Choosing funds for 401k

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
fuelforfire
Posts: 15
Joined: Wed Oct 25, 2017 4:54 am

Choosing funds for 401k

Post by fuelforfire » Sun Jan 07, 2018 11:35 am

I'm a 24 year old and thinking about changing my allocations in my 401k contribution.
Current percentage allocation is shown. I also have a maxed out Roth IRA and just opened a Traditional IRA for this year. There I have a lot of Vanguard ETFs but am planning to consolidate to a three-fund portfolio. Currently i'm about 97% stocks, 3% bonds but was planning on dumping the $5,500 of the Traditional IRA this year into VBMFX to bring it up to around 10% bond.

I'm currently trying to optimize my portfolio and get rid of large fees, for example the T. Rowe Price Growth Stock Fund has ER 0.68% and Dodge & Cox Global Stock Fund is 0.63%, and in my brokerage account I have CGMRX CGM Realty Fund that has an ER 0.99%.




INVESTMENT FUND


Income

Goldman Sachs Financial Square Government Fund - FST Class 0% FGTXX ER 0.18%

Vanguard Intermediate Term Bond Index Fund - Admiral Class 0% ER 0.15%

Wells Fargo Core Bond Fund - Class R6 0% ER 0.42%


Growth & Income

JPMCB SmartRetirement Income Fund - Class C 0%

JPMCB SmartRetirement 2020 Fund - Class C 0%

JPMCB SmartRetirement 2025 Fund - Class C 0%

JPMCB SmartRetirement 2030 Fund - Class C 0%

JPMCB SmartRetirement 2035 Fund - Class C 0%

JPMCB SmartRetirement 2040 Fund - Class C 0%

JPMCB SmartRetirement 2045 Fund - Class C 0%

JPMCB SmartRetirement 2050 Fund - Class C 0%

JPMCB SmartRetirement 2055 Fund - Class C 20% (tried to find the ER, found this instead:
Annual expenses (%)
Net Expenses: 1.55
Gross Expenses: 2.11)


Growth

Columbia Dividend Income Fund - Institutional 2 Class 0% ER 0.64%

Vanguard Institutional Index Fund - Institutional Class 30% ER 0.035%

T. Rowe Price Growth Stock Fund - Investor Class 40% ER 0.68%


Aggressive Growth

DFA US Targeted Value Portfolio - Institutional Class 0% ER 0.37%

Voya SmallCap Opportunities Fund - Class R6 0% ER 0.97%

DFA Large Cap International Portfolio - Institutional Class 0% ER 0.23%

Vanguard FTSE All World ex US Index Fund - Admiral Class 0% ER 0.11%

Dodge & Cox Global Stock Fund 10% ER 0.63%



I would really appreciate any advice for what to choose. I was thinking of getting Vanguard ex US index fund, Vanguard institutional index fund, and maybe the bond fund. Or maybe just one fund to keep it simple, maybe keeping VTSAX in a taxable brokerage, bonds or international stock in 401k and IRA?


CURRENT PORTFOLIO
I rounded the percentages so they might not exactly total. You can see that my current allocation is haphazard and overcomplicated. I want to consolidate to the three-fund portfolio but minimize the tax from buying and selling. I think it's been over a year for most of the funds so I'm wondering if I should just go ahead and start consolidating. It's a mess as it is right now.

Taxable at Vanguard -- $62k -- %46
VTSAX Vanguard Total Stock Market Index Fund Admiral Shares 27%
VOO Vanguard S&P 500 ETF 14%
CGMRX CGM Realty Fund 13%
VXUS Vanguard Total International Stock Index Fund ETF Shares 11%
VTI Vanguard Total Stock Market Index Fund ETF Shares 9%
BND Vanguard Total Bond Market Index Fund ETF Shares 7%
VNQ Vanguard REIT ETF 6%
VEA Vanguard FTSE Developed Markets Index Fund ETF Shares 4%
VWO Vanguard FTSE Emerging Markets Index Fund ETF Shares 4%
VSS Vanguard FTSE All-World ex-US Small-Cap Index Fund ETF Shares 2%
VBR Vanguard Small-Cap Value Index Fund ETF Shares 2%
VHT Vanguard Health Care Index Fund ETF Shares 1%

401K -- $47.8k-- %35
JPMCB SmartRetirement 2055 Fund - Class C 19%
DODWXDodge & Cox Global Stock Fund 10%
PRGFXT. Rowe Price Growth Stock Fund 41%
VINIX Vanguard Institutional Index Fund Institutional Shares 29.5%

Roth IRA --$13.7k --10%
VOO Vanguard S&P 500 ETF 26%
VTI Vanguard Total Stock Market Index Fund ETF Shares 20%
MGK Vanguard Mega Cap Growth Index Fund ETF Shares 13%
VHT Vanguard Health Care Index Fund ETF Shares 12%
VYMI Vanguard International High Dividend Yield Index Fund ETF Shares 10%
VNQI Vanguard Global ex-U.S. Real Estate Index Fund ETF Shares 9%
VNQ Vanguard REIT ETF 9%

HSA--$3400 -- 3%
VTI Vanguard Total Stock Market Index Fund ETF Shares $3,400.00 100%

Cash 10k --14%
Last edited by fuelforfire on Tue Jan 09, 2018 11:08 am, edited 2 times in total.

Lafder
Posts: 3696
Joined: Sat Aug 03, 2013 7:56 pm
Location: East of the Rio Grande

Re: Choosing funds for 401k

Post by Lafder » Sun Jan 07, 2018 2:17 pm

Welcome here.

