Want to sort out my finances and need some help

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Topic Author
Rollo Tomasi
Posts: 4
Joined: Sun Jan 09, 2022 9:07 pm

Want to sort out my finances and need some help

Post by Rollo Tomasi »

Hello all.

Firstly thank you for this great site. You guys do amazing work, are really helpful and I've learned so much from the Wiki over the last few weeks.

Over the years I have found financial planning a little overwhelming so have kind of "buried my head" and taken the easy route of ignoring the investments and stashing any spare cash in a savings account earning nothing, and not contributing to my 401K. I want to finally try to sort it out and put myself in a good position for the future.

I have had a 401K for about 5 years now but have been contributing only 3% (employer match). Over the past two years, I've had two significant pay raises which puts me in the position of being able to max out the 401K this coming year so I have upped my contributions to 14%. So, essentially I'd like to go over the 401K to make sure this money is going to the correct place and also work out what the best thing to do with the rest of my money is.

Emergency funds: I have around $80k in a savings account earning 0.3% right now. My expenses are around $3k per month so I'd estimate that I need to keep about $15-20k of this liquid as an emergency fund.

Debt: I currently have around $20k of medical debt, but I am paying this monthly at 0% directly to the doctor so have not been in a hurry to pay it quickly.

Tax Filing Status: Single

Tax Rate: 24% Federal, 6.33% State, 3.867% Local

State of Residence: NY

Age: 35

Desired Asset allocation: I need help with this, but I have read that it should be in-line with age so around 65/35%?
Desired International allocation: I don't know

Current retirement assets

Taxable
No current taxable accounts

401k
Voya Target Solution 2050 Trust - ER 0.56
3% company match

IRA
No Roth or tIRA currently

_______________________________________________________________

Contributions

New annual Contributions
$20,500 (in addition to 3% employer)

Available funds

Funds available in his 401(k)
Stable Value Fund - 0.65
BlackRock US Debt Index Fund - 0.32
Fidelity Total Return Bond Fund - 0.50
Vanguard Balanced Index Fund - 0.06
American Funds Washington Mutual - 0.27
BlackRock Russell 3000 Index Fund - 0.27
Voya Large Cap Growth Trust - 0.67
John Hancock Disciplined Value Mid Cap Fund - 0.75
T. Rowe Price Mid Cap Growth Fund - 0.61
Columbia Trust Integrated Small Cap Value - 0.4
Victory RS Small Cap Growth Fund - 0.59
BlackRock Global Equity ex-US Index Fund - 0.35
American Funds EuroPacific Growth Fund - 0.46
Voya Target Solution 20XX Trust - 0.56 (There are several retirement age funds starting 2030 up to 2065 with the same ER)

Questions:

1. I am now going to be maxing out my 401K. I currently have it in an 2055 retirement age fund but the expense ratio seems higher than some of the others.
2. I have a lump sum of around $60k after subtracting my emergency fund. I have no idea what to do with this. I'm over the income limit to put anything into a Roth IRA. Does it make sense to put any of this money into a non-deductible IRA? Or should I pick a taxable brokerage account and put it there? I have heard of a backdoor Roth IRA but I don't entirely understand the mechanics of it.
Luckywon
Posts: 1836
Joined: Tue Mar 28, 2017 10:33 am

Re: Want to sort out my finances and need some help

Post by Luckywon »

I'm sure someone will be along shortly to give better answers to your questions than I could but I want to say I love to see what you have learned from the wiki and your plans and questions so far. Follow the advice you receive here and you are going to be very happy for it 30 years from now. I wish I had this forum as a resource when I was starting out.

Good luck! :sharebeer
HomeStretch
Posts: 7325
Joined: Thu Dec 27, 2018 3:06 pm

Re: Want to sort out my finances and need some help

Post by HomeStretch »

Welcome to the forum!

1. The Vanguard Balanced Index Fund ER .06 is a good low-ER 401k option. The fund is 60% US Total Stock Market Fund and 40% US Total Bond Fund.

2. Several options to consider:

A) contribute $6k using a backdoor Roth which is a non-deductible traditional IRA contribution that is converted to a Roth IRA. This BH wiki page may be helpful (read the section about Form 8606 which must be completed and included with Form 1040):
https://www.bogleheads.org/wiki/Backdoor_Roth

B) find out if your 401k offers a Mega Backdoor Roth. This involves making after-tax non-Roth 401k contributions that are converted to Roth via either an in-plan Roth rollover to Roth 401k or an in-service distribution to a Roth IRA. This BH wiki page may be helpful:
https://www.bogleheads.org/wiki/Mega-backdoor_Roth

C) purchase I-Bonds at TreasuryDirect. The current annual rate on new purchases is 7.12%. The rate on your bond resets every 6 months. Bonds are Federal tax deferred, state/local tax free and have some inflation protection.
This BH wiki page may be helpful:
https://www.bogleheads.org/wiki/I_savings_bonds

D) Marcus online savings accounts offer a 0.6% rate with an AARP membership (~$13).
User avatar
Duckie
Posts: 8557
Joined: Thu Mar 08, 2007 2:55 pm

Re: Want to sort out my finances and need some help

Post by Duckie »

