retirement accounts due to their tax-advantaged nature, but have also heard that depending on your yearly income and MAGI, this may or may not be possible/advisable.

Our current retirement accounts:

- Roth 401k with Empower Retirement (husband’s current job)
  • balance: $145,600
  • current contribution rate: 9%
  • employer match: 3%
  • current investments: 50/50 allocation between one blended fund - BlackRock LifePath Index 2055 K (LIVKX) and one mid-cap fund - iShares Russell Mid-Cap Index K (BRMKX)
- Rollover IRA in Schwab (I rolled over my old job’s 401k here)
  • balance: 4,159 (it used to be 14,159, but unfortunately, we took out 10k for the purchase of our first home and did not realize we could repay the amount for a limited number of days; we had planned on putting the 10k back in before the year ended; that was my bad)
  • not invested in anything; haven’t touched it since rolling over the 14k and then taking 10k for our downpayment - I know, I know! This is why I am writing this post
- 401k in Fidelity (my current job)
  • balance: $6,444
  • current contribution rate: 5%
  • employer match: 3%
  • current investments: blended target fund - TRP RETIREMENT 2055 (TRRNX)
Our plan:
  • open a brokerage account with Vanguard
  • invest $20k of the savings based on answers to questions below
Questions:
  • If we are not looking to always max out our Roth 401k, 401k and Traditional IRA, what would you recommend we up our contributions by if we are looking to still have some flexibility with liquidity by also investing some portion in a brokerage account?
  • with a stable employment outlook, is it acceptable to keep only 4 months worth of expenses ($24k) in the Schwab savings account (it earns almost no interest, it’s not even a HYSA)?
  • we were looking at the David Swenson lazy portfolio but after reading a little more on it, it seems like REITs and TIPs might overly complicate the portfolio so considering doing a mix of just stocks and bonds
  • What split would you recommend for our profile?
Last edited by pizzatriscuits on Sat Nov 21, 2020 10:48 pm, edited 3 times in total.
tashnewbie
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Joined: Thu Apr 23, 2020 12:44 pm

Re: Help with portfolio investment plan for a couple in their early late 20s/early 30s

Post by tashnewbie »

Welcome to the forum.

You don’t list the interest rates for the car loan or student loans (are they federal?). That could be a good place to put any extra money. You could easily wipe those out in a few months.

There seem to be good index fund options in both 401ks. You don’t list the expense ratios but I assume the index funds’ are low.

Is there a reason his 401k is invested in a target date fund and the mid cap fund? Are you intentionally tilting? Depending on ERs, I’d either just use the TDF or do a 3-fund portfolio with 500 index, international index, and bond index. Ditto for her 401k.

Doesn’t look like either of you are able to deduct a traditional IRA contribution. Google “traditional IRA deduction limits” to see IRS chart about this. Therefore, it doesn’t make sense to make a non-deductible contribution. Do Roth IRA contributions instead.

If you still have money left over after maxing both 401ks and Roth IRAs (do you have access to a HSA?), then do taxable investing using low-cost index funds. I’d recommend something like a total stock market fund at your preferred brokerage house.

Some might question why he’s doing Roth 401k investments instead of traditional. Seems like you’re in 22% marginal federal tax bracket, so the wiki says it’s a toss up between traditional and Roth. You said his income trajectory is on the rise, so if that’s true, then you’ll be in a higher tax bracket then, and it would make sense to reassess the issue then and possibly switch to traditional 401k.
Topic Author
pizzatriscuits
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Joined: Thu Nov 19, 2020 8:08 pm

Re: Help with portfolio investment plan for a couple in their early late 20s/early 30s

Post by pizzatriscuits »

tashnewbie wrote: Thu Nov 19, 2020 9:08 pm Welcome to the forum.

You don’t list the interest rates for the car loan or student loans (are they federal?). That could be a good place to put any extra money. You could easily wipe those out in a few months.

There seem to be good index fund options in both 401ks. You don’t list the expense ratios but I assume the index funds’ are low.

Is there a reason his 401k is invested in a target date fund and the mid cap fund? Are you intentionally tilting? Depending on ERs, I’d either just use the TDF or do a 3-fund portfolio with 500 index, international index, and bond index. Ditto for her 401k.

Doesn’t look like either of you are able to deduct a traditional IRA contribution. Google “traditional IRA deduction limits” to see IRS chart about this. Therefore, it doesn’t make sense to make a non-deductible contribution. Do Roth IRA contributions instead.

If you still have money left over after maxing both 401ks and Roth IRAs (do you have access to a HSA?), then do taxable investing using low-cost index funds. I’d recommend something like a total stock market fund at your preferred brokerage house.

Some might question why he’s doing Roth 401k investments instead of traditional. Seems like you’re in 22% marginal federal tax bracket, so the wiki says it’s a toss up between traditional and Roth. You said his income trajectory is on the rise, so if that’s true, then you’ll be in a higher tax bracket then, and it would make sense to reassess the issue then and possibly switch to traditional 401k.
Hi there! Thank you so much for the warm welcome and taking the time to respond to my post. I will edit my post to include interest rates for all loans. The interest rate on my student loans is 5%; my husband's student loan interest rate is paid off at this point and only principal is left. The car APR is 4.99%.

I can take a look at all expense ratios and add them to my post tomorrow, but you are right, they are low.

There is no reason, I think that's what my husband was advised at the time he opened this years ago.

So on the maxing out retirement accounts question - we want to strike a balance between adding enough that our retirement is funded but also having the ability to pull funds out relatively easily if needed in the coming decades. So we are not fans of maxing out retirement funds even though that would get us the most ideal return in our old age.

Can you tell us a little more about where to read more on what makes sense for Roth 401k vs traditional 401k? My company recently added the Roth 401k option and we were wondering if I should switch. Seems like based on your advice, maybe he should switch?
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Eagle33
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Re: Help with portfolio investment plan for a couple in their early late 20s/early 30s

Post by Eagle33 »

pizzatriscuits wrote: Thu Nov 19, 2020 9:31 pm Can you tell us a little more about where to read more on what makes sense for Roth 401k vs traditional 401k? My company recently added the Roth 401k option and we were wondering if I should switch. Seems like based on your advice, maybe he should switch?
Read wiki topic Traditional versus Roth
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.
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teen persuasion
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Re: Help with portfolio investment plan for a couple in their early late 20s/early 30s

Post by teen persuasion »

Why not max both 401k contributions, pre-tax?

Crunching numbers based on your given numbers:
$135k + up to 25% bonus ($33.75k)
9% Roth contribution = ~$12k - ~$15k
$60k
5% contribution = $3k
Total contributions = $15k -$18k
Max contributions * 2 = $39k
Difference = $21k - $24k

So it would take $2k or less per month to max both.