Can you go back and add the ER (expense ratio) for each of the available holdings ?

Then it will be more clear what your best options are.

Lafder

fuelforfire
Posts: 15
Joined: Wed Oct 25, 2017 4:54 am

Re: Choosing funds for 401k

Post by fuelforfire » Sun Jan 07, 2018 3:36 pm

Lafder wrote:
Sun Jan 07, 2018 2:17 pm
Can you go back and add the ER (expense ratio) for each of the available holdings ?
Hi Lafder, thank you. I went through an added the ERs

billfromct
Posts: 590
Joined: Tue Dec 03, 2013 9:05 am

Re: Choosing funds for 401k

Post by billfromct » Sun Jan 07, 2018 5:00 pm

If I were 24 with 40 years until retirement, I would be 100% in stocks (domestic & international). You just need the intestinal fortitude to ride out any corrections/bear markets.

The Vanguard indexes (domestic & international) look pretty good. I would go 70%-80% domestic & 20%-30% international.

You can move to your retirement bond allocation as you get closer to retirement.

At your age, I would fund a Roth IRA so you can take advantage of 40 years of tax free compounding & state/Federal tax free withdrawals after age 59.5.

bill

User avatar
Duckie
Posts: 5532
Joined: Thu Mar 08, 2007 2:55 pm

Re: Choosing funds for 401k

Post by Duckie » Sun Jan 07, 2018 6:51 pm

fuelforfire wrote:I'm a 24 year old and thinking about changing my allocations in my 401k contribution.
Current percentage allocation is shown. I also have a maxed out Roth IRA and just opened a Traditional IRA for this year. There I have a lot of Vanguard ETFs but am planning to consolidate to a three-fund portfolio. Currently i'm about 97% stocks, 3% bonds but was planning on dumping the $5,500 of the Traditional IRA this year into VBMFX to bring it up to around 10% bond.
At age 24 an AA of 80-90% stocks and 10-20% bonds is reasonable. I recommend 80/20. As for international, Vanguard has found between 20% and 40% of stocks in international to be the "sweet spot". See the Vanguard paper link and the discussion. I usually split the difference and recommend 30% of stocks.
I'm currently trying to optimize my portfolio and get rid of large fees, for example the T. Rowe Price Growth Stock Fund has ER 0.68% and Dodge & Cox Global Stock Fund is 0.63%, and in my brokerage account I have CGMRX CGM Realty Fund that has an ER 0.99%.
If not already there, consider moving your taxable account and TIRA to Vanguard.
INVESTMENT FUND
The best options in the 401k are:
  • Vanguard Institutional Index 0.035% -- Large caps, 80% of US stocks
  • Vanguard FTSE All World ex US Index 0.11% -- Almost complete international stocks
  • Vanguard Intermediate Term Bond Index 0.15% -- US bonds
You can get the missing US mid/small caps by using Extended Market in your TIRA when you have more assets.
I would really appreciate any advice for what to choose. I was thinking of getting Vanguard ex US index fund, Vanguard institutional index fund, and maybe the bond fund. Or maybe just one fund to keep it simple, maybe keeping VTSAX in a taxable brokerage, bonds or international stock in 401k and IRA?
Totaling 100%, what are the percentages in your three accounts?
  • Taxable brokerage -- %
    401k -- %
    Traditional IRA -- %
The following example of a retirement portfolio has an AA of 80% stocks, 20% bonds, with 30% of stocks in international. That breaks down to 56% US stocks, 24% international stocks, and 20% bonds. Using totally made-up dollar amounts here's one possibility:

Taxable at Vanguard -- $6.5K -- 34%
34% (VTSMX) Vanguard Total Stock Market Index Fund Investor Shares (0.15%)

401k -- $7K -- 37%
17% (VINIX) Vanguard Institutional Index Fund Institutional Shares (0.035%)
20% (VBIIX) Vanguard Intermediate-Term Bond Index Fund Investor Shares (0.15%)

Traditional IRA at Vanguard -- $5.5K -- 29%
29% (VGTSX) Vanguard Total International Stock Index Fund Investor Shares (0.18%)

My comments/questions:
  • The AA is off because of fund minimums. It'll do until you have more assets.
  • Put all the bonds in the 401k.
  • Is the 401k intermediate bond fund VBILX Admiral shares for 0.07% or VBIIX Investor shares for 0.15%? You've listed it as Admiral shares for 0.15%. This is possible but unlikely.
Something to think about.

fuelforfire
Posts: 15
Joined: Wed Oct 25, 2017 4:54 am

Re: Choosing funds for 401k

Post by fuelforfire » Mon Jan 08, 2018 4:01 am

billfromct wrote:
Sun Jan 07, 2018 5:00 pm

At your age, I would fund a Roth IRA so you can take advantage of 40 years of tax free compounding & state/Federal tax free withdrawals after age 59.5.

bill
Thanks Bill,
I have 13k in a Roth IRA but opened the TIRA as I plan to retire early and thus will do a Roth Conversion Ladder. Keeping the funds to grow in the Roth IRA to pull from initially. I'd like to think I have the 'intestinal fortitude' to ride it out so I'm happy to be more stock heavy and rebalance as I age.

fuelforfire
Posts: 15
Joined: Wed Oct 25, 2017 4:54 am

Re: Choosing funds for 401k

Post by fuelforfire » Tue Jan 09, 2018 8:19 am

Duckie wrote:
Sun Jan 07, 2018 6:51 pm
[
Totaling 100%, what are the percentages in your three accounts?
  • Taxable brokerage -- %
    401k -- %
    Traditional IRA -- %
I rounded the percentages so they might not exactly total. You can see that my current allocation is haphazard and overcomplicated. I want to consolidate to the three-fund portfolio but minimize the tax from buying and selling. I think it's been over a year for most of the funds so I'm wondering if I should just go ahead and start consolidating. It's a mess as it is right now.