Rollo Tomasi wrote: Sun Jan 09, 2022 9:43 pm Age: 35

Desired Asset allocation: I need help with this, but I have read that it should be in-line with age so around 65/35%?
65/35 is reasonable. Conservative, but reasonable.
Funds available in his 401(k)
The best funds are:
  • BlackRock Russell 3000 Index Fund - 0.27 -- Almost complete US stocks
  • BlackRock Global Equity ex-US Index Fund - 0.35 -- Almost complete international stocks
  • BlackRock US Debt Index Fund - 0.32 -- US bonds
    or
  • Vanguard Balanced Index Fund - 0.06
I am now going to be maxing out my 401K. I currently have it in an 2055 retirement age fund but the expense ratio seems higher than some of the others.
It is a little expensive. You could use 100% Vanguard Balanced Index Fund - 0.06 which is 60% US stocks and 40% US bonds. It has the lowest expense ratio by far. Then you could put international in your Roth IRA. If you think 40% bonds is too much you could add some Russell 3000 to the 401k.
I have a lump sum of around $60k after subtracting my emergency fund. I have no idea what to do with this. I'm over the income limit to put anything into a Roth IRA. Does it make sense to put any of this money into a non-deductible IRA?
Not if you're going to leave it there.
Or should I pick a taxable brokerage account and put it there?
You could do that, too. Let's say you save $20,000 for emergencies. That leaves $60,000. You put $12,000 in the Roth IRA via the backdoor for 2021 and 2022. That leave $48,000. You could put all of the $48,000 into taxable. Probably a total US stock index fund. Which one depends on the brokerage you choose.
I have heard of a backdoor Roth IRA but I don't entirely understand the mechanics of it.
Under current law (which may change) you could contribute to a Roth IRA via the backdoor method. You make a $6000 non-deductible contribution to a TIRA, then convert 100% of that TIRA to a Roth IRA. You could still make the contribution for 2021.
MattB
Posts: 385
Joined: Fri May 28, 2021 12:27 am

Re: Want to sort out my finances and need some help

Post by MattB »

Duckie wrote: Sun Jan 09, 2022 10:25 pm
Rollo Tomasi wrote: Sun Jan 09, 2022 9:43 pm Age: 35

Desired Asset allocation: I need help with this, but I have read that it should be in-line with age so around 65/35%?
65/35 is reasonable. Conservative, but reasonable.
Funds available in his 401(k)
The best funds are:
  • BlackRock Russell 3000 Index Fund - 0.27 -- Almost complete US stocks
  • BlackRock Global Equity ex-US Index Fund - 0.35 -- Almost complete international stocks
  • BlackRock US Debt Index Fund - 0.32 -- US bonds
    or
  • Vanguard Balanced Index Fund - 0.06
I am now going to be maxing out my 401K. I currently have it in an 2055 retirement age fund but the expense ratio seems higher than some of the others.
It is a little expensive. You could use 100% Vanguard Balanced Index Fund - 0.06 which is 60% US stocks and 40% US bonds. It has the lowest expense ratio by far. Then you could put international in your Roth IRA. If you think 40% bonds is too much you could add some Russell 3000 to the 401k.
I have a lump sum of around $60k after subtracting my emergency fund. I have no idea what to do with this. I'm over the income limit to put anything into a Roth IRA. Does it make sense to put any of this money into a non-deductible IRA?
Not if you're going to leave it there.
Or should I pick a taxable brokerage account and put it there?
You could do that, too. Let's say you save $20,000 for emergencies. That leaves $60,000. You put $12,000 in the Roth IRA via the backdoor for 2021 and 2022. That leave $48,000. You could put all of the $48,000 into taxable. Probably a total US stock index fund. Which one depends on the brokerage you choose.
I have heard of a backdoor Roth IRA but I don't entirely understand the mechanics of it.
Under current law (which may change) you could contribute to a Roth IRA via the backdoor method. You make a $6000 non-deductible contribution to a TIRA, then convert 100% of that TIRA to a Roth IRA. You could still make the contribution for 2021.
I agree with everything in Duckie's post.

One additional note: Backdoor Roth's can be intimidating to people who have not done them. I know this because I was intimidated by the concept until a few days ago, when I did my first. That said, they are easy to do. And working through the process is worth the trouble.

In my case, I added $6,000 to a traditional IRA at Schwab. Called Schwab and asked the money in my IRA to be converted to my Roth account. And the money was converted in less than a minute.

OP, you'll need to open both a traditional IRA and a Roth IRA before you can complete the process. But after that you can make the transfer with a few clicks and a phone call. Ask here if you're having trouble and need some guidance.
Topic Author
Rollo Tomasi
Posts: 4
Joined: Sun Jan 09, 2022 9:07 pm

Re: Want to sort out my finances and need some help

Post by Rollo Tomasi »

Thank you all for the great responses so far! I have a few somewhat basic questions which I feel a bit stupid asking ( :oops: ) but want to make sure I get this correct.

1. It seems that moving my 401K to a different fund is probably the correct thing to do. Is this just a matter of changing my allocation in the Voya portal?

2. If the answer is yes, I assume this "sells" the shares in one fund and buys another fund. Because this is all happening within a 401K, I think there are no tax consequences or anything to report, but am I correct?

3. I guess that moving to the Vanguard Index Fund is the best option if I am going to keep international stocks in the Roth?

4. I don't understand exactly what this means. I don't see anything with this name listed as a fund. I'm also not sure how to tell if 40% bonds is "too much" - I think it probably is for my age from what I have read, but happy to take advice on that.
If you think 40% bonds is too much you could add some Russell 3000 to the 401k
5. For the backdoor Roth IRA in pure dummies terms:
- I open a traditional IRA account (does it matter who I open this with?)
- I also open a Roth IRA account (again, does it matter who I open this with? Should it be the same company as the traditional IRA?)
- I contribute $6k to the IRA noting that this is for 2021 tax year.
- I contribute $6k to the IRA in another transaction noting that this is for the 2022 tax year.
- I ask the IRA company to move / convert this money into my Roth IRA account?

Is all of that correct?