But you'd gain $36k in tax deferral (everything except your 5% already tax deferred). Some or all of that is in the 24% bracket, plus 4.95% state tax, so you could save over $10k in taxes. It would only cost you $11k - $14k to put $39k in tax deferred accounts. Then you still have the majority of your $3500/month to save to taxable, for flexibility.
tashnewbie
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Joined: Thu Apr 23, 2020 12:44 pm

Re: Help with portfolio investment plan for a couple in their early late 20s/early 30s

Post by tashnewbie »

I agree with poster above...maxing retirement accounts seems like a great deal for you two. You'll save on taxes, which you can use to probably almost fill a Roth IRA contribution.

The Roth IRA contributions are very flexible, because they can be withdrawn at any time, penalty- and tax-free. I wouldn't necessarily advise using Roth IRA contributions for elective spending like vacations, but it is an option that's available.

I would pay off that car loan ASAP. There's nowhere you can get that kind of guaranteed, risk-free after-tax return today.

If her loans are federal, it might be worth considering refinancing them once the 0% interest period is over. Otherwise, if the loans are currently private, I'd look into doing another refinance. Either way, the total balance is low-ish, so you should be able to pay these off soon.

Once the car loan and student loans are paid off, then you'll have >$500/month that you can save/invest in a "fun money" account. $6,000/year should be plenty for you to have one or a couple nice trips each year.
HEPennyPacker
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Re: Help with portfolio investment plan for a couple in their early late 20s/early 30s

Post by HEPennyPacker »

I'm sorry for my ignorance but how do you USE your tax money? For example, I get paid gross $100K/year and I have a 25% tax rate. If I contribute $25K to my pre-tax 401/457 (if I could do that in one year) how do I USE the $ to put into Roth? The Feds don't get it, but I don't get it either, right? It goes into the 401/457? Can someone show me an example of how you end up with MORE $ to put into a Roth?
tashnewbie
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Re: Help with portfolio investment plan for a couple in their early late 20s/early 30s

Post by tashnewbie »

HEPennyPacker wrote: Fri Nov 20, 2020 11:45 am I'm sorry for my ignorance but how do you USE your tax money? For example, I get paid gross $100K/year and I have a 25% tax rate. If I contribute $25K to my pre-tax 401/457 (if I could do that in one year) how do I USE the $ to put into Roth? The Feds don't get it, but I don't get it either, right? It goes into the 401/457? Can someone show me an example of how you end up with MORE $ to put into a Roth?
Let's assume your effective tax rate is 15%. If you contribute $20k/year into your 401k, then you're saving $3k in taxes.

That's $3k in your pocket that you wouldn't have gotten if you had paid taxes on your full $100k salary (instead of $80k). You can use that $3k however you see fit, including putting it in a Roth IRA.

ETA: I guess that money's not really in your pocket, but if you don't defer the money into your 401k, you're paying more to the government that tax year. It's money you've "saved" that year.
ivgrivchuck
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Re: Help with portfolio investment plan for a couple in their early late 20s/early 30s

Post by ivgrivchuck »

pizzatriscuits wrote: Thu Nov 19, 2020 9:31 pm
Hi there! Thank you so much for the warm welcome and taking the time to respond to my post. I will edit my post to include interest rates for all loans. The interest rate on my student loans is 5%; my husband's student loan interest rate is paid off at this point and only principal is left. The car APR is 4.99%.
The expected stock market return is around the same as the interest rates in your loans (especially after you consider taxes). But investing in stocks carries a significant risk, while paying back loans gives you a risk-free return.

Hence before you start investing in taxable, you should focus on paying those loans back.
44% VTI | 36% VXUS | 10% I-bonds | 10% EE-bonds
HEPennyPacker
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Re: Help with portfolio investment plan for a couple in their early late 20s/early 30s

Post by HEPennyPacker »

tashnewbie wrote: Fri Nov 20, 2020 11:47 am
HEPennyPacker wrote: Fri Nov 20, 2020 11:45 am I'm sorry for my ignorance but how do you USE your tax money? For example, I get paid gross $100K/year and I have a 25% tax rate. If I contribute $25K to my pre-tax 401/457 (if I could do that in one year) how do I USE the $ to put into Roth? The Feds don't get it, but I don't get it either, right? It goes into the 401/457? Can someone show me an example of how you end up with MORE $ to put into a Roth?
Let's assume your effective tax rate is 15%. If you contribute $20k/year into your 401k, then you're saving $3k in taxes.

That's $3k in your pocket that you wouldn't have gotten if you had paid taxes on your full $100k salary (instead of $80k). You can use that $3k however you see fit, including putting it in a Roth IRA.

ETA: I guess that money's not really in your pocket, but if you don't defer the money into your 401k, you're paying more to the government that tax year. It's money you've "saved" that year.
So, it's NOT really in your pocket. I mean, it's going to the pre-tax account and Uncle Same get's $3K less....that part I understand but you're not putting $3K into the Roth based on that....right?
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Watty
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Re: Help with portfolio investment plan for a couple in their early late 20s/early 30s

Post by Watty »

What are your plans for kids and if you have some then do you expect to have a stay at home parent?
pizzatriscuits wrote: Thu Nov 19, 2020 8:30 pm Tax Rate: 24% - Federal (would love help determining this?, I used the calculator here), 4.95% State
If you did your own taxes last year with tax software then make copy of your old tax return and then add $100 to one of your incomes. The change in your taxes will tell you both your federal and state marginal tax rate. Be sure that you do not change your actual tax return.

In that tax bracket it is very unlikely that Roth accounts would be a better choice than a decidable traditional account unless there is some very unusual situation. After you have maxed out your deductible retirement accounts Roths are still a good choice for any more money that you want to save.
pizzatriscuits wrote: Thu Nov 19, 2020 8:30 pm ....but we’ve built them back up and now that we are $45,000, we want to invest a portion after putting enough for an emergency fund
It would be good to increase your 401k contributions through the end of the year to get a bigger tax deduction. You could increase those to be 100% of your paychecks if your company allows it then use part of that $45K to live on in December. If you could put an additional $20K into the 401k then in your tax brackets you would save almost $6,000 in taxes.
pizzatriscuits wrote: Thu Nov 19, 2020 9:31 pm The car APR is 4.99%.
Pay off the car loan ASAP and then each month put your car payment into a seperate car fund so you will have enough to pay cash when you need a replacement car. With your income there is no reason that you should have car loans.
pizzatriscuits wrote: Thu Nov 19, 2020 9:31 pm my husband's student loan interest rate is paid off at this point and only principal is left.
That statement is almost certainly incorrect unless there is something unusual going on like he had some sort of weird loan from a relative. You need to get the details about what his interest rate really is.
pizzatriscuits wrote: Thu Nov 19, 2020 8:30 pm If we are not looking to always max out our Roth 401k, 401k and Traditional IRA, what would you recommend we up our contributions by if we are looking to still have some flexibility with liquidity by also investing some portion in a brokerage account?
I would pay off the car and student loans before I invested in a taxable account.

