Portfolio Advice

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Topic Author
investor171991
Posts: 8
Joined: Mon May 03, 2021 12:54 pm

Portfolio Advice

Post by investor171991 »

Hi everyone!

Fairly new to investing in 2021 (with the exception of 401k) and was hoping for some advise! I am a 29 year old, filing single, with no debt and a good emergency fund. I just exceed the income limit for a Roth, so am planning on doing a Backdoor Roth. The majority of my investments are for retirement, but I do plan on needing money for a house downpayment and child-adoption expenses.

Below is my current investment portfolio:

401k:
VIVLX (Vang Inst Trust 2055) - I max out these contributions

Taxable:
80% in various stocks (no ETFs)
20% in cyrpto

Roth IRA (I do not currently have this, but below is my planned portfolio for when I contribute the max $6k at some point this month):
VTI - 60%
VXUX - 25%
AVUV - 5%
AVDV - 5%
VNQ - 5%

I have previously viewed my accounts as "separate" so I was curious what everyone things of this total planned portfolio as a whole. Any recommendations are greatly appreciated!
lakpr
Posts: 7444
Joined: Fri Mar 18, 2011 9:59 am

Re: Portfolio Advice

Post by lakpr »

First thing you must do, URGENTLY, is to open a Roth IRA account for 2020 and max that up.
You have just 2 weeks to get this done.
Assuming that you have earned income of at least $6000 in 2020, of course.

Personally, I do not like active funds. So in your proposed Roth IRA portfolio, I would scratch those Avantis ETFs, AVUV and AVDV.
Keep it simple to VTI, VXUS and VNQ
Topic Author
investor171991
Posts: 8
Joined: Mon May 03, 2021 12:54 pm

Re: Portfolio Advice

Post by investor171991 »

Does it matter if I already filed my 2020 tax returns? I thought I was not able to make a '2020 contribution' since I already filed?

Regarding the Avantis funds - no recommendation on other small-cap replacements? Or do you recommend keeping it VTI, VXUS and VNQ (adding the 5% from each Avantis fund back to VTI and VXUS and keeping VNQ at 5%)?
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vineviz
Posts: 9937
Joined: Tue May 15, 2018 1:55 pm

Re: Portfolio Advice

Post by vineviz »

investor171991 wrote: Mon May 03, 2021 1:58 pm Does it matter if I already filed my 2020 tax returns? I thought I was not able to make a '2020 contribution' since I already filed?
For a Roth IRA it doesn't matter, since you'll be contributing already taxed dollars anyway. It won't affect your taxes, so there's not even a need to amend the filed return.

investor171991 wrote: Mon May 03, 2021 1:58 pm Regarding the Avantis funds - no recommendation on other small-cap replacements? Or do you recommend keeping it VTI, VXUS and VNQ (adding the 5% from each Avantis fund back to VTI and VXUS and keeping VNQ at 5%)?
IMHO, the fund to jettison from the IRA allocation is VNQ. It's superfluous.


On the other hand, there's nothing at all wrong with AVUV and AVDV. They're good funds, but at just 5% each of the Roth I question whether your allocation is large enough to mark a difference. If you're just now starting the Roth, I'd suggest either making a meaningful allocation to those funds (e.g. 50% AVUV and 50% AVDV) because you have conviction that the higher risk and expected return is right for you or else just focus on simplicity with a single fund: choose either Vanguard Target Retirement 2055 Fund (VFFVX) or either VT or Vanguard Total World Stock ETF (VT), at least until the Roth IRA balance is large enough make a difference.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Topic Author
investor171991
Posts: 8
Joined: Mon May 03, 2021 12:54 pm

Re: Portfolio Advice

Post by investor171991 »

Thanks! That definitely makes sense. What is the deadline to make 2020 Roth contributions? When I do the backdoor Roth, I do not need to mark these contributions as 2020, correct?