6. I have asked my Voya (my 401K provider) if my plan allows after-tax contributions. I think I would be classed as a HCE so not sure if I would even be able to do this so I would need to confirm this. If this is an option, is it better to put that cash lump sum into a Roth IRA this way rather than a traditional taxable account?

7. Assuming it's not, or if I can't contribute to the 401K after-tax, what are my best taxable options? Are there particular brokerages that would be recommended? And if I'm moving 401K to Vanguard Balanced Index Fund and an international fund in the Roth IRA, what should the taxable money be in?

Many thanks and sorry for the really basic questions. I'm so glad I found this place!
niagara_guy
Posts: 342
Joined: Tue Feb 11, 2020 8:32 am

Re: Want to sort out my finances and need some help

Post by niagara_guy »

What company manages your 401k and are there fees on top of the fund fees? You might be paying 1% or more on top of the fund fees. you don't want to get eaten alive by fees. PM me is you want more information from me.

If you are paying fees on top of the fund fees then you might consider only putting enough in to get the match and using other places (like Roth IRA or traditional IRA) instead). I see you are over the income limit for Roth, maybe you can do a backdoor Roth or mega backdoor Roth as suggested above.

Investing money in a taxable account in index stock funds is another option. You won't pay taxes until you sell (dividends are taxed but most dividends on US companies are qualified, so no taxes). When you sell the profits are long term gains if held over 1 year so smaller taxes.
aristotelian
Posts: 9959
Joined: Wed Jan 11, 2017 8:05 pm

Re: Want to sort out my finances and need some help

Post by aristotelian »

I am not the above poster but can try to help with your follow ups. See below in bold.
Rollo Tomasi wrote: Mon Jan 10, 2022 10:26 am Thank you all for the great responses so far! I have a few somewhat basic questions which I feel a bit stupid asking ( :oops: ) but want to make sure I get this correct.

1. It seems that moving my 401K to a different fund is probably the correct thing to do. Is this just a matter of changing my allocation in the Voya portal? Yes, should be easy to do

2. If the answer is yes, I assume this "sells" the shares in one fund and buys another fund. Because this is all happening within a 401K, I think there are no tax consequences or anything to report, but am I correct? Correct

3. I guess that moving to the Vanguard Index Fund is the best option if I am going to keep international stocks in the Roth? Vanguard balanced index would be my choice.

4. I don't understand exactly what this means. I don't see anything with this name listed as a fund. I'm also not sure how to tell if 40% bonds is "too much" - I think it probably is for my age from what I have read, but happy to take advice on that. I think they are just referring to your risk tolerance and target allocation. Those are subjective and depend on your personal need, ability, and willingness to take risk, with no right or wrong answer. You should note as a younger investor you have a long timeframe which might argue for a higher stock allocation. As a possible benchmark, Vanguard Target Retirement 2060 is currently 90% stocks.

5. For the backdoor Roth IRA in pure dummies terms:
- I open a traditional IRA account (does it matter who I open this with?)
- I also open a Roth IRA account (again, does it matter who I open this with? Should it be the same company as the traditional IRA?)
- I contribute $6k to the IRA noting that this is for 2021 tax year.
- I contribute $6k to the IRA in another transaction noting that this is for the 2022 tax year.
- I ask the IRA company to move / convert this money into my Roth IRA account?

Is all of that correct? You've got the basics of the transaction. You will want to make sure you do not claim the Traditional IRA deduction when entering your taxes, and make sure enter the 1099R for the conversion without paying tax.

6. I have asked my Voya (my 401K provider) if my plan allows after-tax contributions. I think I would be classed as a HCE so not sure if I would even be able to do this so I would need to confirm this. If this is an option, is it better to put that cash lump sum into a Roth IRA this way rather than a traditional taxable account?

7. Assuming it's not, or if I can't contribute to the 401K after-tax, what are my best taxable options? Are there particular brokerages that would be recommended? And if I'm moving 401K to Vanguard Balanced Index Fund and an international fund in the Roth IRA, what should the taxable money be in? Vanguard is the standard recommendation although there are a lot of threads on their customer service taking a long time to answer the phone (like 30 minutes+). If that bothers you, I would suggest Schwab or Fidelity. If you are comfortable purchasing ETF's, it really doesn't matter which custodian you use since you can always transfer back and forth.

Many thanks and sorry for the really basic questions. I'm so glad I found this place!
backpacker61
Posts: 954
Joined: Wed May 20, 2020 6:36 am

Re: Want to sort out my finances and need some help

Post by backpacker61 »

If eligible (you participate in a High Deductible Health Insurance plan at work), you could consider investing in a Health Savings Account.

It is #4 in the list at Prioritizing Investments on the Wiki; ahead of funding a Traditional or Roth IRA.
https://www.bogleheads.org/wiki/Priorit ... nvestments

After contributing funds to the account, you can invest any unspent HSA balance.
“Now shall I walk or shall I ride? | 'Ride,' Pleasure said; | 'Walk,' Joy replied.” | | ― W.H. Davies
User avatar
Duckie
Posts: 8557
Joined: Thu Mar 08, 2007 2:55 pm

Re: Want to sort out my finances and need some help

Post by Duckie »

