Novice 34 y.o. looking for retirement plan guidance

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
jmalwitz
Posts: 15
Joined: Wed Nov 18, 2015 12:28 pm

Novice 34 y.o. looking for retirement plan guidance

Post by jmalwitz » Mon Feb 05, 2018 2:19 pm

Hello all,

I’ve been a lurker on this forum for a few years and it’s helped tremendously in getting my family finances in order. Now that we’re on track with our short-term goals I’ve started to turn my attention to optimizing our retirement portfolio. Definitely a novice investor so I’ve been working my way through the wiki and some of the other suggested reading material to try and learn as much as I can.

We save as much as we can (would like to increase the rate but have to set reasonable expectations...happy wife happy life :) ) but still aren’t able to max out our tax-advantaged plans so our portfolio is pretty straightforward. Hoping you all can review my plan and offer any advice or recommendations to get me started down the right path. And sorry in advance for the length of the post!

Personal Details
Age: 34 / 36 + two kids under 3
Emergency Funds: 40k
Debt:
Mortgage: 173k @ 3.375% (approx. home value = 220k)
Vehicle loan: 19k @ 0.9%
Student loan: 85k @ 5.875% (wife is participating in an income-driven repayment plan and on track for Public Student Loan Forgiveness (PSLF) in 3 years. We file taxes MFS so only her income is used to calculate monthly payments, resulting in 9k-11k per year in reduced payments)
Tax Filing Status: MFS (for student loan repayment purposes)
Tax Rate: Him 25% Federal, 7.05% State | Her 15% Federal, 5.35% State
State of Residence: MN
Desired Asset Allocation: 80-90% stocks / 10-20% bonds
Desired International Allocation: 30-40% of stocks (open to advice on this)


Current Retirement Assets
Total portfolio = approx. 160k
Wife also has a teacher’s pension that should provide 40%-45% of pre-retirement income (average for members in her union). She contributes 7.5% of salary, employer also contributes 7.5%.


My 401K (Fidelity, $37/year management fee):
46.35% | JPMCB SmartRetirement DRE 2050 Fund CF-A Class (ER = 0.62%)

Current Fund (JPMCB) AA = 40% domestic stocks, 30% international stocks, 30% bonds


My Traditional IRA (robo-adviser, Betterment, 0.25% management fee)
41.78% | Total account balance as a % of overall portfolio

Current account AA = 50% domestic stocks, 40% international stocks, 10% bonds
Net expense ratio = 0.07%
Funds are automatically selected based on desired asset allocation, not sure if there would be any value in listing them out individually, but I can if recommended (almost all are Vanguard index funds!)
This account was a rollover from a previous employer. Currently not making any additional contributions because of IRS income limits when filing taxes MFS


Her 403B (Horace Mann, 0.75% management fee)
1.93% | Fixed Account (ER = 0.0%), 1% min. interest rate guaranteed, current interest rate of 1.3%
6.61% | Fidelity VIP Index 500 Portfolio SC2 (ER = 0.35%)
1.78% | Wells Fargo VT Discovery Fund (ER = 1.15%)
1.54% | Dreyfus Investment Portfolios: Small Cap Stock Index Portfolio (ER = 0.60%)


Annual Contributions
$7,480 + $5,610 company match = $13,090 total to my 401K (Fidelity)
$3,000 + $1,128 company match = $4,128 total to her 403B (Horace Mann)
7.5% of her salary + 7.5% employer match = 15% of salary to her pension plan
$0 contributed to tIRA (Betterment) because of MFS income restrictions


Available Funds

My 401K (Fidelity)
JPMCB | SmartRetirement DRE 2020 Fund CF-A Class (0.50%)
JPMCB | SmartRetirement DRE 2030 Fund CF-A Class (0.58%)
JPMCB | SmartRetirement DRE 2040 Fund CF-A Class (0.61%)
JPMCB | SmartRetirement DRE 2050 Fund CF-A Class (0.62%)
JPMCB | SmartRetirement DRE Income Fund CF-A Class (0.40%)
DODGX | Dodge & Cox Stock Fund (0.52%)
Northern Trust S&P 500 Index Fund - DC - Non-Lending - Tier Two (0.026%)
Northern Trust Russell 1000 Growth Index Fund - DC - Non-Lending - Tier Two (0.05%)
JSERX | JPMorgan Small Cap Equity Fund Class R5 (0.87%)
Northern Trust EAFE Index Fund - DC - Non-Lending - Tier Two (0.10%)
Northern Trust Custom Emerging Markets Fund (0.61%)
JP Morgan Bosch Stable Value Fund (0.20%)
Northern Trust Aggregate Bond Index Fund - Non-Lending - Tier Two (0.05%)