Taxable at Vanguard -- $62k -- %46
VTSAX Vanguard Total Stock Market Index Fund Admiral Shares 27%
VOO Vanguard S&P 500 ETF 14%
CGMRX CGM Realty Fund 13%
VXUS Vanguard Total International Stock Index Fund ETF Shares 11%
VTI Vanguard Total Stock Market Index Fund ETF Shares 9%
BND Vanguard Total Bond Market Index Fund ETF Shares 7%
VNQ Vanguard REIT ETF 6%
VEA Vanguard FTSE Developed Markets Index Fund ETF Shares 4%
VWO Vanguard FTSE Emerging Markets Index Fund ETF Shares 4%
VSS Vanguard FTSE All-World ex-US Small-Cap Index Fund ETF Shares 2%
VBR Vanguard Small-Cap Value Index Fund ETF Shares 2%
VHT Vanguard Health Care Index Fund ETF Shares 1%

401K -- $47.8k-- %35
JPMCB SmartRetirement 2055 Fund - Class C 19%
DODWXDodge & Cox Global Stock Fund 10%
PRGFXT. Rowe Price Growth Stock Fund 41%
VINIX Vanguard Institutional Index Fund Institutional Shares 29.5%

Roth IRA --$13.7k --10%
VOO Vanguard S&P 500 ETF 26%
VTI Vanguard Total Stock Market Index Fund ETF Shares 20%
MGK Vanguard Mega Cap Growth Index Fund ETF Shares 13%
VHT Vanguard Health Care Index Fund ETF Shares 12%
VYMI Vanguard International High Dividend Yield Index Fund ETF Shares 10%
VNQI Vanguard Global ex-U.S. Real Estate Index Fund ETF Shares 9%
VNQ Vanguard REIT ETF 9%

HSA--$3400 -- 3%
VTI Vanguard Total Stock Market Index Fund ETF Shares $3,400.00 100%

Cash 10k --14%

User avatar
Duckie
Posts: 5532
Joined: Thu Mar 08, 2007 2:55 pm

Re: Choosing funds for 401k

Post by Duckie » Tue Jan 09, 2018 6:09 pm

fuelforfire wrote:You can see that my current allocation is haphazard and overcomplicated. I want to consolidate to the three-fund portfolio but minimize the tax from buying and selling. I think it's been over a year for most of the funds so I'm wondering if I should just go ahead and start consolidating. It's a mess as it is right now.
You need to figure out the cost basis for each fund/ETF in taxable. Once you know what the unrealized gains/losses are you can figure out the potential tax-hit. You don't need to get rid of everything at once (or even at all), but the first things you sell should be BND, VNQ, and CGMRX. The first two because they don't belong in taxable and the third because of the high expense ratio. Bonds should go in your 401k and REITs (if you want them) go in your Roth IRA.

Going with the same 56/24/20 breakdown, you could have:

Taxable at Vanguard -- $72K -- 53% <-- Includes $10K cash listed separately.
39% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)
14% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)

401k -- $48K -- 35%
15% (VINIX) Vanguard Institutional Index Fund Institutional Shares (0.035%)
20% (VBIIX) Vanguard Intermediate-Term Bond Index Fund Investor Shares (0.15%)

Roth IRA at Vanguard -- $14K -- 10%
10% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)

HSA -- $3K -- 2%
2% (VTI) Vanguard Total Stock Market ETF (0.04%)

Just some possibilities.

fuelforfire
Posts: 15
Joined: Wed Oct 25, 2017 4:54 am

Re: Choosing funds for 401k

Post by fuelforfire » Wed Jan 10, 2018 3:37 am

Duckie wrote:
Tue Jan 09, 2018 6:09 pm
You need to figure out the cost basis for each fund/ETF in taxable. Once you know what the unrealized gains/losses are you can figure out the potential tax-hit.
I looked up my cost basis. It loses the formatting when I try to publish it, sorry.

Taxable:
Short-term Long-term total gains/losses
VTSAX $1,119.17 — $1,119.17
CGMRX $49.33 $946.43 $995.76
VSS $112.95 — $112.95
VEA $177.79 — $177.79
VWO $160.82 — $160.82
VHT $52.54 — $52.54
VNQ – $173.77 — – $173.77
VOO $839.45 — $839.45
VBR $97.50 — $97.50
BND – $55.01 — – $55.01
VXUS $466.60 — $466.60
VTI $537.89 — $537.89

Roth IRA
Short-term Long-term Total gain/loss
VNQI $2.88 $239.84 $242.72
VHT $1.60 $303.20 $304.80
VYMI $3.46 $212.00 $215.46
MGK $2.33 $421.50 $423.83
VNQ – $35.25 — – $35.25
VOO $227.63 $462.71 $690.34
VTI $4.50 $532.92 $537.43

User avatar
teen persuasion
Posts: 479
Joined: Sun Oct 25, 2015 1:43 pm

Re: Choosing funds for 401k

Post by teen persuasion » Wed Jan 10, 2018 8:51 am

fuelforfire wrote:
Mon Jan 08, 2018 4:01 am
billfromct wrote:
Sun Jan 07, 2018 5:00 pm

At your age, I would fund a Roth IRA so you can take advantage of 40 years of tax free compounding & state/Federal tax free withdrawals after age 59.5.

bill
Thanks Bill,
I have 13k in a Roth IRA but opened the TIRA as I plan to retire early and thus will do a Roth Conversion Ladder. Keeping the funds to grow in the Roth IRA to pull from initially. I'd like to think I have the 'intestinal fortitude' to ride it out so I'm happy to be more stock heavy and rebalance as I age.
If you will be under 59.5, you can withdraw contributions w/o penalty, but not growth. So you'd want 5 years of expenses from contributions for the Roth Conversion Ladder.