Having an ample emergency fund, next house downpayment fund, and a next car fund are all fine but you should be maxing out all your deductible accounts before investing in a taxable account.
pizzatriscuits wrote: Thu Nov 19, 2020 8:30 pm with a stable employment outlook, is it acceptable to keep only 4 months worth of expenses ($24k) in the Schwab savings account (it earns almost no interest, it’s not even a HYSA)?
A big factor is how tight your budget would be if you had to live on just one income. If one of you is still working then your emergency fund would likely last a lot longer than four months.



A few general comments.

1) When I was about your age one thing that I did was that I committed to myself to save half of any future pay increases. I was pretty much able to stick with that for a long time. This allowed me to painlessly get to the point were I was saving a high percentage of my income and I never missed the money and every time I got a raise I still got more take home pay. "Saving" can include things other than retirement savings since you will likely have several goals.

2) One thing I have done for years is that I keep a very simple spreadsheet where I list my assets and debts each year on January 1st. I keep it very simple and it only takes about 15 minutes to add a new column each year. This allows me to see my progress over the years. You might start doing this. Depending on how large your student loans are you might even have a negative net worth right now.

3) If you plan on having kids then try to keep your budget so that you can live on one income. Even if you plan on going back to work after you have a kid you might change your mind or if you have a kid with even minor and temporary health problems using daycare may not be a good or even possible option.
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teen persuasion
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Re: Help with portfolio investment plan for a couple in their early late 20s/early 30s

Post by teen persuasion »

HEPennyPacker wrote: Fri Nov 20, 2020 11:45 am I'm sorry for my ignorance but how do you USE your tax money? For example, I get paid gross $100K/year and I have a 25% tax rate. If I contribute $25K to my pre-tax 401/457 (if I could do that in one year) how do I USE the $ to put into Roth? The Feds don't get it, but I don't get it either, right? It goes into the 401/457? Can someone show me an example of how you end up with MORE $ to put into a Roth?
In the case of the OP, putting $12k in pre-tax instead of Roth 401k right now would get them reduced taxes withheld right away. If they are 24% + 4.95%, then that's $3474 less in taxes withheld. There will be more to take home.

Now, for people who are eligible for EITC, contributing to pre-tax 401k will reduce their w2 wages and AGI, which can make them eligible for a larger refundable credit, as well as reducing their tax. We have had tax refunds (with nothing withheld from paychecks) as high as $11k (5 kids, EITC, state matches EITC and CTC partially). We used those refunds to fund our Roth IRAs. That's how you end up with MORE $ to put in a Roth IRA.
HEPennyPacker
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Re: Help with portfolio investment plan for a couple in their early late 20s/early 30s

Post by HEPennyPacker »

Ahhhhhhh, I think I understand now. So, if I could somehow net everything out I would have nothing withheld, contribute that money to pre-tax 457, and then in February-ish, I would STILL receive a refund.....I don't think we get an EITC.

And in the first example of your answer, it makes sense because they are already contributing to a Roth but in our case we aren't (yet) so we wouldn't get more take home, right? We would have to wait until tax return.
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galawdawg
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Re: Help with portfolio investment plan for a couple in their early late 20s/early 30s

Post by galawdawg »

A couple of thoughts in addition to those already mentioned:

1. Is there any possibility that you qualify for a CARES Act distribution from your 401k? If so, you may still be able to repay the $10k that you withdrew from your 401k back into your IRA. https://www.irs.gov/newsroom/coronaviru ... nd-answers

2. I'd recommend you consider a two fund (https://www.bogleheads.org/wiki/Two-fund_portfolio) or three fund (https://www.bogleheads.org/wiki/Three-fund_portfolio) portfolio in an allocation that reflects your ability, willingness and need to take risk. At your ages, you may wish to have an asset allocation between 100/0 (all stock) and 80/20 (stock/bond).
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teen persuasion
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Re: Help with portfolio investment plan for a couple in their early late 20s/early 30s

Post by teen persuasion »

HEPennyPacker wrote: Fri Nov 20, 2020 2:28 pm Ahhhhhhh, I think I understand now. So, if I could somehow net everything out I would have nothing withheld, contribute that money to pre-tax 457, and then in February-ish, I would STILL receive a refund.....I don't think we get an EITC.

And in the first example of your answer, it makes sense because they are already contributing to a Roth but in our case we aren't (yet) so we wouldn't get more take home, right? We would have to wait until tax return.
<<And in the first example of your answer, it makes sense because they are already contributing to a Roth>>
Exactly.
<<in our case we aren't (yet) so we wouldn't get more take home, right? We would have to wait until tax return.>>
If you aren't already saving/contributing X amount, then beginning to contribute more just costs you less (the tax deferred) to contribute, e.g., an extra $1k contributed pre-tax only *costs* $750 at 25%. The taxes withheld from your paycheck will be adjusted automatically (because they are calculated on the reduced pay).

Your tax refund MIGHT change, if your reduced AGI pushes you into a new scenario (like eligible for the retirement saver's credit, or low enough that you can receive part of a refundable credit like CTC, or AOTC, or EITC).


The OP had mentioned having $3500/month for saving (to taxable). So it was always earmarked for saving. I just suggested saving it in pre-tax FIRST, because it cost less with the tax deferral, so there's more left over total to save, if that makes sense.
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pizzatriscuits
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Re: Help with portfolio investment plan for a couple in their early late 20s/early 30s

Post by pizzatriscuits »

I apologize for my late response in this thread. I had a family emergency and just getting back to this. I appreciate everyone’s helpful input (what I read about this forum in the Boggleheads Guide to Investing is clearly true; you guys are an awesome bunch). I also wanted to apologize that my baseline level of knowledge appears lower than everyone here so I might ask questions that are obvious. I hope that’s ok while I learn the ropes. Hope I can help someone else along the way as I learn!
teen persuasion wrote: Fri Nov 20, 2020 9:17 am Why not max both 401k contributions, pre-tax?

Crunching numbers based on your given numbers:
$135k + up to 25% bonus ($33.75k)
9% Roth contribution = ~$12k - ~$15k
$60k
5% contribution = $3k
Total contributions = $15k -$18k
Max contributions * 2 = $39k
Difference = $21k - $24k

So it would take $2k or less per month to max both.

But you'd gain $36k in tax deferral (everything except your 5% already tax deferred). Some or all of that is in the 24% bracket, plus 4.95% state tax, so you could save over $10k in taxes. It would only cost you $11k - $14k to put $39k in tax deferred accounts. Then you still have the majority of your $3500/month to save to taxable, for flexibility.
So can you tell me what the $60k number represents? I gather that you are saying at 9% Roth, the contribution varies between 12 and 15k depending on the bonus amount. But after that I am not sure what is being said. If you have the time/patience to explain, it would be helpful. I think I get maybe the gist of your post - you are saying that putting extra $ in tax-deferred accounts save us on income taxes (last year we had a small refund; didn’t owe anything in taxes just as a point of comparison).
tashnewbie wrote: Fri Nov 20, 2020 10:24 am I agree with poster above...maxing retirement accounts seems like a great deal for you two. You'll save on taxes, which you can use to probably almost fill a Roth IRA contribution.