Her 403B (Horace Mann)
Fidelity VIP Freedom 2015 Service Class 2 (0.82%)
Fidelity VIP Freedom 2025 Service Class 2 (0.87%)
Fidelity VIP Freedom 2035 Service Class 2 (0.94%)
Fidelity VIP Freedom 2045 Service Class 2 (0.94%)
Fidelity VIP FundsManager 20% Service Class 2 (0.65%)
Fidelity VIP FundsManager 50% Service Class 2 (0.86%)
Fidelity VIP FundsManager 60% Service Class 2 (0.93%)
Fidelity VIP FundsManager 70% Service Class 2 (1.0%)
Fidelity VIP FundsManager 85% Service Class 2 (1.12%)
American Funds IS Blue Chip Income & Growth (0.91%)
Fidelity VIP Index 500 Portfolio (SC2) (0.35%)
JPMorgan Insurance Trust US Equity Portfolio (0.80%)
American Funds IS Growth Fund (0.85%)
MFS Mid Cap Value Portfolio (1.06%)
Calvert S & P Mid Cap 400 Index (0.55%)
Wells Fargo Variable Trust Discovery Fund (1.15%)
JPMorgan Small Cap Value (1.25%)
Dreyfus Investment Products: Small Cap Stock Index Portfolio (0.60%)
Lord Abbett Developing Growth Portfolio (0.90%)
American Funds IS New World Fund (1.28%)
Fidelity VIP Overseas Portfolio (SC2) (1.05%)
Fidelity VIP Real Estate Portfolio Service Class 2 (0.92%)
American Funds IS Managed Risk Asset Allocation (0.29%)
Wilshire VIT Global Allocation Fund (1.57%)
Templeton Global Bond Securities Fund - Class 4 (0.85%)
Fidelity VIP Investment Grade Bond Portfolio (SC2) (0.66%)
T Rowe Price Government Money Portfolio (0.55%)

My Traditional IRA (robo-adviser, Betterment)
Funds are automatically selected based on desired asset allocation; Current asset allocation set to 90/10 but can be adjusted.


Our Investment Plan (for the next 3 years)
Target AA: 90% Stocks / 10% Bonds, 30-40% of stocks in international

I think I’ve found a way to shift into a very Boglehead-friendly asset allocation, which I would do immediately. Since my Betterment account is already set up for a 90/10 split I would leave that alone and just focus on balancing my other accounts to the same AA. (Percentages are based on my actual account balances)

Traditional IRA (Betterment)
21.52% | Domestic stocks (various funds) | ER = 0.05%
16.28% | International stocks (various funds) | 0.10%
3.99% | Bonds (various funds) | 0.14%

401K (Fidelity)
19.72% | Northern Trust EAFE Index Fund (international stocks) | 0.10%
6.01% | Northern Trust Aggregate Bond Index Fund (bonds) | 0.05%
20.62% | Northern Trust Russell 1000 Growth Index Fund (domestic stocks) | 0.05%

403B (Horace Mann)
5.93% | Calvert S & P Mid Cap 400 Index (domestic stocks) | 0.55%
5.93% | Dreyfus Investment Products: Small Cap Stock Index (domestic stocks) | 0.60%

As mentioned above, our tax filing status is MFS due to a student loan income-driven repayment plan on track for PSLF in 3 years. Because of the associated IRA income restrictions for this filing status we wouldn’t be able to deduct any contributions to a tIRA or Roth, so have forgone these plans for the time being (with the exception of the Betterment account which was a rollover from a previous employer but not being contributed to). Instead we’ve chosen to put any increases in retirement savings towards our current employer-sponsored plans and will continue to do so for the next 3 years.

Assuming there are no snags with PSLF (knock on wood) we will switch our filing status to MFJ after 3 years and then both open and fully fund Roth IRA accounts at Vanguard. Any increases in savings beyond this would go towards maxing out all our tax-advantaged plans.


Questions:
1. Does this seem like a solid plan given the circumstances? Would you do anything differently?

2. Should I select the Mid (0.55% ER) and Small Cap (0.60%) indexes in the Horace Mann 403B plan to cover a broader range of domestic stocks even though they have a higher expense ratio, or just select the cheaper VIP 500 index (0.35%) to fill my domestic stocks bucket.

