traditional IRA vs Roth - how to figure out

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Topic Author
hartista
Posts: 38
Joined: Fri Mar 19, 2021 2:50 pm

traditional IRA vs Roth - how to figure out

Post by hartista »

Hello, I recently moved a $50,000 traditional IRA from another company over to Vanguard. I am 61 and not retiring anytime soon (by choice!). The advisor talked me through the basics, that I could also open a Roth IRA and start to add to it or convert fund over to it as the years go on. But in his financially savvy mind how to figure out how much sounded easy! He said "sit down and make a pie chart." Well pies to me are things to eat haha. I'm not dummy but that would not come naturally for me to figure out. Any ideas on how to make this easy for a savvy woman trying to wrap her head around this. Next I plan to take on investing in index funds. Thank you!! P.S happy to be here, I love this!
fyre4ce
Posts: 1305
Joined: Sun Aug 06, 2017 11:29 am

Re: traditional IRA vs Roth - how to figure out

Post by fyre4ce »

Trying to simplify things as much as possible, the better choice tends to be the one that incurs the lower tax rate. With Roth, taxes are paid at contribution, and with traditional (assuming the contributions are deductible), the taxes are paid at withdrawal. So, the question becomes, do you expect to pay a higher or lower marginal (ie. on the last dollar) tax rate today, or when you withdraw the money?

Most people have, at best, only a very rough idea of what their tax rate will be when they withdraw the money. Although, with you being 61 and retirement presumably not many decades away, you can probably make a reasonable estimate. If you post the following information, we can help you make an informed decision:
  • Annual gross income, less any deductions like health insurance premiums
  • Whether you have a retirement plan (eg. 401k) available at work, and if so, whether it has a Roth option
  • Current balances of traditional (pre-tax) retirement accounts (traditional IRAs, SEP and SIMPLE IRAs, 401k's, 403b's, 457b's, etc.)
  • Current balance of taxable investments
  • Number of more years you expect to work
  • When you expect to begin collecting Social Security, and how much you expect
  • Amounts of any income you expect once you retire (pensions, royalties, rental properties, income from part-time work, etc.)
  • State of residence today, and where you expect to reside in retirement
tibbitts
Posts: 13278
Joined: Tue Feb 27, 2007 6:50 pm

Re: traditional IRA vs Roth - how to figure out

Post by tibbitts »

hartista wrote: Fri Mar 19, 2021 2:56 pm Hello, I recently moved a $50,000 traditional IRA from another company over to Vanguard. I am 61 and not retiring anytime soon (by choice!). The advisor talked me through the basics, that I could also open a Roth IRA and start to add to it or convert fund over to it as the years go on. But in his financially savvy mind how to figure out how much sounded easy! He said "sit down and make a pie chart." Well pies to me are things to eat haha. I'm not dummy but that would not come naturally for me to figure out. Any ideas on how to make this easy for a savvy woman trying to wrap her head around this. Next I plan to take on investing in index funds. Thank you!! P.S happy to be here, I love this!
There is no precision to this calculation for almost anyone; it's just a best guess. I don't understand the pie chart recommendation - that's really strange and inappropriate, and I don't think anyone would do that.
User avatar
Eagle33
Posts: 1303
Joined: Wed Aug 30, 2017 3:20 pm

Re: traditional IRA vs Roth - how to figure out

Post by Eagle33 »

Read the wiki topic Traditional versus Roth for further understanding.
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.
retiredjg
Posts: 43706
Joined: Thu Jan 10, 2008 12:56 pm

Re: traditional IRA vs Roth - how to figure out

Post by retiredjg »

Post your information in the format shown at the bottom of this message. The closer you follow the format, the easier it is to understand your situation and offer suggestions.

If you are in a very low tax bracket, Roth conversions might make sense.
User avatar
Eagle33
Posts: 1303
Joined: Wed Aug 30, 2017 3:20 pm

Re: traditional IRA vs Roth - how to figure out

Post by Eagle33 »

If you do not have a Roth IRA and had 2020 earned income, while you figure out contributions/conversions to a Roth IRA, I recommend you make a 2020 Roth IRA contribution before 4/15/21 so you can start your Roth account 5-year clock. This will start the clock make on 1/1/2020 and you will be able to withdraw earnings in the Roth IRA tax-free after 12/31/2024. All your contribution and conversion amounts will be immediately accessible tax-free now because you are >59.5. If you need to withdraw earnings before 1/1/2025, you will have to pay taxes on the earnings, but no 10% penalty.
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.
Topic Author
hartista
Posts: 38
Joined: Fri Mar 19, 2021 2:50 pm

Re: traditional IRA vs Roth - how to figure out

Post by hartista »

Hello thank you for responding to my post with some useful questions. My head spins trying to figure this out on my own so hopefully my answers to your questions below can be helpful

[*]Annual gross income, less any deductions like health insurance premiums - $80,000 (no deductions)
[*]Whether you have a retirement plan (eg. 401k) available at work, and if so, whether it has a Roth option - I am self employed so no work retirement plan
[*]Current balances of traditional (pre-tax) retirement accounts (traditional IRAs, SEP and SIMPLE IRAs, 401k's, 403b's, 457b's, etc.) - I just transferred $55,000 from a traditional IRA to Vanguard that is now awaiting where to put it
[*]Current balance of taxable investments - no investments accounts funded just yet, I have about $25,000 ready to put into my new account for index funds
[*]Number of more years you expect to work - 10-12 years, I have no urge to retire
[*]When you expect to begin collecting Social Security, and how much you expect - don't really know when but at the moment it is very low, only about $1800 a month
[*]Amounts of any income you expect once you retire (pensions, royalties, rental properties, income from part-time work, etc.) - hopefully investment income and not sure but I would probably keep working out of choice
[*]State of residence today, and where you expect to reside in retirement[/list] - currently live in California, I don't see myself here permanently but this would be unknown

I understand this is not an exact science but when people say things like "low tax bracket" I don't really get how specific that would be to me, so any specific help from above answers would be fantastic! Thank you! Annie
Topic Author
hartista
Posts: 38
Joined: Fri Mar 19, 2021 2:50 pm

Re: traditional IRA vs Roth - how to figure out

Post by hartista »

Eagle33 wrote: Sat Mar 20, 2021 3:44 pm Read the wiki topic Traditional versus Roth for further understanding.
Thank you for trying to help me here, I don't really need more info on this, just how to calculate a guesstimate given my circumstances.
User avatar
FiveK
Posts: 11108
Joined: Sun Mar 16, 2014 2:43 pm

Re: traditional IRA vs Roth - how to figure out

Post by FiveK »

hartista wrote: Fri Mar 26, 2021 8:53 pm
Eagle33 wrote: Sat Mar 20, 2021 3:44 pm Read the wiki topic Traditional versus Roth for further understanding.
Thank you for trying to help me here, I don't really need more info on this, just how to calculate a guesstimate given my circumstances.
There is a description of how to do such a guesstimate in that article, in the Estimating future marginal tax rate section.

Based on your current age (61), pre-tax balance ($55K), and state of residence (CA), doing all traditional IRA contributions now will likely be best for you.