Another question is whether your income will rise in the future to the point you'd want to do backdoor Roth IRA contributions. If so, traditional IRA balances get in the way. Keep your traditional contributions in your 401k by maxing it out first.

It really depends on your income and situation (married or single, kids, etc) to find the sweet spot for tax deferred vs tax free contributions. Look at tax credits, to see if you can get a bigger bang by squeaking under a limit, as comes to mind with ACA or Retirement Saver's credit or EITC.

fuelforfire
Posts: 15
Joined: Wed Oct 25, 2017 4:54 am

Re: Choosing funds for 401k

Post by fuelforfire » Wed Jan 10, 2018 10:57 am

teen persuasion wrote:
Wed Jan 10, 2018 8:51 am
If you will be under 59.5, you can withdraw contributions w/o penalty, but not growth. So you'd want 5 years of expenses from contributions for the Roth Conversion Ladder.

Another question is whether your income will rise in the future to the point you'd want to do backdoor Roth IRA contributions. If so, traditional IRA balances get in the way. Keep your traditional contributions in your 401k by maxing it out first.

It really depends on your income and situation (married or single, kids, etc) to find the sweet spot for tax deferred vs tax free contributions. Look at tax credits, to see if you can get a bigger bang by squeaking under a limit, as comes to mind with ACA or Retirement Saver's credit or EITC.
I'm still unclear about how the backdoor Roth IRA contributions work. What level of income will I need to have? As a software engineer it's probable that I will want to do backdoor contributions. How do trad IRA balances get in the way? Somebody mentioned I can still change the Trad IRA back into Roth IRA if needed.

Oh that's another question about my 401k, I have 98% to traditional and 2% allocated to after-tax but I'm not sure what that means in respect to the 401k

Right now I'm single, no kids... potentially married in a year or two, no idea about kids.

User avatar
teen persuasion
Posts: 479
Joined: Sun Oct 25, 2015 1:43 pm

Re: Choosing funds for 401k

Post by teen persuasion » Wed Jan 10, 2018 12:51 pm

If you are covered by a workplace retirement plan and single, your tIRA contributions are deductible if your MAGI is <$63k, and partially deductible up to $73k where it phases out (for 2018). https://www.irs.gov/retirement-plans/p ... an-at-work

If your MAGI is < $120k, you can contribute to a Roth IRA, or partially up to $135k.

The backdoor Roth comes in when you are over that upper limit. You can always contribute to a traditional IRA (non-deductible: and convert it to Roth. Since you got no tax deduction, there's no extra tax if that is your only tIRA balance. However, all tIRAs are treated as one giant tIRA, so any balances in other tIRAs will affect the conversion - the amount converted tax free is prorated over the total tIRA balance.

User avatar
M_to_the_G
Posts: 520
Joined: Mon Jan 21, 2013 9:57 am

Re: Choosing funds for 401k

Post by M_to_the_G » Wed Jan 10, 2018 1:24 pm

Listen to that duck! :) Many of us have done so, and many of us have benefited from sage, avian advice.
"It’s basically the plot of 'Charlie and the Chocolate Factory.' If you stick around, doing nothing, while everyone around you ****s up, you’re going to win big." - John Oliver

User avatar
Duckie
Posts: 5532
Joined: Thu Mar 08, 2007 2:55 pm

Re: Choosing funds for 401k

Post by Duckie » Wed Jan 10, 2018 5:09 pm

fuelforfire wrote:I looked up my cost basis. It loses the formatting when I try to publish it, sorry.
To get tables in proper columns you have to use special coding. Here is an example. To see the actual coding click on the "quote" symbol. When doing this you have to use the Preview button often.
Taxable:
Make sure all of your taxable assets are set up to NOT automatically reinvest. Don't buy more of any of them until you have your account figured out (what you'll keep, what you'll sell).

Since both VNQ and BND have losses, sell them immediately. They don't belong in a taxable account. I'd sell CGMRX now, even with the small short-term gain. The other stuff could be kept. It's a bit convoluted but you could organize it. For example:
  • US
    VTSAX -- Total Stock Market
    VTI -- Total Stock Market
    VOO -- S&P 500 Index
    VBR -- Small-cap value
    VHT -- Health Care

    International
    VXUS -- Total International Stock
    VEA -- Developed markets
    VWO -- Emerging markets
    VSS -- Small-cap
In taxable only purchase VTSAX and VTIAX/VXUS.
Roth IRA
You don't need to worry about gains/losses in a tax-sheltered account.
I'm still unclear about how the backdoor Roth IRA contributions work. What level of income will I need to have?
You are allowed to contribute via the Backdoor Roth IRA method even if you are not required to, but these are the income limits for 2018.
How do trad IRA balances get in the way?
When you use the backdoor method you want to get money into a Roth IRA without paying a lot of taxes on the conversion. Because of the pro-rata rule, having money in any non-Roth IRA (Traditional IRA, Rollover IRA, SEP IRA, SIMPLE IRA) means the conversion will be partly or mostly taxable. This should be avoided.
Somebody mentioned I can still change the Trad IRA back into Roth IRA if needed.
Contributions to IRAs can be recharacterized from one to the other for a limited time. Did you contribute to a TIRA in 2017 for 2017? Do you have any money in any non-Roth IRA right now?
Oh that's another question about my 401k, I have 98% to traditional and 2% allocated to after-tax but I'm not sure what that means in respect to the 401k
401k plans can have a pre-tax account, a Roth account, and an after-tax sub-account. There is a difference between after-tax and Roth. In your 401k which do you have?

