Re-assessing IRA/401K portfolio only

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maxim81
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Re-assessing IRA/401K portfolio only

Post by maxim81 » Mon Jul 16, 2012 6:24 am

Hi all,

I posted earlier (http://www.bogleheads.org/forum/viewtop ... &p=1431840) and received excellent feedback.

[Personally identifying information removed by admin LadyGeek, 24-Dec-12. Requested by the OP, the help is much appreciated.]

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ofcmetz
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Re: Re-assessing IRA/401K portfolio only

Post by ofcmetz » Mon Jul 16, 2012 9:18 am

Getting out of debt sounds like a great plan for you all. It's going to be a lot of work knocking off 200K, but that will only make it all the more satisfying when you finish.

I like your portfolio selections. Simple and low cost. A great recipe for success.

Good Luck
Jeff
Never underestimate the power of the force of low cost index funds.

pingo
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Re: Re-assessing IRA/401K portfolio only

Post by pingo » Mon Jul 16, 2012 4:35 pm

Looks like you're moving in the right direction, but I'm still scratching my head about a few things.
maxim81 wrote:In addition to the above:
1) Continue paying off loans
2) Once loans are paid (or at least only <$20,000 total left), start investing in a taxable account <--Red flag!
It makes no sense in your tax bracket to start investing in a taxable account when you have so much available tax-deferred space via His and Her 401ks and Traditional IRAs: Fill your up-to-$44,000 per year of tax-deferred space first!

It may also be a mistake to not include Her 401k information (still), because Her options and the destinations of new contributions influence fund choices to keep the portfolio as balanced as possible between the times you rebalance.

If pressed, I might suggest the following (minor) changes to your proposed Core Four portfolio.

Roth IRA
14% Vanguard Total Stock Market Admin (VTSAX) 0.05 <--Admiral shares. No need to bother with ETFs.

Traditional IRA
07% Vanguard Total Stock Market Inv (VTSMX) 0.17 <--Assuming $5k/yr contributions, convert to Admiral (VTSAX) in 2013. No need to bother with ETFs.

401K:
27% Vanguard Total International Stock Index Fund Signal (VTSGX)
26% Vanguard 500 Index Fund Signal (VIFSX)
07% Vanguard Small Cap Index Fund Signal (VSISX)
9% Vanguard REIT Index Fund Signal (VGRSX)
10% Vanguard Intermed.-Term Bond Index Fund (Sig) (VIBSX) 0.08 <--This way all rebalancing can be done in one account.
Last edited by pingo on Mon Jul 16, 2012 8:55 pm, edited 1 time in total.

pingo
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Re: Re-assessing IRA/401K portfolio only

Post by pingo » Mon Jul 16, 2012 4:39 pm

Also, I recommend posting a table of current new contributions and new contributions starting on whatever date you've paid off the debt. For example:
New Contribtuions:
$xx,xxx --> His 401k
$xx,xxx --> Her 401k
$x,xxx --> His TIRA
$x,xxx --> Her TIRA
$x,xxx --> Taxable
We look forward to seeing how things go!

All the best.

maxim81
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Re: Re-assessing IRA/401K portfolio only

Post by maxim81 » Mon Jul 16, 2012 5:55 pm

ofcmetz

Getting out of debt sounds like a great plan for you all. It's going to be a lot of work knocking off 200K, but that will only make it all the more satisfying when you finish.

I like your portfolio selections. Simple and low cost. A great recipe for success.

Good Luck
Jeff
Thanks!. Student loans are painful, but I guess that is the cost of education (no pun!:) :)
pingo » Mon Jul 16, 2012 5:35 pm

Looks like you're moving in the right direction, but I'm still scratching my head about a few things.

maxim730 wrote:
In addition to the above:
1) Continue paying off loans
2) Once loans are paid (or at least only <$20,000 total left), start investing in a taxable account <--Red flag!
Doh. You are right. I completely forgot about that. Of course, once the loans are paid off, $17,000 (and wife if she finds full time job) to 401k, then then $5000 (x2) for IRA (backdoor IRA probably)
Thank you for the suggestions about Admiral shares. I will definitely purchase Admiral shares and move the bond to 401k.
pingo » Mon Jul 16, 2012 5:39 pm

Also, I recommend posting a table of current new contributions and new contributions starting on whatever date you've paid off the debt
Good idea. I hope it's within a year or so..


Thank you all again. Onto more research and reading other posts.