That is because your marginal tax rate when you start to withdraw from that pre-tax account is likely to be lower than what you will save by contributing to it now. Unless there is a huge change in tax law, there is a good chance you will be paying zero federal tax at that time, so saving what you can now is worthwhile.

If you know something of Excel, the personal finance toolbox can be a useful tool to help you visualize those marginal tax rates, both now and what you might expect when withdrawing.

Happy to get into more details/explanations on any of the above if it isn't immediately clear. Good luck!
User avatar
FiveK
Posts: 11108
Joined: Sun Mar 16, 2014 2:43 pm

Re: traditional IRA vs Roth - how to figure out

Post by FiveK »

hartista wrote: Fri Mar 26, 2021 8:51 pmI am self employed so no work retirement plan
Are you aware of Solo 401(k) plans?
retiredjg
Posts: 43706
Joined: Thu Jan 10, 2008 12:56 pm

Re: traditional IRA vs Roth - how to figure out

Post by retiredjg »

hartista, you did not mention if you are single or married filing jointly.

How much money are you saving for retirement each year?
Topic Author
hartista
Posts: 38
Joined: Fri Mar 19, 2021 2:50 pm

Re: traditional IRA vs Roth - how to figure out

Post by hartista »

retiredjg wrote: Sat Mar 27, 2021 7:10 am hartista, you did not mention if you are single or married filing jointly. Single

How much money are you saving for retirement each year? - I’ve put in the max IRA for the last five years which is currently $7000 as well as approx $19,000 in other savings which I’m about to put into index funds. Thank you!
Topic Author
hartista
Posts: 38
Joined: Fri Mar 19, 2021 2:50 pm

Re: traditional IRA vs Roth - how to figure out

Post by hartista »

Based on your current age (61), pre-tax balance ($55K), and state of residence (CA), doing all traditional IRA contributions now will likely be best for you.

That is because your marginal tax rate when you start to withdraw from that pre-tax account is likely to be lower than what you will save by contributing to it now. Unless there is a huge change in tax law, there is a good chance you will be paying zero federal tax at that time, so saving what you can now is worthwhile.

Happy to get into more details/explanations on any of the above if it isn't immediately clear. Good luck!

So helpful, that is exactly what I needed! I find my head spins when I try to figure this out in my own and figured it would be easy enough for someone else. That is what my accountant initially said as well but then I started to question it. A Vanguard helper when I transferred my funds said he only uses Roth so I got swayed, but then I realized that it doesn’t matter what someone else uses, it needs to be specific to me and for some people (sounds like with me) it’s better to let the total amount earn the interest). What I could figure out in my own is how my tax rate, age and location would factor in, so whew, thanks for the help with that! I’ll look into the other resources as well.
Sahara
Posts: 334
Joined: Tue Dec 04, 2018 6:21 pm

Re: traditional IRA vs Roth - how to figure out

Post by Sahara »

hartista wrote: Sat Mar 27, 2021 11:06 am What I could figure out in my own is how my tax rate, age and location would factor in, so whew, thanks for the help with that! I’ll look into the other resources as well.
Annie, there are a number of factors and steps necessary to make this decision. I am going to try to illustrate the process for you based on the information you have provided. I encourage you to ask questions and clarify the information provided to support an informed decision.

Annie’s Current Tax Situation:
Income 80,000 no deductions
Standard deduction 12,400
Taxable Income 67,600
Tax 10,668
Tax Bracket 22%

Annie’s question: Do I contribute to Roth or Traditional IRA or Solo 401K?

If you contribute to a 401K, the amount contributed reduces your taxable income. That currently saves you 22% of the amount you contribute.

This leads to the next step. When you take the money from the 401k in retirement, you will pay the tax on the contribution plus any growth that has occurred.

So to answer this question we need to estimate your tax bracket in retirement.

Let’s say at age 70 your income looks like this:

Annie’s Retirement Tax Situation
20,000 in social security
20,000 in distributions from a Traditional IRA or Solo 401K
Standard deduction 14,050 (increased at age 65)
Tax $848
Tax Bracket 10%

We don’t know how much income you need in retirement and how you plan to meet that need. We can guess that you will count on the 55,000 recently invested in a Rollover IRA, the 25,000 you have to invest now, and any future contributions will serve to meet that need.

Based upon the difference in my prediction based upon numbers I pulled out of the air, it appears that tax-deferred accounts would benefit you at this time. Your options include Solo 401k or Traditional IRA, with the Solo 401K allowing for a larger amount of contributions.

There are many here who can guide you as you begin the process of setting up the appropriate accounts. Once you have chosen the appropriate accounts, we can also help you choose the appropriate funds to hold within the accounts and any other mechanics necessary.

It will help if you can clarify
Desired retirement income
Expected Social Security benefit (you may find this useful https://opensocialsecurity.com/)
Marital Status

This site is a good resource for tax estimates https://www.mortgagecalculator.org/calc ... ulator.php
Sahara
Posts: 334
Joined: Tue Dec 04, 2018 6:21 pm

Re: traditional IRA vs Roth - how to figure out

Post by Sahara »

Keep in mind that my tax calculation is a simplification. As a self-employed individual, you will want to look at the “taxable income” on your most recent tax return or ask your accountant or the forum to verify my assumptions.

You might also keep in mind that the person on the phone at Vanguard may not be licensed to give investment advice. At the same time, he or she may be compensated via commission for any money they convince you to invest with them. Meaning that he or she may offer to assist you in opening a Roth IRA even though there may be a better option for your individual situation.

Take this slowly as you get a feel for the big picture.

Here’s a simplified overview for you to contemplate as you learn more.

You say you want to retire at age 72. That gives you 11 more years to save.

You have 25,000 + 55,000 invested now (let’s say by the end of 2021.)

Then let’s say you add 7,000 per year for the next 11 years.

Using the future value calculation with a 5% return - you will have $150,000 in investments to supplement your social security. There are many ways to calculate and estimate withdrawals in retirement. I believe every case is individual and your withdrawals will vary each year. At the same time, the basic 4% withdrawal figure can be used to estimate what you can safely withdraw without depleting your funds. So, 4% of 150,000 would allow you to withdraw 6,000 per year.

You’ll also have 1,800 per month in Social Security beginning at age 70.

The sum of your social security and your portfolio withdrawals would provide you approximately 27,600 per year. If you estimate you need more income than that, you will need to increase your contributions above the 7,000 per year I used in this estimate.

What do your next steps look like?

1 Determine your Solo 401k allowance. The contribution allowance will vary, depending on the profit from your business as well as whether you are a sole proprietor or S Corp. You might want assistance from your accountant or the forum to determine that number. If your Solo 401k allowance is greater than your 7,000 IRA contribution allowance, open a Solo 401K and invest the maximum allowed contribution for 2021.
2 Determine your overall preferred asset allocation.
3 Invest the funds in the Rollover IRA and Solo 401k according to the asset allocation you've chosen.
4 Set up contributions to maintain the asset allocation you’ve chosen.
Topic Author
hartista
Posts: 38
Joined: Fri Mar 19, 2021 2:50 pm

Re: traditional IRA vs Roth - how to figure out

Post by hartista »

FiveK wrote: Fri Mar 26, 2021 10:26 pm
hartista wrote: Fri Mar 26, 2021 8:51 pmI am self employed so no work retirement plan
Are you aware of Solo 401(k) plans?