The Roth IRA contributions are very flexible, because they can be withdrawn at any time, penalty- and tax-free. I wouldn't necessarily advise using Roth IRA contributions for elective spending like vacations, but it is an option that's available.

I would pay off that car loan ASAP. There's nowhere you can get that kind of guaranteed, risk-free after-tax return today.

If her loans are federal, it might be worth considering refinancing them once the 0% interest period is over. Otherwise, if the loans are currently private, I'd look into doing another refinance. Either way, the total balance is low-ish, so you should be able to pay these off soon.

Once the car loan and student loans are paid off, then you'll have >$500/month that you can save/invest in a "fun money" account. $6,000/year should be plenty for you to have one or a couple nice trips each year.
Would it be possible to explain how we save on taxes this way? We don’t have a Roth IRA currently — is the suggestion that we open one after we max out our work 401ks? And is the suggestion to also switch to a traditional 401k for my husband as well from the Roth 401k he currently has?

I did not know that Roth IRA contributions are flexible and can be withdrawn; while the gains on the principal would not be penalty free, I can see how having the principal withdrawalable (not a word, ha) would give us peace of mind.

I am not sure what you mean by the car loan having a risk-free after tax return… I am sorry if the answer is obvious but can you explain a little what you mean? I saw someone further down say
ivgrivchuck wrote:The expected stock market return is around the same as the interest rates in your loans (especially after you consider taxes). But investing in stocks carries a significant risk, while paying back loans gives you a risk-free return.
so I might be getting stuck on the word “return” but is it that paying off the car means the “return” we get in the amount of interest we pay is risk free?

My loans (her) are private and subsidized. They are 5% interest. Here’s a screenshot of the current details .

I appreciate your vacation/fun money consideration, ha! $6000 is exactly what we are targeting for a nice anniversary vacation every year :)
Watty wrote: Fri Nov 20, 2020 12:49 pm What are your plans for kids and if you have some then do you expect to have a stay at home parent?
We don’t have any plans for children in the near future (5+ year outlook) but we have decided that if we do decide to have children, neither of us would be a stay at home parent.
Watty wrote: Fri Nov 20, 2020 12:49 pm If you did your own taxes last year with tax software then make copy of your old tax return and then add $100 to one of your incomes. The change in your taxes will tell you both your federal and state marginal tax rate. Be sure that you do not change your actual tax return.

In that tax bracket it is very unlikely that Roth accounts would be a better choice than a decidable traditional account unless there is some very unusual situation. After you have maxed out your deductible retirement accounts Roths are still a good choice for any more money that you want to save.
We use Free Tax USA. I can see if I can do as you suggest to get the marginal rate. I also have a copy of our tax return if any of those numbers would be helpful (but they might not be due to change of jobs/circumstances - husband got promoted late in 2019; I took a paycut to switch to nonprofit from a for-profit industry so our income was slightly different than it will be this year)
Watty wrote: Fri Nov 20, 2020 12:49 pm It would be good to increase your 401k contributions through the end of the year to get a bigger tax deduction. You could increase those to be 100% of your paychecks if your company allows it then use part of that $45K to live on in December. If you could put an additional $20K into the 401k then in your tax brackets you would save almost $6,000 in taxes.
I thought we wouldn’t get a tax deduction for our 401k contributions because of our income level. Sorry if I am misunderstanding, do you mean, a bigger tax deduction because our overall income is decreased by my traditional 401k contributions? I am not sure how much we could put in there, assuming we go with this approach it would probably only apply to December by the time the paperwork is through but it probably could get close to 20k.
Watty wrote: Fri Nov 20, 2020 12:49 pm Pay off the car loan ASAP and then each month put your car payment into a seperate car fund so you will have enough to pay cash when you need a replacement car. With your income there is no reason that you should have car loans.
This makes sense. My husband bought the (used) car before we met/were married and before he earned enough to pay cash.
Watty wrote: Fri Nov 20, 2020 12:49 pm That statement is almost certainly incorrect unless there is something unusual going on like he had some sort of weird loan from a relative. You need to get the details about what his interest rate really is.
Here are the details - I just realized that the interest is paused because he is in business school so they are in forbearance until September of next year. Sorry that I did not mention that up at the top.
Watty wrote: Fri Nov 20, 2020 12:49 pm I would pay off the car and student loans before I invested in a taxable account.

Having an ample emergency fund, next house downpayment fund, and a next car fund are all fine but you should be maxing out all your deductible accounts before investing in a taxable account.
Our concern about investing everything in tax-advantaged accounts was that it’s not easy to pull that money before we are 65. It seems from what people are posting, we might be able to withdraw some of our funds if needed from a Roth IRA penalty free so that helps to know.

Appreciate your general comments and will keep those in mind!
galawdawg wrote: Fri Nov 20, 2020 2:32 pm A couple of thoughts in addition to those already mentioned:

1. Is there any possibility that you qualify for a CARES Act distribution from your 401k? If so, you may still be able to repay the $10k that you withdrew from your 401k back into your IRA. https://www.irs.gov/newsroom/coronaviru ... nd-answers

2. I'd recommend you consider a two fund (https://www.bogleheads.org/wiki/Two-fund_portfolio) or three fund (https://www.bogleheads.org/wiki/Three-fund_portfolio) portfolio in an allocation that reflects your ability, willingness and need to take risk. At your ages, you may wish to have an asset allocation between 100/0 (all stock) and 80/20 (stock/bond).
So this is really interesting about the CARES act distribution. I am not sure we qualify unfortunately. We took out the money in January (before the pandemic) and none of us had COVID-19 or were furloughed. My husband did take a voluntary paycut (along with his senior management team) when it was really bad back in April to avoid laying people off but it only lasted for about a month if I remember correctly. So based on that, I don’t think we qualify?

Thank you for the asset allocation recommendation. I think 90/10 or 80/20 makes sense. We know it’s ok to be aggressive at this age so that’s what we had been considering. This portfolio recommendation should apply across the board right? In all retirement accounts and brokerage accounts?
ivgrivchuck
Posts: 321
Joined: Sun Sep 27, 2020 6:20 pm

Re: Help with portfolio investment plan for a couple in their early late 20s/early 30s

Post by ivgrivchuck »

pizzatriscuits wrote: Sat Nov 21, 2020 3:58 pm
ivgrivchuck wrote:The expected stock market return is around the same as the interest rates in your loans (especially after you consider taxes). But investing in stocks carries a significant risk, while paying back loans gives you a risk-free return.
so I might be getting stuck on the word “return” but is it that paying off the car means the “return” we get in the amount of interest we pay is risk free?
If you invest $1000 into stocks, you are expected to get roughly $50 per year in stock appreciation and dividends, but this investment carries a significant risk (stocks can go up and stocks can go down).