Rollo Tomasi wrote: Mon Jan 10, 2022 10:26 am It seems that moving my 401K to a different fund is probably the correct thing to do. Is this just a matter of changing my allocation in the Voya portal?
Yes, but there are two parts to this. You have change your future contributions to go to the new desired fund(s) and then you have to move your current assets into the new fund(s).
If the answer is yes, I assume this "sells" the shares in one fund and buys another fund. Because this is all happening within a 401K, I think there are no tax consequences or anything to report, but am I correct?
Correct.
I guess that moving to the Vanguard Index Fund is the best option if I am going to keep international stocks in the Roth?
The Vanguard Balanced Fund (VBIAX) is the cheapest option.
If you think 40% bonds is too much you could add some Russell 3000 to the 401k
I don't understand exactly what this means. I don't see anything with this name listed as a fund. I'm also not sure how to tell if 40% bonds is "too much" - I think it probably is for my age from what I have read, but happy to take advice on that.
The BlackRock Russell 3000 Index Fund (0.27%) is one of the funds available in your 401k. Is a "total" US stock index fund. If you think your bond allocation is too high using the Balanced Fund you could add some Russell 3000 to the 401k to reduce the percentage of bonds in your portfolio. But once you add the Roth IRA and taxable account your bond percentage will go down on its own.
For the backdoor Roth IRA in pure dummies terms:
- I open a traditional IRA account (does it matter who I open this with?)
You should open it at a discount brokerage like Fidelity, Schwab, or Vanguard. Not at a bank or insurance company.
- I also open a Roth IRA account (again, does it matter who I open this with? Should it be the same company as the traditional IRA?)
You are allowed to open it anywhere. But to make things easier open it at the same custodian as the TIRA. It makes converting less complicated.
- I contribute $6k to the IRA noting that this is for 2021 tax year.
- I contribute $6k to the IRA in another transaction noting that this is for the 2022 tax year.
- I ask the IRA company to move / convert this money into my Roth IRA account?

Is all of that correct?
Yes. Once you contribute to the TIRA you have the custodian convert 100% of your TIRA to your Roth IRA. Some custodians can do this online, others you have to call.
I have asked my Voya (my 401K provider) if my plan allows after-tax contributions. I think I would be classed as a HCE so not sure if I would even be able to do this so I would need to confirm this. If this is an option, is it better to put that cash lump sum into a Roth IRA this way rather than a traditional taxable account?
First, whether to contribute to tax-sheltered versus taxable, it's usually better to contribute to tax-sheltered, especially in your case.

Second, where the after-tax goes depends on your plan. Some plans allow rolling after-tax contributions (and their related earnings) in-plan to a Roth 401k sub-account. Some allow rolling in-service to a Roth IRA outside the 401k. Some allow both. Some allow neither, in which case you're probably not going to want to use it. Some allow rolling once a quarter or once a year. Some allow rolling every a paycheck. It depends on your plan.
Assuming it's not, or if I can't contribute to the 401K after-tax, what are my best taxable options?
In taxable a total US stock market index fund/ETF and possibly a total international stock market index fund/ETF are the best options. Which ones depends on which brokerage. You want to keep all bonds in the pre-tax 401k. If that mean eventually adding an individual bond fund like BlackRock US Debt Index Fund (0.32%) to the 401k then that's what you do.
Are there particular brokerages that would be recommended?
Fidelity, Schwab, and Vanguard.
And if I'm moving 401K to Vanguard Balanced Index Fund and an international fund in the Roth IRA, what should the taxable money be in?
Stock mutual funds/ETFs.
Parkinglotracer
Posts: 519
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Location: Upstate NY

Re: Want to sort out my finances and need some help

Post by Parkinglotracer »

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freckles01
Posts: 228
Joined: Sun Aug 10, 2008 4:43 pm

Re: Want to sort out my finances and need some help

Post by freckles01 »

For backdoor RothIRA, I follow Physician on Fire- he shows a step by step guide every year-

https://www.physicianonfire.com/backdoor/
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ruralavalon
Posts: 22792
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Want to sort out my finances and need some help

Post by ruralavalon »

Welcome to the forum :) .

It's good to see that you will be making maximum annual employee contributions to your 401k account. Your employer's plan offers some excellent funds, you are fortunate.

Rollo Tomasi wrote: Sun Jan 09, 2022 9:43 pm Emergency funds: I have around $80k in a savings account earning 0.3% right now. My expenses are around $3k per month so I'd estimate that I need to keep about $15-20k of this liquid as an emergency fund.

Debt: I currently have around $20k of medical debt, but I am paying this monthly at 0% directly to the doctor so have not been in a hurry to pay it quickly.
You have $60k to spare, I suggest paying off this $20k medical debt. It seems wrong to make the doctor carry this debt for services rendered. Since you are able to pay it seems wrong to make the doctor delay being paid for his/her services.


Rollo Tomasi wrote: Sun Jan 09, 2022 9:43 pm Age: 35

Desired Asset allocation: I need help with this, but I have read that it should be in-line with age so around 65/35%?
Desired International allocation: I don't know
I suggest about 20% in bonds or other fixed income investments (fixed income can include bonds, bond funds, I-bonds, CDs, savings accounts, a Stable Value Fund or Guaranteed Income fund, money market funds). This is expected to substantially reduceportfolio volatility (risk), with only a relatively modest decrease in portfolio return. Graph, "An Efficient Frontier: the power of diversification".Please see:
1) Wiki article Bogleheads® investment philosophy, part 3 "Never bear too much or too little risk";
2) Wiki article, "Asset allocation";
3) Morningstar (8/20/2019),"The Best Diversifiers for Your Equity Portfolio", link;
4) Morningstar (4/8/2020), "What's the Best Diversifier for Stocks?", link;
5) White Coat Investor (9/23/2016), "In Defense of Bonds", link;
6) Ben Carlson (8/2/2020), "Why Would Anyone Own Bonds Right Now?",link;
7) Morningstar (4/13/2021), "Which Bonds Provide the Biggest Diversification Benefits?", link; and
8) Age versus stocks, graph, and Bogleheads' stock allocations, bar graph and table.