Bob's not my name
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Re: Re-assessing IRA/401K portfolio only

Post by Bob's not my name » Mon Jul 16, 2012 6:52 pm

Can you explain how you're in the 28% bracket and 6.37% NJ bracket? From your prior posts we know that your income is about $110,000. What is your wife's?

If you're in the 28% bracket there's a significant probability that you're also in the AMT, which makes our effective marginal rate 32.5%, or 39% including NJ.

You may wish to convert your existing Roth IRA to a traditional 401k. See http://www.bogleheads.org/forum/viewtop ... 10&t=98625

Here's an illustrative stack of tax numbers:

$190,000 combined gross income
- $10,450 his 401k contributions (15% through June, 4% thereafter)
- $9,000 her 401k (guess based on your prior post that she was maxing it through June at least)
- $2,000 pre-tax health, dental, and disability insurance premiums (guess)
- $1,000 FSA contributions (guess)
-------------
$167,550 AGI --> fully eligible for Roth IRA contributions, no need to back door
- $7,600 personal exemptions
- $25,000 itemized deductions (guess based on mortgage and state tax)
-------------
$135,000 taxable income --> about $8,000 below 28% bracket

In this and your prior thread, you're getting a lot of advice based on that tax bracket statement, so I'm just trying to determine if your combined income is really over $200,000. Since the stack above assumes your 401k contributions are about $15,000 below the max and still leaves you with $8,000 of headroom in the 25% bracket and about $6,000 of headroom before the Roth phaseout, you can see that your gross income could be above $210,000 and you could still be in the 25% bracket and fully eligible for direct Roth contributions.

I'm not contradicting earlier advice that you prioritize paying down the loans, just trying to get a clear picture of your tax situation.

maxim81
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Re: Re-assessing IRA/401K portfolio only

Post by maxim81 » Mon Jul 16, 2012 8:17 pm

Bob's not my name wrote:Can you explain how you're in the 28% bracket and 6.37% NJ bracket? From your prior posts we know that your income is about $110,000. What is your wife's?

If you're in the 28% bracket there's a significant probability that you're also in the AMT, which makes our effective marginal rate 32.5%, or 39% including NJ.

You may wish to convert your existing Roth IRA to a traditional 401k. See http://www.bogleheads.org/forum/viewtop ... 10&t=98625

Here's an illustrative stack of tax numbers:

$190,000 combined gross income
- $10,450 his 401k contributions (15% through June, 4% thereafter)
- $9,000 her 401k (guess based on your prior post that she was maxing it through June at least)
- $2,000 pre-tax health, dental, and disability insurance premiums (guess)
- $1,000 FSA contributions (guess)
-------------
$167,550 AGI --> fully eligible for Roth IRA contributions, no need to back door
- $7,600 personal exemptions
- $25,000 itemized deductions (guess based on mortgage and state tax)
-------------
$135,000 taxable income --> about $8,000 below 28% bracket

In this and your prior thread, you're getting a lot of advice based on that tax bracket statement, so I'm just trying to determine if your combined income is really over $200,000. Since the stack above assumes your 401k contributions are about $15,000 below the max and still leaves you with $8,000 of headroom in the 25% bracket and about $6,000 of headroom before the Roth phaseout, you can see that your gross income could be above $210,000 and you could still be in the 25% bracket and fully eligible for direct Roth contributions.

I'm not contradicting earlier advice that you prioritize paying down the loans, just trying to get a clear picture of your tax situation.
Hi Bob. I married 4 months go. Previously, I filed as "single" and my gross income was around mid 120s (with bonus). I was not experienced (or smart) enough to figure out if I truly could contribute a "reduced amount" to a Roth IRA and vanguard.com did not have any built-in functionality that checked whether my MAGI was in the proper range (I know, I know, I shouldn't make excuses). I did look at IRA contribution charts and assumed that I could not contribute to Roth IRA. All this without calculating MAGI.

Since I recently married, my income situation is sort of the "same". My wife is currently partime and is expected to go full-time soon. As of today, you are correct, we will be in the 25% bracket (married filing jointly). However, she is going to be full time within 3-4 months and at that point our combined gross will be over $200K. I am guessing I can contribute a "reduced amount" to a Roth IRA or look into the IRA backdoor trick.

I will check out the link your provided.

Thanks again for the response and looking forward to your reply!