3. When switching my entire Fidelity 401k account from one fund to another should I do this gradually over a period of time, say 6 months or 1 year? Or is it better to just rip the band-aid off and make the switch all at once? Risks involved with either approach? I know it sounds like market timing so the choice is probably obvious….

4. Overall, I’ve been happy with my Betterment account, but since they basically invest in Vanguard funds anyway, I’d like to eventually rollover this account directly to Vanguard and save myself the 0.25% management fee. Since I won’t be making any additional contributions to this account for the next 3 years, however, should I just stick with Betterment for the time being and wait on the rollover until I’m able to open the Roth IRA’s with Vanguard at the same time? Or just make the switch now?

I truly do appreciate any and all replies! Let me know if any additional info is needed.

User avatar
sunnywindy
Posts: 374
Joined: Sat Jan 18, 2014 4:42 pm
Location: Wilmington, NC

Re: Novice 34 y.o. looking for retirement plan guidance

Post by sunnywindy » Mon Feb 05, 2018 2:57 pm

1. Your plan seems fine. Morningstar has a Portfolio X-Ray tool that lets you see your entire portfolio all added up and you might want to do this with your current portfolio. But, it is also a good idea to open a new browser tab and enter in your proposed portfolio to see what the changes might mean. I will flip back and forth between the two and see the differences - it's a very good learning tool.
http://portfolio.morningstar.com/RtPort ... =0.7055475

2. Here is a comparison of the S&P 500 (Large), S&P 400 (Mid), and S&P 600 (Small) cap indexes. https://tinyurl.com/y8sco23a As you will see, the smaller the size of the company, the more volatility/risk you take (Standard Deviation) and the more return you will get. There isn't any guarantee this will happen in the future. If you are comfortable with more risk, by all means, include mid and small caps in your portfolio. If not, go with the large caps. (You can also use this tool to compare before and after portfolios like the X-Ray tool mentioned above.)

3. There isn't any foolproof concrete answer to this question. You will have people swearing that they have scientific data that you should dollar cost average and others recommending just changing it all at once. It all depends what the market does, and since nobody knows what will happen going forward, do whatever you feel best doing. I personally just switch it all at once, especially if there are trading costs involved.

4. Yes, if you know what you are doing and don't want to pay the Betterment 'autopilot' fee, you should handle the money yourself.
Powered by chocolate!

ICMoney
Posts: 170
Joined: Fri Oct 28, 2016 2:38 pm

Re: Novice 34 y.o. looking for retirement plan guidance

Post by ICMoney » Mon Feb 05, 2018 3:19 pm

jmalwitz wrote:
Mon Feb 05, 2018 2:19 pm
...

Questions:
1. Does this seem like a solid plan given the circumstances? Would you do anything differently?

2. Should I select the Mid (0.55% ER) and Small Cap (0.60%) indexes in the Horace Mann 403B plan to cover a broader range of domestic stocks even though they have a higher expense ratio, or just select the cheaper VIP 500 index (0.35%) to fill my domestic stocks bucket.

3. When switching my entire Fidelity 401k account from one fund to another should I do this gradually over a period of time, say 6 months or 1 year? Or is it better to just rip the band-aid off and make the switch all at once? Risks involved with either approach? I know it sounds like market timing so the choice is probably obvious….

4. Overall, I’ve been happy with my Betterment account, but since they basically invest in Vanguard funds anyway, I’d like to eventually rollover this account directly to Vanguard and save myself the 0.25% management fee. Since I won’t be making any additional contributions to this account for the next 3 years, however, should I just stick with Betterment for the time being and wait on the rollover until I’m able to open the Roth IRA’s with Vanguard at the same time? Or just make the switch now?

I truly do appreciate any and all replies! Let me know if any additional info is needed.
I think your proposed plan is an improvement for sure - good job!

1. Are you just contributing enough to her 403b to get the match? With the high fees, only putting enough to get the match is all I would put towards that. (use your 401k and/or HSA beyond that)

2. Personally I'd go with the 500 index due to the lower ER. Alternatively, could you use your IRA to buy small/mid caps to balance it out if you're inclined to do so? (i.e. look at your portfolio as one big pot of money - pick the lowest ER in the Horace Mann plan since it's the expensive one and use other accounts with many low ER options to balance it out)

3. Do it all at once, there are no tax consequences for changing funds in your 401k. You are just setting your portfolio to your desired asset allocation, not market timing.

4. If you can DIY your IRA investments, then roll it over as soon as you can. No need to continue paying fees you don't have to be paying.