I suggest around 20 - 30% of stocks in international stocks. Vanguard paper (March 2012), "Considerations for investing in non-U.S. equities", available as an archived pdf. Historically, allocating 20% of an equity portfolio to non-U.S. stocks would have captured about 84% of the maximum possible diversification benefit, and allocating 30% of an equity portfolio to non-U.S. stocks would have captured about 99% of the maximum possible diversification benefit (p. 6). The diversification benefit has varied over time. (You can find lots of debate here on international allocation, opinions ranging all the way from 00% to 50% of stocks in international stocks. If you want more viewpoints on international stocks please try the Google search box, upper right, this page).

That works out to about 20% bonds, 20% international stocks, and 60% domestic stocks. Asset allocation is a very personal decision. You must decide on an allocation that is comfortable for you based on your own ability, willingness and need to take risk


Rollo Tomasi wrote: Sun Jan 09, 2022 9:43 pm Available funds

Funds available in his 401(k)
Stable Value Fund - 0.65
BlackRock US Debt Index Fund - 0.32
Fidelity Total Return Bond Fund - 0.50
Vanguard Balanced Index Fund - 0.06
American Funds Washington Mutual - 0.27
BlackRock Russell 3000 Index Fund - 0.27
Voya Large Cap Growth Trust - 0.67
John Hancock Disciplined Value Mid Cap Fund - 0.75
T. Rowe Price Mid Cap Growth Fund - 0.61
Columbia Trust Integrated Small Cap Value - 0.4
Victory RS Small Cap Growth Fund - 0.59
BlackRock Global Equity ex-US Index Fund - 0.35
American Funds EuroPacific Growth Fund - 0.46
Voya Target Solution 20XX Trust - 0.56 (There are several retirement age funds starting 2030 up to 2065 with the same ER)
Vanguard Balanced Index Fund - 0.06 has a very low expense ratio, it invests in 60% U.S. stocks and 40% bonds. It is an excellent fund if you don't want an international stock investment. But it has a 40% bond allocation, probably more than necessary at your age.

I suggest using:
1) BlackRock Russell 3000 Index Fund - 0.27;
2) BlackRock Global Equity ex-US Index Fund - 0.35; and
3) BlackRock US Debt Index Fund - 0.32.
The expense ratios are fairly low, and you can use the asset allocation you wish. In the long run it will be easier to manage your portfolio asset allocation if you use the three separate index funds rather than the Vanguard Balanced Index Fund.

BlackRock is an excellent fund provider, they are the largest asset manager in the entire world. ADV Ratings

Rollo Tomasi wrote: Sun Jan 09, 2022 9:43 pm Questions:

1. I am now going to be maxing out my 401K. I currently have it in an 2055 retirement age fund but the expense ratio seems higher than some of the others.
I suggest using:
1) BlackRock Russell 3000 Index Fund - 0.27;
2) BlackRock Global Equity ex-US Index Fund - 0.35; and
3) BlackRock US Debt Index Fund - 0.32.

Rollo Tomasi wrote: Sun Jan 09, 2022 9:43 pm2. I have a lump sum of around $60k after subtracting my emergency fund. I have no idea what to do with this. I'm over the income limit to put anything into a Roth IRA. Does it make sense to put any of this money into a non-deductible IRA? Or should I pick a taxable brokerage account and put it there? I have heard of a backdoor Roth IRA but I don't entirely understand the mechanics of it.
I suggest using $20k to pay off your medical debt.

I suggest using $12k to fund a backdoor Roth IRA at a low cost fund provider (like Vanguard, Fidelity or Schwab), $6k for tax year 2021, and $6k for tax year 2022. In a Roth IRA its best to use only stock funds. At Vanguard I suggest using Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.04% or the ETF share class (VTI), and Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER 0.11% or the ETF share class (VXUS).

I suggest using $10k to purchase I savings bonds. "The composite rate for I bonds issued from November 2021 through April 2022 is 7.12 percent. This rate applies for the first six months you own the bond." Treasury Direct.

The remaining $18k can be invested in a taxable brokerage account at a low cost fund provider like Vanguard, Fidelity or Schwab. Invest in very tax-efficient stock index funds. At Vanguard I suggest using Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.04% or the ETF share class (VTI), and Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER 0.11% or the ETF share class (VXUS).
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
LittleMaggieMae
Posts: 1309
Joined: Mon Aug 12, 2019 9:06 pm

Re: Want to sort out my finances and need some help

Post by LittleMaggieMae »

Rollo Tomasi wrote: Mon Jan 10, 2022 10:26 am 1. It seems that moving my 401K to a different fund is probably the correct thing to do. Is this just a matter of changing my allocation in the Voya portal?

2. If the answer is yes, I assume this "sells" the shares in one fund and buys another fund. Because this is all happening within a 401K, I think there are no tax consequences or anything to report, but am I correct?
I am not the sharpest knife in the drawer so I struggled when trying to change the funds and where my contributions go within my 401K. It took me a couple of go arounds to accomplish what I wanted done. Things that probably should be obvious are not to me. :)


Here's some tips:
Changing where the contributions from your paycheck go - may not happen instantaneously (ie with your next paycheck) it may take a cycle or two for the change to go thru. There should be some words about this timing when you initiate the change (maybe your provider and payroll company work together and it will happen within a few days... maybe not).

You may need to do 2 steps:
The first will be changing where your payroll contributions go (you want your new contributions to buy the new funds you picked out).

The second thing will be to move your money from your old funds to the new ones you picked out. It may not be called a "transfer" you may need to do a "sell" the old fund(s) and then "buy" the new fund(s) "trade". You may be asked if you want to do a $$ amount or a share amount. I have seen the option to "sell all the shares". Moving based on shares might be better than $$ amounts.