fuelforfire
Posts: 15
Joined: Wed Oct 25, 2017 4:54 am

Re: Choosing funds for 401k

Post by fuelforfire » Fri Jan 12, 2018 6:24 am

Since both VNQ and BND have losses, sell them immediately. They don't belong in a taxable account. I'd sell CGMRX now, even with the small short-term gain.
Ok, is there a specific method to sell? Market, Limit, Stop, that kind of thing?
Make sure all of your taxable assets are set up to NOT automatically reinvest. Don't buy more of any of them until you have your account figured out (what you'll keep, what you'll sell).
I just went though and stopped automatically reinvesting, now dividends and capital gains are going to the settlement fund for everything but VTSAX and VXUS.
You don't need to worry about gains/losses in a tax-sheltered account.
So for the Roth IRA I can just go ahead and sell everything and just buy VTIAX or VTSAX? Again does it matter how I sell or I just bite the bullet and sell it all and buy into just one fund?

Contributions to IRAs can be recharacterized from one to the other for a limited time. Did you contribute to a TIRA in 2017 for 2017? Do you have any money in any non-Roth IRA right now?
I contributed to the TIRA in 2018 for 2018. It's the only money and I haven't bought any funds with it yet so it's just sitting in the settlement account because I wanted to make sure everything was sorted before dumping haphazardly as I have in the past.
In your 401k which do you have?
Contribution Type
Before-Tax: 2%
Roth 401(k): 15%

If I start shifting my portfolio to be more like how you suggested above, again since this is tax sheltered can I just sell everything and buy into
15% (VINIX) Vanguard Institutional Index Fund Institutional Shares (0.035%)
20% (VBIIX) Vanguard Intermediate-Term Bond Index Fund Investor Shares (0.15%)

User avatar
Duckie
Posts: 5532
Joined: Thu Mar 08, 2007 2:55 pm

Re: Choosing funds for 401k

Post by Duckie » Fri Jan 12, 2018 3:45 pm

fuelforfire wrote:
Since both VNQ and BND have losses, sell them immediately. They don't belong in a taxable account. I'd sell CGMRX now, even with the small short-term gain.
Ok, is there a specific method to sell? Market, Limit, Stop, that kind of thing?
I've always used Market because I wasn't picky. Others on this forum recommend Limit.
So for the Roth IRA I can just go ahead and sell everything and just buy VTIAX or VTSAX?
Yes.
Again does it matter how I sell or I just bite the bullet and sell it all and buy into just one fund?
It doesn't matter; just sell and buy one fund.
I contributed to the TIRA in 2018 for 2018. It's the only money and I haven't bought any funds with it yet so it's just sitting in the settlement account because I wanted to make sure everything was sorted before dumping haphazardly as I have in the past.
Okay, assuming both TIRA and Roth IRA are at the same custodian, convert 100% of the TIRA into your Roth IRA. Next year when you file your taxes you'll fill out IRS Form 8606, Part I for the non-deductible contribution and Part II for the conversion.
If I start shifting my portfolio to be more like how you suggested above, again since this is tax sheltered can I just sell everything and buy into
15% (VINIX) Vanguard Institutional Index Fund Institutional Shares (0.035%)
20% (VBIIX) Vanguard Intermediate-Term Bond Index Fund Investor Shares (0.15%)
Yes. The account percentages will be roughly 43% VINIX and 57% VBIIX.

fuelforfire
Posts: 15
Joined: Wed Oct 25, 2017 4:54 am

Re: Choosing funds for 401k

Post by fuelforfire » Sun Jan 14, 2018 1:01 pm

Okay, assuming both TIRA and Roth IRA are at the same custodian, convert 100% of the TIRA into your Roth IRA. Next year when you file your taxes you'll fill out IRS Form 8606, Part I for the non-deductible contribution and Part II for the conversion.
Vanguard says "If you choose to convert to a Roth IRA, your conversion will be final and can't be reversed. You can't unwind—or recharacterize—conversions made in 2018 or later.

Generally, you'll owe taxes on the amount you convert from any eligible retirement account into a Roth IRA for that calendar year."

Will I be penalized for this conversion from Trad IRA to Roth IRA or pay extra taxes? Currently all 5500 is in a money market fund. Also, I'm still unconvinced that a Roth IRA is better than a Trad IRA if you retire early and want to start withdrawing funds, it seems like contributing to a Trad IRA and doing a Roth Conversion Ladder is the best way. Am I missing something?

PFInterest
Posts: 1046
Joined: Sun Jan 08, 2017 12:25 pm

Re: Choosing funds for 401k

Post by PFInterest » Sun Jan 14, 2018 1:04 pm

you pay tax on the earnings. my MM went up 1 dollar so i pay tax on that....which is zero.
if you are doing backdoor rIRA, you are missing the point that you cant deduct the tIRA anyways....so no tax break in....and taxes on earnings on the way out.

fuelforfire
Posts: 15
Joined: Wed Oct 25, 2017 4:54 am

Re: Choosing funds for 401k

Post by fuelforfire » Sun Jan 14, 2018 1:14 pm

PFInterest wrote:
Sun Jan 14, 2018 1:04 pm
you pay tax on the earnings. my MM went up 1 dollar so i pay tax on that....which is zero.
if you are doing backdoor rIRA, you are missing the point that you cant deduct the tIRA anyways....so no tax break in....and taxes on earnings on the way out.
I think this must be where I'm getting confused. Can I not deduct the tIRA because of my income? Why can't it be deducted? From what I understand generally taking deductions (Trad IRA) when working is better if you get a chance to convert later at lower rates. I might not be able to get a tax deduction looking at https://www.fidelity.com/retirement-ira ... -deadlines I make 71k + bonus before taxes so I'm right on the edge of a partial. But I don't think I included my salary before so how did you know I wouldn't be able to deduct?

