Help a Lost Sheep! Portfolio Review Needed

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Topic Author
tin_foil_hat
Posts: 19
Joined: Fri Nov 05, 2021 7:28 am

Help a Lost Sheep! Portfolio Review Needed

Post by tin_foil_hat »

Greetings,

For the past several years, I've been proudly adopting the Boogleheads mentality in managing my investments. However, even the keenest eyes can miss a beat or two.

I would greatly appreciate your community wisdom in reviewing my portfolio for any blind spots or overlooked opportunities.

Thanks a million,
Ben
_______________________________________________________________


Emergency funds: Yes, 6 month in High Yield Savings account.

Debt: None

Tax Filing Status: Single

Tax Rate: 24% Federal, 0% State

Annual Gross Income: around $160K

State of Residence: WA

Age: 31

Desired Asset allocation: 100% stocks / 0% bonds
Desired International allocation: up to 10% of stocks / 0% bonds

_______________________________________________________________

Approximate size of total portfolio: 565K
_______________________________________________________________

Current assets:
401K (pre-tax)
28.3% | FXAIX - Fidelity 500 Index | Exp Ratio: 0.015%
7.9% | FSPSX - Fidelity International Index | Exp Ratio: 0.030%

HSA
2.5%| FSSNX- Fidelity Small Cap Index | Exp Ratio: 0.025%
1.6% | FZROX - Fidelity ZERO Total Market Index | Exp Ratio: 0.000%

Roth IRA (Fidelity)
7.6% | FSSNX- Fidelity Small Cap Index | Exp Ratio: 0.025%
3.4% | FZROX - Fidelity ZERO Total Market Index | Exp Ratio: 0.000%

Roth IRA (Vanguard)
9.1% | VSMAX - Vanguard Small-Cap Index Fund Admiral Shares) | Exp Ratio: 0.050%

529
1.4% | Vanguard 500 Index | Exp Ratio: 0.130%
Note: Invested $7.5K this year while planning to roll it over to Roth IRA in 15 years as it hits $35K. Otherwise use for education of my kid(s) - currently no kids.

Taxable
20.7% | VLCAX (Vanguard Large Cap Index)
9.5% | VTSAX (Total Market Index)
0.4% | Apple
3.3% | Tesla
1.3% | SPY (S&P 500 ETF)

Cripto
1.6% | Bitcoin
0.8% | Ethereum
_______________________________________________________________
Annual Contributions
401k: $23,000 (frontloaded in Q1)
Roth IRA: $7,000 (frontloaded in January 2024)
HSA: $4,150
Taxable: $15,000 (so far)

_______________________________________________________________

Questions:
1. I plan to continue contributing $50K - $75K per year for the next 12 years. Assuming an annual market return of 8-9% (adjusted for inflation), my goal is to reach $1M by age 35, $2M by age 40, and $3.5M by age 45 achieving financial independence. Do you notice any potential concerns ("yellow or red flags") in my portfolio? Should I consider a different asset allocation? I lean towards high-risk investments while recognizing importance of diversification.

2. Over the past 5 years, due to job changes and living in multiple states, I haven't purchased a primary residence. Real estate prices in the Seattle area continue to rise. Renting seems financially wise in the short term, but for the mid to long term buying might be more prudent since I plan to stay in this area. What are your thoughts on this?

3. I currently drive a 13-year-old Audi which runs like a champ. However, I enjoy the outdoors, and my Audi isn't suitable for some of the trails I want to explore. I'm considering purchasing a '10-'14 Lexus LX 570 (fancy yet more affordable Toyota Land Cruiser 200) for $18K-$24K. Based on my extensive research, this vehicle is known for its durability and capability, and I believe it could serve my needs well for another 10 years if well maintained. I'm fully aware that this isn't the most financially wise decision, but it's emotionally charged. Do you think this idea is completely irrational, or should I continue to consider it?

[Emojis removed from title (distracting formatting) - moderator Kendall]
Last edited by tin_foil_hat on Mon Jul 08, 2024 4:58 pm, edited 1 time in total.
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retired@50
Posts: 13950
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Re: Help a Lost Sheep! Portfolio Review Needed

Post by retired@50 »

tin_foil_hat wrote: Sun Jul 07, 2024 7:46 pm
529
1.4% | Vanguard 500 Index | Exp Ratio: 0.130%
Note: Invested $7.5K this year while planning to roll it over to Roth IRA in 15 years as it hits $35K. Otherwise use for education of my kid(s) - currently no kids.


Questions:
1. I plan to continue contributing $50K - $75K per year for the next 12 years. Assuming an annual market return of 8-9% (adjusted for inflation), my goal is to reach $1M by age 35, $2M by age 40, and $3.5M by age 45 achieving financial independence. Do you notice any potential concerns ("yellow or red flags") in my portfolio? Should I consider a different asset allocation? I lean towards high-risk investments while recognizing importance of diversification.
You might benefit from reading this article that discusses the 529 to Roth idea.
https://www.fidelity.com/learning-cente ... er-to-roth

It's nice to have goals, and targets, (as mentioned above) but I hope your plans are flexible enough to adapt to changing circumstances. Nobody knows with any degree of certainty what kind of stock market returns the next 12 years will offer.

You may want to consider adding more international stock or some bonds to your portfolio as you move toward financial independence.

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
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Miriam2
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Re: Help a Lost Sheep! Portfolio Review Needed

Post by Miriam2 »

tin_foil_hat wrote: Sun Jul 07, 2024 7:46 pm
529
1.4% | Vanguard 500 Index | Exp Ratio: 0.130%
Note: Invested $7.5K this year while planning to roll it over to Roth IRA in 15 years as it hits $35K. Otherwise use for education of my kid(s) - currently no kids.
ie - you're investing in the 529 as an additional tax advantaged account for you and your finances, not for your future education?
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dogagility
Posts: 3451
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Location: Del Boca Vista - Phase 3

Re: Help a Lost Sheep! Portfolio Review Needed

Post by dogagility »

tin_foil_hat wrote: Sun Jul 07, 2024 7:46 pm Desired Asset allocation: 100% stocks / 0% bonds
Desired International allocation: up to 10% of stocks / 0% bonds
This is reasonable for your age and stated goal.

