First time poster seeking advice for lump sum

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Topic Author
Fingerscrossedd
Posts: 2
Joined: Fri Apr 30, 2021 9:10 am

First time poster seeking advice for lump sum

Post by Fingerscrossedd »

I have really enjoyed reading this forum and it has helped us move toward our long term goals. I appreciate any advice that the board brings for our current situation. Thanks in advance!

Emergency funds: 9 to 12 months expenses

Debt: No debt, renting.

Tax Filing Status: Married Filing Jointly

Tax Rate: 35% Federal, 0% State

Age: 40

Desired Asset allocation: ~95% stocks / ~0% bonds; intend to shift at 50 but open to critique.
Desired International allocation: 30-40% of stocks but open to critique

Portfolio mid-high 6 figures

Taxable
11.58% Vanguard Total World Stock Index Admiral (VTWAX) (.10%)
11.00% Vanguard Total World Stock ETF (VT) (0.08%)

Person 1 Trad IRA
6.98% Vanguard Total World Stock Index Admiral (VTWAX) (.10%)

Person 1 Roth IRA
9.06% Vanguard Total World Stock Index Admiral (VTWAX) (.10%)

Person 1 Simple IRA
3.87% Vanguard Total World Stock ETF (VT) (0.08%)
10.90% Schwab S&P 500 Index Fund (SWPPX) (0.08%)
3% match

Person 2 Trad IRA
40.16% Vanguard Total World Stock Index Admiral (VTWAX) (.10%)

Person 2 Roth IRA
2.80% Vanguard Total World Stock Index Admiral (VTWAX) (.10%)

Person 2 401k
2.05% T. Rowe Price Retirement 2045 Fund (TRRKX) (0.71%)
no match

Person 2 HSA
1.60% Vanguard Total World Stock ETF (VT) (0.08%)

We expect a modest pension at age 65. Hard to say how much to expect so we have not planned for it and will take it as gravy when the time comes. Guessing 10 - 25% of living expenses.
Have a good chunk in a 529 which would cover enough of college expenses that we feel confident we could figure out any potential shortfall.
_______________________________________________________________

Contributions

New annual Contributions
Lately we have maxed available retirement accounts and put some in taxable and have done so this year. In the next few years we expect some career transition and plan for contributions to possibly drop to under 40k per year, perhaps to 20k for a few years.


Questions:
1. Recently sold property and plan to invest. The new amount to invest is about 50% of our current portfolio. Right now the plan is to lump sum into our taxable brokerage, all in VT. Not married to this and would appreciate any thoughts on what you would do if this was your portfolio. We plan to not use our taxable accounts until retirement. Our stretch goal is to retire or cut back at 55. I know the uncertainty around future contributions make any kind of forward look even more difficult. We are comfortable renting and are resisting the temptation to buy in our HCOL area. The hope is to come out ahead by investing this cash, travel with no home base for a time after 55, and see where the chips have fallen when it comes to buying a place to live out our golden years.

2. Since we are basically 100% equity, when the time comes to shift our AA, my understanding is that we would just shift whatever % in one of our tax advantaged accounts into fixed income. I think we would shift into some sort of total bond fund but that is just out a desire for simplicity. Happy to hear all thoughts on different ways to go about this.

3. We have never done backdoor Roths and have not looked deeply into it. Is it a no brainer to do this? If so, should we only do it going forward or is there a way to convert past contributions?

3. Please fire away with any thoughts about how you would approach this portfolio. We have learned a lot from this forum and look forward to our portfolio being torn apart :)

4. Can you make your annual Traditional IRA contributions into your rollover IRA account?
Last edited by Fingerscrossedd on Mon May 03, 2021 2:41 pm, edited 3 times in total.
lakpr
Posts: 7422
Joined: Fri Mar 18, 2011 9:59 am

Re: First time poster seeking advice

Post by lakpr »

Fingerscrossedd wrote: Mon May 03, 2021 1:31 pm <<clipped>>
4. Can you make your annual Traditional IRA contributions into your rollover IRA account?
While I will come back a bit later to your original post ... let me answer this question quickly.

Yes, you *can* make the non-deductible Traditioonal IRA contributions into the Rollover account.
But it is NOT advisable.

Many 401k plans will refuse to accept rollovers from any IRA that has deductible and non-deductible contributions commingled. Some plans even refuse outright if the IRA is not titled as "Rollover IRA". So if you make the contributions to the same account, you might be stuck having to convert the entire existing Rollover IRA to Roth if you do want to start/continue the Backdoor Roth process.

=====

I suggest that you go to another brokerage firm -- your bank will do in a pinch -- to contribute the non-deductible tIRA for 2020 for both yourself and your wife before May 17th. If you want, you can also make the 2021 contribution(s) at the same time.