Best,
ICM

perl
Posts: 130
Joined: Mon Apr 28, 2014 12:46 pm

Re: Novice 34 y.o. looking for retirement plan guidance

Post by perl » Mon Feb 05, 2018 3:49 pm

1. Good overall. I would look at backdoor Roth IRAs, especially for your wife while she's in a relatively low tax bracket.

2. Do the 500 index in the 403b since it's your cheapest option. Still ridiculously expensive. Do you have a choice of 403b providers?

3. I would rip off the band aid because the fees in your current funds are high.

4. Do you feel like you have the time and energy to deal with this now? That's how I would decide.

User avatar
ruralavalon
Posts: 13748
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Novice 34 y.o. looking for retirement plan guidance

Post by ruralavalon » Mon Feb 05, 2018 5:10 pm

jmalwitz wrote:
Mon Feb 05, 2018 2:19 pm
Questions:
1. Does this seem like a solid plan given the circumstances? Would you do anything differently?
In his 401k I suggest using Northern Trust S&P 500 Index Fund, ER 0.026% for domestic stocks, instead of th Russell 1000 Growth Fund.

In my opinion a S&P 500 index fund is good enough for domestic stocks. A S&P 500 index fund covers 81% of the U.S. stock market, investing in stocks of selected large-cap and mid-cap companies. In the 25 years since the creation of the first total stock market index fund the two types, of fund have had almost identical performance. So there has been little benefit in adding more to the S&P 500 fund.

Also a growth fund is less diversified than a blend fund, a growth fund omits the value side of the stock market.

jmalwitz wrote:2. Should I select the Mid (0.55% ER) and Small Cap (0.60%) indexes in the Horace Mann 403B plan to cover a broader range of domestic stocks even though they have a higher expense ratio, or just select the cheaper VIP 500 index (0.35%) to fill my domestic stocks bucket.
I suggest just using the Fidelity VIP 500 portfolio, ER 0.35%.

jmalwitz wrote:3. When switching my entire Fidelity 401k account from one fund to another should I do this gradually over a period of time, say 6 months or 1 year? Or is it better to just rip the band-aid off and make the switch all at once? Risks involved with either approach? I know it sounds like market timing so the choice is probably obvious….
You might as well switch all at once. You are not adding to your investments, just changing them. I see no benefit to stringing out the process.

jmalwitz wrote:4. Overall, I’ve been happy with my Betterment account, but since they basically invest in Vanguard funds anyway, I’d like to eventually rollover this account directly to Vanguard and save myself the 0.25% management fee. Since I won’t be making any additional contributions to this account for the next 3 years, however, should I just stick with Betterment for the time being and wait on the rollover until I’m able to open the Roth IRA’s with Vanguard at the same time? Or just make the switch now?
Go ahead and do the rollover now, there is no reason to pay that 0.25% fee since you are capable on managing for yourself.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

jmalwitz
Posts: 15
Joined: Wed Nov 18, 2015 12:28 pm

Re: Novice 34 y.o. looking for retirement plan guidance

Post by jmalwitz » Mon Feb 05, 2018 10:13 pm

sunnywindy wrote: 1. Your plan seems fine. Morningstar has a Portfolio X-Ray tool that lets you see your entire portfolio all added up and you might want to do this with your current portfolio. But, it is also a good idea to open a new browser tab and enter in your proposed portfolio to see what the changes might mean. I will flip back and forth between the two and see the differences - it's a very good learning tool.
http://portfolio.morningstar.com/RtPort ... =0.7055475

2. Here is a comparison of the S&P 500 (Large), S&P 400 (Mid), and S&P 600 (Small) cap indexes. https://tinyurl.com/y8sco23a As you will see, the smaller the size of the company, the more volatility/risk you take (Standard Deviation) and the more return you will get. There isn't any guarantee this will happen in the future. If you are comfortable with more risk, by all means, include mid and small caps in your portfolio. If not, go with the large caps. (You can also use this tool to compare before and after portfolios like the X-Ray tool mentioned above.)
Thanks sunnywind, I'll check out the suggested tools!