While your portfolio is not overly complex, you should consider your portfolio as a single entity and not separate accounts. I wonder what your thoughts are investing in small cap in some accounts coupled with large cap in your taxable account? This seems like it may approximate a total market fund. You may consider simplifying even more and just investing in total stock market funds (when available).

A Boglehead investment philosophy is to diversify and not invest in concentrated positions like single stocks and Bitcoin. You may want to consider why you are investing in these. One the one hand, the percentage of your total portfolio is low so these positions will have little impact on overall portfolio volatility. On the other hand, the low percentages will not little impact on your portfolio growth... so why add the complexity?
Annual Contributions
No longer contributing to your HSA?

You didn't state that you have money set aside for "emergencies" like a job loss. It's not required to have this type of fund. Maybe you plan on using Roth contributions or pull from your taxable account for this type of fund?

If you want a separate emergency fund, you should consider taking some of your taxable contributions and purchasing I bonds. https://www.elevationfinancial.com/shou ... in-i-bonds
Renting seems financially wise in the short term, but for the mid to long term buying might be more prudent since I plan to stay in this area. What are your thoughts on this?
Renting and buying may be a wash financially in many cases. I suggest thinking of the rent vs buy decision as more of a lifestyle decision.
Do you think this idea is completely irrational, or should I continue to consider it?
Money has a purpose... to be used as currency to purchase items of need or those that will enhance your life. You're saving well... if you want to buy a car that will enhance your lifestyle, go for it.
Make sure you check out my list of certifications. The list is short, and there aren't any. - Eric 0. from SMA
bonesly
Posts: 1686
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Location: WA

Re: Help a Lost Sheep! Portfolio Review Needed

Post by bonesly »

tin_foil_hat wrote: Sun Jul 07, 2024 7:46 pm 1a. I plan to continue contributing $50K - $75K per year for the next 12 years. Assuming an annual market return of 8-9% (adjusted for inflation), my goal is to reach $1M by age 35, $2M by age 40, and $3.5M by age 45 achieving financial independence.
I'm not fond of using a fixed rate of return, with zero volatility, to project the balance of a volatile investment mix. A Monte Carlo simulation is a better approach as it will provide a range of outcomes. If we have a starting balance of $565K, assume contributions of $50K/yr with +3%/yr increases for raises/inflation, an asset allocation (AA) of 100/0, and an average portfolio expense ratio of 0.10%, then the range of balances by percentile at those ages looks something like this:

Image

The row at the 50th percentile means half of the 1,000 trials had a lower balance, while the other half were more. There's only a 50% chance of reaching about a balance greater than or equal to $1.1M by age 35 ($1M is 39th percentile), $2.1M by age 40 ($2M is 47th percentile), and $3.8M by age 45 ($3.5M is 45th percentile). It's certainly possible to reach the balances you set as goals, but it's not like a 95% chance (5th percentile) that you will reach those goals. Obviously, the chance of reaching your target is increased with a consistent $75K/yr contribution vs $50K/yr.

You can play around with my Accumulation Monte Carlo if you're good with Excel, or try one of the other models I like with a web-site interface.

Data and Models I use for Monte Carlo:
NYU Data Set 1928-2017 with Model Fits
Accumulation Monte Carlo <- used for projections above
Withdrawal Monte Carlo

You'll need a MS Excel license; download to your local machine and enable macros (required for the 1,000 random trials and results aggregation).

I'm using my own model as I like to know what's under the hood, but there are other models I like that have public facing website interfaces:
Portfolio Visualizer's Monte Carlo (I like this one best),
FiCalc (probably easiest to use),
TPAW, and
FireCalc.
tin_foil_hat wrote: Sun Jul 07, 2024 7:46 pm 1b. Do you notice any potential concerns ("yellow or red flags") in my portfolio? Should I consider a different asset allocation? I lean towards high-risk investments while recognizing importance of diversification.
Image

You're a little shy of your desired 10% international stock exposure.

Initially I thought you were aiming for a 20% small cap tilt, but perhaps you're just trying to pair your S&P-500 (large) with small to more closely approximate the Total US Stock Market. If it is a tilt, why small rather than small-value per the Fama-French research paper? It's a minor thing that likely wont' matter so I'm not suggesting a change necessarily, just trying to understand how you arrived at your fund choices.

You're holding an S&P-500 fund in both Taxable (SPY) and Tax-Deferred (FXIAX) (and the 529 might count too). If you ever sell from Taxable (say for rebalancing or whatever reason) and that sale happens to be at a loss, then you buy a "substantially identical" fund in a tax-advantaged account (e.g., auto contribution or reinvestment of distributions in your 401k) within ±31 days of the loss sale date, then you are potentially looking at a Wash Sale. That is most easily avoided by NOT holding an S&P-500 fund in both taxable & tax-advantaged. I'm guessing your 401k doesn't offer a Fidelity Total Market fund and if that's the case, you might consider selling SPY from taxable and buying more Vanguard Large Cap Index, although that may incur capital gains. As an aside, VTSAX and FZROX might also seem like a wash sale pair, but Fido is using a proprietary index so seemingly not an issue. The wash sale isn't an illegal situation, it just means you can't deduct the loss on your tax return, so up to you to fix the S&P-500 holdings or leave as is.

Most Bogleheads are going to recommend against individual stocks & crypto.

I certainly think there's room to simplify down to 2 funds in the 401k (S&P-500 and Total Int'l) and only 1 fund in each of the other accounts (that might be painful tax-wise in the Taxable account). I'd probably rebalance the 401k so you're at your 10% int'l target. Due to the market cap weighting of large/mid/small in a total market fund, it's about 80% the same as an S&P-500 fund, I would probably just go with FZROX in the HSA and Fido Roth IRA. I'd probably swap the SC for SCV in the Vanguard Roth IRA. If you can stand the tax burden, I'd probably simplify the Taxable account into your largest holding VLCAX; simplifying into VTSAX would've made more sense if the VLCAX balance wasn't so large.