Believe it or not, I never heard of them, until now!
Topic Author
hartista
Posts: 38
Joined: Fri Mar 19, 2021 2:50 pm

Re: traditional IRA vs Roth - how to figure out

Post by hartista »

Sahara wrote: Sat Mar 27, 2021 3:06 pm Keep in mind that my tax calculation is a simplification. As a self-employed individual, you will want to look at the “taxable income” on your most recent tax return or ask your accountant or the forum to verify my assumptions.
I think you’re pretty close.

You might also keep in mind that the person on the phone at Vanguard may not be licensed to give investment advice. At the same time, he or she may be compensated via commission for any money they convince you to invest with them. Meaning that he or she may offer to assist you in opening a Roth IRA even though there may be a better option for your individual situation.
Yes I think that’s what happened.

Take this slowly as you get a feel for the big picture.
Good idea, it’s a lot to take in but I’ll take my time.

Here’s a simplified overview for you to contemplate as you learn more.

You say you want to retire at age 72. That gives you 11 more years to save.

You have 25,000 + 55,000 invested now (let’s say by the end of 2021.)

Then let’s say you add 7,000 per year for the next 11 years.

Using the future value calculation with a 5% return - you will have $150,000 in investments to supplement your social security. There are many ways to calculate and estimate withdrawals in retirement. I believe every case is individual and your withdrawals will vary each year. At the same time, the basic 4% withdrawal figure can be used to estimate what you can safely withdraw without depleting your funds. So, 4% of 150,000 would allow you to withdraw 6,000 per year.

You’ll also have 1,800 per month in Social Security beginning at age 70.

The sum of your social security and your portfolio withdrawals would provide you approximately 27,600 per year. If you estimate you need more income than that, you will need to increase your contributions above the 7,000 per year I used in this estimate.

What do your next steps look like?

1 Determine your Solo 401k allowance. The contribution allowance will vary, depending on the profit from your business as well as whether you are a sole proprietor or S Corp. You might want assistance from your accountant or the forum to determine that number. If your Solo 401k allowance is greater than your 7,000 IRA contribution allowance, open a Solo 401K and invest the maximum allowed contribution for 2021.
2 Determine your overall preferred asset allocation.
3 Invest the funds in the Rollover IRA and Solo 401k according to the asset allocation you've chosen.
4 Set up contributions to maintain the asset allocation you’ve chosen.
I will need some time to look into this. I had never heard of a solo 401K. After tax season I’ll talk to my accountant. In the meantime that $50,000 is sitting in a Vanguard money market account. Is that ok or should I try to put it somewhere else while I’m figuring this out. I am single now but don’t plan to be single forever. I also don’t really plan to retire in the typical way I really love what I do. Thus planning my retirement income is a wild card!

But I think if I can sort out the IRS vs 401K bucket, then also invest my other 25,000 I should be at least getting myself going best as possible for now. Thanks for all your guidance. I have a lot to learn haha!
Sahara
Posts: 334
Joined: Tue Dec 04, 2018 6:21 pm

Re: traditional IRA vs Roth - how to figure out

Post by Sahara »

It sounds like you are passionate about your work and plan to continue into your seventy’s which is exciting.

In terms of investing the current $50,000. Yes, it is 100% OK to have it sitting there in the money market fund for now.

Moving forward you’ll want to choose an asset allocation. The typical format used to share this information on the forum is as follows:

Desired Asset allocation: xx% stocks / xx% bonds
Desired International allocation: xx% of stocks

You might want to see this article for guidance in choosing your asset allocation:

https://www.bogleheads.org/wiki/Boglehe ... art-up_kit

Also, page 10 of this paper from Vanguard has a nice representation of asset allocation return and risk averages. Just keep in mind that what happened in the past does not guarantee what happens in the future.

https://about.vanguard.com/what-sets-va ... Online.pdf

If you want a simple 3 fund portfolio with 60% stock and 40% bonds it would look like this
Assets 50,000
40% Bonds = 20,000 VBTLX Vangaurd Total Bond Index
60% Stock = 30,000
>> 80% US = 24,000 VTSAX Vanguard Total Stock Market Index
>> 20% International = 6,000 VTIAX Vanguard Total International Stock Index

Another option would be to use the equivalent ETFs. If you want another asset allocation such as 50/50 or 70/30 the computation and funds would be the same.

I encourage you to read more, post all of your information in the suggested format (viewtopic.php?f=1&t=6212) and continue to explore as you plan for your retirement. Every individual financial scenario is unique and needs to be addressed on a case-to-case basis. The more information we have the more accurate our suggestions are going to be.

If you want to do some reading I wold recommend the following books:
"How to Make Your Money Last” Jane Bryant Quinn
"The Charles Schwab Guide to Finances After Fifty: Answers to Your Most Important Money Questions" Carrie Pomeranz Schwab
“The Bogleheads' Guide to Investing” Taylor Larimore, Michael LeBeouf, Mel Lindauer
“The Bogleheads' Guide to the Three-Fund Portfolio” Taylor Larimore
retiredjg
Posts: 43706
Joined: Thu Jan 10, 2008 12:56 pm

Re: traditional IRA vs Roth - how to figure out

Post by retiredjg »

Don't get too excited and invest all your money. :happy

You need an emergency fund - cash you can lay your hands on...enough to live on at least a few months if there is an interruption in income.

I'd also suggest that you invest in both traditional and Roth IRA, not just one or the other. Each has pros and cons.

If you remain single your income would have to go down quite a bit to get into a lower tax bracket, so using some Roth now while tax rates are low is worth considering.
Sahara
Posts: 334
Joined: Tue Dec 04, 2018 6:21 pm

Re: traditional IRA vs Roth - how to figure out

Post by Sahara »

retiredjg wrote: Sun Mar 28, 2021 6:49 am Don't get too excited and invest all your money. :happy

You need an emergency fund - cash you can lay your hands on...enough to live on at least a few months if there is an interruption in income.

I'd also suggest that you invest in both traditional and Roth IRA, not just one or the other. Each has pros and cons.

If you remain single your income would have to go down quite a bit to get into a lower tax bracket, so using some Roth now while tax rates are low is worth considering.
I agree. Since we don't have an overall picture I am responding to specific questions.

I like the idea of Roth as well.
As suggested by eagle33 the OP could invest 7,000 in a Roth IRA for 2020 asap.
She could also invest 7,000 in a Roth IRA for 2021 asap.

If she did this with the 25,000 she has not invested, would she effectively be paying 22% on the money invested in the Roth versus deferring the money in a Solo 401k to be taken out later at a lower rate?

I don't want to put too many options out there and confuse the OP.
User avatar
FiveK
Posts: 11108
Joined: Sun Mar 16, 2014 2:43 pm

Re: traditional IRA vs Roth - how to figure out

Post by FiveK »

Sahara wrote: Sun Mar 28, 2021 7:10 am If she did this with the 25,000 she has not invested, would she effectively be paying 22% on the money invested in the Roth versus deferring the money in a Solo 401k to be taken out later at a lower rate?

