Military Pilot- 8/10 yrs to FIRE, need help! BONDS/ Taxes

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Sophia1884
Posts: 118
Joined: Mon Aug 05, 2013 10:23 pm

Military Pilot- 8/10 yrs to FIRE, need help! BONDS/ Taxes

Post by Sophia1884 » Fri Nov 02, 2018 1:05 pm

Looking for suggestions and guidance on portfolio organization and three main things:
1. Bonds: How to get to 20 % in bonds (where to invest, how much money would we need to get us to 15/20% within our portfolio?)
a. Should I use to G fund in the TSP to hold the bonds? If so, what do I do with the LifeCycle we are currently investing into?
b. Long term, in retirement, I’d like to probably be in Wellington and/or Wellsley or another “invest and leave it” account. Should I invest
into them now to get the bond allocation up? If so, how do I do that with the focus on getting the bonds up to 15 or 20 %?
c. Should all of our new investment funds and reinvestment funds be going to bonds until we get them up to 15/20%?

2 . Wellington in Taxable: In college, before I knew much, I started putting all the savings into the Wellington in taxable. I don’t’ think I can sell the shares without tax implications. As I’m learning more about tax efficiency, how do I make this more tax efficient? Other suggestions on tax efficiency within the portfolio?

3. Any suggestions on lowering our federal tax rate?

BONUS 1; Should we be investing in Roth IRA or Traditional IRA?

BONUS 2:Other suggestions?

Background: Military family, 2 kids under 5, maxing out TSP and IRAs, investing about $1500 monthly to taxable (plus my full salary when I find work), $500 to 529. Planning to leave service in 8-10 years, assuming retirement (pension, healthcare coverage) at 42/44. Husband and/or I may continue to work but we would like to be financially independent by that time. We reached 1 million this year but lost some with the market this month. As we are looking at FIRE in 10 years or less (not including pension in the planning), I’d like to change our allocations from 90/10 to 80/20 or 85/15. I don’t know how best to do this-we can invest into Wellington, the TSP G fund, the Total Bond index, or others. I’d really appreciate help in planning a strategy. We currently have $50,000 in checking to start the process.

FIRE Goal: 2.5/3 million in 10 years -->Necessary as we own nothing but furniture, kid/s and a car.

Emergency funds: 10,000 (will start adding to this for a total of 6 mths savings when closer to FIRE)
Discretionary/Vacation/Fun Funds: $5,000
Debt: 0
Tax Filing Status: Married Filing Jointly
Tax Rate: 25% Federal, Military: no state tax
State of Residence: IL
Age: 34/34
Desired Asset allocation: 80 stocks / 20 or 15 bonds (due to more or less reliable employment)
Desired International allocation: ??


Current retirement assets

Checking:
$50,000 to invest in bonds

Taxable
8,554 Cerner (CERN)
59,580 Vanguard Healthcare Index (VGHAX)
30,256 Vanguard REIF (VGSLX)
103,720 Vanguard Total Int (VTIAX)
251, 437 Vanguard Total Stock (VTSAX)
87,520 Vanguard Wellington (VWELX)

Her Rollover IRA at Vanguard

24,108 Cerner (CERN)
35,235 Vanguard Total Stock (VTSAX)
Her Roth IRA at Vanguard
30,080 Vanguard Total Stock (VTSAX)
37,913 Vanguard Wellington (VWELX)

Her Roth IRA at Vanguard
30,080 Vanguard Total Stock (VTSAX)
37,913 Vanguard Wellington (VWELX)

Her TSP
62,773 LifeCycle Fund 2050 (TSP funds do not have a ticker symbol)

His Roth IRA at Vanguard
11,900 Vanguard Healthcare Index (VGHAX)
17,657 Vanguard Total Stock (VTSAX)
70,000 Vanguard Wellington (VWELX)

His TSP
120,000 LifeCycle Fund 2050 (TSP funds do not have a ticker symbol)

529 at Vanguard
17,489

New annual Contributions
18,000 his TSP
5,500 his IRA/Roth IRA
5,500 IRA/Roth IRA
18,000 taxable (for retirement)

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Duckie
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Re: Military Pilot- 8/10 yrs to FIRE, need help! BONDS/ Taxes