These are just ideas on what I'd do ... you need to think if these make sense for you to do.
tin_foil_hat wrote: Sun Jul 07, 2024 7:46 pm 2. Over the past 5 years, due to job changes and living in multiple states, I haven't purchased a primary residence. Real estate prices in the Seattle area continue to rise. Renting seems financially wise in the short term, but for the mid to long term buying might be more prudent since I plan to stay in this area. What are your thoughts on this?
If you're actually going to end up in the same house for 7+ years, owning might be superior if you get a low mortgage, make pre-payments on principal if the rate is >3%, and the home you buy appreciates in value faster than inflation. This graph was for another poster in the NYC area and does not consider the cost of renter's insurance nor home maintenance. For those that expect to move around a lot, buying is more an anchor than an investment. For those that expect to stay put a long time, owning usually wins over renting in the long-term.

Image
tin_foil_hat wrote: Sun Jul 07, 2024 7:46 pm 3. I currently drive a 13-year-old Audi which runs like a champ. However, I enjoy the outdoors, and my Audi isn't suitable for some of the trails I want to explore. I'm considering purchasing a '10-'14 Lexus LX 570 (fancy yet more affordable Toyota Land Cruiser 200) for $18K-$24K. Based on my extensive research, this vehicle is known for its durability and capability, and I believe it could serve my needs well for another 10 years if well maintained. I'm fully aware that this isn't the most financially wise decision, but it's emotionally charged. Do you think this idea is completely irrational, or should I continue to consider it?
Lexus like Toyota has high reliability & longevity. If your monthly savings & budget will not even be pinched by a $24K purchase, you've done your research on a particular vehicle (e.g., CARFAX of the VIN#, reviews on Edmunds, KellyBlueBook, Car & Driver, etc.), and are convinced it's a good deal "for you," then sure why not? If you're reducing your annual contributions to retirement for a year or three to fund this "emotionally charged" purchase, then no that's a bad idea.
Don't do what Bogleheads tell you. Listen to what we say, consider other sources, and make your own decisions, since you have to live with the risks & rewards (not us or anyone else).
Topic Author
tin_foil_hat
Posts: 19
Joined: Fri Nov 05, 2021 7:28 am

Re: Help a Lost Sheep! Portfolio Review Needed

Post by tin_foil_hat »

retired@50 wrote: Sun Jul 07, 2024 11:19 pm
tin_foil_hat wrote: Sun Jul 07, 2024 7:46 pm
529
1.4% | Vanguard 500 Index | Exp Ratio: 0.130%
Note: Invested $7.5K this year while planning to roll it over to Roth IRA in 15 years as it hits $35K. Otherwise use for education of my kid(s) - currently no kids.


Questions:
1. I plan to continue contributing $50K - $75K per year for the next 12 years. Assuming an annual market return of 8-9% (adjusted for inflation), my goal is to reach $1M by age 35, $2M by age 40, and $3.5M by age 45 achieving financial independence. Do you notice any potential concerns ("yellow or red flags") in my portfolio? Should I consider a different asset allocation? I lean towards high-risk investments while recognizing importance of diversification.
You might benefit from reading this article that discusses the 529 to Roth idea.
https://www.fidelity.com/learning-cente ... er-to-roth

It's nice to have goals, and targets, (as mentioned above) but I hope your plans are flexible enough to adapt to changing circumstances. Nobody knows with any degree of certainty what kind of stock market returns the next 12 years will offer.

You may want to consider adding more international stock or some bonds to your portfolio as you move toward financial independence.

Regards,
Thank you for sharing the article and your insights on the 529 to Roth strategy!

I agree that having goals and targets is important, and I appreciate your reminder about flexibility in planning for unforeseen circumstances. It's a wise approach to consider diversifying with international stocks or bonds as part of my path to financial independence.

Best regards,
Ben
Topic Author
tin_foil_hat
Posts: 19
Joined: Fri Nov 05, 2021 7:28 am

Re: Help a Lost Sheep! Portfolio Review Needed

Post by tin_foil_hat »

Miriam2 wrote: Mon Jul 08, 2024 12:12 am
tin_foil_hat wrote: Sun Jul 07, 2024 7:46 pm
529
1.4% | Vanguard 500 Index | Exp Ratio: 0.130%
Note: Invested $7.5K this year while planning to roll it over to Roth IRA in 15 years as it hits $35K. Otherwise use for education of my kid(s) - currently no kids.
ie - you're investing in the 529 as an additional tax advantaged account for you and your finances, not for your future education?
Yes, that's correct. Based on my research, we can rollover 529 funds into a Roth IRA under specific conditions:

> The 529 account must exist for a minimum of 15 years, and the maximum amount you can transfer over a lifetime is $35,000.
> Contributions made to the 529 within the last 5 years prior to rolling over cannot be transferred.
> In the year you roll over the 529 funds into a Roth IRA, you cannot make contributions to the Roth IRA.
> The rollover amount cannot exceed the annual Roth IRA contribution limit.


By investing $7.5K in 2024, there's potential for these funds to grow tax-free to $35K by 2040. It's an aggressive but optimistic potential outcome, and I remain hopeful.
Topic Author
tin_foil_hat
Posts: 19
Joined: Fri Nov 05, 2021 7:28 am

Re: Help a Lost Sheep! Portfolio Review Needed

Post by tin_foil_hat »

dogagility wrote: Mon Jul 08, 2024 5:21 am
tin_foil_hat wrote: Sun Jul 07, 2024 7:46 pm Desired Asset allocation: 100% stocks / 0% bonds
Desired International allocation: up to 10% of stocks / 0% bonds
This is reasonable for your age and stated goal.

