Just beginning: $40k to open taxable and IRA accounts

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OffTheGrid
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Just beginning: $40k to open taxable and IRA accounts

Post by OffTheGrid » Thu Feb 23, 2017 5:08 pm

Debt: None
Married Filing Jointly
Ages: 29, Spouse is 26, one child under 2
Tax Bracket: 15% Federal, no state (WY)
Emergency Fund: 6-months expenses in 1% savings account
+ Extra Savings: plans to put upwards of $10,000 across a few laddered CDs (Ally, CapOne360)
Desired Asset Allocation: 70% stocks (maybe 20% international -- open to suggestions here)/30% bonds

We have $40,000 to invest. We unfortunately do not have retirement accounts (ugh) and we do not work for companies that contribute to 401(k)s/retirement. I want a Roth IRA; maybe we both should have one. Contributing 15% of our annual income per year to these accounts isn't very much, but it is something we are going to aim for. My husband was gifted a cash-value whole life that has an option to be used for monthly retirement payments/supposedly the account can be changed when he turns 30 in a few years (we don't know much about this and need to talk more with the company about it). It's cash surrender value is $41k right now. We may invest in a 529 (we would earmark $5-10,000 for this).

On top of this money, we also inherited an Edward Jones mutual fund, which performed quite well in 2016 but I want to put the money to use elsewhere (in an index fund, and not at EJ). It's valued at about $8,000 now.

I do have some ideas on what I want to do with all this... I'm leaning towards a three-fund portfolio with Vanguard in order to keep it simple at first. I'm honestly really not sure what/how much to put in IRAs versus taxable accounts. My head is starting to spin looking at all our options! What would you do?

nps
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Re: Just beginning: $40k to open taxable and IRA accounts

Post by nps » Thu Feb 23, 2017 9:16 pm

Put everything you want to save toward retirement in tax advantaged accounts before turning to taxable. You mention your workplaces do not contribute to 401k accounts. Does this mean that they do not have them at all, or just that you wouldn't get a match?

I would not recommend 529s for anyone who has no retirement savings.

Agree with getting away from EJ and moving to the simple portfolio at Vanguard for the IRA/taxable portion.

dacalo
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Re: Just beginning: $40k to open taxable and IRA accounts

Post by dacalo » Thu Feb 23, 2017 9:27 pm

nps wrote:Put everything you want to save toward retirement in tax advantaged accounts before turning to taxable. You mention your workplaces do not contribute to 401k accounts. Does this mean that they do not have them at all, or just that you wouldn't get a match?

I would not recommend 529s for anyone who has no retirement savings.

Agree with getting away from EJ and moving to the simple portfolio at Vanguard for the IRA/taxable portion.
I agree with nps. If your employers do not offer any 401k or similar retirement plans, I would try to maximize Roth IRA for you and your spouse for both 2016 (you have until the tax deadline in April) and 2017. I would not concern myself with 529 until you have everything in order for your retirement.

OffTheGrid
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Re: Just beginning: $40k to open taxable and IRA accounts

Post by OffTheGrid » Fri Feb 24, 2017 10:58 am

Right, our employers do not even have retirement accounts.

Even if I max out contributions for Roth IRAs 2016 and 2017 ($5,500 x 2 years x 2 accounts = $22,000), that would still leave us with $18,000. (Also does it sound like we should aim to do something differently with this cash-value life/retirement backup he has?)

Interested to know more about why some of that should NOT go towards a 529 specifically (I mean, we're not sold on 529's anyways to be honest but why would this be specifically a poor choice?).

What about that remaining $18k?

dacalo
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Re: Just beginning: $40k to open taxable and IRA accounts

Post by dacalo » Fri Feb 24, 2017 2:39 pm

OffTheGrid wrote:Right, our employers do not even have retirement accounts.

Even if I max out contributions for Roth IRAs 2016 and 2017 ($5,500 x 2 years x 2 accounts = $22,000), that would still leave us with $18,000. (Also does it sound like we should aim to do something differently with this cash-value life/retirement backup he has?)

Interested to know more about why some of that should NOT go towards a 529 specifically (I mean, we're not sold on 529's anyways to be honest but why would this be specifically a poor choice?).

What about that remaining $18k?
This is just my opinion, but I would use the remaining $18k to open a taxable account and invest in a tax efficient fund(s), depending on your risk tolerance. Personally, I wouldn't invest in a 529 until I have a good starting nest egg for our retirement. The reason from my perspective is that your child may able to get some help and get a loan in worst case scenario, whereas you won't have anything to fall on if your retirement is insufficient.

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BL
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Re: Just beginning: $40k to open taxable and IRA accounts

Post by BL » Fri Feb 24, 2017 3:22 pm

You should both have an IRA, whether that is Roth or traditional + 15% additional invested in taxable (you get a 15% tax break with traditional so the extra should be invested in taxable). There have been some math experts here that prove that traditional + tax savings invested in taxable are equal to Roth in the end if the tax brackets remain the same.

I suggest you get or use free online a tax program and try some what-if changes, especially with Roth vs. Traditional. It is possible that traditional might also give you some tax credit advantages based on AGI. but it is hard to know without trying it out.

