Portfolio Review-Fund Placement & Tax efficiency Questions

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Topic Author
bh3fpinv
Posts: 13
Joined: Sun Jan 03, 2021 1:49 pm

Portfolio Review-Fund Placement & Tax efficiency Questions

Post by bh3fpinv »

Hello all, long time lurker, this is my first post. About 10 years ago my spouse and I left an advisor to follow the Boglehead methodology and subscribed to trying to primarily follow the 3 Fund portfolio. I have been reading on the site periodically. Lately, I’ve been thinking we should get a “professional” opinion but that is how we ended up with the expensive advisor that we left. Thank you for your time to review and provide feedback on our portfolio and answer questions. Using the recommended template, I describe my current portfolio and list my questions at the end.

Emergency funds: Yes, $100,000 15 months of expenses in MM and HYS.

Debt: $30,250 auto loan, zero interest loan, $550/mo 57 months remain
$534,447 Mortgage, 15 yr fixed at 1.75%, New refi-178 months remain.

Tax Filing Status: MFJ

Tax Rate: 24% Federal, 0% State

State of Residence: WA

Age: 55 & 53

Desired Asset allocation: 49% US stocks/21% International/30% bonds

Current retirement assets: $1,916,949

New Annual Contributions
$26,000 TSP, Annual Match is ~$9,000.
$14,000 Back Door Roth
$52,000 Taxable (Goal is $2,000 bi-weekly, don’t always reach it.)

Percentages are per entire portfolio.

Taxable-Vanguard Brokerage $801,240
5.4% VG High Yield Tax exempt VWALX 0.09%
5.1% VG Intermediate Term Tax Exempt VWIUX 0.09%
23.9% VG Total Stock Market VTSAX 0.04%
7.4% VG Total International VTIAX Stock 0.11%

TSP Traditional Option $590866
30.8% TSP L2030 .042%
Current AA for L 2030 is: G Fund 33.09%, F Fund 6.79%, C Fund 30.77%, S Fund 8.31%, I Fund 21.04%


My Back Door Roth IRA $262963
7.6% VG Total Stock Market VTSAX 0.04%
2.2% VG Total International stock VTIAX 0.11
3.9% VG Total Bond VBTLX 0.05%

Spouse Back Door Roth IRA $261,882
7.5% VG Total Stock Market VTSAX 0.04%
2.8% VG Total International stock VTIAX 0.11
3.4% VG Total Bond VBTLX 0.05%

Old 401(k)s’ x 2 $273,181 in two accounts.
Funds here are not included in the total listed above. We cannot add new money to them. The money here is distributed either in a life cycle or 3 fund index portfolios as best I could considering our goal AA and to keep cost low. ER ranges from 0.27 to 1.23% Fortunately, the fund with highest ER at 1.23% only holds about $14k

Questions:
For simplicity sake and ease of rebalancing I set up 3 fund portfolios in our IRAs. As I have added funds I have typically added in my desired AA. I also elected to use life cycle funds in TSP for simplicity. What do you think of my fund placement?

Considering tax efficiency, as I add new money, should I primarily increase bonds in tax deferred and Roth? Or continue investing in my chosen AA in each account?

Prior to the Trump tax cut we were in the 33% federal tax bracket. Now we are in the 24%. Should we continue to keep/add to our tax free munis in the taxable account?

We invest in the traditional TSP because we think we will be in the 12% tax bracket in retirement. We add annually to the backdoor Roth for tax diversification. Should I add a portion of my TSP to the Roth option for additional tax diversification?

We have left the old 401(k)s’ with the current custodians so we can add to the back-door Roth and avoid the pro-rata rule. Once we stop adding to the Roth, we planned to roll them over to Vanguard. Do you think this is reasonable? Or should I roll them over now and either deal with the pro-rata issue or just increase my investment in taxable by $14,000?

Some may consider our 70/30 AA aggressive for our age, however, I have an inflation adjusted pension with survivorship. Also, I plan to continue to work for some time. Possibly, into my 70s, at least part time, if my health holds.