It's not hard... I just didn't "grasp" the mechanics involved - because I was expecting to do a "transfer" not a "sell" and a "buy" as that was how my 401K account worked. When the "transfer" thing didn't look what what I wanted - it took me some time to determine that "sell" and "buy" things were what I wanted. And I didn't think about changing my payroll contribution allocation until after a couple of payrolls passed and I bought more of the "old" fund and then had to do the "sell/buy" thing a second time to clean it up.

There will be no tax consequences or anything to report - as all of the transactions should take place within your 401K account.
Topic Author
Rollo Tomasi
Posts: 4
Joined: Sun Jan 09, 2022 9:07 pm

Re: Want to sort out my finances and need some help

Post by Rollo Tomasi »

Thanks everyone for your great advice and replies. I'll try to address them all:
niagara_guy wrote: Mon Jan 10, 2022 10:53 am What company manages your 401k and are there fees on top of the fund fees? You might be paying 1% or more on top of the fund fees. you don't want to get eaten alive by fees. PM me is you want more information from me.

If you are paying fees on top of the fund fees then you might consider only putting enough in to get the match and using other places (like Roth IRA or traditional IRA) instead). I see you are over the income limit for Roth, maybe you can do a backdoor Roth or mega backdoor Roth as suggested above.

Investing money in a taxable account in index stock funds is another option. You won't pay taxes until you sell (dividends are taxed but most dividends on US companies are qualified, so no taxes). When you sell the profits are long term gains if held over 1 year so smaller taxes.
Looking at the plan disclosure, it says this:
The Plan pays amounts each year for general administrative expenses of the Plan, including amounts paid to certain outside providers for services such as legal, trustee/custodial, accounting and recordkeeping services. As an example, the annual record keeping fees paid by the Plan are calculated using a flat fee of $55 per participant.The general administrative expenses of the Plan, estimated at 0.27% for periods on and after March 22, 2021, are paid from the total annual operating expenses of each designated investment alternative. In other words, on and after March 22, 2021, each fund’s total annual operating expense will include 0.27% for general administrative expenses
Does that seem high? I guess with moving to the Vangauard Balanced Index Fund would bring the entire cost down to 0.33%?

I am planning to contribute to the backdoor Roth IRA but my 401K provider has confirmed that I cannot make after-tax contributions so mega backdoor Roth is not an option for me.
Parkinglotracer wrote: Mon Jan 10, 2022 8:13 pm Have you asked thdoctor for some concessions on your medical debt? I have seen a show re: an org that helps people pay off medical debt - but I don’t know what the org was … seems like someone might have an idea. Any docs out there in medical land that might have some ideas of orgs they know of?

The bill has already been reduced unfortunately.
ruralavalon wrote: Tue Jan 11, 2022 3:10 pm You have $60k to spare, I suggest paying off this $20k medical debt. It seems wrong to make the doctor carry this debt for services rendered. Since you are able to pay it seems wrong to make the doctor delay being paid for his/her services.
Sorry, I should have been more specific with this. The Dr themselves is not carrying the debt, it's financed at 0% through CareCredit. I don't feel the need to pay this off any earlier.

@Duckie / ruralavalon - Thank you for the wonderful detail below. If I followed all your fund advice, I think I'd be invested in around 7 funds. I'm concerned this might be too many funds for me to keep a handle on at this stage. If invest in the Vanguard Balanced Index (which is 60/40) and then put $12k into international stocks (via back door Roth IRA, to (VTIAX) for example), that would leave me at about the following (before taxable investment):

- US Stocks - ~$33k - 49%
- Bonds - ~$22k - 33%
- International Stocks - ~$12k - 18%

If I then drop the ~$48k into Vanguard Total Stock Market Index Fund Admiral Shares, this would mean I would be invested in:

- Vanguard Balanced Index Fund
- Vanguard Total International Stock Index Fund Admiral Shares
- Vanguard Total Stock Market Index Fund Admiral Shares

with a split of:

- US Stocks - ~$81k - 71%
- Bonds - ~$22k - 19%
- International Stocks - ~$12k - 10%

Does this seem reasonable? Or do you still think it would be better moving to the Blackrock funds? I am interested in the I Bonds but I'm wary of overcomplicating my portfolio to begin with. Also a basic question, but is there any issue with having everything in Vanguard funds rather than split across different brokers?
freckles01 wrote: Tue Jan 11, 2022 12:52 pm For backdoor RothIRA, I follow Physician on Fire- he shows a step by step guide every year-

https://www.physicianonfire.com/backdoor/
Thank you, this is a great read!
LittleMaggieMae wrote: Tue Jan 11, 2022 3:55 pm You may need to do 2 steps:
The first will be changing where your payroll contributions go (you want your new contributions to buy the new funds you picked out).

The second thing will be to move your money from your old funds to the new ones you picked out. It may not be called a "transfer" you may need to do a "sell" the old fund(s) and then "buy" the new fund(s) "trade". You may be asked if you want to do a $$ amount or a share amount. I have seen the option to "sell all the shares". Moving based on shares might be better than $$ amounts.
Thank you! The Voya website is actually pretty good and I think I've worked it out. I could easily change my future elections, though they do have two options for moving existing funds; "account rebalance" where you can choose percentage you want in each fund and then "fund to fund transfer", so I wasn't sure exactly what to go with. I have tried the transfer and will see what happens there.
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ruralavalon
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Location: Illinois

Re: Want to sort out my finances and need some help

Post by ruralavalon »

Rollo Tomasi wrote: Wed Jan 12, 2022 7:06 pm@Duckie / ruralavalon - Thank you for the wonderful detail below. If I followed all your fund advice, I think I'd be invested in around 7 funds. I'm concerned this might be too many funds for me to keep a handle on at this stage. If invest in the Vanguard Balanced Index (which is 60/40) and then put $12k into international stocks (via back door Roth IRA, to (VTIAX) for example), that would leave me at about the following (before taxable investment):