Bob's not my name
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Re: Re-assessing IRA/401K portfolio only

Post by Bob's not my name » Tue Jul 17, 2012 3:33 am

I may be misinterpreting it, but your reply suggests to me that you're not thinking of your income in calendar years, which is what you need to do. Forget 2013; it is the future and the tax code then is unknowable. What will your combined gross income be in 2012? Over $200,000 even though your wife will not start working full time until November?

maxim81
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Re: Re-assessing IRA/401K portfolio only

Post by maxim81 » Tue Jul 17, 2012 5:18 am

Bob's not my name wrote:I may be misinterpreting it, but your reply suggests to me that you're not thinking of your income in calendar years, which is what you need to do. Forget 2013; it is the future and the tax code then is unknowable. What will your combined gross income be in 2012? Over $200,000 even though your wife will not start working full time until November?
Bob - that is correct. I would say close to $195K.The story is wife had a $115K job until Jun, left that job in Jun, is working part time now (annualized salary of $85K), and is expected to go full-time again by Sept. I am guessing at the end of 2012, we will be at the border of the $200K limit, but it is difficult to assess right way (marriage, moving to a different city, etc.). Let me know your thoughts!

Bob's not my name
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Re: Re-assessing IRA/401K portfolio only

Post by Bob's not my name » Tue Jul 17, 2012 5:28 am

OK, at about $200,000 gross you can use 401k contributions to get under the Roth phaseout.

That said, I think you should prioritize paying down the debt over Roth contributions.

As for 6.8% debt vs. 401k, it's a tough call, especially since you have so much debt, but I would use 401k contributions to at least avoid the AMT and 28% bracket.

livesoft
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Re: Re-assessing IRA/401K portfolio only

Post by livesoft » Tue Jul 17, 2012 7:27 am

Families with $200,000 gross income do not have to pay much in the way of income taxes. One has to remember that lots of things reduce adjusted gross income and taxable income. Here is a complete thread on the subject: http://www.bogleheads.org/forum/viewtopic.php?t=79510
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catba
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Re: Re-assessing IRA/401K portfolio only

Post by catba » Tue Jul 17, 2012 8:01 am

I'm new to Bogleheads so I can't give advice, but I am surprised that more people aren't focusing on your huge student loan debt.

If I were you that would be the #1 thing I would be focusing on and only be worried about retirement contributions if they either 1) get you matching funds or 2) will lower your tax bracket. Beyond that, I would consider postponing a move and put some of that emergency fund (which is saving for a down payment also?) towards the loans. I would even consider pulling out the Roth contributions and putting that towards the debt but that's me. Every extra dollar I had would go towards paying off those loans at that interest rate.

I guess now I'm curious what the Boglehead approach is to balancing retirement savings with debt.

Bob's not my name
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Re: Re-assessing IRA/401K portfolio only

Post by Bob's not my name » Tue Jul 17, 2012 12:36 pm

It's a lot of debt but their income is also high.

catba
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Re: Re-assessing IRA/401K portfolio only

Post by catba » Tue Jul 17, 2012 1:26 pm

It's a lot of debt but their income is also high.
So you are okay with carrying high debt at a high rate if income is high enough?

I guess that just doesn't make sense to me, but since that isn't what the OP was asking it doesn't really matter. Sorry for the tangent, maxim730 :)

Khanmots
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Re: Re-assessing IRA/401K portfolio only

Post by Khanmots » Tue Jul 17, 2012 2:15 pm

catba wrote:
It's a lot of debt but their income is also high.
So you are okay with carrying high debt at a high rate if income is high enough?

I guess that just doesn't make sense to me, but since that isn't what the OP was asking it doesn't really matter. Sorry for the tangent, maxim730 :)
His current plans are to contribute enough to the 401k for the free money and direct the remainder of his excess cash to paying down the debt. He's already liquidated his taxable investments as those were essentially leveraged monies and unwound that leveraged position by using them to payoff debt. I think I saw him state that he plans to have the student loans paid off (or close to) within a year. The big reason to be worried about interest rates on debt is the compounding and how little of early payments are going to principal which isn't a big concern for him. Consider:

A 15 year payback period with interest compounded yearly
@ 6.8% results in interest paid of around 168% of the original balance
@ 5% results in interest paid of around 108% of the original balance

In contrast, paying it off in one year (compounded monthly) results in:
@ 6.8% results in interest paid of 3.7% of the original balance
@ 5% results in interest paid of 2.7% of the original balance

He could save a bit more by throwing the saved down-payment at it up front, but you're kind of at the point of diminishing returns, and banks can be picky about how long the cash for a down-payment has been in an account.
I wouldn't throw emergency fund cash at it as it serves an important purpose and an otherwise minor financial bump could turn into a major wreck without it.