Do you use dependent care credit?

Child tax credit/Additional child tax credit is another one that comes to mind.

Earned income credit is another, depending on what your income is.

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ps56k
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Re: Just beginning: $40k to open taxable and IRA accounts

Post by ps56k » Fri Feb 24, 2017 3:46 pm

nps wrote:... and moving to the simple portfolio at Vanguard for the IRA/taxable portion.
What would be a suggestion - in the taxable account - ??

as someone else also echoed -
This is just my opinion, but I would use the remaining $18k to open a taxable account and invest in a tax efficient fund(s).

Alto Astral
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Re: Just beginning: $40k to open taxable and IRA accounts

Post by Alto Astral » Fri Feb 24, 2017 4:07 pm

1. Use 3 fund portfolio with 70% Stocks (total stock market) and 30% bonds (total bond market). You can skip international for now.
2. Put the $22k in Roth IRA.
3. Put the $18k in taxable.
For tax efficient funds for #3, see this spreadsheet : https://docs.google.com/spreadsheets/d/ ... sp=sharing
from this thread: viewtopic.php?t=208818

OffTheGrid
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Re: Just beginning: $40k to open taxable and IRA accounts

Post by OffTheGrid » Fri Feb 24, 2017 4:22 pm

Alto-- close to what I was leaning towards, but I was going to include total international stock too. Is this just to keep things simple and because we have little money to work with?
That is quite the spreadsheet! Thanks.

Also wondering if my assumption that something like a target date fund for our Roths would have higher fees and be less ideal than picking out the funds ourselves. I haven't looked at that many target date accounts so far and maybe this is not the case.

BL -- no dependent care credit, we get the child tax credit and we qualify for the earned income credit. The EIC goes away, however, if we have more than $3400 in investment income for the year. We're already quite close to this threshold because we get a fraction of some farm rental income that is split between my husband's family. So, no matter what we do with personal investments for the year we are always at risk of not getting this credit. I don't count on it.

I was also leaning towards just doing Roth because there is a chance in the near future our annual income would go up a lot more, as I'm self-employed but doing very little work at the moment to take care of our toddler.

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ps56k
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Re: Just beginning: $40k to open taxable and IRA accounts

Post by ps56k » Fri Feb 24, 2017 4:26 pm

Alto Astral wrote:For tax efficient funds,
see this spreadsheet : https://docs.google.com/spreadsheets/d/ ... sp=sharing
from this thread: viewtopic.php?t=208818
just stumbled across this thread -
tnx for the thread and pointing to Part I of the discussion -

OffTheGrid
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Re: Just beginning: $40k to open taxable and IRA accounts

Post by OffTheGrid » Fri Feb 24, 2017 8:55 pm

Oh... another q. And this may be an incredibly silly question...

So let's say I do the $11k to one Roth, $11k to another Roth, and $18 to taxable and I (hypothetically) aim for a 70%/30% VTSMX/VMBFX balance across the board.
How exactly do I split 2 types of funds across 3 different accounts? Would Vanguard do that for me? For example, I know most funds need a $3k minimum, but what if I want a fund split between accounts and less than that $3k minimum ends up in different accounts (is that a possibility)? I'm just wondering.

(I looked around for quite a while on Vanguard's site thinking I'd find an answer about this but no luck.)

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BL
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Re: Just beginning: $40k to open taxable and IRA accounts

Post by BL » Fri Feb 24, 2017 9:49 pm

30% of 40k is 12k for bonds.
So that leaves 28k for stock fund.

You could divide bonds in half and do 6k bonds in each Roth and the rest of the 28k to fill the rest of the space: 5k stock in each Roth, 18k in taxable.

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jmndu99
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Re: Just beginning: $40k to open taxable and IRA accounts

Post by jmndu99 » Fri Feb 24, 2017 9:50 pm

Hello, I by no means claim that I know much about backdoor roths.

Wait for experts on backdoor roths.

My question is this:

1. OP contribute to the Roth up to max
2. Then Couldn't OP contribute to non deductible IRA with the rest of the money, then backdoor Roth it?

nps
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Re: Just beginning: $40k to open taxable and IRA accounts

Post by nps » Fri Feb 24, 2017 9:50 pm

OffTheGrid wrote:For example, I know most funds need a $3k minimum, but what if I want a fund split between accounts and less than that $3k minimum ends up in different accounts (is that a possibility)?
Not really.

Simplest thing is to buy both funds in all three accounts in a 70/30 ratio. In that case your lowest account balance would be $11k, your lowest allocation is 30 percent, and 30 percent of $11k is more than $3k.

Most tax and fee efficient is to hold only total stock in taxable. In that case hold $5k total stock and $6k total bond in each Roth.

nps
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Re: Just beginning: $40k to open taxable and IRA accounts

Post by nps » Fri Feb 24, 2017 9:54 pm

jmndu99 wrote:Hello, I by no means claim that I know much about backdoor roths.

Wait for experts on backdoor roths.