DavidW
Posts: 77
Joined: Wed Jan 24, 2018 4:14 pm

Re: Novice 34 y.o. looking for retirement plan guidance

Post by DavidW » Mon Feb 05, 2018 10:30 pm

I was in your situation but I was 40 yo (so you are smarter than me in starting this journey). This is a bit off topic but I found a job with pension (like your wife). Based on my calculation, my wife and I might able to live off the pensions/ss without ever touching our 401k/457. I was very surprised how much the pension would be. However, this depends on your profession and location but something to consider...

jmalwitz
Posts: 15
Joined: Wed Nov 18, 2015 12:28 pm

Re: Novice 34 y.o. looking for retirement plan guidance

Post by jmalwitz » Mon Feb 05, 2018 10:39 pm

Thanks for the reply ICMoney.
ICMoney wrote:1. Are you just contributing enough to her 403b to get the match? With the high fees, only putting enough to get the match is all I would put towards that. (use your 401k and/or HSA beyond that)
It's more then what we need to get the full match. It's actually just enough to reduce her AGI to the point that her student loan payments are reduced to $0 or almost $0. Her income-driven repayment plan is calculated using AGI. But now thinking about it I should probably run the numbers to see if her plan is actually more expensive then what slightly increased loan payments would be.
ICMoney wrote:2. Personally I'd go with the 500 index due to the lower ER. Alternatively, could you use your IRA to buy small/mid caps to balance it out if you're inclined to do so? (i.e. look at your portfolio as one big pot of money - pick the lowest ER in the Horace Mann plan since it's the expensive one and use other accounts with many low ER options to balance it out)
Right now I wouldn't be able to use my tIRA for that specific purpose because I can't select individual funds with Betterment, only set a desired AA. If I did roll that account over to Vanguard then I suppose I could. However, with our MFS filing status I wouldn't be able to deduct any of the contributions so not sure if it would be worth it.

jmalwitz
Posts: 15
Joined: Wed Nov 18, 2015 12:28 pm

Re: Novice 34 y.o. looking for retirement plan guidance

Post by jmalwitz » Mon Feb 05, 2018 10:59 pm

Thanks perl.
perl wrote:1. Good overall. I would look at backdoor Roth IRAs, especially for your wife while she's in a relatively low tax bracket.
I have to admit I'm not up to speed yet on backdoor roth's...my novice is showing :wink:. I've seen plenty of thread titles on the subject but always thought they were for high earners or those that have maxed out their tax-advantaged accounts, neither of which apply to me at the moment. Time to start researching!
per wrote:2. Do the 500 index in the 403b since it's your cheapest option. Still ridiculously expensive. Do you have a choice of 403b providers?
Unfortunately it's the only provider option we have. Agreed...the entire plan is ridiculously expensive!

jmalwitz
Posts: 15
Joined: Wed Nov 18, 2015 12:28 pm

Re: Novice 34 y.o. looking for retirement plan guidance

Post by jmalwitz » Mon Feb 05, 2018 11:15 pm

ruralavalon wrote:In his 401k I suggest using Northern Trust S&P 500 Index Fund, ER 0.026% for domestic stocks, instead of th Russell 1000 Growth Fund.

In my opinion a S&P 500 index fund is good enough for domestic stocks. A S&P 500 index fund covers 81% of the U.S. stock market, investing in stocks of selected large-cap and mid-cap companies. In the 25 years since the creation of the first total stock market index fund the two types, of fund have had almost identical performance. So there has been little benefit in adding more to the S&P 500 fund.

Also a growth fund is less diversified than a blend fund, a growth fund omits the value side of the stock market.
Thank you for the advice, ruralavalon. Again, the novice investor coming out in me, I was paying more attention to "Index" in the fund name and almost missed the "Growth" part! Hopefully I would have caught that reading through the fund summary before pulling the trigger :? . A diverse blend fund is more appealing to me so I will add the S&P 500 index per your suggestion.

jmalwitz
Posts: 15
Joined: Wed Nov 18, 2015 12:28 pm

Re: Novice 34 y.o. looking for retirement plan guidance

Post by jmalwitz » Tue Feb 06, 2018 10:35 am

DavidW wrote:I was in your situation but I was 40 yo (so you are smarter than me in starting this journey). This is a bit off topic but I found a job with pension (like your wife). Based on my calculation, my wife and I might able to live off the pensions/ss without ever touching our 401k/457. I was very surprised how much the pension would be. However, this depends on your profession and location but something to consider...
I started to run those numbers but very quickly became overwhelmed with all the variables that go into it. When would we like to retire, what will our benefit amounts be at that age, income tax rates, safe withdrawal rates, annual spending, etc. More than likely we will probably need our 401k and 403b plans to supplement our pension/ss, but to what extent I really don't have a good estimate yet. Our plan is to save as aggressively as we can while still maintaining a comfortable lifestyle, and more importantly, survive the next few years with two toddlers running wild around the house :D