I don't want to put too many options out there and confuse the OP.
Back of the envelope calculations I did, and
Sahara wrote: Sat Mar 27, 2021 3:06 pmSo, 4% of 150,000 would allow you to withdraw 6,000 per year.
You’ll also have 1,800 per month in Social Security beginning at age 70.
both indicate traditional withdrawals are highly likely to be federally untaxed in retirement. Unless/until that changes, it's difficult to see any reason for Roth now, other than perhaps using a Roth IRA for an emergency fund.

hartista, to add to the reading advice that is accumulating (all of it good! :)), see Investment Order and Prioritizing investments.

Other than doing something with your 2020 eligibility for IRA contributions that will expire on April 15 (or maybe May 17) this year, taking days or weeks or even months to absorb all this will be fine. Might not want to extend that to years.... ;)
Topic Author
hartista
Posts: 38
Joined: Fri Mar 19, 2021 2:50 pm

Re: traditional IRA vs Roth - how to figure out

Post by hartista »

Don't get too excited and invest all your money. :happy
Just so you understand, I've had the money sitting in money market accounts for quite a few years now, frustrated that I couldn't figure out how/where to invest it to earn more interest. So I'm not an overeager type but until I found Jack Bogle's work (and some others) this part of my financial life completely stumped me. Now I see the light!

You need an emergency fund - cash you can lay your hands on...enough to live on at least a few months if there is an interruption in income.
Again from the above, I've had that for awhile and plan to keep that in it's current money market fund with my bank. It's this extra load of funds that need to start to earn real interest for me.

I'd also suggest that you invest in both traditional and Roth IRA, not just one or the other. Each has pros and cons.
That's certainly an idea worth pursuing. All of these things come down to understanding as much as I can, and then trusting whatever choice I make! That one makes sense to me. I didn't do my 2021 investment yet so maybe that will go to the Roth.

If you remain single your income would have to go down quite a bit to get into a lower tax bracket, so using some Roth now while tax rates are low is worth considering.
Yes good point, thank you!
[/quote]
Topic Author
hartista
Posts: 38
Joined: Fri Mar 19, 2021 2:50 pm

Re: traditional IRA vs Roth - how to figure out

Post by hartista »

Eagle33 wrote: Sun Mar 21, 2021 5:17 pm If you do not have a Roth IRA and had 2020 earned income, while you figure out contributions/conversions to a Roth IRA, I recommend you make a 2020 Roth IRA contribution before 4/15/21 so you can start your Roth account 5-year clock. This will start the clock make on 1/1/2020 and you will be able to withdraw earnings in the Roth IRA tax-free after 12/31/2024. All your contribution and conversion amounts will be immediately accessible tax-free now because you are >59.5. If you need to withdraw earnings before 1/1/2025, you will have to pay taxes on the earnings, but no 10% penalty.
Thank you, I did make a 2020 contribution so it would have to be one for 2021. I'm ok on the timeline.
Topic Author
hartista
Posts: 38
Joined: Fri Mar 19, 2021 2:50 pm

Re: traditional IRA vs Roth - how to figure out

Post by hartista »

Sahara wrote: Sun Mar 28, 2021 6:29 am It sounds like you are passionate about your work and plan to continue into your seventy’s which is exciting.
I adore my work and have only gotten real traction in the last five years. It was not an easy build but now that I'm really cooking, I really want to give it my all. I've always been "off the beaten path" so everyone else retiring and I'm just getting firing haha.

In terms of investing the current $50,000. Yes, it is 100% OK to have it sitting there in the money market fund for now.
The $55,000 was from my IRA that is the one I had sent from the other company to Vanguard and they put it in some money market account for me. Would I want to put it into a traditional IRA instead of that? I could as someone suggested open a second Roth IRA and contribute my 2021 to that as an option?

Moving forward you’ll want to choose an asset allocation. The typical format used to share this information on the forum is as follows:
Yes, I'm getting very excited about this!! I just read the 3 fund portfolio and I have the other 2 books of theirs. I did the Vanguard quiz and it gives me a 70/30 ratio because my instinct is to really go for it for another 10-15 years. But if that seems foolish, I could do 60/40. I'll ask more questions on this when I get closer to doing it.

Desired Asset allocation: xx% stocks / xx% bonds
Desired International allocation: xx% of stocks

You might want to see this article for guidance in choosing your asset allocation:

https://www.bogleheads.org/wiki/Boglehe ... art-up_kit
Yes will look that up!

Also, page 10 of this paper from Vanguard has a nice representation of asset allocation return and risk averages. Just keep in mind that what happened in the past does not guarantee what happens in the future.
I totally get that, have read 3 books so far and have more to read but that makes total sense to me. What I got from Jack Bogle's mindset is to think over the longer term, that's why I picked 10-15 years as somewhat of a timeline because I understand it goes up and down, but it's over time that it is of most benefit.

https://about.vanguard.com/what-sets-va ... Online.pdf
looks good!

If you want a simple 3 fund portfolio with 60% stock and 40% bonds it would look like this
Assets 50,000
40% Bonds = 20,000 VBTLX Vangaurd Total Bond Index
60% Stock = 30,000
>> 80% US = 24,000 VTSAX Vanguard Total Stock Market Index
>> 20% International = 6,000 VTIAX Vanguard Total International Stock Index
Yes looks like what I'm aiming at. I would like to do Admiral shares if possible. I have approx $25,000 to start with for this fund (the $55,000 above is for the IRA).

Another option would be to use the equivalent ETFs. If you want another asset allocation such as 50/50 or 70/30 the computation and funds would be the same.
I like the above suggested index funds, that's what I've been researching and how I'm leaning.

I encourage you to read more, post all of your information in the suggested format (viewtopic.php?f=1&t=6212) and continue to explore as you plan for your retirement. Every individual financial scenario is unique and needs to be addressed on a case-to-case basis. The more information we have the more accurate our suggestions are going to be.
Absolutely! I appreciate your helping me even as I'm a newbie and just getting my "sealegs" with all of this!

If you want to do some reading I wold recommend the following books:
"How to Make Your Money Last” Jane Bryant Quinn
"The Charles Schwab Guide to Finances After Fifty: Answers to Your Most Important Money Questions" Carrie Pomeranz Schwab
“The Bogleheads' Guide to Investing” Taylor Larimore, Michael LeBeouf, Mel Lindauer
“The Bogleheads' Guide to the Three-Fund Portfolio” Taylor Larimore
Terrific! I finished 3 fund and have more on my list.
Topic Author
hartista
Posts: 38
Joined: Fri Mar 19, 2021 2:50 pm

Re: traditional IRA vs Roth - how to figure out

Post by hartista »

both indicate traditional withdrawals are highly likely to be federally untaxed in retirement. Unless/until that changes, it's difficult to see any reason for Roth now, other than perhaps using a Roth IRA for an emergency fund.
Wow, I'm so inspired to read the dialogue between you both and to see how you're working this out for me. I sure appreciate that. The idea of putting my Emergency fund into the Roth might be a very good one. I'm going to look into that. Right now it's just in a bank money market account. I'd lose a small amount to transfer it out but might be worth it. Then I'd have that Roth for a specific purchase.

hartista, to add to the reading advice that is accumulating (all of it good! :)), see Investment Order and Prioritizing
investments
.
Great, I've got a lot to take in but I'm up for it, I appreciate the guidance!