Regarding the fund distrubtion - also makes sense. I would like to do something other than Vang Inst Trust 2055 just because that is what my 401k is already invested in. VTI/VXUS seem like the best best, with differing opinions on AVUV/AVDV/VNQ.
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vineviz
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Re: Portfolio Advice

Post by vineviz »

investor171991 wrote: Mon May 03, 2021 2:39 pm Thanks! That definitely makes sense. What is the deadline to make 2020 Roth contributions? When I do the backdoor Roth, I do not need to mark these contributions as 2020, correct?
May 17th.

investor171991 wrote: Mon May 03, 2021 2:39 pm Regarding the fund distrubtion - also makes sense. I would like to do something other than Vang Inst Trust 2055 just because that is what my 401k is already invested in. VTI/VXUS seem like the best best, with differing opinions on AVUV/AVDV/VNQ.
There is very little practical difference between a VTI/VXUS combination and a Target Date 2055 funds. If the goal is simply to be "different" from the 2055 target date fund, a VTI/VXUS combination doesn't accomplish that very well IMHO since over 90% of your Vang Inst Trust 2055 fund is in fact invested in VTI and VXUS.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Topic Author
investor171991
Posts: 8
Joined: Mon May 03, 2021 12:54 pm

Re: Portfolio Advice

Post by investor171991 »

Again, makes sense! I did not consider all of the overlap between the two. Do you suggest structuring the Roth IRA different all-together? Does the plan to have a down-payment for house or child-adoption expenses make a potential impact?
lakpr
Posts: 7444
Joined: Fri Mar 18, 2011 9:59 am

Re: Portfolio Advice

Post by lakpr »

investor171991 wrote: Mon May 03, 2021 2:39 pm Thanks! That definitely makes sense. What is the deadline to make 2020 Roth contributions? When I do the backdoor Roth, I do not need to mark these contributions as 2020, correct?
May 17th is the deadline (already been answered by @vineviz).

You must make the contributions for the tax year 2020 (except, since you exceed the limit for making direct contributions to Roth IRA, you make a Traditional IRA contribution to start with). Then send in a Form 8606 for 2020.

Since making a non-deductible contribution to a Traditional IRA neither increases nor decreases your tax liability, you can send this form as a stand-alone, to the same mailing address as your regular IRS tax return. Note that you will NOT get any acknowledgment from IRS when you do this, so you must send it through an Return Receipt Requested, and hang on to that green receipt for at least 4 years from the date of the contribution. [ Scan and keep a soft copy in cloud somewhere, that is ok too ]

On the Form 8606 itself, there is a section that asks whether you made any Roth conversions. Note that that's asking about the Roth conversions made in 2020, so you fill in zero there -- even if you end up converting that 2020 n-d-tIRA contribution to Roth. That Roth conversion will have been made in 2021, so you need to report it next year, on your 2021 taxes. Sending in the Form 8606 would establish your basis, so you would not get taxed on it twice.

If you do not send the Form 8606, well, IRS thinks you converted a pretax contribution to Roth so will be expecting taxes, so important that you send it. While there is no specific deadline for sending this form (it's not bound by the April 15th, or May 17th for this year), it is equally critical that you take care of this requirement while it is still fresh in your mind.
Topic Author
investor171991
Posts: 8
Joined: Mon May 03, 2021 12:54 pm

Re: Portfolio Advice

Post by investor171991 »

Thanks for all this clarification! Do I need to send the form twice, once for my 2020 contributions and once for my 2021 contributions? Realistically I may use a CPA for my taxes to ensure I don't mess any of these up, on top of switching taxable account brokerages this year etc. Just want to ensure nothing falls through the cracks, but I think that this is beneficial to my understanding regardless!
lakpr
Posts: 7444
Joined: Fri Mar 18, 2011 9:59 am

Re: Portfolio Advice

Post by lakpr »

investor171991 wrote: Mon May 03, 2021 3:55 pm Thanks for all this clarification! Do I need to send the form twice, once for my 2020 contributions and once for my 2021 contributions? Realistically I may use a CPA for my taxes to ensure I don't mess any of these up, on top of switching taxable account brokerages this year etc. Just want to ensure nothing falls through the cracks, but I think that this is beneficial to my understanding regardless!
Once for 2020 contributions, yes. The Form 8606 for 2021 will be sent next year when you do your 2021 taxes (in 2022). You need to send Form 8606 for each year that you make the non-deductible traditional IRA contributions.