PFInterest
Posts: 1046
Joined: Sun Jan 08, 2017 12:25 pm

Re: Choosing funds for 401k

Post by PFInterest » Sun Jan 14, 2018 1:20 pm

fuelforfire wrote:
Sun Jan 14, 2018 1:14 pm
PFInterest wrote:
Sun Jan 14, 2018 1:04 pm
you pay tax on the earnings. my MM went up 1 dollar so i pay tax on that....which is zero.
if you are doing backdoor rIRA, you are missing the point that you cant deduct the tIRA anyways....so no tax break in....and taxes on earnings on the way out.
I think this must be where I'm getting confused. Can I not deduct the tIRA because of my income? Why can't it be deducted? From what I understand generally taking deductions (Trad IRA) when working is better if you get a chance to convert later at lower rates. I might not be able to get a tax deduction looking at https://www.fidelity.com/retirement-ira ... -deadlines I make 71k + bonus before taxes so I'm right on the edge of a partial. But I don't think I included my salary before so how did you know I wouldn't be able to deduct?
You need to know your MAGI. simply put: gross income - trad 401k contributions.
if < limits then you can directly contribute to a rIRA. if < trad IRA deduction limit, then you have a choice to make.
yes, all the FIRE people are on the ladder issue. its not a wrong plan. it just becomes dicey if in the future your income goes past the deduction limit, then you cant do a backdoor rIRA without some maneuvering.

fuelforfire
Posts: 15
Joined: Wed Oct 25, 2017 4:54 am

Re: Choosing funds for 401k

Post by fuelforfire » Sun Jan 14, 2018 1:36 pm

PFInterest wrote:
Sun Jan 14, 2018 1:20 pm
You need to know your MAGI. simply put: gross income - trad 401k contributions.
if < limits then you can directly contribute to a rIRA. if < trad IRA deduction limit, then you have a choice to make.
yes, all the FIRE people are on the ladder issue. its not a wrong plan. it just becomes dicey if in the future your income goes past the deduction limit, then you cant do a backdoor rIRA without some maneuvering.
Ah okay. So for now the best thing would be to contribute to the Roth IRA so later when I'm above the limit it makes it easier to do a backdoor rIRA, essentially? I'm good with that, since I think I will go over the limit to contribute to a Roth IRA eventually. And I can just do that conversion now without worrying about it, and later ease up the backdoor rIRA process

User avatar
teen persuasion
Posts: 479
Joined: Sun Oct 25, 2015 1:43 pm

Re: Choosing funds for 401k

Post by teen persuasion » Sun Jan 14, 2018 1:55 pm

fuelforfire wrote:
Fri Jan 12, 2018 6:24 am

In your 401k which do you have?
Contribution Type
Before-Tax: 2%
Roth 401(k): 15%
Does this say that you are contributing 15% of your income to Roth 401k, and only 2% to traditional (pre-tax) 401k? If you want traditional retirement accounts to convert via Roth ladder, max your traditional 401k contributions.

fuelforfire
Posts: 15
Joined: Wed Oct 25, 2017 4:54 am

Re: Choosing funds for 401k

Post by fuelforfire » Sun Jan 14, 2018 2:04 pm

teen persuasion wrote:
Sun Jan 14, 2018 1:55 pm
Does this say that you are contributing 15% of your income to Roth 401k, and only 2% to traditional (pre-tax) 401k? If you want traditional retirement accounts to convert via Roth ladder, max your traditional 401k contributions.
Admittedly I did a set-it-and-forget-it with my 401k and initially thought Roth 401k was better. So should I change it to 0% Roth and 15/whatever-percentage-I-need-to-max (I still need to do those calculations, I accidentally maxed it out too early last year) on Traditional 401k? Is the difference between Roth and Trad 401k similar to the differences in IRAs?

User avatar
teen persuasion
Posts: 479
Joined: Sun Oct 25, 2015 1:43 pm

Re: Choosing funds for 401k

Post by teen persuasion » Sun Jan 14, 2018 2:45 pm

Differences between traditional and Roth 401k are similar to IRAs. Basically, traditional contributions to a 401k are tax deferred: you are not taxed on those $$ when contributed, but when you withdraw those $$ later they get added as ordinary income on your tax return (that is, they don't get favorable investment tax options like LTCG). Your current w2 will show your wages as gross minus traditional contributions. For traditional IRA contributions, you get to deduct your contribution from reported income on your tax return IF you are income eligible, and later withdrawals come out as ordinary income again. Both types also have RMDs after 70.5.

Roth contributions to both 401k and IRAs get no upfront tax break, but withdrawals can ultimately be completely tax free later. You can withdraw contributions from a Roth IRA at any time tax and penalty free, but earnings are not tax and penalty free until age 59.5. Roth IRAs have no RMDs. Roth 401k are a bit more restrictive - they do have RMDs (you can roll the account over to a Roth IRA after leaving an employer to get around this), and generally you can't make withdrawals w/o penalty while you are still employed by that employer. So there are some pros and cons to each type of account: Roth IRA is the most flexible, but has a lower contribution limit than 401k type accounts. Traditional accounts get an upfront tax break, but you'll have to pay taxes eventually due to RMDs. Contributing to IRA accounts can be limited by MAGI.