While your portfolio is not overly complex, you should consider your portfolio as a single entity and not separate accounts. I wonder what your thoughts are investing in small cap in some accounts coupled with large cap in your taxable account? This seems like it may approximate a total market fund. You may consider simplifying even more and just investing in total stock market funds (when available).
I appreciate your perspective. I've opted for a slight tilt towards small cap in my HSA and Roth IRA because they grow tax-free, which can potentially amplify long-term gains. Several studies suggest that small cap indices have historically outperformed large cap over extended periods. Given my investment horizon of over 25 years, I feel comfortable taking on the additional risk associated with small caps while maintaining a significant portion of my portfolio in large caps.
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retired@50
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Re: Help a Lost Sheep! Portfolio Review Needed

Post by retired@50 »

tin_foil_hat wrote: Mon Jul 08, 2024 4:33 pm
Miriam2 wrote: Mon Jul 08, 2024 12:12 am
tin_foil_hat wrote: Sun Jul 07, 2024 7:46 pm
529
1.4% | Vanguard 500 Index | Exp Ratio: 0.130%
Note: Invested $7.5K this year while planning to roll it over to Roth IRA in 15 years as it hits $35K. Otherwise use for education of my kid(s) - currently no kids.
ie - you're investing in the 529 as an additional tax advantaged account for you and your finances, not for your future education?
Yes, that's correct. Based on my research, we can rollover 529 funds into a Roth IRA under specific conditions:

> The 529 account must exist for a minimum of 15 years, and the maximum amount you can transfer over a lifetime is $35,000.
> Contributions made to the 529 within the last 5 years prior to rolling over cannot be transferred.
> In the year you roll over the 529 funds into a Roth IRA, you cannot make contributions to the Roth IRA.
> The rollover amount cannot exceed the annual Roth IRA contribution limit.


By investing $7.5K in 2024, there's potential for these funds to grow tax-free to $35K by 2040. It's an aggressive but optimistic potential outcome, and I remain hopeful.
There might be one tiny catch that could thwart your plan...

What if you're not eligible to contribute to a Roth IRA because your income exceeds the limit in place at that time for a direct contribution?

More details here: https://www.nerdwallet.com/article/inve ... ion-limits

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
Topic Author
tin_foil_hat
Posts: 19
Joined: Fri Nov 05, 2021 7:28 am

Re: Help a Lost Sheep! Portfolio Review Needed

Post by tin_foil_hat »

dogagility wrote: Mon Jul 08, 2024 5:21 am A Boglehead investment philosophy is to diversify and not invest in concentrated positions like single stocks and Bitcoin. You may want to consider why you are investing in these. One the one hand, the percentage of your total portfolio is low so these positions will have little impact on overall portfolio volatility. On the other hand, the low percentages will not little impact on your portfolio growth... so why add the complexity?

I agree that simplicity in investing is key. I've learned some hard lessons from my foray into crypto investments, where I've experienced significant losses. Despite this, I remain hopeful for a recovery.

Regarding Tesla (TSLA), I did take a risk during a period of market fear recently. I strongly believe in Tesla's long-term potential, which could potentially double or triple my initial investment.
Topic Author
tin_foil_hat
Posts: 19
Joined: Fri Nov 05, 2021 7:28 am

Re: Help a Lost Sheep! Portfolio Review Needed

Post by tin_foil_hat »

dogagility wrote: Mon Jul 08, 2024 5:21 am
Annual Contributions
No longer contributing to your HSA?
Thank you for pointing that out! Yes, continue to contribute to HSA - original post updated.
Topic Author
tin_foil_hat
Posts: 19
Joined: Fri Nov 05, 2021 7:28 am

Re: Help a Lost Sheep! Portfolio Review Needed

Post by tin_foil_hat »

@bonesly - Thank you so much for taking the time to respond with such detailed insights! I genuinely appreciate your analysis, especially your use of Monte Carlo and other tools—it's incredibly valuable. Moving forward, I'll explore ways to increase my annual investing funds to $75K or even $100K.
bonesly wrote: Mon Jul 08, 2024 12:05 pm You're a little shy of your desired 10% international stock exposure.

Initially I thought you were aiming for a 20% small cap tilt, but perhaps you're just trying to pair your S&P-500 (large) with small to more closely approximate the Total US Stock Market. If it is a tilt, why small rather than small-value per the Fama-French research paper? It's a minor thing that likely wont' matter so I'm not suggesting a change necessarily, just trying to understand how you arrived at your fund choices.
Currently, my 401K doesn't offer a Total Stock Market Index, and the Small Cap Index available is prohibitively expensive. In my HSA and Roth IRA, I've chosen to invest in the Small Cap Index to balance with the Large Cap Index and to pursue higher risk and potential returns.
bonesly wrote: Mon Jul 08, 2024 12:05 pm You're holding an S&P-500 fund in both Taxable (SPY) and Tax-Deferred (FXIAX) (and the 529 might count too). If you ever sell from Taxable (say for rebalancing or whatever reason) and that sale happens to be at a loss, then you buy a "substantially identical" fund in a tax-advantaged account (e.g., auto contribution or reinvestment of distributions in your 401k) within ±31 days of the loss sale date, then you are potentially looking at a Wash Sale. That is most easily avoided by NOT holding an S&P-500 fund in both taxable & tax-advantaged. I'm guessing your 401k doesn't offer a Fidelity Total Market fund and if that's the case, you might consider selling SPY from taxable and buying more Vanguard Large Cap Index, although that may incur capital gains. As an aside, VTSAX and FZROX might also seem like a wash sale pair, but Fido is using a proprietary index so seemingly not an issue. The wash sale isn't an illegal situation, it just means you can't deduct the loss on your tax return, so up to you to fix the S&P-500 holdings or leave as is.
Thanks for the heads-up. My understanding was that SPY and FXIAX are not considered 'substantially identical'. I'll definitely look into it further. I appreciate your suggestion about potentially selling SPY, accepting the tax implications on gains, and reinvesting in FXIAX within my Vanguard Taxable account.
Topic Author
tin_foil_hat
Posts: 19
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Re: Help a Lost Sheep! Portfolio Review Needed