If you use $1000 to pay back your loan, you save $50 per year by not having to pay interest on that portion of the loan. This "investment" doesn't carry any risk. You are guaranteed to save that $50 without any downsides.
44% VTI | 36% VXUS | 10% I-bonds | 10% EE-bonds
Topic Author
pizzatriscuits
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Re: Help with portfolio investment plan for a couple in their early late 20s/early 30s

Post by pizzatriscuits »

ivgrivchuck wrote: Sat Nov 21, 2020 4:33 pm
pizzatriscuits wrote: Sat Nov 21, 2020 3:58 pm
ivgrivchuck wrote:The expected stock market return is around the same as the interest rates in your loans (especially after you consider taxes). But investing in stocks carries a significant risk, while paying back loans gives you a risk-free return.
so I might be getting stuck on the word “return” but is it that paying off the car means the “return” we get in the amount of interest we pay is risk free?
If you invest $1000 into stocks, you are expected to get roughly $50 per year in stock appreciation and dividends, but this investment carries a significant risk (stocks can go up and stocks can go down).

If you use $1000 to pay back your loan, you save $50 per year by not having to pay interest on that portion of the loan. This "investment" doesn't carry any risk. You are guaranteed to save that $50 without any downsides.
Thank you! That's what I thought it was but it's so helpful to see it explained this way. I appreciate you taking the time to do that!
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teen persuasion
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Re: Help with portfolio investment plan for a couple in their early late 20s/early 30s

Post by teen persuasion »

pizzatriscuits wrote: Sat Nov 21, 2020 3:58 pm
teen persuasion wrote: Fri Nov 20, 2020 9:17 am Why not max both 401k contributions, pre-tax?

Crunching numbers based on your given numbers:
$135k + up to 25% bonus ($33.75k) husband income
9% Roth contribution = ~$12k - ~$15k husband current contribution
$60k your income
5% contribution = $3k your current contribution
Total current contributions = $15k -$18k
Max possible contributions * 2 = $39k
Difference = $21k - $24k

So it would take $2k or less per month to max both.

But you'd gain $36k in tax deferral (everything except your 5% already tax deferred). Some or all of that is in the 24% bracket, plus 4.95% state tax, so you could save over $10k in taxes. It would only cost you $11k - $14k to put $39k in tax deferred accounts. Then you still have the majority of your $3500/month to save to taxable, for flexibility.
So can you tell me what the $60k number represents? I gather that you are saying at 9% Roth, the contribution varies between 12 and 15k depending on the bonus amount. But after that I am not sure what is being said. If you have the time/patience to explain, it would be helpful. I think I get maybe the gist of your post - you are saying that putting extra $ in tax-deferred accounts save us on income taxes (last year we had a small refund; didn’t owe anything in taxes just as a point of comparison).
Sorry that I didn't label things for clarity - $60k is your income. I was listing out each income, and the corresponding retirement account contributions, then comparing your possible max contributions.

You mentioned having $3500/month to contribute to taxable savings. An extra $2k of that could be redirected to max the retirement accounts. The larger amount tax deferred, plus switching husband's contributions to traditional instead of Roth, really boosts the tax savings. Right now you are only deferring $3k (5% of your $60k). Maxing both pre-tax would defer $39k ($36k more).

When you contribute to pre-tax retirement accounts thru payroll, your payroll withholdings are adjusted immediately. You are having tax withholding taken out not on your entire paycheck (as you are with Roth contributions), but only on the reduced amount. If your combined tax rate is approximately 29%, and you contribute $1k pre-tax, then your pay is reduced $1k. If instead you contribute $1k Roth, your pay is reduced $1k plus $290 for the tax on it. So you can contribute a similar amount to pre-tax retirement while receiving (relatively) more in take home. I was calculating the tax deferred on my suggested change in amount and type (not Roth); tax rate * increase in income moved to tax deferred. If you don't get that tax withheld (as it is now), it can be included in the contribution instead.

So I was saying: increase your retirement savings to the max, taking up to an extra $24k per year ($2k/month) from what you are now taking home. But the tax savings drop your taxes $10k per year, so take home might only drop $24k - $10k = $14k in the end.

Would you like an extra $24k in retirement, that only reduces take home $14k?

There's still some extra for taxable savings. Or to put in Roth IRAs instead. They cost the same going in, but Roth is tax free in growth, and tax free coming out. Taxable has LTCG on dividends and when holdings are sold. So Roth is generally better than taxable when you have a choice.
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pizzatriscuits
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Re: Help with portfolio investment plan for a couple in their early late 20s/early 30s

Post by pizzatriscuits »

teen persuasion wrote: Sat Nov 21, 2020 6:26 pm
pizzatriscuits wrote: Sat Nov 21, 2020 3:58 pm
teen persuasion wrote: Fri Nov 20, 2020 9:17 am Why not max both 401k contributions, pre-tax?

Crunching numbers based on your given numbers:
$135k + up to 25% bonus ($33.75k) husband income
9% Roth contribution = ~$12k - ~$15k husband current contribution
$60k your income
5% contribution = $3k your current contribution
Total current contributions = $15k -$18k
Max possible contributions * 2 = $39k
Difference = $21k - $24k

So it would take $2k or less per month to max both.

But you'd gain $36k in tax deferral (everything except your 5% already tax deferred). Some or all of that is in the 24% bracket, plus 4.95% state tax, so you could save over $10k in taxes. It would only cost you $11k - $14k to put $39k in tax deferred accounts. Then you still have the majority of your $3500/month to save to taxable, for flexibility.
So can you tell me what the $60k number represents? I gather that you are saying at 9% Roth, the contribution varies between 12 and 15k depending on the bonus amount. But after that I am not sure what is being said. If you have the time/patience to explain, it would be helpful. I think I get maybe the gist of your post - you are saying that putting extra $ in tax-deferred accounts save us on income taxes (last year we had a small refund; didn’t owe anything in taxes just as a point of comparison).
Sorry that I didn't label things for clarity - $60k is your income. I was listing out each income, and the corresponding retirement account contributions, then comparing your possible max contributions.

You mentioned having $3500/month to contribute to taxable savings. An extra $2k of that could be redirected to max the retirement accounts. The larger amount tax deferred, plus switching husband's contributions to traditional instead of Roth, really boosts the tax savings. Right now you are only deferring $3k (5% of your $60k). Maxing both pre-tax would defer $39k ($36k more).

When you contribute to pre-tax retirement accounts thru payroll, your payroll withholdings are adjusted immediately. You are having tax withholding taken out not on your entire paycheck (as you are with Roth contributions), but only on the reduced amount. If your combined tax rate is approximately 29%, and you contribute $1k pre-tax, then your pay is reduced $1k. If instead you contribute $1k Roth, your pay is reduced $1k plus $290 for the tax on it. So you can contribute a similar amount to pre-tax retirement while receiving (relatively) more in take home. I was calculating the tax deferred on my suggested change in amount and type (not Roth); tax rate * increase in income moved to tax deferred. If you don't get that tax withheld (as it is now), it can be included in the contribution instead.