By the way, if you do make the backdoor Roth for 2020, make sure you do NOT late-contribute the n-d-tIRA contribution for 2021. If you do, you will be subject to the pro-rata rule, since the 2021 n-d-tIRA contributions made in 2022 will be counted as if they were made on 12-31-2021. So once you are on the backdoor Roth train, you need to make sure you contribute and convert-to-Roth, for the same year, in the same year.
Topic Author
investor171991
Posts: 8
Joined: Mon May 03, 2021 12:54 pm

Re: Portfolio Advice

Post by investor171991 »

I think I may be a bit confused. As some background - I have already filed my 2020 taxes. My plan was to open a Traditional IRA in May 2021, contribute $6000, immediately convert to a Roth and invest. It was made aware to me that I can do this for both 2020 and 2021. If I do this in May for my 2020 contributions and say, October, for my 2021 contributions, can I submit just one Form 8606 when I do my 2021 taxes? Or if I contribute now so I need to submit a Form 8606 immediately for 2020 and then another for 2021 when I do my taxes early 2022?

I'm not sure I am following the pro-rata rule - I thought that was only in effect if you used the Traditional IRA for anything non-backdoor purposes. I only plan to use the Traditional IRA for this backdoor Roth, so it should not hold any money for more than a day at most at any given time.

Thanks again!
lakpr
Posts: 7444
Joined: Fri Mar 18, 2011 9:59 am

Re: Portfolio Advice

Post by lakpr »

investor171991 wrote: Mon May 03, 2021 4:31 pm I think I may be a bit confused. As some background - I have already filed my 2020 taxes. My plan was to open a Traditional IRA in May 2021, contribute $6000, immediately convert to a Roth and invest. It was made aware to me that I can do this for both 2020 and 2021. If I do this in May for my 2020 contributions and say, October, for my 2021 contributions, can I submit just one Form 8606 when I do my 2021 taxes? Or if I contribute now so I need to submit a Form 8606 immediately for 2020 and then another for 2021 when I do my taxes early 2022?
Your filing of 2020 taxes already, is immaterial.

Form 8606 needs to be filed *for that year* for which you made contributions.

If you made a non-deductible contribution for 2020, you need to file 2020 Form 8606.
If you made a non-deductible contribution for 2021, you need to file 2021 Form 8606.

etc.
investor171991 wrote: Mon May 03, 2021 4:31 pm I'm not sure I am following the pro-rata rule - I thought that was only in effect if you used the Traditional IRA for anything non-backdoor purposes. I only plan to use the Traditional IRA for this backdoor Roth, so it should not hold any money for more than a day at most at any given time.

Thanks again!
You are technically right on this point. You are subject to pro-rata rule still, but you would owe no additional taxes.

Pro-rata rule kicks in if there is any balance left in a Traditional IRA account, pre-tax or non-deductible, as of 12/31/20xx where 20xx is the year you are filing the taxes for. The ability to make the contributions in the following year complicates it a bit, since technically those contributions are deemed to have been made on 12/31 of the previous year.

Let's run through this example.

You made a n-d-tIRA contribution in 2021, for 2020: $6000
You made a Roth conversion of that amount, in 2021 (as before, no growth assumed).
You made a n-d-tIRA contribution in 2022, for 2021: $6000

Now, the pro-rata rule says that you have $12000 in basis ($6000 basis from 2020 + $6000 basis from 2021).
Of which you converted $6000, or 50%.

So you would "owe" taxes on $6000 of conversion, but that amount is less than the basis, AND THERE IS NO PRETAX IRA (this makes the proportional factor attributable to pretax amount zero), so no taxes due in 2021.

When you convert the remainder $6000 amount in 2022, that amount will cover the remaining basis, so no additional taxes due in 2022 either.

I am also not sure if you understand the pro-rata rule correctly. It is not "a Traditional IRA", that hints that you are thinking this is a particular account at a particular brokerage firm. It is ALL YOUR t-IRAs, whether deductible or non-deductible, that are considered for the calculations. So no, it is not possible to have a Traditional IRA at Vanguard that's composed of non-deductible contributions, you convert it to Roth, while having a $100k Rollover IRA over at Fidelity or Schwab. In the eyes of the IRS, all you have is one big giant IRA and you are converting a piece of it to Roth.
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