Thank you for your review, consideration, and viewpoint.

BH3
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ruralavalon
Posts: 20223
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Portfolio Review-Fund Placement & Tax efficiency Questions

Post by ruralavalon »

Welcome to the forum :).

It's good to see you have minimal debt, are making maximum use of tax-advantaged accounts, invest in very low expense index funds, have a portfolio of almost $2 million, and have a high rate of contributions to investing ($92k annually). You are doing great.

bh3fpinv wrote: Sun Jan 10, 2021 12:27 pmOld 401(k)s’ x 2 $273,181 in two accounts.
Funds here are not included in the total listed above. We cannot add new money to them. The money here is distributed either in a life cycle or 3 fund index portfolios as best I could considering our goal AA and to keep cost low. ER ranges from 0.27 to 1.23% Fortunately, the fund with highest ER at 1.23% only holds about $14k
. . . . . .
We have left the old 401(k)s’ with the current custodians so we can add to the back-door Roth and avoid the pro-rata rule. Once we stop adding to the Roth, we planned to roll them over to Vanguard. Do you think this is reasonable? Or should I roll them over now and either deal with the pro-rata issue or just increase my investment in taxable by $14,000?
Is there a reason that you don't want to rollover the old 401k accounts into your Thrift Savings Plan (TSP) account?

That would give you much lower expense ratios and a simpler portfolio. That would also let you continue to contribute to backdoor Roth IRAs.

bh3fpinv wrote: Sun Jan 10, 2021 12:27 pmAge: 55 & 53
. . . . .
New Annual Contributions
$26,000 TSP, Annual Match is ~$9,000.
$14,000 Back Door Roth
$52,000 Taxable (Goal is $2,000 bi-weekly, don’t always reach it.)
. . . . .
TSP Traditional Option $590866
. . . . .
We invest in the traditional TSP because we think we will be in the 12% tax bracket in retirement. We add annually to the backdoor Roth for tax diversification. Should I add a portion of my TSP to the Roth option for additional tax diversification?
. . . . .
. . . Also, I plan to continue to work for some time. Possibly, into my 70s, at least part time, if my health holds.
Will you be eligible for both a substantial pension and Social Security?

Are the old 401k accounts ($273k) traditional or Roth?

I see that you currently have $591k in the traditional tax-deferred TSP account, contribute $26k annually to the TSP plus $9k employer match, are in your mid 50s and plan to work into your 70s if possible.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
Topic Author
bh3fpinv
Posts: 13
Joined: Sun Jan 03, 2021 1:49 pm

Re: Portfolio Review-Fund Placement & Tax efficiency Questions

Post by bh3fpinv »

ruralavalon-thank you for your reply.
Is there a reason that you don't want to rollover the old 401k accounts into your Thrift Savings Plan (TSP) account?
Yes. The old 401ks' belong to my spouse who currently works part time. I own the TSP.

Regarding SS-The estimates for SS are around $36K at age 70 for me and $12k at 62 for my spouse. I am the 55 year old. The SS calculators that I have looked at recommend my spouse taking SS at 62 and 70 for me. so that is what we are planning. I'm currently receiving a pension that amounts to about $80,000. Around $20,000 is tax free because it is actually disability payment due to an injuries sustained during my previous career. I'm actually in pretty good shape physically now.

The old 401k accounts are traditional also.

Thanks again!
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ruralavalon
Posts: 20223
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Portfolio Review-Fund Placement & Tax efficiency Questions

Post by ruralavalon »

bh3fpinv wrote: Sun Jan 10, 2021 3:12 pm ruralavalon-thank you for your reply.
Is there a reason that you don't want to rollover the old 401k accounts into your Thrift Savings Plan (TSP) account?
Yes. The old 401ks' belong to my spouse who currently works part time. I own the TSP.