- US Stocks - ~$33k - 49%
- Bonds - ~$22k - 33%
- International Stocks - ~$12k - 18%

If I then drop the ~$48k into Vanguard Total Stock Market Index Fund Admiral Shares, this would mean I would be invested in:

- Vanguard Balanced Index Fund
- Vanguard Total International Stock Index Fund Admiral Shares
- Vanguard Total Stock Market Index Fund Admiral Shares

with a split of:

- US Stocks - ~$81k - 71%
- Bonds - ~$22k - 19%
- International Stocks - ~$12k - 10%

Does this seem reasonable? Or do you still think it would be better moving to the Blackrock funds? I am interested in the I Bonds but I'm wary of overcomplicating my portfolio to begin with. Also a basic question, but is there any issue with having everything in Vanguard funds rather than split across different brokers?
I don't think there is a problem in having everything in Vanguard funds and at single brokerage.

Wiki article, Vanguard safety

As for using Vanguard Balanced Index Fund (VBIAX) versus the three BlackRock index funds, I think it's a matter of personal convenience. I was concerned that using VBIAX might make in difficult to monitor and maintain the desired asset allocation. If you find using VBIAX convenient, that's fine in my opinion.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
zie
Posts: 364
Joined: Sun Mar 22, 2020 4:35 pm

Re: Want to sort out my finances and need some help

Post by zie »

Rollo Tomasi wrote: Wed Jan 12, 2022 7:06 pm
The Plan pays amounts each year for general administrative expenses of the Plan, including amounts paid to certain outside providers for services such as legal, trustee/custodial, accounting and recordkeeping services. As an example, the annual record keeping fees paid by the Plan are calculated using a flat fee of $55 per participant.The general administrative expenses of the Plan, estimated at 0.27% for periods on and after March 22, 2021, are paid from the total annual operating expenses of each designated investment alternative. In other words, on and after March 22, 2021, each fund’s total annual operating expense will include 0.27% for general administrative expenses
Does that seem high? I guess with moving to the Vangauard Balanced Index Fund would bring the entire cost down to 0.33%?
I pay $35/yr for my 403B, paid quarterly. I get a pretty great deal though. so $55/yr seems nice.
Rollo Tomasi wrote: Wed Jan 12, 2022 7:06 pm
- US Stocks - ~$81k - 71%
- Bonds - ~$22k - 19%
- International Stocks - ~$12k - 10%

Does this seem reasonable? Or do you still think it would be better moving to the Blackrock funds? I am interested in the I Bonds but I'm wary of overcomplicating my portfolio to begin with. Also a basic question, but is there any issue with having everything in Vanguard funds rather than split across different brokers?
It's reasonable, 7 is not ridiculous, but perhaps a bit high if you value simplicity. If you value simplicity, it's maybe a bit much.

The lazy/simple method:

The Vanguard Balanced in the 401k, and the same 60/40 in the new ROTH IRA you are going to create using the backdoor method. If you don't pick Vanguard for the IRA's, then use the ETF: AOR which is basically the same 60/40 fund, just in an ETF form (and provided by Blackrock/iShares).

In taxable, with whatever is left, you can just buy VT, it's a global stock market ETF that holds almost 7k stocks across the entire world. If you want US only, then VTI is where it's at. I'd recommend VT, but you do you, neither choice will likely materially affect your retirement.

As you perhaps do more taxable investing, this might bring your equities up much higher than 60%, but I'd worry about that when your taxable balance is approaching say half or so of your 401k/IRA balance(s) and then you can choose to learn more at that time and see if a change might make sense.

As for Funds vs Brokerage. Vanguard encourages their funds to be held outside of Vanguard, and they are widely held all over the place, including Voya, your 401k provider. My 403B provider also offers Vanguard funds. The Vanguard funds tend to be the cheapest and best funds around, regardless of which Brokerage you use, and nobody will care if you use Vanguard products @ other brokerages, it's very common.

Fidelity is privately owned, by a woman. Schwab is publicly owned and is traded on the stock market, your current 401k probably owns some of Schwab. Vanguard is unique as it is privately owned by itself. In theory the Vanguard ownership model should more closely align with their customers, I've not seen this to be objectively true, but it is unique. At Schwab and Fidelity, you could even use them as your checking and savings account(s); a one stop shop for all your financial needs pretty much. None of them are objectively better than the other(s) to materially affect anything useful. All of them are likely to outlive you, so you don't have to worry about them going broke when you are 90. They each hold more than the US govt budget in assets for their customers.

My recommendation, visit each of the websites, see which one seems to make the most sense to you and then pick that one and go with it for all of your taxable investing, your IRA's, etc.

Good luck!
Last edited by zie on Thu Jan 13, 2022 1:58 pm, edited 1 time in total.
Whether rich or poor, a young woman should know how a bank account works, understand the composition of mortgages and bonds, and know the value of interest and how it accumulates. -Hetty Green
OhBoyUhoh
Posts: 73
Joined: Wed Feb 10, 2016 2:16 pm
Location: SW Ohio

Re: Want to sort out my finances and need some help

Post by OhBoyUhoh »

Welcome, Rollo. Great user name! Good luck and keep asking questions.

~Will
Topic Author
Rollo Tomasi
Posts: 4
Joined: Sun Jan 09, 2022 9:07 pm

Re: Want to sort out my finances and need some help

Post by Rollo Tomasi »

zie wrote: Thu Jan 13, 2022 1:41 pmThe lazy/simple method:

The Vanguard Balanced in the 401k, and the same 60/40 in the new ROTH IRA you are going to create using the backdoor method. If you don't pick Vanguard for the IRA's, then use the ETF: AOR which is basically the same 60/40 fund, just in an ETF form (and provided by Blackrock/iShares).