So I was saying: increase your retirement savings to the max, taking up to an extra $24k per year ($2k/month) from what you are now taking home. But the tax savings drop your taxes $10k per year, so take home might only drop $24k - $10k = $14k in the end.

Would you like an extra $24k in retirement, that only reduces take home $14k?

There's still some extra for taxable savings. Or to put in Roth IRAs instead. They cost the same going in, but Roth is tax free in growth, and tax free coming out. Taxable has LTCG on dividends and when holdings are sold. So Roth is generally better than taxable when you have a choice.
Thank you so much for explaining that thoroughly. I see what you are saying and it does sound beneficial (I like the idea we'd still have some money to save in taxable and have flexibility), but I have a couple of follow up questions, if you would indulge me:

- when you say, "the tax savings drop your taxes $10k per year" - how is this realized? Is it that our taxable income is reduced by 10k? Where is the 10k number coming from or how is it calculated (sorry if I am dense and this is obvious?)
- is the tax benefit only realized if we are maxing out contributions or can it work even if say we decided instead of $2k/month we do $1.5k extra towards our 401k? Just curious
- what happens to the current Roth 401k? Would husband need to essentially stop contributions to his Roth 401k and request a regular 401k?
- finally if we were to go with the suggestion, what would the practical next steps be? Should we try to do it this year or just start the new year with the new contributions plan?

I appreciate your patience; thanks for the advice.
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galawdawg
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Re: Help with portfolio investment plan for a couple in their early late 20s/early 30s

Post by galawdawg »

pizzatriscuits wrote: Sat Nov 21, 2020 3:58 pm I apologize for my late response in this thread. I had a family emergency and just getting back to this. I appreciate everyone’s helpful input (what I read about this forum in the Boggleheads Guide to Investing is clearly true; you guys are an awesome bunch). I also wanted to apologize that my baseline level of knowledge appears lower than everyone here so I might ask questions that are obvious. I hope that’s ok while I learn the ropes. Hope I can help someone else along the way as I learn!
galawdawg wrote: Fri Nov 20, 2020 2:32 pm A couple of thoughts in addition to those already mentioned:

1. Is there any possibility that you qualify for a CARES Act distribution from your 401k? If so, you may still be able to repay the $10k that you withdrew from your 401k back into your IRA. https://www.irs.gov/newsroom/coronaviru ... nd-answers

2. I'd recommend you consider a two fund (https://www.bogleheads.org/wiki/Two-fund_portfolio) or three fund (https://www.bogleheads.org/wiki/Three-fund_portfolio) portfolio in an allocation that reflects your ability, willingness and need to take risk. At your ages, you may wish to have an asset allocation between 100/0 (all stock) and 80/20 (stock/bond).
So this is really interesting about the CARES act distribution. I am not sure we qualify unfortunately. We took out the money in January (before the pandemic) and none of us had COVID-19 or were furloughed. My husband did take a voluntary paycut (along with his senior management team) when it was really bad back in April to avoid laying people off but it only lasted for about a month if I remember correctly. So based on that, I don’t think we qualify?

Thank you for the asset allocation recommendation. I think 90/10 or 80/20 makes sense. We know it’s ok to be aggressive at this age so that’s what we had been considering. This portfolio recommendation should apply across the board right? In all retirement accounts and brokerage accounts?
No worries and welcome to Bogleheads! We all started somewhere...

1. Taking the distribution in January isn't an issue. From the IRS (https://www.irs.gov/newsroom/coronaviru ... nd-answers):
A coronavirus-related distribution is a distribution that is made from an eligible retirement plan to a qualified individual from January 1, 2020, to December 30, 2020, up to an aggregate limit of $100,000 from all plans and IRAs.
As to whether you qualify, you need to meet just one of the criteria from the IRS guidelines (https://www.irs.gov/pub/irs-drop/n-20-50.pdf). The IRS has expanded eligibility to include the following (see page 5):
In addition, pursuant to the authority of the Secretary to issue guidance to provide for other factors under section 2202(a)(4)(A)(ii)(III) of the CARES Act, a qualified individual for purposes of this notice is an individual who experiences adverse financial consequences as a result of...the individual having a reduction in pay (or self-employment income) due to COVID-19...
While I do not practice tax law and IANYL, it appears that you may qualify for a CARES act distribution, (You can verify that with your tax professional.) In that case, I'd strongly consider doing a repayment/recontribution of the full amount of the distribution to the Schwab Rollover IRA. You may wish to contact Schwab to see whether anything needs to be done to designate the funds you send as a Cares Act repayment/recontribution (it is treated as a rollover contribution). Since you have your savings built up, I'd recommend that you do the recontribution before the end of December. It is simpler for tax-reporting and it puts that money back to work quickly in your tax-advantaged account.

2. Yes, you'd want your overall portfolio to have the allocation you choose. It doesn't matter so much what the allocation for each individual account is, the allocation is spread among all of your investments. (Note: there is a debate whether bond funds should be in taxable or tax-advantaged accounts. With current bond markets, it doesn't really makes a significant difference, but you may want to try to hold the bond allocation portion in tax-advantaged just in case bond yields shoot up during your investing years).

So you could have the ten or twenty percent of your total portfolio allocated to bonds in an index bond fund (preferred) in your husband's Roth 401k and have the remainder of his Roth 401k and all of your other investments in a stock index fund.

Hope that makes sense!
Riversong
Posts: 4
Joined: Wed Aug 02, 2017 11:58 am

Re: Help with portfolio investment plan for a couple in their early late 20s/early 30s

Post by Riversong »

Here's an illustration from Turbotax on how tax savings on 401(k) contributions.

For example, let's assume your salary is $35,000 and your tax bracket is 25%.

When you contribute 6% of your salary into a tax-deferred 401(k)— $2,100—your taxable income becomes $32,900.
$35,000 x 0.06 = $2,100
$35,000 - $2,100 = $32,900
The income tax on $32,900 is $525 less than the tax on your full salary. So, not only do you get savings for retirement, you save on taxes today.

You should absolutely be maxing out your 401(k) ($19000 x 2).
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teen persuasion
Posts: 1328
Joined: Sun Oct 25, 2015 1:43 pm

Re: Help with portfolio investment plan for a couple in their early late 20s/early 30s

Post by teen persuasion »

pizzatriscuits wrote: Sat Nov 21, 2020 10:30 pm
Thank you so much for explaining that thoroughly. I see what you are saying and it does sound beneficial (I like the idea we'd still have some money to save in taxable and have flexibility), but I have a couple of follow up questions, if you would indulge me:

- when you say, "the tax savings drop your taxes $10k per year" - how is this realized? Is it that our taxable income is reduced by 10k? Where is the 10k number coming from or how is it calculated (sorry if I am dense and this is obvious?)
- is the tax benefit only realized if we are maxing out contributions or can it work even if say we decided instead of $2k/month we do $1.5k extra towards our 401k? Just curious
- what happens to the current Roth 401k? Would husband need to essentially stop contributions to his Roth 401k and request a regular 401k?
- finally if we were to go with the suggestion, what would the practical next steps be? Should we try to do it this year or just start the new year with the new contributions plan?