Post by Duckie » Fri Nov 02, 2018 5:44 pm

Sophia1884 wrote:Bonds: How to get to 20% in bonds (where to invest, how much money would we need to get us to 15/20% within our portfolio?)
  • Should I use to G fund in the TSP to hold the bonds? If so, what do I do with the LifeCycle we are currently investing into?
Yes, use the TSPs for all your bonds. Instead of LifeCycle use the individual stock funds (C, S, I) if you have room. Right now you don't because you need all your TSP space for bonds.
Long term, in retirement, I’d like to probably be in Wellington and/or Wellesley or another “invest and leave it” account. Should I invest into them now to get the bond allocation up? If so, how do I do that with the focus on getting the bonds up to 15 or 20 %?
No, don't buy more W/W now. Sell them in tax-sheltered. Use the TSPs for bonds.
Should all of our new investment funds and reinvestment funds be going to bonds until we get them up to 15/20%?
Since you can swap things around in tax-sheltered without issue, just swap.
Wellington in Taxable: In college, before I knew much, I started putting all the savings into the Wellington in taxable. I don’t’ think I can sell the shares without tax implications. As I’m learning more about tax efficiency, how do I make this more tax efficient?
Some of the shares may have losses and are worth selling now. At the very least turn off any automatic dividend reinvestment. Send all dividends to a money market or settlement fund.
Should we be investing in Roth IRA or Traditional IRA?
It's unlikely he can deduct TIRA contributions so he should definitely use a Roth IRA. For her it depends on her employment situation. But even it she can deduct, I still recommend Roth IRA.
Age: 34/34
Desired Asset allocation: 80 stocks / 20 or 15 bonds (due to more or less reliable employment)
At your ages 80/20 is reasonable.
Desired International allocation: ??
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. At 80/20 that would break down to 56% US stocks, 24% international stocks, and 20% bonds.
New annual Contributions
18,000 his TSP
5,500 his IRA/Roth IRA
5,500 IRA/Roth IRA
18,000 taxable (for retirement)
It's $18,500 for 2018 and $19,000 and $6,000 for 2019. Does she not have a current employer retirement plan?
__________________________

The following example has an AA of 56/24/20. With a little selling in taxable and major swapping in tax-sheltered you could have:

Taxable at Vanguard -- $591K -- 59% <-- Includes $50K from checking.
34% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)
6% (VGHAX) Vanguard Health Care Fund Admiral Shares (0.33%)
9% (VWENX) Vanguard Wellington Fund Admiral Shares (0.17%)
10% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)

His Thrift Savings Plan -- $120K -- 12%
12% (N/A) G Fund (0.033%)

Her Thrift Savings Plan -- $63K -- 6%
6% (N/A) F Fund (0.033%)

Her Rollover IRA at Vanguard -- $59K -- 6%
4% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)
2% (VBTLX) Vanguard Total Bond Market Index Fund Admiral Shares (0.05%)

His Roth IRA at Vanguard -- $100K -- 10%
10% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)

Her Roth IRA at Vanguard -- $68K -- 7%
3% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)
4% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)

My comments:
  • The above removes the REITs and CERN from taxable. REITs especially do not belong in taxable and you already know about the bond issue in Wellington. I'm ignoring any tax issues here.
  • Turn off automatic dividend reinvestment for every fund in taxable. You should try to get that account down to just VTSAX and VTIAX.
  • I know the 9% Wellington in taxable has bonds but I'm ignoring that 3% for this AA. Also, if you really are in VWELX you should switch to VWENX. You're above the $50K minimum.
  • Her rollover IRA could be rolled to her TSP if she ever needs to use the Backdoor Roth IRA method. So don't lose her TSP.
  • Try to keep the Roth IRAs all stocks. In general it's better to put assets with higher expected growth (stocks) in Roth accounts and assets with lower expected growth (bonds) in pre-tax accounts. That's because you've already paid the taxes in the Roth accounts so future growth is tax-free.
Something to think about.

warner25
Posts: 315
Joined: Wed Oct 29, 2014 4:38 pm

Re: Military Pilot- 8/10 yrs to FIRE, need help! BONDS/ Taxes

Post by warner25 » Fri Nov 02, 2018 6:32 pm

So does this mean your husband took the bonus?

Just some encouragement from me: You guys are doing a phenomenal job to have already saved $1M in 10-12 years on active duty. I think you are set if you just stay the course as your husband finishes out his 20 years of service. And I'm all in favor of just consolidating each account into a single balanced fund or target date/life cycle fund, maybe done over the course of several years in your taxable account to minimize costs there.