To use the Roth ladder strategy effectively, you want to contribute as much as possible to traditional accounts for the tax break NOW, and later convert traditional to Roth in lower tax brackets a bit at a time. There's a five year lag that each conversion must season before it is available for penalty free withdrawal just like contributions. So you need other funds to live on for five years until the first conversions become available. Contributions to a Roth IRA would be possible, and have the advantage of being tax free, so don't push conversions into higher tax brackets. Taxable investments would also work, especially if you can keep conversion amounts plus investment income low enough that the LTCG remain in the zero % band (again doesn't push conversions into higher brackets). Or a combination of both Roth contributions and taxable.

Roth conversion ladder is both a way to access 401k/IRA $$ before age 59.5 and a way to shift $$ from traditional to Roth to avoid/reduce taxes long term, especially with RMDs .

Mors
Posts: 165
Joined: Wed Aug 16, 2017 10:06 am

Re: Choosing funds for 401k

Post by Mors » Sun Jan 14, 2018 3:15 pm

The DFA funds have some merit and can take a place in your portfolio. Having access to them as an individual is only possible through hiring a FA, so it is supposed to be a privilege to have them available through your employers' plan. I do not suggest that you replace the more standard Vanguard funds completely though.

You could do for example 90% Vanguard Institutional Index Fund and 10% DFA US Targeted Value Portfolio for your US allocation.

Your international exposure could be 70% Vanguard FTSE All World ex US Index Fund and 30% DFA Large Cap International Portfolio.

Of course you have to take in mind your IRA and taxable allocations, your bond allocations etc. From your 401k, Vanguard Intermediate Term Bond Index Fund is the only other fund you should consider.

fuelforfire
Posts: 15
Joined: Wed Oct 25, 2017 4:54 am

Re: Choosing funds for 401k

Post by fuelforfire » Mon Jan 15, 2018 3:40 am

teen persuasion wrote:
Sun Jan 14, 2018 2:45 pm
To use the Roth ladder strategy effectively, you want to contribute as much as possible to traditional accounts for the tax break NOW, and later convert traditional to Roth in lower tax brackets a bit at a time. There's a five year lag that each conversion must season before it is available for penalty free withdrawal just like contributions.

Roth conversion ladder is both a way to access 401k/IRA $$ before age 59.5 and a way to shift $$ from traditional to Roth to avoid/reduce taxes long term, especially with RMDs .
Okay so I think I should shift to 15-20% of my paycheck into Traditional 401k only, then continue to contribute to my Roth IRA for the time being so that when I retire I will have funds to draw from. This is the first I've read about RMDs so I'll have to look at that.

fuelforfire
Posts: 15
Joined: Wed Oct 25, 2017 4:54 am

Re: Choosing funds for 401k

Post by fuelforfire » Mon Jan 15, 2018 3:42 am

Mors wrote:
Sun Jan 14, 2018 3:15 pm
The DFA funds have some merit and can take a place in your portfolio. Having access to them as an individual is only possible through hiring a FA, so it is supposed to be a privilege to have them available through your employers' plan. I do not suggest that you replace the more standard Vanguard funds completely though.

You could do for example 90% Vanguard Institutional Index Fund and 10% DFA US Targeted Value Portfolio for your US allocation.

Your international exposure could be 70% Vanguard FTSE All World ex US Index Fund and 30% DFA Large Cap International Portfolio.

Of course you have to take in mind your IRA and taxable allocations, your bond allocations etc. From your 401k, Vanguard Intermediate Term Bond Index Fund is the only other fund you should consider.
Hi Mors,
Thanks for your comment. I didn't know that about the DFA funds. I think for now I might focus on the Vanguard Institutional Index Fund and
Vanguard Intermediate Term Bond Index Fund to keep it simple, but now that I know I can look a little more into DFA funds and maybe do a 10% or so allocation.

fuelforfire
Posts: 15
Joined: Wed Oct 25, 2017 4:54 am

Re: Choosing funds for 401k

Post by fuelforfire » Mon Jan 15, 2018 7:03 am

teen persuasion wrote:
Sun Jan 14, 2018 2:45 pm
Roth IRA is the most flexible, but has a lower contribution limit than 401k type accounts.
I looked into this more and it looks like the contribution limits are the same: https://www.irs.gov/retirement-plans/ro ... ison-chart

User avatar
teen persuasion
Posts: 479
Joined: Sun Oct 25, 2015 1:43 pm

Re: Choosing funds for 401k

Post by teen persuasion » Mon Jan 15, 2018 9:56 am

fuelforfire wrote:
Mon Jan 15, 2018 7:03 am
teen persuasion wrote:
Sun Jan 14, 2018 2:45 pm
Roth IRA is the most flexible, but has a lower contribution limit than 401k type accounts.
I looked into this more and it looks like the contribution limits are the same: https://www.irs.gov/retirement-plans/ro ... ison-chart
IRAs, either Roth or traditional, have a contribution limit of $5500 + an additional $1000 if you are age 50+.

401ks, either Roth or traditional, have a contribution limit of $18,500 + an additional $6000 if you are age 50+.