Other than doing something with your 2020 eligibility for IRA contributions that will expire on April 15 (or maybe May 17) this year, taking days or weeks or even months to absorb all this will be fine. Might not want to extend that to years.... ;)
I did already contribute to my former traditional IRA for 2020. I usually do that at the beginning of the year. So I have the 2021 contribution to make which is the one I'm the time with to decide.

I had never heard of a solo 401K so I need to read up on that but right now don't know where the $55,000 (previously in traditional IRA0 should go, so that's what I'm trying to figure out. Sure appreciate all the good ideas and your patience!
User avatar
FiveK
Posts: 11108
Joined: Sun Mar 16, 2014 2:43 pm

Re: traditional IRA vs Roth - how to figure out

Post by FiveK »

hartista wrote: Sun Mar 28, 2021 4:19 pm ...but right now don't know where the $55,000 (previously in traditional IRA) should go, so that's what I'm trying to figure out.
When you said
hartista wrote: Fri Mar 19, 2021 2:56 pm Hello, I recently moved a $50,000 traditional IRA from another company over to Vanguard.
does that mean it is no longer in a traditional IRA? Or is it still in a traditional IRA, just one held at Vanguard instead of elsewhere?

See also Please Try Out Test Posts Here - Bogleheads.org if you want to work out how quotes, etc., work in this forum. :)
Sahara
Posts: 334
Joined: Tue Dec 04, 2018 6:21 pm

Re: traditional IRA vs Roth - how to figure out

Post by Sahara »

You want to think of the Traditional IRA or Roth IRA as a vehicle, a wrapper or a vessel. And the money market or VTSAX or VTIAX are the funds within that vehicle.

The above calculation can apply to the $50,000. You would exchange it from the Money Market fund to the other 3 funds.

It could also apply to the $25,000. But first you’ll need to determine the best vehicle for the additional $25,000. Now we know you cannot use an IRA vehicle for 2020, since that has already been done.

Tha options include $7,000 in an IRA for 2021 or/and a yet to be determined amount in a Solo 401k or possibly others.
Topic Author
hartista
Posts: 38
Joined: Fri Mar 19, 2021 2:50 pm

Re: traditional IRA vs Roth - how to figure out

Post by hartista »

does that mean it is no longer in a traditional IRA? Or is it still in a traditional IRA, just one held at Vanguard instead of elsewhere?
Yes that's what it means. I transferred to it Vanguard and they opened a Roth IRA for me but I did not put the money in it. It is sitting in a money market holding tank right now.

See also Please Try Out Test Posts Here - Bogleheads.org if you want to work out how quotes, etc., work in this forum. :)
[/quote]
I think I'm doing it correctly no? It's fairly cumbersome but I thought I understood it and I did read that. Anything specific?
Topic Author
hartista
Posts: 38
Joined: Fri Mar 19, 2021 2:50 pm

Re: traditional IRA vs Roth - how to figure out

Post by hartista »

Sahara wrote: Sun Mar 28, 2021 4:59 pm You want to think of the Traditional IRA or Roth IRA as a vehicle, a wrapper or a vessel. And the money market or VTSAX or VTIAX are the funds within that vehicle.
Yes I do understand that now, takes awhile to wrap one's head around that idea!

The above calculation can apply to the $50,000. You would exchange it from the Money Market fund to the other 3 funds.
Ok so if I get all that you're saying my first step could be to figure out the right "vessel" (type of IRA or 401K) for the $50,000 and then use my 3 fund portfolio mix inside of that? Correct??

It could also apply to the $25,000. But first you’ll need to determine the best vehicle for the additional $25,000. Now we know you cannot use an IRA vehicle for 2020, since that has already been done - options include $7,000 in an IRA for 2021 or/and a yet to be determined amount in a Solo 401k or possibly others.
Well if I put the $50,000 into the IRA or 401K vessel, wouldn't these additional $25,000 in funds just go to another 3 fund portfolio or is there something I'm missing here?

This sure is a lot to wrap one's head around but thanks to all the help I'm slowly inching my way there!
Sahara
Posts: 334
Joined: Tue Dec 04, 2018 6:21 pm

Re: traditional IRA vs Roth - how to figure out

Post by Sahara »

hartista wrote: Mon Mar 29, 2021 4:25 pm does that mean it is no longer in a traditional IRA? Or is it still in a traditional IRA, just one held at Vanguard instead of elsewhere?
Yes that's what it means. I transferred to it Vanguard and they opened a Roth IRA for me but I did not put the money in it. It is sitting in a money market holding tank right now.
I think I'm doing it correctly no? It's fairly cumbersome but I thought I understood it and I did read that. Anything specific?
Even if the money is in a "money market holding tank" right now, it will be in a Rollover IRA or a Roth IRA.
Could you check that out and get back to us?
Sahara
Posts: 334
Joined: Tue Dec 04, 2018 6:21 pm

Re: traditional IRA vs Roth - how to figure out

Post by Sahara »

hartista wrote: Mon Mar 29, 2021 4:30 pm Well if I put the $50,000 into the IRA or 401K vessel, wouldn't these additional $25,000 in funds just go to another 3 fund portfolio or is there something I'm missing here?
This sure is a lot to wrap one's head around but thanks to all the help I'm slowly inching my way there!
Yes, but that "other 3 fund portfolio" would need to be in a "vessel" as well!
The language can be confusing.
Here's a visual example with $50,000 in an IRA and $25,000 in a 401k.
The asset allocation of the combined accounts is 70% stock, 30% Bond, 20% of the stock is international.

Does that help clarify a bit?

https://docs.google.com/spreadsheets/d/ ... sp=sharing
User avatar
FiveK
Posts: 11108
Joined: Sun Mar 16, 2014 2:43 pm

Re: traditional IRA vs Roth - how to figure out

Post by FiveK »

hartista wrote: Mon Mar 29, 2021 4:25 pm
FiveK wrote: Sun Mar 28, 2021 4:29 pm does that mean it is no longer in a traditional IRA? Or is it still in a traditional IRA, just one held at Vanguard instead of elsewhere?
Yes that's what it means. I transferred to it Vanguard and they opened a Roth IRA for me but I did not put the money in it. It is sitting in a money market holding tank right now.
Unfortunately I can't tell whether the "Yes" refers to the first or the second question...? Seems Sahara is likewise in the dark on this.
See also Please Try Out Test Posts Here - Bogleheads.org if you want to work out how quotes, etc., work in this forum. :)
I think I'm doing it correctly no? It's fairly cumbersome but I thought I understood it and I did read that. Anything specific?
Quotes from previous posts should be indented and have a different background color. New text in the current note will not be indented, allowing a quick read on what is new vs. what is quoted.
Topic Author
hartista
Posts: 38
Joined: Fri Mar 19, 2021 2:50 pm