Post by tin_foil_hat »

retired@50 wrote: Mon Jul 08, 2024 4:53 pm
tin_foil_hat wrote: Mon Jul 08, 2024 4:33 pm
Miriam2 wrote: Mon Jul 08, 2024 12:12 am
tin_foil_hat wrote: Sun Jul 07, 2024 7:46 pm
529
1.4% | Vanguard 500 Index | Exp Ratio: 0.130%
Note: Invested $7.5K this year while planning to roll it over to Roth IRA in 15 years as it hits $35K. Otherwise use for education of my kid(s) - currently no kids.
ie - you're investing in the 529 as an additional tax advantaged account for you and your finances, not for your future education?
Yes, that's correct. Based on my research, we can rollover 529 funds into a Roth IRA under specific conditions:

> The 529 account must exist for a minimum of 15 years, and the maximum amount you can transfer over a lifetime is $35,000.
> Contributions made to the 529 within the last 5 years prior to rolling over cannot be transferred.
> In the year you roll over the 529 funds into a Roth IRA, you cannot make contributions to the Roth IRA.
> The rollover amount cannot exceed the annual Roth IRA contribution limit.


By investing $7.5K in 2024, there's potential for these funds to grow tax-free to $35K by 2040. It's an aggressive but optimistic potential outcome, and I remain hopeful.
There might be one tiny catch that could thwart your plan...

What if you're not eligible to contribute to a Roth IRA because your income exceeds the limit in place at that time for a direct contribution?

More details here: https://www.nerdwallet.com/article/inve ... ion-limits

Regards,
Wow, I hadn't considered that - thank you for pointing it out!
bonesly
Posts: 1686
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Location: WA

Re: Help a Lost Sheep! Portfolio Review Needed

Post by bonesly »

tin_foil_hat wrote: Mon Jul 08, 2024 5:35 pm My understanding was that SPY and FXIAX are not considered 'substantially identical'.
They both track the Standard & Poors 500 Index, so it's likely they are "substantially identical" from an IRS viewpoint (your broker might or might not automatically flag wash sales for you and/or check a wash-sale box on a your year-end 1099B form, but you're still on the hook for accurate tax filing).
tin_foil_hat wrote: Mon Jul 08, 2024 5:35 pm I appreciate your suggestion about potentially selling SPY, accepting the tax implications on gains, and reinvesting in FXIAX within my Vanguard Taxable account.
Selling SPY and buying FXIAX does not solve the problem of "substantially identical fund in both Taxable and Tax-Deferred." If anything, it removes all doubt that you have a potential wash sale issue. My suggestion was to sell SPY and buy more of your existing position in VCLAX in the Taxable account. That way S&P-500 funds are only in tax-advantaged accounts (no two funds are both in Taxable and tax-advantaged).
Don't do what Bogleheads tell you. Listen to what we say, consider other sources, and make your own decisions, since you have to live with the risks & rewards (not us or anyone else).
User avatar
Miriam2
Posts: 4463
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Re: Help a Lost Sheep! Portfolio Review Needed

Post by Miriam2 »

tin_foil_hat wrote: Mon Jul 08, 2024 5:40 pm
retired@50 wrote: Mon Jul 08, 2024 4:53 pm
tin_foil_hat wrote: Mon Jul 08, 2024 4:33 pm
Miriam2 wrote: Mon Jul 08, 2024 12:12 am
tin_foil_hat wrote: Sun Jul 07, 2024 7:46 pm
529
1.4% | Vanguard 500 Index | Exp Ratio: 0.130%
Note: Invested $7.5K this year while planning to roll it over to Roth IRA in 15 years as it hits $35K. Otherwise use for education of my kid(s) - currently no kids.
ie - you're investing in the 529 as an additional tax advantaged account for you and your finances, not for your future education?
Yes, that's correct. Based on my research, we can rollover 529 funds into a Roth IRA under specific conditions:

> The 529 account must exist for a minimum of 15 years, and the maximum amount you can transfer over a lifetime is $35,000.
> Contributions made to the 529 within the last 5 years prior to rolling over cannot be transferred.
> In the year you roll over the 529 funds into a Roth IRA, you cannot make contributions to the Roth IRA.
> The rollover amount cannot exceed the annual Roth IRA contribution limit.

By investing $7.5K in 2024, there's potential for these funds to grow tax-free to $35K by 2040. It's an aggressive but optimistic potential outcome, and I remain hopeful.
There might be one tiny catch that could thwart your plan...

What if you're not eligible to contribute to a Roth IRA because your income exceeds the limit in place at that time for a direct contribution?

More details here: https://www.nerdwallet.com/article/inve ... ion-limits

Regards,
Wow, I hadn't considered that - thank you for pointing it out!

Tin_foil_hat - Looks like you're going to open and use a 529 plan for yourself - not for your college expenses, but as an additional tax advantaged investment/retirement account for yourself.

Here are some good articles that outline some issues to consider 8-)

************************

From White Coat Investor - "The 529 to Roth IRA Rollover (Including for Yourself)"
https://www.whitecoatinvestor.com/the-5 ... -rollover/

"Today, let's talk about this possible 529 to Roth IRA rollover a little bit more.

Another Escape Valve for a 529
The way this is intended to be used—and, honestly, the way I think it should be used—is as an additional escape valve for an overfunded 529. People worry about putting too much into 529s. They worry that they'll oversave for college and then need the money themselves, which means they'd have to pay the 10% penalty plus ordinary income tax rates on the gains in the plan when they withdraw it for something other than an approved educational expense. This fear inappropriately keeps them from using this excellent college savings vehicle, so the government is trying to minimize that fear.