Basically my position, (and I think that a lot of other posters) is that if he can pay it off in a year, then it's not worth drastically upsetting his life to try to save what would amount to a few dollars, and that optimizing his tax situation would likely be time better spent.

catba
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Re: Re-assessing IRA/401K portfolio only

Post by catba » Tue Jul 17, 2012 5:06 pm

Basically my position, (and I think that a lot of other posters) is that if he can pay it off in a year, then it's not worth drastically upsetting his life to try to save what would amount to a few dollars, and that optimizing his tax situation would likely be time better spent.
Ah, I didn't see that the loans would be paid off in a year. That makes a lot more sense - thanks for explaining.

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grap0013
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Re: Re-assessing IRA/401K portfolio only

Post by grap0013 » Tue Jul 17, 2012 5:25 pm

Bob's not my name wrote:Can you explain how you're in the 28% bracket and 6.37% NJ bracket? From your prior posts we know that your income is about $110,000. What is your wife's?

If you're in the 28% bracket there's a significant probability that you're also in the AMT, which makes our effective marginal rate 32.5%, or 39% including NJ.

You may wish to convert your existing Roth IRA to a traditional 401k. See http://www.bogleheads.org/forum/viewtop ... 10&t=98625

Here's an illustrative stack of tax numbers:

$190,000 combined gross income
- $10,450 his 401k contributions (15% through June, 4% thereafter)
- $9,000 her 401k (guess based on your prior post that she was maxing it through June at least)
- $2,000 pre-tax health, dental, and disability insurance premiums (guess)
- $1,000 FSA contributions (guess)
-------------
$167,550 AGI --> fully eligible for Roth IRA contributions, no need to back door
- $7,600 personal exemptions
- $25,000 itemized deductions (guess based on mortgage and state tax)
-------------
$135,000 taxable income --> about $8,000 below 28% bracket

In this and your prior thread, you're getting a lot of advice based on that tax bracket statement, so I'm just trying to determine if your combined income is really over $200,000. Since the stack above assumes your 401k contributions are about $15,000 below the max and still leaves you with $8,000 of headroom in the 25% bracket and about $6,000 of headroom before the Roth phaseout, you can see that your gross income could be above $210,000 and you could still be in the 25% bracket and fully eligible for direct Roth contributions.

I'm not contradicting earlier advice that you prioritize paying down the loans, just trying to get a clear picture of your tax situation.
+1 Not Bob. I've enjoyed your recent flurry of posts on educating investors with examples of calculating tax rates. I tip my hat to you. :beer
There are no guarantees, only probabilities.

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grap0013
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Re: Re-assessing IRA/401K portfolio only

Post by grap0013 » Tue Jul 17, 2012 5:35 pm

OP, since you stated you are going to be able to pay these off so soon it sounds like you are putting some pretty serious extra month monthly on these loans. You are not getting much bang for your buck by lowering your 401K contributions to only the match due to your tax rates. I think you are making a mistake. Once a year is over, that tax deferred space is gone forever. No big deal you might say, but studies have shown you lose about 30% value to taxes in a taxable account vs. a tax deferred over 30 yrs. That number lost grows as the time increases. Therefore, when you only contribute, let's say 8K in for 2012 instead of 44K and compound it out with some reasonable assumptions, you are missing out on some potentially tremendous tax deferred growth.

I would stuff all tax deferred accounts and use leftover $ to pay off loans. How long would it take you to pay them off then? You have dual incomes and large cash reserve so I don't think this is that risky.
There are no guarantees, only probabilities.

maxim81
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Re: Re-assessing IRA/401K portfolio only

Post by maxim81 » Tue Jul 17, 2012 5:47 pm

grap0013 wrote:OP, since you stated you are going to be able to pay these off so soon it sounds like you are putting some pretty serious extra month monthly on these loans. You are not getting much bang for your buck by lowering your 401K contributions to only the match due to your tax rates. I think you are making a mistake. Once a year is over, that tax deferred space is gone forever. No big deal you might say, but studies have shown you lose about 30% value to taxes in a taxable account vs. a tax deferred over 30 yrs. That number lost grows as the time increases. Therefore, when you only contribute, let's say 8K in for 2012 instead of 44K and compound it out with some reasonable assumptions, you are missing out on some potentially tremendous tax deferred growth.