Regarding SS-The estimates for SS are around $36K at age 70 for me and $12k at 62 for my spouse. I am the 55 year old. The SS calculators that I have looked at recommend my spouse taking SS at 62 and 70 for me. so that is what we are planning.

The old 401k accounts are traditional also.

Thanks again!
That makes sense now.

Traditional TSP contributions probably will be better for you. You could consider splitting the TSP contributions between traditional and Roth. It depends on how solid your estimate of the 12% federal tax bracket in retirement is, and how certain you are that you will work into your 70s.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
Topic Author
bh3fpinv
Posts: 13
Joined: Sun Jan 03, 2021 1:49 pm

Re: Portfolio Review-Fund Placement & Tax efficiency Questions

Post by bh3fpinv »

Bumping my post....does anyone have any thoughts about repeating the 3 Fund portfolio in multiple locations? Can I do this more tax efficiently? I've read that munis are a good choice for those in higher tax brackets? Does that make sense for a MFJ couple in the 24% bracket?

Thanks for reading!

bh3
Topic Author
bh3fpinv
Posts: 13
Joined: Sun Jan 03, 2021 1:49 pm

Re: Portfolio Review-Fund Placement & Tax efficiency Questions

Post by bh3fpinv »

Bumping my post, looking for the wisdom of the crowd....does anyone have any thoughts about repeating the 3 Fund portfolio in multiple locations? Can I do this more tax efficiently? I've read that munis are a good choice for those in higher tax brackets? Does that make sense for a MFJ couple in the 24% bracket?

Thanks for reading!

bh3
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grabiner
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Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Portfolio Review-Fund Placement & Tax efficiency Questions

Post by grabiner »

bh3fpinv wrote: Tue Jan 12, 2021 11:02 am Bumping my post, looking for the wisdom of the crowd....does anyone have any thoughts about repeating the 3 Fund portfolio in multiple locations? Can I do this more tax efficiently? I've read that munis are a good choice for those in higher tax brackets? Does that make sense for a MFJ couple in the 24% bracket?
In the 24% tax bracket, I normally recommend munis in preference to taxable bonds if you are subject to the Net Investment Income tax (adjusted gross income over $250K), or if Vanguard has a muni fund for your high-tax state (not applicable in WA).

But in your situation, the advantage of holding all your bonds in tax-deferred is not a tax issue. You have the TSP G fund, which is a better bond fund than you can get at retail. Conversely, Vanguard Total International is (at least for now) better diversified than the TSP I fund, since Vanguard's fund holds emerging markets and small-cap stocks. Thus I would recommend holding the TSP entirely in the G fund, adding 80% C and 20% S to approximate the total stock market if your TSP is larger than your target bond allocation.
Wiki David Grabiner
Topic Author
bh3fpinv
Posts: 13
Joined: Sun Jan 03, 2021 1:49 pm

Re: Portfolio Review-Fund Placement & Tax efficiency Questions

Post by bh3fpinv »

grabiner wrote: Tue Jan 12, 2021 11:02 pm

In the 24% tax bracket, I normally recommend munis in preference to taxable bonds if you are subject to the Net Investment Income tax (adjusted gross income over $250K), or if Vanguard has a muni fund for your high-tax state (not applicable in WA).

But in your situation, the advantage of holding all your bonds in tax-deferred is not a tax issue. You have the TSP G fund, which is a better bond fund than you can get at retail. Conversely, Vanguard Total International is (at least for now) better diversified than the TSP I fund, since Vanguard's fund holds emerging markets and small-cap stocks. Thus I would recommend holding the TSP entirely in the G fund, adding 80% C and 20% S to approximate the total stock market if your TSP is larger than your target bond allocation.
Grabiner, thank you for your reply. I am going to consider taking your recommendation. To summarize your recommendations, with my current assets I believe I can change my TSP to 100% G Fund and still have my desired AA. Going forward I can add C and S as you recommend to the TSP. In the IRAs I would sell VBTLX and re-invest that in VTIAX and VTSAX. I will continue holding the municipal bond funds. Thanks for your time!

bh3
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