User avatar
ruralavalon
Posts: 13748
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Novice 34 y.o. looking for retirement plan guidance

Post by ruralavalon » Tue Feb 06, 2018 11:02 am

jmalwitz wrote:
Tue Feb 06, 2018 10:35 am
DavidW wrote:I was in your situation but I was 40 yo (so you are smarter than me in starting this journey). This is a bit off topic but I found a job with pension (like your wife). Based on my calculation, my wife and I might able to live off the pensions/ss without ever touching our 401k/457. I was very surprised how much the pension would be. However, this depends on your profession and location but something to consider...
I started to run those numbers but very quickly became overwhelmed with all the variables that go into it. When would we like to retire, what will our benefit amounts be at that age, income tax rates, safe withdrawal rates, annual spending, etc. More than likely we will probably need our 401k and 403b plans to supplement our pension/ss, but to what extent I really don't have a good estimate yet. Our plan is to save as aggressively as we can while still maintaining a comfortable lifestyle, and more importantly, survive the next few years with two toddlers running wild around the house :D
That's a good plan.

In my opinion it is not practical to turn it all into a math problem at ages 34 and 36, when you are decades from retirement.

I think that can be done when about 5-10 years from retirement, when the variables are knowable. There are many important variables that you just can't now know with a high degree of certainty.

You don't now know what your living expenses will be during retirement. Most people seem to want a lifestyle similar to their lifestyle just before retirement, but you don't now know what your lifestyle will be just before retirement. You don't know rates of return for stocks and bonds, or inflation over the next 3 decades before retirement, or during the following 2-3 decades during your retirement. You don't know what tax bracket you will be in during the next 5-6 decades, or even what the tax brackets will be. You don't know whether there will be changes in her pension program, or even the elimination of the pension.

My suggestion is to maintain a high savings rate, as high as you can comfortably sustain, and make use of tax-advantaged accounts, investing in broadly diversified funds with low expense ratios. To try to evaluate your progress you could use this calculator -- www.firecalc.com.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

jmalwitz
Posts: 15
Joined: Wed Nov 18, 2015 12:28 pm

Re: Novice 34 y.o. looking for retirement plan guidance

Post by jmalwitz » Wed Feb 07, 2018 12:31 pm

perl wrote:1. Good overall. I would look at backdoor Roth IRAs, especially for your wife while she's in a relatively low tax bracket.
jmalwitz wrote:I have to admit I'm not up to speed yet on backdoor roth's...my novice is showing :wink:. I've seen plenty of thread titles on the subject but always thought they were for high earners or those that have maxed out their tax-advantaged accounts, neither of which apply to me at the moment. Time to start researching!

OP here,

I’ve now spent some time learning about backdoor roth’s. Since we file MFS (which reduces the IRA income limit to 10k, we are both above this amount) it appears that it’s something we could potentially take advantage of. This link from the wiki page was very helpful in understanding the mechanics.

https://thefinancebuff.com/the-backdoor ... ow-to.html

Regarding the wife (12% tax rate and an expensive 403B plan (see my OP)):
She has no tIRA account currently. If I’m understanding correctly she would need to open one, fund it with after-tax dollars up to $5,500 annually, work with the IRA provider to complete the conversion, and then report the non-deductible contributions using Form 8606 on her tax return. Sound about right? Would this have any effect on her AGI? I don’t think so, but just wanted to confirm. We want to keep that number as close as possible to where it’s at right now because it optimizes her student loan repayment.

Regarding me (25% tax rate, decent options in 401K but I don’t max it out):
Other than the tax-free vs. tax-deferred differentiation, would there be any advantages for me to do the backdoor roth rather than just increasing contributions to my 401K? Similarly, does it make sense for my wife to do the roth conversion now with her lower tax rate rather than simply increasing my 401k contributions?

In 3 years we will be able to start filing MFJ and our joint income would put us into the 22% tax bracket. Based on the current IRA income limits we will be close to the partial deduction/no deduction cutoff. If we do land in the partial deduction window is there a rule of thumb on whether it is more beneficial to take the partial deduction or do the roth conversion? Or is that something that would need to be analyzed on an individual basis?

Appreciate all the help!