Doing 529 to Roth IRA Rollovers for Yourself
However, nobody who has been emailing me for the last year is really interested in using the 529 to Roth IRA rollover as an escape valve. They are most interested in doing this for themselves. They're typically a 40-year-old doctor who is really into personal finance, does a Backdoor Roth IRA each year, and does all that can be done to lower the average expense ratio in the portfolio. They're maximizers (rather than satisficers) in every sense of the word. They want to eke out every benefit they can from their investments and the tax code.

For these maximizers, I want to do two things today. First, I want to attempt to quantify the size of the potential benefit of doing this so they can properly decide if the juice is worth the squeeze. Second, I want to make sure they understand all of the ways this can go sideways on them. . . . . ."


************************

From Michael Kitces -
"529-To-Roth IRA Rollovers: Taking Advantage Of The New Option To Move Education Savings To Retirement Savings"
https://www.kitces.com/blog/529-to-roth ... 0must%20be

"How Useful Are 529-To-Roth Rollovers As A Planning Tool?
Although Congress's intent in creating the 529-to-Roth rollover was clearly to create a safety valve for moving unneeded funds from a 529 plan without incurring taxes and penalties, as soon as the new rules were announced, tax planners began to explore opportunities to create tax savings in other ways. Could the 529-to-Roth rollover rules provide ways for clients to create significant tax-free wealth for their children – or even for themselves?

Right off the bat, it's clear that as a method of moving significant amounts of funds into a tax-free Roth account, the 529-to-Roth rollover pales in comparison to other strategies. Much of this is because of the comparatively small annual rollover limit (up to $7,000 in 2024, or $8,000 for those eligible for catch-up contributions) and lifetime rollover limit ($35,000) on 529-to-Roth conversions. . . . . ."


**********************

This is a new topic for me and I found it interesting to read and learn about it. Let us know what you do :happy
SchruteB&B
Posts: 693
Joined: Mon Jul 02, 2018 7:48 am

Re: Help a Lost Sheep! Portfolio Review Needed

Post by SchruteB&B »

tin_foil_hat wrote: Mon Jul 08, 2024 5:40 pm
retired@50 wrote: Mon Jul 08, 2024 4:53 pm
tin_foil_hat wrote: Mon Jul 08, 2024 4:33 pm
Miriam2 wrote: Mon Jul 08, 2024 12:12 am
tin_foil_hat wrote: Sun Jul 07, 2024 7:46 pm
529
1.4% | Vanguard 500 Index | Exp Ratio: 0.130%
Note: Invested $7.5K this year while planning to roll it over to Roth IRA in 15 years as it hits $35K. Otherwise use for education of my kid(s) - currently no kids.
ie - you're investing in the 529 as an additional tax advantaged account for you and your finances, not for your future education?
Yes, that's correct. Based on my research, we can rollover 529 funds into a Roth IRA under specific conditions:

> The 529 account must exist for a minimum of 15 years, and the maximum amount you can transfer over a lifetime is $35,000.
> Contributions made to the 529 within the last 5 years prior to rolling over cannot be transferred.
> In the year you roll over the 529 funds into a Roth IRA, you cannot make contributions to the Roth IRA.
> The rollover amount cannot exceed the annual Roth IRA contribution limit.


By investing $7.5K in 2024, there's potential for these funds to grow tax-free to $35K by 2040. It's an aggressive but optimistic potential outcome, and I remain hopeful.
There might be one tiny catch that could thwart your plan...

What if you're not eligible to contribute to a Roth IRA because your income exceeds the limit in place at that time for a direct contribution?

More details here: https://www.nerdwallet.com/article/inve ... ion-limits

Regards,
Wow, I hadn't considered that - thank you for pointing it out!
I don’t think that’s correct. The income limitations do not apply according to this: https://www.journalofaccountancy.com/ne ... h-ira.html


The beneficiary is not subject to income limitations to contribute to a Roth IRA. For example, even if the beneficiary's income is over $153,000 (if single), the beneficiary can make a rollover from the 529 plan to the Roth IRA.
User avatar
retired@50
Posts: 13950
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Help a Lost Sheep! Portfolio Review Needed

Post by retired@50 »

SchruteB&B wrote: Tue Jul 09, 2024 6:12 am
tin_foil_hat wrote: Mon Jul 08, 2024 5:40 pm
retired@50 wrote: Mon Jul 08, 2024 4:53 pm
tin_foil_hat wrote: Mon Jul 08, 2024 4:33 pm
Miriam2 wrote: Mon Jul 08, 2024 12:12 am

ie - you're investing in the 529 as an additional tax advantaged account for you and your finances, not for your future education?
Yes, that's correct. Based on my research, we can rollover 529 funds into a Roth IRA under specific conditions:

> The 529 account must exist for a minimum of 15 years, and the maximum amount you can transfer over a lifetime is $35,000.
> Contributions made to the 529 within the last 5 years prior to rolling over cannot be transferred.
> In the year you roll over the 529 funds into a Roth IRA, you cannot make contributions to the Roth IRA.
> The rollover amount cannot exceed the annual Roth IRA contribution limit.


By investing $7.5K in 2024, there's potential for these funds to grow tax-free to $35K by 2040. It's an aggressive but optimistic potential outcome, and I remain hopeful.
There might be one tiny catch that could thwart your plan...

What if you're not eligible to contribute to a Roth IRA because your income exceeds the limit in place at that time for a direct contribution?

More details here: https://www.nerdwallet.com/article/inve ... ion-limits

Regards,
Wow, I hadn't considered that - thank you for pointing it out!
I don’t think that’s correct. The income limitations do not apply according to this: https://www.journalofaccountancy.com/ne ... h-ira.html


The beneficiary is not subject to income limitations to contribute to a Roth IRA. For example, even if the beneficiary's income is over $153,000 (if single), the beneficiary can make a rollover from the 529 plan to the Roth IRA.
Seems like good news for the OP. I wasn't sure one way or the other as to the legality of this, which is why I formed my response as a question. Thanks for the updated information.