In taxable, with whatever is left, you can just buy VT, it's a global stock market ETF that holds almost 7k stocks across the entire world. If you want US only, then VTI is where it's at. I'd recommend VT, but you do you, neither choice will likely materially affect your retirement.

My recommendation, visit each of the websites, see which one seems to make the most sense to you and then pick that one and go with it for all of your taxable investing, your IRA's, etc.

Good luck!
Thanks for this. In the end I have plumped for Vanguard for all the accounts - I agree that having everything there isn't really a worry.

I would like to keep it as simple as possible at the moment and re-evaluate in a while once I have all the money where it's supposed to be.

Now that I have opened the Vanguard accounts, I have a few more basic questions about the mechanics of the account which I know will be very stupid, but here goes:

1. I have now opened the traditional IRA and the Roth IRA accounts. I am funding the traditional from my bank account (contributed for both 2021 and 2022) and it says they should be available in 2-3 days. My understanding is I wait for these funds to be available, then immediately convert to the Roth IRA. Is there any danger if I miss this immediate conversion that I could end up with gaining or losing money in the IRA? Is there a way I can tell Vanguard not to do anything with the money until I convert? Or even tell them to immediately convert the funds when they arrive?

2. What exactly is the Federal Money Market account? Is this kind of a "holding" account for my money before it's invested in a fund?

3. When the money arrives into the Roth and taxable accounts - what exactly are the next steps to get it into the funds? I have had a poke around the Vanguard website and I can see a Buy / Sell button. When I click on that, I assume next step is "Buy Vanguard Funds", choose "Add another Vanguard Mutual Fund" and then enter the ticker and dollar amount?

4. If I want to invest into the taxable account from each paycheck, what is the best way to do that? Can I set up a direct deposit with a routing number to deposit directly to Vanguard? Or would I have to have the money paid to my normal bank and then transfer it over?
OhBoyUhoh wrote: Thu Jan 13, 2022 1:56 pm Welcome, Rollo. Great user name! Good luck and keep asking questions.

~Will
Thank you! I wish I had found this forum sooner. I've lurked on Reddit for a few months and found it fairly intimidating but you guys are great. I really appreciate all the help and hopefully one day I can be one of the people answering the questions :)
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Duckie
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Re: Want to sort out my finances and need some help

Post by Duckie »

Rollo Tomasi wrote: Thu Jan 13, 2022 10:45 pm I have now opened the traditional IRA and the Roth IRA accounts. I am funding the traditional from my bank account (contributed for both 2021 and 2022) and it says they should be available in 2-3 days. My understanding is I wait for these funds to be available, then immediately convert to the Roth IRA. Is there any danger if I miss this immediate conversion that I could end up with gaining or losing money in the IRA?
If you have the TIRA money in the settlement fund (Federal Money Market) you cannot lose and might earn a few pennies. When you convert you convert 100% of the TIRA including any earnings.
Is there a way I can tell Vanguard not to do anything with the money until I convert? Or even tell them to immediately convert the funds when they arrive?
No and no. Just wait until the money is available then convert it.
What exactly is the Federal Money Market account? Is this kind of a "holding" account for my money before it's invested in a fund?
It is the cash settlement fund. Yes it is the "holding" account. When you buy other assets the money usually comes from the settlement fund. When you sell assets the money usually goes into the settlement fund. I think you can go directly through your bank but I've never done it that way. I always go through the settlement fund first.
When the money arrives into the Roth and taxable accounts - what exactly are the next steps to get it into the funds? I have had a poke around the Vanguard website and I can see a Buy / Sell button. When I click on that, I assume next step is "Buy Vanguard Funds", choose "Add another Vanguard Mutual Fund" and then enter the ticker and dollar amount?
That's roughly it. Since this is a brokerage you can buy other than Vanguard mutual funds. You can buy ETFs and mutual funds from other companies. Mutual funds are purchased by dollar amount. Stocks and ETFs are purchased by share amount.
If I want to invest into the taxable account from each paycheck, what is the best way to do that? Can I set up a direct deposit with a routing number to deposit directly to Vanguard?
I don't know if you can do that. Vanguard isn't a bank. Even their checks aren't exactly checks.
Or would I have to have the money paid to my normal bank and then transfer it over?
That would work. Once you link the bank to Vanguard you can have Vanguard pull the money from your bank. (I always pull or push money from Vanguard rather than pull or push from my bank account. Mainly because my Vanguard account is massively larger.)
zie
Posts: 364
Joined: Sun Mar 22, 2020 4:35 pm

Re: Want to sort out my finances and need some help

Post by zie »

I agree with Duckie. I'm not a Vanguard brokerage user, so I can't comment on the specifics of your Vanguard questions. I assume they can do most of those things. There may be answers to those questions in this forum(try search on the top right of the page) or the wiki, or perhaps others with Vanguard experience can chime in here and answer the Vanguard specific questions. Alternatively you can check their website or call/email them.

But the larger picture:

You have it basically right, like Duckie said, the money defaults into a "core" holding, the federal money market fund, it will just sit there indefinitely until you do something with it, you have to push the buy/trade button and spend the money from the core and buy VT or VBIAX or whatever it is you are going to buy.

For every account you can, if one wanted, have some money in X and some money in Y investment, plus some in the core holding. The simple/lazy method I talked about would just have 1 fund in each, plus core, which would have essentially a 0 balance.

Good luck and happy investing!
Whether rich or poor, a young woman should know how a bank account works, understand the composition of mortgages and bonds, and know the value of interest and how it accumulates. -Hetty Green
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