User avatar
neurosphere
Posts: 2936
Joined: Sun Jan 17, 2010 1:55 pm

Re: Novice 34 y.o. looking for retirement plan guidance

Post by neurosphere » Tue Feb 13, 2018 12:44 pm

jmalwitz wrote:
Wed Feb 07, 2018 12:31 pm
I’ve now spent some time learning about backdoor roth’s. Since we file MFS (which reduces the IRA income limit to 10k, we are both above this amount) it appears that it’s something we could potentially take advantage of. This link from the wiki page was very helpful in understanding the mechanics.

https://thefinancebuff.com/the-backdoor ... ow-to.html

Regarding the wife (12% tax rate and an expensive 403B plan (see my OP)):
She has no tIRA account currently. If I’m understanding correctly she would need to open one, fund it with after-tax dollars up to $5,500 annually, work with the IRA provider to complete the conversion, and then report the non-deductible contributions using Form 8606 on her tax return. Sound about right? Would this have any effect on her AGI? I don’t think so, but just wanted to confirm. We want to keep that number as close as possible to where it’s at right now because it optimizes her student loan repayment.

Regarding me (25% tax rate, decent options in 401K but I don’t max it out):
Other than the tax-free vs. tax-deferred differentiation, would there be any advantages for me to do the backdoor roth rather than just increasing contributions to my 401K? Similarly, does it make sense for my wife to do the roth conversion now with her lower tax rate rather than simply increasing my 401k contributions?

In 3 years we will be able to start filing MFJ and our joint income would put us into the 22% tax bracket. Based on the current IRA income limits we will be close to the partial deduction/no deduction cutoff. If we do land in the partial deduction window is there a rule of thumb on whether it is more beneficial to take the partial deduction or do the roth conversion? Or is that something that would need to be analyzed on an individual basis?
Unless I missed something skimming your posts, it seems your wife does not have any IRA balances. She would be able to make a non-deductible IRA contribution and subsequent Roth conversion (i.e. backdoor Roth). Without owing any tax. So I don't understand your questions about when your wife should do a Roth conversion. There is nothing to convert, except for after making a non-deductible IRA contribution (and then the conversion would be tax free). There is no effect on her AGI. Oh, but wait, now I understand your question is probably: which is better, a backdoor Roth for my wife OR increased 401k contributions for ME. Keep this in mind: any 401k contribution you make reduces your AGI. Any reduction in your AGI reduces your loan payments by 10% (or 15% if using IBR). Any loan payment reductions lead to increased loan forgiveness. SO, your 401k contributions are essentially "matched" at either 10% or 15%. So the answer to your question is: by all means direct all savings into YOUR 401k contributions up to the max. And you would not want to do any Roth conversion, as that would increase your AGI and increase your payments and decrease PSLF.

NS

P.S. Remember, I didn't read much of this thread, so forgive if some of my advice is incorrect or inapplicable! :D
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

jmalwitz
Posts: 15
Joined: Wed Nov 18, 2015 12:28 pm

Re: Novice 34 y.o. looking for retirement plan guidance

Post by jmalwitz » Wed Feb 14, 2018 8:54 am

neurosphere wrote:
Tue Feb 13, 2018 12:44 pm
jmalwitz wrote:
Wed Feb 07, 2018 12:31 pm
I’ve now spent some time learning about backdoor roth’s. Since we file MFS (which reduces the IRA income limit to 10k, we are both above this amount) it appears that it’s something we could potentially take advantage of. This link from the wiki page was very helpful in understanding the mechanics.

https://thefinancebuff.com/the-backdoor ... ow-to.html

Regarding the wife (12% tax rate and an expensive 403B plan (see my OP)):
She has no tIRA account currently. If I’m understanding correctly she would need to open one, fund it with after-tax dollars up to $5,500 annually, work with the IRA provider to complete the conversion, and then report the non-deductible contributions using Form 8606 on her tax return. Sound about right? Would this have any effect on her AGI? I don’t think so, but just wanted to confirm. We want to keep that number as close as possible to where it’s at right now because it optimizes her student loan repayment.

Regarding me (25% tax rate, decent options in 401K but I don’t max it out):
Other than the tax-free vs. tax-deferred differentiation, would there be any advantages for me to do the backdoor roth rather than just increasing contributions to my 401K? Similarly, does it make sense for my wife to do the roth conversion now with her lower tax rate rather than simply increasing my 401k contributions?