I appreciate your patience; thanks for the advice.
Base case, no contributions (or all Roth), if your combined income is $140k (some bonus) + $60k or $200k total, your taxable income is $200k - $25k (approx. standard deduction) = $175k.

If you each contribute $19.5k to pre-tax 401k, that reduces your taxable income by that amount.
$175k - $39k = $136k.

Tax rates are progressive, they are lower on income in the lowest levels, and get higher as you add more income (like a layer cake). So any reductions to income (like 401k contributions) affect the tax at your highest level, or your marginal rate. If all of your contributions fit in the 24% bracket, then we can figure the tax avoided by simply multiplying the amount deferred by the rate: $39k * 24%. In your case, I was using $36k (the increase in tax deferred, since you already contribute $3k in your 401k) and I added your state rate to the federal rate (24% + 4.95%) = 28.95%. This number was something in excess of $10k.

So for any amount you decide to contribute, you can estimate the tax deferred by multiplying the rate by the additional amount deferred. You should check your actual AGI/taxable income levels - you can cross tax bracket thresholds, in which case some of the contributions fall in one bracket, some in the next lower one. Then just figure each part separately and add.

For your husband's 401k, he can request his contributions switch to traditional 401k instead of Roth. It isn't a different account so much as different buckets in one account. If he gets a match, it's already being contributed to the traditional 401k side of his account (by law, all employer contributions are pre-tax). If his employer lets him make changes frequently/easily, he could change and increase now, to get as much as possible into this year. Then readjust for next year to balance it out over the entire year.

My husband's employer previously only allowed 401k changes quarterly, so I had to plan ahead if I wanted changes. They recently updated to allow monthly changes. But other employers had an online portal so we could make changes easily, whenever. It just depends.

I just got access to my first employer retirement plan last year, a SIMPLE IRA, in mid year. I wanted to max it, but couldn't hit the max beginning mid year (not enough income left). So I set my contribution to 100% (after mandatory things like FICA) for the rest of the year to pack in as much as possible. Then I reset it to 80% for this year to hit the max.
Topic Author
pizzatriscuits
Posts: 6
Joined: Thu Nov 19, 2020 8:08 pm

Re: Help with portfolio investment plan for a couple in their early late 20s/early 30s

Post by pizzatriscuits »

What does it say about me that I got so giddy when I saw responses to this post as soon as I woke up and again now that I had time to sit down in front of my laptop and respond? :D
galawdawg wrote: Sun Nov 22, 2020 6:07 am No worries and welcome to Bogleheads! We all started somewhere...

1. Taking the distribution in January isn't an issue. From the IRS (https://www.irs.gov/newsroom/coronaviru ... nd-answers):
A coronavirus-related distribution is a distribution that is made from an eligible retirement plan to a qualified individual from January 1, 2020, to December 30, 2020, up to an aggregate limit of $100,000 from all plans and IRAs.
As to whether you qualify, you need to meet just one of the criteria from the IRS guidelines (https://www.irs.gov/pub/irs-drop/n-20-50.pdf). The IRS has expanded eligibility to include the following (see page 5):
In addition, pursuant to the authority of the Secretary to issue guidance to provide for other factors under section 2202(a)(4)(A)(ii)(III) of the CARES Act, a qualified individual for purposes of this notice is an individual who experiences adverse financial consequences as a result of...the individual having a reduction in pay (or self-employment income) due to COVID-19...
While I do not practice tax law and IANYL, it appears that you may qualify for a CARES act distribution, (You can verify that with your tax professional.) In that case, I'd strongly consider doing a repayment/recontribution of the full amount of the distribution to the Schwab Rollover IRA. You may wish to contact Schwab to see whether anything needs to be done to designate the funds you send as a Cares Act repayment/recontribution (it is treated as a rollover contribution). Since you have your savings built up, I'd recommend that you do the recontribution before the end of December. It is simpler for tax-reporting and it puts that money back to work quickly in your tax-advantaged account.

2. Yes, you'd want your overall portfolio to have the allocation you choose. It doesn't matter so much what the allocation for each individual account is, the allocation is spread among all of your investments. (Note: there is a debate whether bond funds should be in taxable or tax-advantaged accounts. With current bond markets, it doesn't really makes a significant difference, but you may want to try to hold the bond allocation portion in tax-advantaged just in case bond yields shoot up during your investing years).

So you could have the ten or twenty percent of your total portfolio allocated to bonds in an index bond fund (preferred) in your husband's Roth 401k and have the remainder of his Roth 401k and all of your other investments in a stock index fund.

Hope that makes sense!
Thank you again for the warm welcome. This forum is awesome, I am so excited to learn more!

That makes a LOT of sense. Thank you so much for sharing the CARES act detailed info; we had resigned ourselves that we wouldn't repay it and it's great that it seems like we qualify based on my husband's reduction in pay during April and May (20%). We'll plan on making that contribution back so it's not treated as income on our taxes and so we can have the benefit of money in a tax advantaged account. I think we might just invest that IRA we are repaying the 10k into into a Schwab bond fund (seems like SCHR is most similar to VFITX) so most of that 10% of our portfolio is one place. Thanks for the advice.
Riversong wrote: Sun Nov 22, 2020 7:40 am Here's an illustration from Turbotax on how tax savings on 401(k) contributions.

For example, let's assume your salary is $35,000 and your tax bracket is 25%.

When you contribute 6% of your salary into a tax-deferred 401(k)— $2,100—your taxable income becomes $32,900.
$35,000 x 0.06 = $2,100
$35,000 - $2,100 = $32,900
The income tax on $32,900 is $525 less than the tax on your full salary. So, not only do you get savings for retirement, you save on taxes today.

You should absolutely be maxing out your 401(k) ($19000 x 2).

Thank you, that makes sense. Appreciate you crunching the numbers!
teen persuasion wrote: Sun Nov 22, 2020 10:35 am
pizzatriscuits wrote: Sat Nov 21, 2020 10:30 pm
Thank you so much for explaining that thoroughly. I see what you are saying and it does sound beneficial (I like the idea we'd still have some money to save in taxable and have flexibility), but I have a couple of follow up questions, if you would indulge me:

- when you say, "the tax savings drop your taxes $10k per year" - how is this realized? Is it that our taxable income is reduced by 10k? Where is the 10k number coming from or how is it calculated (sorry if I am dense and this is obvious?)
- is the tax benefit only realized if we are maxing out contributions or can it work even if say we decided instead of $2k/month we do $1.5k extra towards our 401k? Just curious
- what happens to the current Roth 401k? Would husband need to essentially stop contributions to his Roth 401k and request a regular 401k?
- finally if we were to go with the suggestion, what would the practical next steps be? Should we try to do it this year or just start the new year with the new contributions plan?

I appreciate your patience; thanks for the advice.
Base case, no contributions (or all Roth), if your combined income is $140k (some bonus) + $60k or $200k total, your taxable income is $200k - $25k (approx. standard deduction) = $175k.