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
jumbo shrimp
Posts: 158
Joined: Wed Apr 12, 2023 3:43 pm

Re: Help a Lost Sheep! Portfolio Review Needed

Post by jumbo shrimp »

SchruteB&B wrote: Tue Jul 09, 2024 6:12 am
I don’t think that’s correct. The income limitations do not apply according to this: https://www.journalofaccountancy.com/ne ... h-ira.html

The beneficiary is not subject to income limitations to contribute to a Roth IRA. For example, even if the beneficiary's income is over $153,000 (if single), the beneficiary can make a rollover from the 529 plan to the Roth IRA.
I went through the link above. OP, let's say you don't have kids. I read that the Roth IRA annual limit still applies and rolling over a 529 into a Roth IRA contributes toward the annual limit. Is the benefit that you get to fund your Roth IRA for a few years for "free" from the appreciated 529? "Free" isn't the best word, but an example is below.

Example
Let's say $35k remains to be the lifetime max and that's what you end up with in the 529. Let's say the Roth IRA annual limit is now $10k for the year 2039 (the start of the 15 year requirement). The math follows:

Code: Select all

Year     Roth Contribution

2039     $10k from 529, no other contributions
2040     $10k from 529, no other contributions
2041     $10k from 529, no other contributions
2042     last $5k from 529, $5k from other contribution
Is this right? So now the benefit shows that, if you have money in the future to contribute to a Roth IRA during those years, you can send it somewhere else or even spend it. And you have to have some type of notice/alarm that this 529 doesn't exceed $35k if the goal is to rollover all of it?
Topic Author
tin_foil_hat
Posts: 19
Joined: Fri Nov 05, 2021 7:28 am

Re: Help a Lost Sheep! Portfolio Review Needed

Post by tin_foil_hat »

Miriam2 wrote: Tue Jul 09, 2024 1:52 am
tin_foil_hat wrote: Mon Jul 08, 2024 5:40 pm
retired@50 wrote: Mon Jul 08, 2024 4:53 pm
tin_foil_hat wrote: Mon Jul 08, 2024 4:33 pm
Miriam2 wrote: Mon Jul 08, 2024 12:12 am

ie - you're investing in the 529 as an additional tax advantaged account for you and your finances, not for your future education?
Yes, that's correct. Based on my research, we can rollover 529 funds into a Roth IRA under specific conditions:

> The 529 account must exist for a minimum of 15 years, and the maximum amount you can transfer over a lifetime is $35,000.
> Contributions made to the 529 within the last 5 years prior to rolling over cannot be transferred.
> In the year you roll over the 529 funds into a Roth IRA, you cannot make contributions to the Roth IRA.
> The rollover amount cannot exceed the annual Roth IRA contribution limit.

By investing $7.5K in 2024, there's potential for these funds to grow tax-free to $35K by 2040. It's an aggressive but optimistic potential outcome, and I remain hopeful.
There might be one tiny catch that could thwart your plan...

What if you're not eligible to contribute to a Roth IRA because your income exceeds the limit in place at that time for a direct contribution?

More details here: https://www.nerdwallet.com/article/inve ... ion-limits

Regards,
Wow, I hadn't considered that - thank you for pointing it out!

Tin_foil_hat - Looks like you're going to open and use a 529 plan for yourself - not for your college expenses, but as an additional tax advantaged investment/retirement account for yourself.

Here are some good articles that outline some issues to consider 8-)

************************

From White Coat Investor - "The 529 to Roth IRA Rollover (Including for Yourself)"
https://www.whitecoatinvestor.com/the-5 ... -rollover/

"Today, let's talk about this possible 529 to Roth IRA rollover a little bit more.

Another Escape Valve for a 529
The way this is intended to be used—and, honestly, the way I think it should be used—is as an additional escape valve for an overfunded 529. People worry about putting too much into 529s. They worry that they'll oversave for college and then need the money themselves, which means they'd have to pay the 10% penalty plus ordinary income tax rates on the gains in the plan when they withdraw it for something other than an approved educational expense. This fear inappropriately keeps them from using this excellent college savings vehicle, so the government is trying to minimize that fear.


Doing 529 to Roth IRA Rollovers for Yourself
However, nobody who has been emailing me for the last year is really interested in using the 529 to Roth IRA rollover as an escape valve. They are most interested in doing this for themselves. They're typically a 40-year-old doctor who is really into personal finance, does a Backdoor Roth IRA each year, and does all that can be done to lower the average expense ratio in the portfolio. They're maximizers (rather than satisficers) in every sense of the word. They want to eke out every benefit they can from their investments and the tax code.

For these maximizers, I want to do two things today. First, I want to attempt to quantify the size of the potential benefit of doing this so they can properly decide if the juice is worth the squeeze. Second, I want to make sure they understand all of the ways this can go sideways on them. . . . . ."


************************

From Michael Kitces -
"529-To-Roth IRA Rollovers: Taking Advantage Of The New Option To Move Education Savings To Retirement Savings"
https://www.kitces.com/blog/529-to-roth ... 0must%20be

"How Useful Are 529-To-Roth Rollovers As A Planning Tool?
Although Congress's intent in creating the 529-to-Roth rollover was clearly to create a safety valve for moving unneeded funds from a 529 plan without incurring taxes and penalties, as soon as the new rules were announced, tax planners began to explore opportunities to create tax savings in other ways. Could the 529-to-Roth rollover rules provide ways for clients to create significant tax-free wealth for their children – or even for themselves?

Right off the bat, it's clear that as a method of moving significant amounts of funds into a tax-free Roth account, the 529-to-Roth rollover pales in comparison to other strategies. Much of this is because of the comparatively small annual rollover limit (up to $7,000 in 2024, or $8,000 for those eligible for catch-up contributions) and lifetime rollover limit ($35,000) on 529-to-Roth conversions. . . . . ."