Mors
Posts: 165
Joined: Wed Aug 16, 2017 10:06 am

Re: Choosing funds for 401k

Post by Mors » Mon Jan 15, 2018 10:34 am

fuelforfire wrote:
Mon Jan 15, 2018 3:42 am
Mors wrote:
Sun Jan 14, 2018 3:15 pm
The DFA funds have some merit and can take a place in your portfolio. Having access to them as an individual is only possible through hiring a FA, so it is supposed to be a privilege to have them available through your employers' plan. I do not suggest that you replace the more standard Vanguard funds completely though.

You could do for example 90% Vanguard Institutional Index Fund and 10% DFA US Targeted Value Portfolio for your US allocation.

Your international exposure could be 70% Vanguard FTSE All World ex US Index Fund and 30% DFA Large Cap International Portfolio.

Of course you have to take in mind your IRA and taxable allocations, your bond allocations etc. From your 401k, Vanguard Intermediate Term Bond Index Fund is the only other fund you should consider.
Hi Mors,
Thanks for your comment. I didn't know that about the DFA funds. I think for now I might focus on the Vanguard Institutional Index Fund and
Vanguard Intermediate Term Bond Index Fund to keep it simple, but now that I know I can look a little more into DFA funds and maybe do a 10% or so allocation.
You are welcome. A fine decision. Do not disregard the international exposure, unless you wish to allocate it in your IRA.

Betterment has sample portfolios with value tilts, you may wish to check their allocations for value funds as a guideline. For example, in a 90/10 stocks/bonds portfolio, us large cap is 32% and us large cap value is 8%. They also tilt for small caps though, which is something you may or may not wish to do (personally I would tilt towards quality and high dividend, if I tilted at all).

fuelforfire
Posts: 15
Joined: Wed Oct 25, 2017 4:54 am

Re: Choosing funds for 401k

Post by fuelforfire » Mon Jan 15, 2018 10:51 am

Mors wrote:
Mon Jan 15, 2018 10:34 am
You are welcome. A fine decision. Do not disregard the international exposure, unless you wish to allocate it in your IRA.

Betterment has sample portfolios with value tilts, you may wish to check their allocations for value funds as a guideline. For example, in a 90/10 stocks/bonds portfolio, us large cap is 32% and us large cap value is 8%. They also tilt for small caps though, which is something you may or may not wish to do (personally I would tilt towards quality and high dividend, if I tilted at all).
I'm planning to invest my Roth IRA all in VTIAX https://personal.vanguard.com/us/funds/ ... irect=true, which has a lower ER than Vanguard FTSE All World ex US Index Fund https://personal.vanguard.com/us/funds/ ... irect=true, although I'm not sure entirely what the major differences are between those two funds.

Pretty much following Duckie's guidelines above.
Duckie wrote:
Tue Jan 09, 2018 6:09 pm
Taxable at Vanguard -- $72K -- 53% <-- Includes $10K cash listed separately.
39% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)
14% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)

401k -- $48K -- 35%
15% (VINIX) Vanguard Institutional Index Fund Institutional Shares (0.035%)
20% (VBIIX) Vanguard Intermediate-Term Bond Index Fund Investor Shares (0.15%)

Roth IRA at Vanguard -- $14K -- 10%
10% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)

HSA -- $3K -- 2%
2% (VTI) Vanguard Total Stock Market ETF (0.04%)
except that my taxable will be a bit complicated for a while until I can minimize the tax hit from selling and buying into VTSAX.

That's interesting about the Betterment funds, seems like a good place to look for some examples of value tilts. I'll look into those!

Mors
Posts: 165
Joined: Wed Aug 16, 2017 10:06 am

Re: Choosing funds for 401k

Post by Mors » Mon Jan 15, 2018 11:19 am

fuelforfire wrote:
Mon Jan 15, 2018 10:51 am
Mors wrote:
Mon Jan 15, 2018 10:34 am
You are welcome. A fine decision. Do not disregard the international exposure, unless you wish to allocate it in your IRA.

Betterment has sample portfolios with value tilts, you may wish to check their allocations for value funds as a guideline. For example, in a 90/10 stocks/bonds portfolio, us large cap is 32% and us large cap value is 8%. They also tilt for small caps though, which is something you may or may not wish to do (personally I would tilt towards quality and high dividend, if I tilted at all).
I'm planning to invest my Roth IRA all in VTIAX https://personal.vanguard.com/us/funds/ ... irect=true, which has a lower ER than Vanguard FTSE All World ex US Index Fund https://personal.vanguard.com/us/funds/ ... irect=true, although I'm not sure entirely what the major differences are between those two funds.

Pretty much following Duckie's guidelines above.
Duckie wrote:
Tue Jan 09, 2018 6:09 pm
Taxable at Vanguard -- $72K -- 53% <-- Includes $10K cash listed separately.
39% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)
14% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)

401k -- $48K -- 35%
15% (VINIX) Vanguard Institutional Index Fund Institutional Shares (0.035%)
20% (VBIIX) Vanguard Intermediate-Term Bond Index Fund Investor Shares (0.15%)

Roth IRA at Vanguard -- $14K -- 10%
10% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)

HSA -- $3K -- 2%
2% (VTI) Vanguard Total Stock Market ETF (0.04%)
except that my taxable will be a bit complicated for a while until I can minimize the tax hit from selling and buying into VTSAX.

That's interesting about the Betterment funds, seems like a good place to look for some examples of value tilts. I'll look into those!
The total international fund has some minor differences, they are explained in the bogleheads wiki. All in all, it is a marginally better fund.

A great allocation overall. By sourcing a 5% from VINIX to DFA US Targeted Value Portfolio you also approach better the total us market (since VINIX omits small caps).

Post Reply