If you each contribute $19.5k to pre-tax 401k, that reduces your taxable income by that amount.
$175k - $39k = $136k.

Tax rates are progressive, they are lower on income in the lowest levels, and get higher as you add more income (like a layer cake). So any reductions to income (like 401k contributions) affect the tax at your highest level, or your marginal rate. If all of your contributions fit in the 24% bracket, then we can figure the tax avoided by simply multiplying the amount deferred by the rate: $39k * 24%. In your case, I was using $36k (the increase in tax deferred, since you already contribute $3k in your 401k) and I added your state rate to the federal rate (24% + 4.95%) = 28.95%. This number was something in excess of $10k.

So for any amount you decide to contribute, you can estimate the tax deferred by multiplying the rate by the additional amount deferred. You should check your actual AGI/taxable income levels - you can cross tax bracket thresholds, in which case some of the contributions fall in one bracket, some in the next lower one. Then just figure each part separately and add.

For your husband's 401k, he can request his contributions switch to traditional 401k instead of Roth. It isn't a different account so much as different buckets in one account. If he gets a match, it's already being contributed to the traditional 401k side of his account (by law, all employer contributions are pre-tax). If his employer lets him make changes frequently/easily, he could change and increase now, to get as much as possible into this year. Then readjust for next year to balance it out over the entire year.

My husband's employer previously only allowed 401k changes quarterly, so I had to plan ahead if I wanted changes. They recently updated to allow monthly changes. But other employers had an online portal so we could make changes easily, whenever. It just depends.

I just got access to my first employer retirement plan last year, a SIMPLE IRA, in mid year. I wanted to max it, but couldn't hit the max beginning mid year (not enough income left). So I set my contribution to 100% (after mandatory things like FICA) for the rest of the year to pack in as much as possible. Then I reset it to 80% for this year to hit the max.
Right! That makes sense. I had forgotten about the additional savings in state income taxes it saves us on.

So we just checked on his empower account and it was possible to switch; easy peasy. We switched his contributions to traditional but it said the max he could contribute was 25% of his paycheck. Do you know why that might be? Is there some kind of limit to what you can contribute max because of his Roth contributions he had been making all year?

My fidelity 401k says I can contribute up to 90% of my paycheck. Before I do that - is there anything we need to check in terms of total Roth and traditional 401k contributions we had across both of us? Or am I fine to contribute 90% given I will never reach the 19.5k threshold this year?

If I can bother you again - can you also explain the Roth IRA option you had mentioned - the one where we can potentially pull the principal if we ever need to but since it’s tax-advantaged avoids LTCG? How is that done exactly? Also should I be contributing more from any extra money we have to my Rolled over Schwab IRA or just funnel everything in the above Roth IRA you have mentioned?

Thanks again for your generosity with your time and engaging with me/giving me the explanations you have. I really appreciate it.
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teen persuasion
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Re: Help with portfolio investment plan for a couple in their early late 20s/early 30s

Post by teen persuasion »

pizzatriscuits wrote: Sun Nov 22, 2020 2:39 pm
Right! That makes sense. I had forgotten about the additional savings in state income taxes it saves us on.

So we just checked on his empower account and it was possible to switch; easy peasy. We switched his contributions to traditional but it said the max he could contribute was 25% of his paycheck. Do you know why that might be? Is there some kind of limit to what you can contribute max because of his Roth contributions he had been making all year?

My fidelity 401k says I can contribute up to 90% of my paycheck. Before I do that - is there anything we need to check in terms of total Roth and traditional 401k contributions we had across both of us? Or am I fine to contribute 90% given I will never reach the 19.5k threshold this year?

If I can bother you again - can you also explain the Roth IRA option you had mentioned - the one where we can potentially pull the principal if we ever need to but since it’s tax-advantaged avoids LTCG? How is that done exactly? Also should I be contributing more from any extra money we have to my Rolled over Schwab IRA or just funnel everything in the above Roth IRA you have mentioned?

Thanks again for your generosity with your time and engaging with me/giving me the explanations you have. I really appreciate it.
Unfortunately, some employers limit you to a % of income. We've been lucky that we haven't had limits put on us, to date, because it's much harder to max from relatively lower incomes if restricted to 25%. It's probably partially a holdover from early 401k rules that had a low % max in addition to $ max, and partially due to HCE rules that might force a return of pre-tax funds (if the employer fails testing criteria). Set it as high as you can for the next few pay periods, then reset for the new calendar year. He should be able to hit the max if he contributes evenly throughout the year, even under 25%.

Maximums for 401k don't add between you, so as long as you individually don't exceed the max/year you should be good. It can be an issue if you have more than one job, though. Usually a single employer cuts off your contributions at the max, but they'd have no way of knowing about contributions to another employer's plan. DH did this a few years back - changed jobs mid year and contributed partially to both. I thought I'd figured his contributions out perfectly for the new job, but he had a bit of extra income over his base, and a straight percentage of that kicked him $27 over the limit. We had to ask them to refund it and adjust our tax return the next year (because the refund happens in the next year).

Contributions to a Roth IRA can always be withdrawn tax and penalty free, but not any earnings on those contributions. Those only come out tax and penalty free after age 59.5. It's a great emergency fund backup, because Roth space is precious - you really don't want to dip into it if you don't need to, but it's there in a true emergency. The longer funds stay in the Roth IRA, the larger they can grow with no tax drag. Compare it to putting funds in taxable investments - they will throw off dividends and possibly a bit of capital gains every year, which are taxed. If you sell an investment (rebalancing, or to withdraw) some of it is return of your basis (no tax) and some will be capital gains (hopefully it has grown!) which is taxed.

You can likely arrange to max employer retirement plans, and Roth IRAs, and still have excess to put in taxable for flexibility. Many promote doing pre-tax in employer retirement accounts and Roth in IRAs so you have some of each, and because deductibility of IRA contributions is eventually phased out at higher AGI. You can continue to make direct Roth IRA contributions for a bit higher agi, but eventually that is phased out, too. Then you can do backdoor Roth IRA contributions (contribute to an IRA on a non deductible basis, and convert to Roth immediately). This works best when you have no already existing tIRA balances (pro-rata rules interfere), so if you expect to have income rise into Roth phaseout territory it's best to avoid tIRA contributions (and rollovers to tIRA) so you can do backdoor Roth IRAs in the future. It might be possible to roll a rollover into a current employer's 401k, to clear the deck for backdoor Roth IRAs.
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teen persuasion
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Re: Help with portfolio investment plan for a couple in their early late 20s/early 30s

Post by teen persuasion »

I just looked up the MFJ income limits on IRA deductions (104k MAGI) and Roth IRA contributions ($196k). So you definitely wouldn't be eligible for a tIRA deduction, no point in pursuing that.

Contributions to pre-tax 401k could decrease your combined MAGI enough to possibly make you eligible for direct Roth IRA contributions (another advantage to maxing 401k pre-tax).
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