Let me start with my asset allocation:
Emergency funds: Six months worth
Debt: Nothing, except my day-to-day spending on a credit card paid off at the end of each month, though.
Tax Filing Status: Single
Tax Rate: 12% Federal, 5% State
State of Residence: Kentucky
Desired Asset Allocation: 85% stocks / 15% bonds
Desired International Allocation: 0% of stocks (yeah, I know, but most US companies have pretty big international presences these days, anyway. Open to being convinced, though).
100% T. Rowe Price Target Date 2055 (PAROX) (0.96%)
Company match? Yes, every dollar is matched by $0.50 up to 4% of my contributions.
Roth IRA at Vanguard
85.3% Total Stock Market (VTSAX) (0.04%)
14.6% Total Bond Market (BND) (0.035%)
Traditional IRA at Vanguard
83% Total Stock Market (VTI) (0.03%)
13.1% Total Bond Market (BND) (0.035%)
Portfolio Size: Low five figures, just starting out.
I'm very lucky. I don't tend to spend a lot of money, and I've been pretty good at avoiding debt. I'm holding onto a normal savings account at a bank with a 0.05% APY. Much of it is earmarked as emergency/lose-my-job money, but the remainder will be rolled into the Roth over time, as there's too much to go at once.
My question for you is: Should I keep all the money in the savings account while I roll it into the Roth over time, or should I put some portion of it into a Vanguard taxable account (same funds at same allocations) so that it doesn't just sit there making $5 per $10,000 per year? If permissible, I would roll the taxable into the Roth each year, so that the taxable would eventually hit $0 and I don't get hit with taxes on many decades of growth down the road.
It seems like it should be obvious; stock market returns, volatile though they may be, can usually beat 0.05% growth per year, even taking taxes from rolling over into the Roth into account. However, I ran the numbers twice in Excel and found the opposite - holding in the savings account + what I had in Roth seemed to beat investing, even at 7% stock market returns. (A third run showed stocks as better, though.)
New for 2021-04-19
Goodness! Quite a lot of questions to go through. Thank you all for your input!
That is my goal over time, yes, but I have more to contribute than the annual limit allows.If you have plenty of spare cash to fund the Roth IRA, I'd do it right away...
News to me! I was not aware of that. Would the desired allocation for the Traditional be 70/30 stocks/bonds, then?It's typically more tax efficient to hold your bond funds in a tax deferred account...
I'm not a big fan of my company's 401k. The expenses are high, the funds aren't that great, and I'm only funding up to the employer match at the moment (annual contribution $1,600). I wouldn't be against funding the 401k more, though, but I didn't look into it much because I was more focused on what to do with my savings. It would be tough, income-wise, to do the full $19,500 match - like serious QoL reduction tough, so I probably won't yet be able to achieve that.Many 401k questions
The other funds available to me in the 401k:
- T. Rowe Price 2010 through 2060 (PARAX, PARHX, PARBX, PARJX, PARCX, PARKX, PARDX, PARLX, PARFX)
- American Funds EuroPacific Gr R3 (RERCX)
- American Funds New Perspective R3 (RNPCX)
- Invesco Developing Markets A (ODMAX)
- Virtus Duff & Phelps Real Estate Sec A (PHRAX)
- Delaware Small Cap Value A (DEVLX)
- AB Small Cap Growth A (QUASX)
- JHancock Disciplined Value Mid Cap R2 (JVMSX)
- Ivy Mid Cap Growth A (WMGAX)
- T. Rowe Price Equity Income Adv (PAFDX)
- JPMorgan Large Cap Growth A (OLGAX)
- State Street S&P 500 Index N (SVSPX)
- PGIM Total Return Bond R6 (PTRQX)
- Pioneer Strategic Income A (PSRAX)
- Key Guaranteed Portfolio Fund (KGPF)
I have about $18k or so over my emergency fund/lost job contingency to invest. I have made my full 2020 Roth contribution, but not my 2021 contribution yet - I need to find out if the new tax due date means I can't invest yet. The investment is one lump sum each year.
I hadn't thought of this, and it's quite clever!...and draw from your extra cash in savings to pay living expenses you would have otherwise have covered from your paycheck...
The most likely explanation is that I made a math error somewhere. Sadly, I tend to make a lot of throwaway spreadsheets to calculate something out, which I then just close without saving. The only explanation I had at the time was that, were I to move all the investing money from savings to a brokerage account, then transfer that brokerage account to my Roth over time, the balance (and therefore, returns) would similarly decrease. It was a surprising result, which makes it probably wrong.You are saying when you compared investing the money in a savings account to investing it in the stock market, you came out with an answer that keeping it in the savings account yielded a higher return? I’d question what assumptions you are using, because that doesn’t make sense.
My tax rate is rather low right now, but won't be in the future, assuming good wage growth. Plus, I expect taxes themselves to be higher in the future, which is why I'm so gung-ho on the Roth.At your tax rate, the 401(k) isn’t going to save a lot of taxes but over the next 30 years it will.
IBonds, eh? Wasn't aware that those were a good emergency fund vehicle. I'll need to look into that!alternatively, you may choose to look into ibonds...
I've been a bit cautious about those, but maybe unnecessarily. They'd trigger my "too good to be true" alarms, since their rates were so much higher than brick-and-mortar banks. But I may need to take another look.you can occasionally find higher yield bank accounts if you jump through a few hoops
Hmm. I think my tax rate now is a lower than it will be when I retire. Doesn't 401(k) money get taxed at whatever your tax rate at withdrawal is?At your tax rate, the 401(k) isn’t going to save a lot of taxes but over the next 30 years it will...
The IRA, as noted above, is worth less than $1,000, so I didn't really think much about converting it. I might in the future, likely all at once since it's not too big.Have you considered converting your traditional IRA to a Roth?
Yes, and I think I already have that plan. I don't know the specifics, though - I have the cost deducted from my paycheck, and then I use the insurance when I need to.Are you eligible for a HSA with your health insurance?
I thought that at first, too, but the general direction of these forums shied away from 100% equities, so I'd figure I'd have some bonds. But a lot of people had said 100% equities on this thread, so I should probably change that.But if I were you, I'd have my retirement accounts be 100% equities.
If I recall correctly, the company through which we do our retirement has one flat, really high fee for every fund.That expense ratio is way too high.
I mean, it's easy for me to say that I'll never ever ever make stupid investing decisions, but when push comes to shove, I just don't know. My investing strategy is buy and hold forever, selling only for retirement income (which I won't need for a long time), but I also know that I can't always count on myself not to make stupid decisions in the future.If you can't handle the volatility of a 100% stock portfolio to the point where you make bad behavioral decisions (selling low, buying high)
I can't tell you about March 2020 much because I invested right in the middle of the decline. I did NOT time the market on purpose, though, that was just the date I decided to throw some cash in on.
Yes, likely best to do it now rather than later.Consider using your extra cash to convert your Traditional IRA to a Roth IRA.
I do not. Like I said, I don't like my 401k much.If you have a Roth 401k option...
Sadly, I don't really have this option - contributing the full $19,500 would cut into my living expenses quite a lot. I could do it for a year or two using the strategy suggested above, but not for any longer than that.You didn't mention if you are contributing the max to your 401k or not.