Fishing50
Posts: 264
Joined: Tue Sep 27, 2016 1:18 am

Re: Military Pilot- 8/10 yrs to FIRE, need help! BONDS/ Taxes

Post by Fishing50 » Sat Nov 03, 2018 7:23 am

Duckie's portfolio is an excellent goal. With taxable, IRA, and TSP accounts you can take advantage of asset location better without lifecycle funds.

Priority 1, Bonds in TSP. Use inter fund to transfer L 2050 to G Fund to hit your target bond allocation. Consider adding F Fund because it outperforms G Fund over the long run. L 2050 has about 1/3 bond allocation in F Fund. With new TSP contributions less than 2% of the total portfolio, future TSP contributions should probably be bonds.

Priority 2, Develop a plan in taxable. Determine your basis and capital gains for taxable holdings. It might make sense to pay some long term capital gains to improve tax efficiency in future years. Vanguard Total Int (VTIAX) and Vanguard Total Stock (VTSAX) are a tax efficient goal, but it's acceptable to retain some highly appreciated stocks. In taxable, I recommend selling Cerner (CERN), Vanguard Healthcare Index (VGHAX), Vanguard REIT (VGSLX), and Vanguard Wellington (VWELX) for broader diversification and tax efficiency. During low taxable income years, harvest capital gains at 0% taxes in the 12% tax bracket to simplify taxable holdings. Definitely turn off automatic dividend and capital gains reinvestment on those investments. You can invest dividend received as needed to maintain asset allocation. You can also spend it, allowing a smaller emergency fund.

Roth IRA should be stocks. If you want Vanguard Healthcare Index (VGHAX), Vanguard REIT (VGSLX) hold them in Roth IRA accounts. I recommend setting a target allocation, so you harvest gains during periods of over performance and purchase shares during under performance.

I recommend moving her Rollover IRA to TSP to reduce the number of accounts.

Learn your tax bracket and anticipate changes. There is no longer a 25% tax bracket so you are either in the 22% or 24% bracket. I purchase turbo tax every year in November and plug in the predictable military income which allows us opportunity to harvest capital gains during low taxable income years due to deployment. I start a file for the following year to ensure proper withholding by entering predicted income. Turbo tax also tracks capital loss carryovers and depreciation for our rental property.

You should definitely use Roth IRA, and you should consider Roth TSP. Military Pension and dividends from a large taxable portfolio will fill the lowest tax brackets possibly to the 12% limit, meaning you can anticipate paying 22% taxes or more on TSP withdrawals. Roth TSP gives you the option to pay 22% or 24% taxes on TSP Roth contributions with no further tax burden on growth or withdrawals. Current tax law expires at the end of 2025 which means taxes could be higher (or lower) in retirement. If you continue to work while receiving military pension, you could be in a much higher tax bracket (employment income + pension income + taxable account dividends) which makes tax deferred contributions from employment would probably be better than Roth.

You are doing good with the Emergency funds: $10,000. Military members need less than most people because of extremely reliable income that extends into retirement pension payments. Taxable account dividends provide additional income if they are not reinvested.

Lump sum invest the $50,000 in VTSAX or VTIAX and prepare to tax loss harvest.

Capital Gain Harvesting: https://www.kitces.com/blog/understandi ... -in-basis/

Tax Loss Harvesting: https://www.bogleheads.org/wiki/Tax_loss_harvesting

Roth TSP: https://thefinancebuff.com/most-tsp-par ... h-tsp.html

Hope that helps! :beer
It's perfectly legal, go ask the IRS, they'll say the same thing. I actually feel stupid telling you this, I'm sure you would've investigated the matter yourself. Andy Dufresne

Sophia1884
Posts: 118
Joined: Mon Aug 05, 2013 10:23 pm

Re: Military Pilot- 8/10 yrs to FIRE, need help! BONDS/ Taxes

Post by Sophia1884 » Sat Nov 03, 2018 1:07 pm

Duckie wrote:
Fri Nov 02, 2018 5:44 pm

Duckie, would you recommend TSP G or TSP F or a mix? Why? It seems that TSP F has higher returns (even with higher risk) and since we're not looking at immediate retirement/need for safety/income, it may be worth it?
Long term, in retirement, I’d like to probably be in Wellington and/or Wellesley or another “invest and leave it” account. Should I invest into them now to get the bond allocation up? If so, how do I do that with the focus on getting the bonds up to 15 or 20 %?
No, don't buy more W/W now. Sell them in tax-sheltered. Use the TSPs for bonds.