This way, the Rollover IRA and your n-d-contributions will NOT be mixed together, and therefore lesser chances for your 401k plan to reject.

Then between now and the end of the year, try to roll your Rollover IRA into your 401k plan.

After that rollover is successful, THEN convert the balance in your non-deductible tIRA to Roth.
tashnewbie
Posts: 1555
Joined: Thu Apr 23, 2020 12:44 pm

Re: First time poster seeking advice

Post by tashnewbie »

Fingerscrossedd wrote: Mon May 03, 2021 1:31 pm Person 2 401k
2.05% T. Rowe Price Retirement 2045 Fund (TRRKX) (0.71%)
no match

3. We have never done backdoor Roths and have not looked deeply into it. Is it a no brainer to do this? If so, should we only do it going forward or is there a way to convert past contributions?
I don't think it is a no-brainer for you two. For person 1, they'd always run into the pro rata rule because of the SIMPLE IRA. I would just do taxable investing instead of trying to do backdoor Roth.

For person 2, do they have any cheaper options in the 401k? If you can get a cheaper option, then that person could explore moving the TIRA into the 401k and then they'd be able to do the backdoor Roth without the pro rata rule.
User avatar
dratkinson
Posts: 5338
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: First time poster seeking advice

Post by dratkinson »

Fingerscrossedd wrote: Mon May 03, 2021 1:31 pm I have really enjoyed reading this forum and it has helped us move toward our long term goals. I appreciate any advice that the board brings for our current situation. Thanks in advance!

Emergency funds: 9 to 12 months expenses

Debt: No debt, renting.

Tax Filing Status: Married Filing Jointly

Tax Rate: 35% Federal, 0% State

Age: 40

Desired Asset allocation: ~95% stocks / ~0% bonds; intend to shift at 50 but open to critique.
Desired International allocation: 30-40% of stocks but open to critique

Portfolio mid-high 6 figures

Taxable
11.58% Vanguard Total World Stock Index Admiral (VTWAX) (.10%)
11.00% Vanguard Total World Stock ETF (VT) (0.08%)

Person 1 Trad IRA
6.98% Vanguard Total World Stock Index Admiral (VTWAX) (.10%)

Person 1 Roth IRA
9.06% Vanguard Total World Stock Index Admiral (VTWAX) (.10%)

Person 1 Simple IRA
3.87% Vanguard Total World Stock ETF (VT) (0.08%)
10.90% Schwab S&P 500 Index Fund (SWPPX) (0.08%)
3% match

Idea. Begin Solo 401K, then move Simple IRA and traditional IRA into Solo 401K to avoid backdoor Roth pro-rata problem.

Person 2 Trad IRA
40.16% Vanguard Total World Stock Index Admiral (VTWAX) (.10%)

Person 2 Roth IRA
2.80% Vanguard Total World Stock Index Admiral (VTWAX) (.10%)

Person 2 401k
2.05% T. Rowe Price Retirement 2045 Fund (TRRKX) (0.71%)
no match

Person 2 HSA
1.60% Vanguard Total World Stock ETF (VT) (0.08%)

Idea. Try to move traditional IRA into 401k to avoid backdoor Roth pro-rata problem.

We expect a modest pension at age 65. Hard to say how much to expect so we have not planned for it and will take it as gravy when the time comes. Guessing 10 - 25% of living expenses.
Have a good chunk in a 529 which would cover enough of college expenses that we feel confident we could figure out any potential shortfall.
_______________________________________________________________

Contributions

New annual Contributions
Lately we have maxed available retirement accounts and put some in taxable and have done so this year. In the next few years we expect some career transition and plan for contributions to possibly drop to under 40k per year, perhaps to 20k for a few years.


Questions:
1. Recently sold property and plan to invest. The new amount to invest is about 50% of our current portfolio. Right now the plan is to lump sum into our taxable brokerage, all in VT. Not married to this and would appreciate any thoughts on what you would do if this was your portfolio. We plan to not use our taxable accounts until retirement. Our stretch goal is to retire or cut back at 55. I know the uncertainty around future contributions make any kind of forward look even more difficult. We are comfortable renting and are resisting the temptation to buy in our HCOL area. The hope is to come out ahead by investing this cash, travel with no home base for a time after 55, and see where the chips have fallen when it comes to buying a place to live out our golden years.

2. Since we are basically 100% equity, when the time comes to shift our AA, my understanding is that we would just shift whatever % in one of our tax advantaged accounts into fixed income. I think we would shift into some sort of total bond fund but that is just out a desire for simplicity. Happy to hear all thoughts on different ways to go about this.

3. We have never done backdoor Roths and have not looked deeply into it. Is it a no brainer to do this? If so, should we only do it going forward or is there a way to convert past contributions?