**********************

This is a new topic for me and I found it interesting to read and learn about it. Let us know what you do :happy
Both WCI and Kitces are well-established and reliable sources. However, I believe there's value in consulting the original IRS document. If I find time this weekend, I'll look into it and update the community. If someone does so before me, please inform us.
Topic Author
tin_foil_hat
Posts: 19
Joined: Fri Nov 05, 2021 7:28 am

Re: Help a Lost Sheep! Portfolio Review Needed

Post by tin_foil_hat »

bonesly wrote: Mon Jul 08, 2024 8:21 pm
tin_foil_hat wrote: Mon Jul 08, 2024 5:35 pm My understanding was that SPY and FXIAX are not considered 'substantially identical'.
They both track the Standard & Poors 500 Index, so it's likely they are "substantially identical" from an IRS viewpoint (your broker might or might not automatically flag wash sales for you and/or check a wash-sale box on a your year-end 1099B form, but you're still on the hook for accurate tax filing).
tin_foil_hat wrote: Mon Jul 08, 2024 5:35 pm I appreciate your suggestion about potentially selling SPY, accepting the tax implications on gains, and reinvesting in FXIAX within my Vanguard Taxable account.
Selling SPY and buying FXIAX does not solve the problem of "substantially identical fund in both Taxable and Tax-Deferred." If anything, it removes all doubt that you have a potential wash sale issue. My suggestion was to sell SPY and buy more of your existing position in VCLAX in the Taxable account. That way S&P-500 funds are only in tax-advantaged accounts (no two funds are both in Taxable and tax-advantaged).
bonesly - Thank you for pointing that out and keeping me straight! I agree on the importance of addressing this. I've added it to my action list.
Topic Author
tin_foil_hat
Posts: 19
Joined: Fri Nov 05, 2021 7:28 am

Re: Help a Lost Sheep! Portfolio Review Needed

Post by tin_foil_hat »

jumbo shrimp wrote: Tue Jul 09, 2024 12:30 pm
SchruteB&B wrote: Tue Jul 09, 2024 6:12 am
I don’t think that’s correct. The income limitations do not apply according to this: https://www.journalofaccountancy.com/ne ... h-ira.html

The beneficiary is not subject to income limitations to contribute to a Roth IRA. For example, even if the beneficiary's income is over $153,000 (if single), the beneficiary can make a rollover from the 529 plan to the Roth IRA.
I went through the link above. OP, let's say you don't have kids. I read that the Roth IRA annual limit still applies and rolling over a 529 into a Roth IRA contributes toward the annual limit. Is the benefit that you get to fund your Roth IRA for a few years for "free" from the appreciated 529? "Free" isn't the best word, but an example is below.

Example
Let's say $35k remains to be the lifetime max and that's what you end up with in the 529. Let's say the Roth IRA annual limit is now $10k for the year 2039 (the start of the 15 year requirement). The math follows:

Code: Select all

Year     Roth Contribution

2039     $10k from 529, no other contributions
2040     $10k from 529, no other contributions
2041     $10k from 529, no other contributions
2042     last $5k from 529, $5k from other contribution
Is this right? So now the benefit shows that, if you have money in the future to contribute to a Roth IRA during those years, you can send it somewhere else or even spend it. And you have to have some type of notice/alarm that this 529 doesn't exceed $35k if the goal is to rollover all of it?
Yes, based on the rule of 72, it should be feasible but not guaranteed. I typically conduct portfolio reviews once a quarter. I'll make a note to monitor both the 529 balance and the 15-year requirement.

Thank you for investigating and providing an example for the community
Topic Author
tin_foil_hat
Posts: 19
Joined: Fri Nov 05, 2021 7:28 am

Re: Help a Lost Sheep! Portfolio Review Needed

Post by tin_foil_hat »

tin_foil_hat wrote: Tue Jul 09, 2024 5:20 pm
jumbo shrimp wrote: Tue Jul 09, 2024 12:30 pm
SchruteB&B wrote: Tue Jul 09, 2024 6:12 am
I don’t think that’s correct. The income limitations do not apply according to this: https://www.journalofaccountancy.com/ne ... h-ira.html

The beneficiary is not subject to income limitations to contribute to a Roth IRA. For example, even if the beneficiary's income is over $153,000 (if single), the beneficiary can make a rollover from the 529 plan to the Roth IRA.
I went through the link above. OP, let's say you don't have kids. I read that the Roth IRA annual limit still applies and rolling over a 529 into a Roth IRA contributes toward the annual limit. Is the benefit that you get to fund your Roth IRA for a few years for "free" from the appreciated 529? "Free" isn't the best word, but an example is below.

Example
Let's say $35k remains to be the lifetime max and that's what you end up with in the 529. Let's say the Roth IRA annual limit is now $10k for the year 2039 (the start of the 15 year requirement). The math follows:

Code: Select all

Year     Roth Contribution

2039     $10k from 529, no other contributions
2040     $10k from 529, no other contributions
2041     $10k from 529, no other contributions
2042     last $5k from 529, $5k from other contribution
Is this right? So now the benefit shows that, if you have money in the future to contribute to a Roth IRA during those years, you can send it somewhere else or even spend it. And you have to have some type of notice/alarm that this 529 doesn't exceed $35k if the goal is to rollover all of it?
Yes, based on the rule of 72, it should be feasible but not guaranteed. I typically conduct portfolio reviews once a quarter. I'll make a note to monitor both the 529 balance and the 15-year requirement.

Thank you for investigating and providing an example for the community
After further research, it appears that only three limitations apply to the rollover option:

The rollover is subject to annual Roth IRA contribution limits.
The IRS has not yet provided guidance on this legislation, which may lead to interpretative changes.
The rollover is only permissible for 529 plan funds that have been held for more than 15 years.
Additionally, according to the Journal of Accountancy, "The beneficiary is not restricted by income limitations to contribute to a Roth IRA. For example, even if the beneficiary's income exceeds $153,000 (if single), they can still transfer funds from a 529 plan to a Roth IRA." Credit to SchruteB&B for sharing this resource.

Time will tell how these provisions are implemented. Thank you once again for your valuable comments and suggestions. It's inspiring to be part of such a supportive community where we can explore financial topics and assist each other! Have a fantastic day, everyone! :sharebeer
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