Re: traditional IRA vs Roth - how to figure out

Post by hartista »

Sahara wrote: Mon Mar 29, 2021 4:32 pm
hartista wrote: Mon Mar 29, 2021 4:25 pm does that mean it is no longer in a traditional IRA? Or is it still in a traditional IRA, just one held at Vanguard instead of elsewhere?
Yes that's what it means. I transferred to it Vanguard and they opened a Roth IRA for me but I did not put the money in it. It is sitting in a money market holding tank right now.
I think I'm doing it correctly no? It's fairly cumbersome but I thought I understood it and I did read that. Anything specific?
Even if the money is in a "money market holding tank" right now, it will be in a Rollover IRA or a Roth IRA.
Could you check that out and get back to us?
Hello again! Well here’s what I understand. A Roth IRA was opened for my by Vanguard but I didn’t put the money right in there as it was getting liquid. So I thought I understood it was in a money market fund until I moved it. Maybe that’s the same thing?
Topic Author
hartista
Posts: 38
Joined: Fri Mar 19, 2021 2:50 pm

Re: traditional IRA vs Roth - how to figure out

Post by hartista »

Sahara wrote: Mon Mar 29, 2021 4:48 pm
hartista wrote: Mon Mar 29, 2021 4:30 pm Well if I put the $50,000 into the IRA or 401K vessel, wouldn't these additional $25,000 in funds just go to another 3 fund portfolio or is there something I'm missing here?
This sure is a lot to wrap one's head around but thanks to all the help I'm slowly inching my way there!
Yes, but that "other 3 fund portfolio" would need to be in a "vessel" as well!
The language can be confusing.
Here's a visual example with $50,000 in an IRA and $25,000 in a 401k.
The asset allocation of the combined accounts is 70% stock, 30% Bond, 20% of the stock is international.

Does that help clarify a bit?

https://docs.google.com/spreadsheets/d/ ... sp=sharing
Yes! Helps a lot, I love the visual. I think i get it now - the vessel/bucket is some choice of type of account IRA, 401K etc that makes sense. I guess what I never thought about is other than an IRA what would my second choice be for this other money. I’m still researching that.
Topic Author
hartista
Posts: 38
Joined: Fri Mar 19, 2021 2:50 pm

Re: traditional IRA vs Roth - how to figure out

Post by hartista »

FiveK wrote: Mon Mar 29, 2021 5:06 pm
hartista wrote: Mon Mar 29, 2021 4:25 pm
FiveK wrote: Sun Mar 28, 2021 4:29 pm does that mean it is no longer in a traditional IRA? Or is it still in a traditional IRA, just one held at Vanguard instead of elsewhere?
Yes that's what it means. I transferred to it Vanguard and they opened a Roth IRA for me but I did not put the money in it. It is sitting in a money market holding tank right now.
Unfortunately I can't tell whether the "Yes" refers to the first or the second question...? Seems Sahara is likewise in the dark on this.
See also Please Try Out Test Posts Here - Bogleheads.org if you want to work out how quotes, etc., work in this forum. :)
I think I'm doing it correctly no? It's fairly cumbersome but I thought I understood it and I did read that. Anything specific?
Quotes from previous posts should be indented and have a different background color. New text in the current note will not be indented, allowing a quick read on what is new vs. what is quoted.
First of all, please excuse my cumbersome previous replies. I did restudy how to post and tested a few times so it should read better now! Anyway the answer is that the $55,000 is no longer in a traditional IRA (with previous company). I opened a Roth IRA with Vanguard but didn’t put that money in there yet. I’m rethinking the Roth.
Topic Author
hartista
Posts: 38
Joined: Fri Mar 19, 2021 2:50 pm

Re: traditional IRA vs Roth - how to figure out

Post by hartista »

Hello again gosh your ideas and consideration have been so helpful and given me a lot of direction for my learning. I’m not there yet but eager learner and studying a lot! Anyway i am rethinking using the Roth. I chose it based in the idea that wouldn’t I be happy in the future if I knew I’d already paid the taxes (be proactive) but then I came across info that suggested otherwise - firstly that my tax bracket should be lower in retirement and second (see quote below) that earning more interest now could be better. So I’m leaning to a traditional IRA as the “bucket” for $55,000 and now need to understand how to choose bucket 2 for the other $25,000 or so. Thanks for your input and patience haha - it’s a lot for sure! Never thought about these things before :)

quote I found - “(one might think that) it is better to pay a lesser tax amount now to make a Roth contribution, instead of a larger amount of tax later on a traditional withdrawal. This is not true because taking a percentage of the "seed" is the same as letting the full seed grow and then taking the same percentage of the "harvest." The result will be the same in either case. The goal should not be to pay as little tax as possible. The goal should be to have as much money leftover after taxes as possible.”
User avatar
FiveK
Posts: 11108
Joined: Sun Mar 16, 2014 2:43 pm

Re: traditional IRA vs Roth - how to figure out

Post by FiveK »

hartista wrote: Tue Mar 30, 2021 9:40 pm First of all, please excuse my cumbersome previous replies. I did restudy how to post and tested a few times so it should read better now!
Yes it does! And we all had to learn at some point, so no problem. ;)
Anyway the answer is that the $55,000 is no longer in a traditional IRA (with previous company). I opened a Roth IRA with Vanguard but didn’t put that money in there yet. I’m rethinking the Roth.
But, speaking of problems, if the money is not currently in an IRA of any type, and stays out of an IRA for more than 60 days, then it is deemed a withdrawal. That is almost certainly not what you want.

If you are still within 60 days of when you withdrew the $50K, the simplest and fastest thing to do is have Vanguard put it into a traditional IRA - tomorrow.

That preserves your options of leaving it in the traditional IRA or converting it to Roth.
Sahara
Posts: 334
Joined: Tue Dec 04, 2018 6:21 pm

Re: traditional IRA vs Roth - how to figure out

Post by Sahara »

FiveK wrote: Tue Mar 30, 2021 10:03 pm
If you are still within 60 days of when you withdrew the $50K, the simplest and fastest thing to do is have Vanguard put it into a traditional IRA - tomorrow.
That preserves your options of leaving it in the traditional IRA or converting it to Roth.

If you do this you can still use the Money Market fund until you decide which Index Funds you would like to use. You are just changing the "bucket."

If you do not put the money in a Traditional IRA "bucket," but you withdrew the money from a Traditional IRA "bucket" there are consequences you need to be aware of. The $50,000 will count as income in the year it was withdrawn and it will impact your taxes because it has left the tax deferred "bucket."
Topic Author
hartista
Posts: 38
Joined: Fri Mar 19, 2021 2:50 pm

Re: traditional IRA vs Roth - how to figure out

Post by hartista »

FiveK wrote: Tue Mar 30, 2021 10:03 pm
hartista wrote: Tue Mar 30, 2021 9:40 pm First of all, please excuse my cumbersome previous replies. I did restudy how to post and tested a few times so it should read better now!
Yes it does! And we all had to learn at some point, so no problem. ;)
Anyway the answer is that the $55,000 is no longer in a traditional IRA (with previous company). I opened a Roth IRA with Vanguard but didn’t put that money in there yet. I’m rethinking the Roth.
But, speaking of problems, if the money is not currently in an IRA of any type, and stays out of an IRA for more than 60 days, then it is deemed a withdrawal. That is almost certainly not what you want.