I would stuff all tax deferred accounts and use leftover $ to pay off loans. How long would it take you to pay them off then? You have dual incomes and large cash reserve so I don't think this is that risky.
Interesting. I thought about that too. I used some free online calculators to calculate take home pay if i put in only 4% (company matches 100%) versus 15%. I think the take-home pay increased by about $300 (or $600 monthly). I am actually waiting for the next paycheck to see how much exactly. I then planned on use this extra $ to pay off the student loans.

Let me see how much the next paycheck is..

Novine
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Re: Re-assessing IRA/401K portfolio only

Post by Novine » Tue Jul 17, 2012 8:04 pm

"Mortgage: ~255,000 @ 5.12% (I can't refi since I have a FHA loan, and the house has lost value. I could refi but I have to put a lot of cash down. It is not worth it since we plan on moving out in 1-2 years)"

If you have a FHA loan, you can refinance down to a lower interest rate using the Streamline FHA refinancing program. This program is available if it would reduce your interest rate (which it would) even if the value of the loan exceeds the value of the house. FHA doesn't require a reappraisal for this refinancing. If your loan dates back to before June 2009, you can refinance with reduced MIP rates. This article has a good overview of the program. You would have to do the math but you might be able to make up the costs associated with refinancing before you sell in a year or two.

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market timer
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Re: Re-assessing IRA/401K portfolio only

Post by market timer » Tue Jul 17, 2012 8:11 pm

maxim81 wrote:Mortgage: ~255,000 @ 5.12% (I can't refi since I have a FHA loan, and the house has lost value. I could refi but I have to put a lot of cash down. It is not worth it since we plan on moving out in 1-2 years)
You have nearly $90K saved for a downpayment on your next house. Why not park most of that in your current house by paying down your mortgage? Then when you sell your current house, the greater equity can go towards your next house. You'd likely save several thousand dollars this way.

If I were in your shoes, and I was not long ago with lots of debt, I'd max out the 401K (to save on income taxes) and take out a 401K loan to pay down your student loans. Makes sense to pay yourself interest instead of the government.

maxim81
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Re: Re-assessing IRA/401K portfolio only

Post by maxim81 » Wed Jul 18, 2012 11:08 am

market timer wrote:
maxim81 wrote:Mortgage: ~255,000 @ 5.12% (I can't refi since I have a FHA loan, and the house has lost value. I could refi but I have to put a lot of cash down. It is not worth it since we plan on moving out in 1-2 years)
You have nearly $90K saved for a downpayment on your next house. Why not park most of that in your current house by paying down your mortgage? Then when you sell your current house, the greater equity can go towards your next house. You'd likely save several thousand dollars this way.

If I were in your shoes, and I was not long ago with lots of debt, I'd max out the 401K (to save on income taxes) and take out a 401K loan to pay down your student loans. Makes sense to pay yourself interest instead of the government.
Really? You would take out a 401k loan to pay off the debt? I used the 401k loan calculator on my 401k Admin's website:


This loan will require 121 payments of $459.44 to be paid on a Semi-Monthly frequency.

The Payments will continue until paid off on 08/01/2017.

The total amount re-paid is expected to be $55592.24, if repaid on schedule

When paid off on the date above, about $5592.24 of interest will have been credited to your account.

You will be charged a fee of $100.00 for the loan processing.



So I am borrowing $50K, paying $55592.04 back, and the interest is credited. How is the 401k Admin "making money". It looks like I have nothing to lose...(besides losing on any asset growth).

Default User BR
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Re: Re-assessing IRA/401K portfolio only

Post by Default User BR » Wed Jul 18, 2012 2:20 pm

maxim81 wrote:So I am borrowing $50K, paying $55592.04 back, and the interest is credited. How is the 401k Admin "making money". It looks like I have nothing to lose...(besides losing on any asset growth).
The biggest potential problem is loss of job. Many, if not most, plans require payback of the loan within a specified time, or they will take it from the 401(k) and consider it an early distribution.

A smaller issue is that the tax treatment of the interest payments isn't favorable. That's not a huge deal.


Brian

Bob's not my name
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Re: Re-assessing IRA/401K portfolio only

Post by Bob's not my name » Wed Jul 18, 2012 4:07 pm

Default User BR wrote:A smaller issue is that the tax treatment of the interest payments isn't favorable. That's not a huge deal.
It's not any deal at all if your wallet and your 401k are both better off. I can borrow from my 401k at 3.25%. That's better than the bond funds in my 401k are earning, so my 401k wins. If 3.25% is a lower rate than I get elsewhere, my wallet wins, too. It's a very simple thing. Tax treatment matters not a whit. Only gets complicated if your wallet or your 401k is worse off.

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