My question is this:

1. OP contribute to the Roth up to max
2. Then Couldn't OP contribute to non deductible IRA with the rest of the money, then backdoor Roth it?
No. Non-deductible IRAs are still traditional IRAs, and once you max Roth you can't contribute anything to a traditional IRA.

OffTheGrid
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Re: Just beginning: $40k to open taxable and IRA accounts

Post by OffTheGrid » Fri Feb 24, 2017 11:39 pm

Ok, I realize I gave a bad example and didn't really explain myself with my hypothetical (sorry). I am aiming for that 70/30 balance but was interested in a little bit of international stock/bond funds too, still keeping the stock/bond balance just with a greater # of funds... so it got me thinking I couldn't divide them up among accounts without making sure there was the $3k minimum met per account (I was just wondering if that minimum $ could be split up across accounts, and if I had misunderstood what Vanguard meant by minimums). But I realize if I end up just picking 2 funds to balance out I wouldn't encounter this problem.

Man... I really sound like I'm overthinking this now!

chonp3
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Re: Just beginning: $40k to open taxable and IRA accounts

Post by chonp3 » Sat Feb 25, 2017 12:21 am

For your desired allocation of 70/30 with 20% international, a tax efficient allocation would look like:

$22,400 Total US stock
$5,600 international
$12k total bond
Total = $40k

Her Roth
6k Bond
5k US Stock

His Roth
6k Bond
5k US Stock

Taxable
12.4k US stock
5.6k Int

nps
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Re: Just beginning: $40k to open taxable and IRA accounts

Post by nps » Sat Feb 25, 2017 6:50 am

OffTheGrid wrote:I am aiming for that 70/30 balance but was interested in a little bit of international stock/bond funds too, still keeping the stock/bond balance just with a greater # of funds... so it got me thinking I couldn't divide them up among accounts without making sure there was the $3k minimum met per account (I was just wondering if that minimum $ could be split up across accounts, and if I had misunderstood what Vanguard meant by minimums).
The minimums are per fund, not per account. Also owning the same fund in different accounts means you need to meet the fund's minimum in each account.

OffTheGrid
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Re: Just beginning: $40k to open taxable and IRA accounts

Post by OffTheGrid » Sat Feb 25, 2017 11:06 am

nps -- that's what I was wondering, thank you for clarifying!

Thanks all for the help, I appreciate it.

blastoff
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Re: Just beginning: $40k to open taxable and IRA accounts

Post by blastoff » Sat Feb 25, 2017 12:06 pm

A taxable account is not very taxed in the 15% bracket.

HSA?

OffTheGrid
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Re: Just beginning: $40k to open taxable and IRA accounts

Post by OffTheGrid » Sat Feb 25, 2017 1:34 pm

blastoff -- are you asking if we have an HSA or suggesting we get one? We don't have one. (Our current insurance has a low deductible and out-of-pocket.)

OffTheGrid
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Re: Just beginning: $40k to open taxable and IRA accounts

Post by OffTheGrid » Mon Feb 27, 2017 1:00 pm

So a couple things. First, we'll actually be investing $45k (not $40k) as originally planned. We're planning to do a 50% Total Stock -- 20% Total Int'l -- 30% Total Bond split. It'll look like this:

His Roth IRA ($11,000)
$ 4,250 — Total Stock VSTMX
$ 6,750 — Total Bonds VBMFX

Her Roth IRA ($11,000)
$ 4,250 — Total Stock VSTMX
$ 6,750 — Total Bonds VBMFX

Taxable ($23,000)
$14,000 — Total Stock VSTMX (or Admiral shares? see note)
$ 9,000 — Total Int’l Stock VGTSX

1) Is there a reason that Vanguard's online fund recommendation tool *does not* recommend Admiral shares when, clearly, we have enough in our taxable to do so? (Says the minimum to invest is $10k)

2) We would like to eventually diversify to include a ~5% Small-Cap Value fund in the taxable account. We'd also like to have ~5% Total Int'l Bonds and ~5% REIT Index into the IRAs. Is there *any reason* I should attempt to diversify a little more now rather later? My thinking here is that we don't really have much to invest anyways just yet -- but I do feel I'm being too cautious.

3) BIGGER QUESTION: I was going to make a new post, but figure I'll keep things all together on this thread and since I've already brought this issue up but haven't gotten feedback on it yet.
Back to this weird Whole Life Insurance plan my husband was gifted. Here's the thing: I've done some reading on how bad WLI plans are, and I get it now. One big downside of WLI plans that *doesn't* apply to our situation is the cost -- we didn't pay for it and it was a single-premium plan. Also it can be used as retirement income at age 65: he can surrender the insurance for monthly income (guaranteed payment right now is ~$800/month until death or 10 years... whichever is LONGER, and this guaranteed amount grows each year). And, of course, my husband doesn't have to worry about paying for a term-life plan at the moment... but...

-Should we cash this plan out and do something different? We want to maximize our investment and retirement funds, and I'm under the impression we won't be doing that with the WLI. It's current value is about $42k; it has a guaranteed surrender value in about 10 years of ~$59k (and so on)... I'd be interested to know if anyone feels there is something better we can do with this money (either now, or down the road).

Thanks again for all the help.

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