If you are still within 60 days of when you withdrew the $50K, the simplest and fastest thing to do is have Vanguard put it into a traditional IRA - tomorrow.

That preserves your options of leaving it in the traditional IRA or converting it to Roth.
I am within 60 days and will put that money into a traditional IRA tomorrow thanks for noting this! I would never have known.
Topic Author
hartista
Posts: 38
Joined: Fri Mar 19, 2021 2:50 pm

Re: traditional IRA vs Roth - how to figure out

Post by hartista »

Sahara wrote: Wed Mar 31, 2021 8:49 am
FiveK wrote: Tue Mar 30, 2021 10:03 pm
If you are still within 60 days of when you withdrew the $50K, the simplest and fastest thing to do is have Vanguard put it into a traditional IRA - tomorrow.
That preserves your options of leaving it in the traditional IRA or converting it to Roth.

If you do this you can still use the Money Market fund until you decide which Index Funds you would like to use. You are just changing the "bucket."

If you do not put the money in a Traditional IRA "bucket," but you withdrew the money from a Traditional IRA "bucket" there are consequences you need to be aware of. The $50,000 will count as income in the year it was withdrawn and it will impact your taxes because it has left the tax deferred "bucket."
Aha! I think I may be understanding the bucket! So for now I will take that $55,00 and put it in a traditional IRA using a money market fund until I decide on my Index fund picks (which I'm getting closer thanks to your spreadsheet). Do I have this now?? BTW - at first it all seems overwhelming, but with help like this and persistence in learning on my part it starts to get exciting! Thank you!
Sahara
Posts: 334
Joined: Tue Dec 04, 2018 6:21 pm

Re: traditional IRA vs Roth - how to figure out

Post by Sahara »

You are doing great! :D

Yes, call Vanguard and tell them the $55,000 needs to be in a Traditional IRA. Or do it online if you are able.

The clearer you are about the funds and the actions you take the better we can help you get yourself set up.
It gets easier once you understand some basic concepts.
Sahara
Posts: 334
Joined: Tue Dec 04, 2018 6:21 pm

Re: traditional IRA vs Roth - how to figure out

Post by Sahara »

Moving the Traditional IRA from one company to Vanguard will need to be reported on your 2021 taxes, although it should have no impact on your taxable income.

The company where the Traditional IRA was previously held will send you a Form 1099-R to record the distribution. Please make sure to keep the form with any records for these accounts. They will also send a copy of the Form 1099-R to the IRS.

Vanguard will send you a Form 5498 to record your contribution. Please make sure to keep the form with any records for these accounts. They will also send a copy of the Form 5498 to the IRS.

You will give a copy of Form 1099-R to your accountant when he prepares your 2021 taxes. He will not need the Form 5498, but I recommend keeping the forms with the account information, statements etc. I use a binder, with tabs for each of my accounts/buckets.
Topic Author
hartista
Posts: 38
Joined: Fri Mar 19, 2021 2:50 pm

Re: traditional IRA vs Roth - how to figure out

Post by hartista »

Sahara wrote: Wed Mar 31, 2021 4:13 pm You are doing great! :D
Thank you, it helps to have some helpers!

Yes, call Vanguard and tell them the $55,000 needs to be in a Traditional IRA. Or do it online if you are able.
Calling right now!

The clearer you are about the funds and the actions you take the better we can help you get yourself set up.
It gets easier once you understand some basic concepts.
That is great and exciting! Now that I have step one sorted out I'm moving on to study my asset allocation. Was the one you sent me a general guide or pretty close to what you think I could choose based on what I've shared? It looks right to me so far. I would love to have help with this next! Oh and thanks for the second post on taxes, I've put that note in my files for next year.
Topic Author
hartista
Posts: 38
Joined: Fri Mar 19, 2021 2:50 pm

IRA solved, onto asset allocation and next fund

Post by hartista »

Good news friends! Vanguard was one step ahead of me, when they transferred the money they did put it into a traditional IRA (not Roth) with a money market bucket! The Roth IRA is still there but empty. Yay! Maybe that's how they naturally do transfers because I didn't ask for that. But that part is done.

Second good news - Sahara's spreadsheet matches well with where I've been leaning in my asset allocation. So while I was on the phone with Vanguard I asked an investment advisor what he thought of my choice and he said, "Wow, you've really done your homework, that sounds spot on!" I was thrilled. I knew nothing about this a month ago and with reading and the help of you in this forum - I'm ready to invest.

So unless you have more fine points on the asset allocation, that's my starting point. Question - I have another $25, 000 to invest as well but don't know what kind of bucket it should be in. How does one make a decision on that? If it's not an IRA bucket what is it?

Thanks for your help, I feel so elated at this learning. :happy
User avatar
FiveK
Posts: 11108
Joined: Sun Mar 16, 2014 2:43 pm

Re: IRA solved, onto asset allocation and next fund

Post by FiveK »

hartista wrote: Thu Apr 01, 2021 12:34 pm Question - I have another $25, 000 to invest as well but don't know what kind of bucket it should be in. How does one make a decision on that? If it's not an IRA bucket what is it?

Thanks for your help, I feel so elated at this learning. :happy
You should feel good - well done!

As suggested in the Investment Order & Prioritizing Investments links, after you have filled tax-advantaged buckets you go to "normal" taxable accounts. You can invest the money using exactly the same percentages you choose for your IRAs, or you could be a little cleverer and apply Tax-efficient fund placement ideas. See that article for more.

"How much" you invest remains much more important than nuances of exactly what funds you use in which accounts.
Sahara
Posts: 334
Joined: Tue Dec 04, 2018 6:21 pm

Re: traditional IRA vs Roth - how to figure out

Post by Sahara »

FiveK wrote: Thu Apr 01, 2021 1:03 pm
hartista wrote: Thu Apr 01, 2021 12:34 pm Question - I have another $25, 000 to invest as well but don't know what kind of bucket it should be in. How does one make a decision on that? If it's not an IRA bucket what is it?

Thanks for your help, I feel so elated at this learning. :happy
You should feel good - well done!

As suggested in the Investment Order & Prioritizing Investments links, after you have filled tax-advantaged buckets you go to "normal" taxable accounts. You can invest the money using exactly the same percentages you choose for your IRAs, or you could be a little cleverer and apply Tax-efficient fund placement ideas. See that article for more.

"How much" you invest remains much more important than nuances of exactly what funds you use in which accounts.
I believe that the OP has tax-advantaged space for 2021. She has to decide whether the Roth IRA, Traditional IRA, or Solo 401k would be best.
Topic Author
hartista
Posts: 38
Joined: Fri Mar 19, 2021 2:50 pm

Re: IRA solved, onto asset allocation and next fund

Post by hartista »

FiveK wrote: Thu Apr 01, 2021 1:03 pm
hartista wrote: Thu Apr 01, 2021 12:34 pm Question - I have another $25, 000 to invest as well but don't know what kind of bucket it should be in. How does one make a decision on that? If it's not an IRA bucket what is it?