In 3 years we will be able to start filing MFJ and our joint income would put us into the 22% tax bracket. Based on the current IRA income limits we will be close to the partial deduction/no deduction cutoff. If we do land in the partial deduction window is there a rule of thumb on whether it is more beneficial to take the partial deduction or do the roth conversion? Or is that something that would need to be analyzed on an individual basis?
Unless I missed something skimming your posts, it seems your wife does not have any IRA balances. She would be able to make a non-deductible IRA contribution and subsequent Roth conversion (i.e. backdoor Roth). Without owing any tax. So I don't understand your questions about when your wife should do a Roth conversion. There is nothing to convert, except for after making a non-deductible IRA contribution (and then the conversion would be tax free). There is no effect on her AGI. Oh, but wait, now I understand your question is probably: which is better, a backdoor Roth for my wife OR increased 401k contributions for ME. Keep this in mind: any 401k contribution you make reduces your AGI. Any reduction in your AGI reduces your loan payments by 10% (or 15% if using IBR). Any loan payment reductions lead to increased loan forgiveness. SO, your 401k contributions are essentially "matched" at either 10% or 15%. So the answer to your question is: by all means direct all savings into YOUR 401k contributions up to the max. And you would not want to do any Roth conversion, as that would increase your AGI and increase your payments and decrease PSLF.

NS

P.S. Remember, I didn't read much of this thread, so forgive if some of my advice is incorrect or inapplicable! :D
Thanks for your reply, neurosphere!

You got most of it right except that my wife has the IBR loan, not me. We are currently contributing just enough to her 403B plan at work to lower her AGI right to the point where it reduces her loan payment to $0. I don't think it makes sense for her to go any lower (when we still have other tax-advantaged plans that aren't maxed yet), which leaves us with two options:

A) Backdoor Roth for my wife
or
B) Increase my 401K contributions (I do have low-cost index funds available)

For additional consideration, my wife's 2018 tax rate will be 12% and mine 22% (filing MFS). In 3 years when her loan is forgiven we will file MFJ, most likely have a 22% tax rate, and be within the income limits for contributing directly to a Roth IRA.

On the surface it appears that increasing contributions to my 401K is the best option because 1.) I'll save 22% on taxes for any new contributions, 2.) we've already optimized my wife's AGI to reduce her IBR loan payments to $0, and 3.) it will just be a whole lot easier.

What do you think? Am I missing anything obvious in this assessment?

Keep in mind that whichever of these options make the most sense we still wouldn't have enough savings to max out our tax-advantaged plans. Ideally I would like to do both, but we just aren't at that savings rate yet.

User avatar
neurosphere
Posts: 2936
Joined: Sun Jan 17, 2010 1:55 pm

Re: Novice 34 y.o. looking for retirement plan guidance

Post by neurosphere » Wed Feb 14, 2018 9:20 am

jmalwitz wrote:
Wed Feb 14, 2018 8:54 am
You got most of it right except that my wife has the IBR loan, not me. We are currently contributing just enough to her 403B plan at work to lower her AGI right to the point where it reduces her loan payment to $0. I don't think it makes sense for her to go any lower (when we still have other tax-advantaged plans that aren't maxed yet), which leaves us with two options:

A) Backdoor Roth for my wife
or
B) Increase my 401K contributions (I do have low-cost index funds available)
Sorry! Big difference if it's your wife's student loans and not yours.

So yes, I think you have framed the question correctly. There is no correct answer, or rather the answer depends on the future and unknowns, e.g. your future salaries and savings rate and future taxes and the relative mix of investments (taxable vs tax-advantaged) at retirement, whenever that is.

I'm a big fan of tax diversification, and having some Roth balances in addition to regular retirement accounts contributions. Many folks would say that 22% tax bracket is close to a breakeven point in deciding between the two. But again, a lot depends on the future. I'd say stick with an increase of 401k contributions for now, simply to have one less account to think about.

As for your other questions, I would use the low costs stock fund at 0.35% in the 403b, and then use the 401k and/or IRA to get your asset allocation where it needs to be. I would do this all at once. No need to gradually make this change. Just do it.

NS

jmalwitz
Posts: 15
Joined: Wed Nov 18, 2015 12:28 pm

Re: Novice 34 y.o. looking for retirement plan guidance

Post by jmalwitz » Wed Feb 14, 2018 10:12 am

neurosphere wrote:I'm a big fan of tax diversification, and having some Roth balances in addition to regular retirement accounts contributions. Many folks would say that 22% tax bracket is close to a breakeven point in deciding between the two. But again, a lot depends on the future. I'd say stick with an increase of 401k contributions for now, simply to have one less account to think about.
I agree with your thinking and would plan on contributing directly to a Roth as soon as we switch our filing status to MFJ. Appreciate your help!

Post Reply