3. Please fire away with any thoughts about how you would approach this portfolio. We have learned a lot from this forum and look forward to our portfolio being torn apart :)

4. Can you make your annual Traditional IRA contributions into your rollover IRA account?

Backdoor Roth. I've never done a backdoor Roth, but above suggestions are what I've read on the forum as recommended solutions to sidestep pro-rata problem.

If you've comingled non/deductible contributions, then you'll need good records of which IRA contributions were deductible, and which were not. (I did all of my Roth conversions after retirement, and did have to untangle the tax paid on comingled contributions. But I never had to work with an employer to get them to accept comingled contributions.)

Since the IRA is "by individual", the pro-rata problem and its solution are also by individual. Meaning if Person 2 can't roll their IRA into their 401k, that does not prevent Person 1 from rolling their IRAs into a Solo 401k and contributing to a backdoor Roth.

IRS Rollover Chart: https://www.irs.gov/pub/irs-tege/rollover_chart.pdf
Rollover of traditional IRA to qualified plan (pre-tax).

Since you (plural) are ~20yrs from age 59.5 (when you can withdraw penalty-free from your IRAs), if that growth were tax-free in a rIRA, it'd probably be worth it tax-wise (growth in Roth to retirement > than tax paid to get into backdoor Roth) to get as much as you can into a backdoor Roth.

Cutting back at age 55, and assuming your tax situation changes and you can get tax-deductible IRA contributions. If still working, in lower tax bracket, and closer to retirement, then the backdoor Roth growth/tax-paid analysis changes. Recall some on forum suggest getting the tIRA tax-deductible contribution (deduction should be > than tax-free growth to retirement) now, and converting to Roth when in lower tax bracket in retirement. (For simplicity of tracking, put new 100% deductible IRA contributions in a separate IRA account.)

But if you've lived this long without doing a backdoor Roth, you can continue as before. Contribution limits:
--$6K age 40-49: $108K (=$6K x 9 x 2).
--$7K age 50-55: $70K (=$7K x 5 x 2).
Is it worth it to you to do the work required to untangle your IRAs to get $178K principal (~$282K principal+growth, assuming 7%/yr market growth), into Roths before you scale back at age 55? Your choice.


Idea. My only concern is that your EFs seem to be all equities. And if you need them for an emergency, then you'd like more stability than equities in your EF.

Since you seem to be able to tolerate risk, and are in a higher tax bracket, suggest you begin buying bonds now in taxable as VWLTX (Vanguard's long term national muni fund). The bonds will give more stability to your taxable account and you can more count on them in an emergency than equities. (Recall the forum prefers the less risky VWITX (intermediate-term national). But if you can tolerate more risk, then VWLTX pays higher dividends. I prefer/use VWLTX. Your choice.)

If I've misunderstood and your EFs are in bank savings/CDs, then adding munis in taxable can become an extended-tier EF and perform multiple duties: higher after-tax income than savings/CDs, more stability than equities in taxable, new car, dry power, and retirement bonds if not otherwise used.

You'll be surprised by how financial emergencies shrink to financial annoyances when you have 1yr of living expenses in savings/CDs, and 4-5yrs in bonds in taxable.

Bonds can lose 5-15% during a crash, so my solution is to overfill them to ~120% (=1/(1-.15)) of expected need, and stop worrying. Worst case, I have the money I need, and I get to TLH (tax-loss harvest) bonds---not a terrible thing.


Sequence of returns risk (SoRR). Recall some retirees report keeping 5yrs of living expenses in bonds (saving, CDs,...) to avoid the SoRR---the need to sell equities to pay for retirement living expenses in a down market. This assumes most market crashes recover within 4yrs. There have been notable exceptions. (Bonds get refilled by selling equities after market recovers.)

Plan for the worst, hope for the best. 2008-2009 happened and market was down 40%. Being fat in bonds in taxable in retirement will ease your worries. But those taxable bonds must be put in place before a crash. (Can't withdraw bonds in tax-deferred until age 59.5; and putting bonds in tax-free/Roth to plan to withdraw principal if needed, wastes that space better used for equities' tax-free growth and is planning to steal eggs from the golden goose sitting on your retirement nest egg.) Bottom line: taxable is your best place to put some bonds, now.


Bonds were? When you begin adding bonds to your retirement accounts, recall the advice is to put them in your tax-deferred accounts (traditional 401k, IRA, solo 401k,...). Why? Their expected growth (vs equities) should be lower, so too should the tax paid on withdrawals, conversions, RMDs.

Save your tax-free accounts (Roths) for equities and their expected greater growth.


Welcome.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.
Topic Author
Fingerscrossedd
Posts: 2
Joined: Fri Apr 30, 2021 9:10 am

Re: First time poster seeking advice for lump sum

Post by Fingerscrossedd »

Thank you all.
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