Thanks for your help, I feel so elated at this learning. :happy
You should feel good - well done!

As suggested in the Investment Order & Prioritizing Investments links, after you have filled tax-advantaged buckets you go to "normal" taxable accounts. You can invest the money using exactly the same percentages you choose for your IRAs, or you could be a little cleverer and apply Tax-efficient fund placement ideas. See that article for more.

"How much" you invest remains much more important than nuances of exactly what funds you use in which accounts.
Hi, thank you! I'm going to read up on the tax efficient placement, I think my other investment order is coming along. And helpful to know it's more about how much one invests rather than which type of account. One thing I don't understand is if I could or would want to look into a solo 401K in addition to an IRA, not sure if you can have both or how to know if that's a good first choice for me? If that's not it then I'll see what the tax efficient fund placement mind be or use a regular taxable account as you suggest. :>) on a roll now!
Sahara
Posts: 334
Joined: Tue Dec 04, 2018 6:21 pm

Re: traditional IRA vs Roth - how to figure out

Post by Sahara »

hartista wrote: Thu Apr 01, 2021 12:04 pm
Sahara wrote: Wed Mar 31, 2021 4:13 pm You are doing great! :D
Thank you, it helps to have some helpers!

Yes, call Vanguard and tell them the $55,000 needs to be in a Traditional IRA. Or do it online if you are able.
Calling right now!

The clearer you are about the funds and the actions you take the better we can help you get yourself set up.
It gets easier once you understand some basic concepts.
That is great and exciting! Now that I have step one sorted out I'm moving on to study my asset allocation. Was the one you sent me a general guide or pretty close to what you think I could choose based on what I've shared? It looks right to me so far. I would love to have help with this next! Oh and thanks for the second post on taxes, I've put that note in my files for next year.
You are welcome. I think the spreadsheet is pretty close to what you could choose. The only question is how to get the $25,000 in the market - which "bucket." Here are the options I can think of:

a) Wait until you have checked out the 401k options. The advantage is that you might be able to contribute more than $7,000 tax-deferred for 2021 and reduce your taxable income for 2021.
b) Add 7,000 to the Traditional IRA for 2021 and figure out the 401K options before investing the 15,000.
c) Add 7,000 to the Traditional IRA for 2021 and place the other 15,000 in a Taxable account as suggested by FiveK.
d) Add 7,000 to a Roth IRA for 2021 and place the other 15,000 in a Taxable account as suggested by FiveK.

If you want to explore c or d I can modify the spreadsheet to reflect that. Just let me know.

And for clarity's sake -
1) is the current Traditional IRA $50,000 or $55,000?
2) Do you have ACA health insurance?
ETA
3) Do you plan to invest any more money in 2021?
Last edited by Sahara on Thu Apr 01, 2021 1:49 pm, edited 2 times in total.
Sahara
Posts: 334
Joined: Tue Dec 04, 2018 6:21 pm

Re: IRA solved, onto asset allocation and next fund

Post by Sahara »

hartista wrote: Thu Apr 01, 2021 1:20 pm
FiveK wrote: Thu Apr 01, 2021 1:03 pm
hartista wrote: Thu Apr 01, 2021 12:34 pm Question - I have another $25, 000 to invest as well but don't know what kind of bucket it should be in. How does one make a decision on that? If it's not an IRA bucket what is it?

Thanks for your help, I feel so elated at this learning. :happy
You should feel good - well done!

As suggested in the Investment Order & Prioritizing Investments links, after you have filled tax-advantaged buckets you go to "normal" taxable accounts. You can invest the money using exactly the same percentages you choose for your IRAs, or you could be a little cleverer and apply Tax-efficient fund placement ideas. See that article for more.

"How much" you invest remains much more important than nuances of exactly what funds you use in which accounts.
Hi, thank you! I'm going to read up on the tax efficient placement, I think my other investment order is coming along. And helpful to know it's more about how much one invests rather than which type of account. One thing I don't understand is if I could or would want to look into a solo 401K in addition to an IRA, not sure if you can have both or how to know if that's a good first choice for me? If that's not it then I'll see what the tax efficient fund placement mind be or use a regular taxable account as you suggest. :>) on a roll now!
Tax-efficient fund placement, in its simplest form, means this: Keep the stock in a Roth or Taxable account, but no bonds in those accounts. Keep the bonds in the Rollover IRA, and place stock there as well if you have room left over in that account. I suggest you keep reading and learning but this relates to which funds you place in which buckets. It's not optimal to place all 3 funds in each bucket.
Topic Author
hartista
Posts: 38
Joined: Fri Mar 19, 2021 2:50 pm

Re: traditional IRA vs Roth - how to figure out

Post by hartista »

Sahara wrote: Thu Apr 01, 2021 1:29 pm
hartista wrote: Thu Apr 01, 2021 12:04 pm
Sahara wrote: Wed Mar 31, 2021 4:13 pm You are doing great! :D
Thank you, it helps to have some helpers!

Yes, call Vanguard and tell them the $55,000 needs to be in a Traditional IRA. Or do it online if you are able.
Calling right now!

The clearer you are about the funds and the actions you take the better we can help you get yourself set up.
It gets easier once you understand some basic concepts.
That is great and exciting! Now that I have step one sorted out I'm moving on to study my asset allocation. Was the one you sent me a general guide or pretty close to what you think I could choose based on what I've shared? It looks right to me so far. I would love to have help with this next! Oh and thanks for the second post on taxes, I've put that note in my files for next year.
You are welcome. I think the spreadsheet is pretty close to what you could choose. The only question is how to get the $25,000 in the market - which "bucket." Here are the options I can think of:

a) Wait until you have checked out the 401k options. The advantage is that you might be able to contribute more than $7,000 tax-deferred for 2021 and reduce your taxable income for 2021.
b) Add 7,000 to the Traditional IRA for 2021 and figure out the 401K options before investing the 15,000.
c) Add 7,000 to the Traditional IRA for 2021 and place the other 15,000 in a Taxable account as suggested by FiveK.
d) Add 7,000 to a Roth IRA for 2021 and place the other 15,000 in a Taxable account as suggested by FiveK.

If you want to explore c or d I can modify the spreadsheet to reflect that. Just let me know.

And for clarity's sake -
1) is the current Traditional IRA $50,000 or $55,000?
2) Do you have ACA health insurance?
ETA
3) Do you plan to invest any more money in 2021?
Ok, so sounds like my best approach is to see if the Solo 401K is a go for me, if it is then that solves the other options. I'm also going to speak to my accountant soon. In answer of your questions - Traditional current IRA has exactly $55,910.80 in it and I worked out all my percentages but happy to see yours! I do not use health insurance. I could definitely invest more this year. I currently save $18,000 ($1500 per month) reliably and sometimes more so that could be invested (minus the $7000 for the IRA). Thanks for all the options! I'll let you know how the 401K turns out. And thanks for the heads up about tax efficient funds, buckets and bonds!
Post Reply