Since W/W are best kept in tax-sheltered, why not keep them there to avoid a hike in our fed tax, stop reinvesting, and just contribute going forward to TSP G or F
Wellington in Taxable: In college, before I knew much, I started putting all the savings into the Wellington in taxable. I don’t’ think I can sell the shares without tax implications. As I’m learning more about tax efficiency, how do I make this more tax efficient?
Some of the shares may have losses and are worth selling now. At the very least turn off any automatic dividend reinvestment. Send all dividends to a money market or settlement fund.

Why would you recommend selling the Wellington in tax-sheltered but keep it (with tax-loss harvesting) in the taxable?
Should we be investing in Roth IRA or Traditional IRA?
It's unlikely he can deduct TIRA contributions so he should definitely use a Roth IRA. For her it depends on her employment situation. But even it she can deduct, I still recommend Roth IRA.

Would you recommend this (Roth IRA) in the event we need the funds before the official retirement age?
New annual Contributions
18,000 his TSP
5,500 his IRA/Roth IRA
5,500 IRA/Roth IRA
18,000 taxable (for retirement)
It's $18,500 for 2018 and $19,000 and $6,000 for 2019. Does she not have a current employer retirement plan?

Thank you, I'll make sure to check how much we've invested. I'm not currently working
__________________________

The following example has an AA of 56/24/20. With a little selling in taxable and major swapping in tax-sheltered you could have:

Taxable at Vanguard -- $591K -- 59% <-- Includes $50K from checking.
34% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)
6% (VGHAX) Vanguard Health Care Fund Admiral Shares (0.33%)
9% (VWENX) Vanguard Wellington Fund Admiral Shares (0.17%)
10% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)

His Thrift Savings Plan -- $120K -- 12%
12% (N/A) G Fund (0.033%)

Her Thrift Savings Plan -- $63K -- 6%
6% (N/A) F Fund (0.033%)

Her Rollover IRA at Vanguard -- $59K -- 6%
4% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)
2% (VBTLX) Vanguard Total Bond Market Index Fund Admiral Shares (0.05%)

His Roth IRA at Vanguard -- $100K -- 10%
10% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)

Her Roth IRA at Vanguard -- $68K -- 7%
3% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)
4% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)

Where did you input the numbers Duckie? I'll need to see what the actual sums are

My comments:
  • The above removes the REITs and CERN from taxable. REITs especially do not belong in taxable and you already know about the bond issue in Wellington. I'm ignoring any tax issues here. Sorry, what tax issue should I be aware of outside of selling in taxable=hike in fed taxes
  • Turn off automatic dividend reinvestment for every fund in taxable. You should try to get that account down to just VTSAX and VTIAX.
  • I know the 9% Wellington in taxable has bonds but I'm ignoring that 3% for this AA. Also, if you really are in VWELX you should switch to VWENX. You're above the $50K minimum.
  • Her rollover IRA could be rolled to her TSP if she ever needs to use the Backdoor Roth IRA method. So don't lose her TSP. great idea
  • Try to keep the Roth IRAs all stocks. In general it's better to put assets with higher expected growth (stocks) in Roth accounts and assets with lower expected growth (bonds) in pre-tax accounts. That's because you've already paid the taxes in the Roth accounts so future growth is tax-free.


Would you suggest a plan of action Duckie? The first/easiest start seems to be 1. move the LifeCycle funds to TSP G or F or mix, then 2. move Her Rollover IRA to Traditional TSP G/F or mix. What then? Thank you Duckie!

Sophia1884
Posts: 118
Joined: Mon Aug 05, 2013 10:23 pm

Re: Military Pilot- 8/10 yrs to FIRE, need help! BONDS/ Taxes

Post by Sophia1884 » Sat Nov 03, 2018 1:09 pm

warner25 wrote:
Fri Nov 02, 2018 6:32 pm
So does this mean your husband took the bonus?

Just some encouragement from me: You guys are doing a phenomenal job to have already saved $1M in 10-12 years on active duty. I think you are set if you just stay the course as your husband finishes out his 20 years of service. And I'm all in favor of just consolidating each account into a single balanced fund or target date/life cycle fund, maybe done over the course of several years in your taxable account to minimize costs there.
Yes, we took the pilot bonus so....pretty committed now, fingers crossed. That's where the $50,000 is from. I plan to consolidate when we get closer to FIRE or full retirement. Particularly looking at Wellington but we'll see when I learn more. Thank you!

Sophia1884
Posts: 118
Joined: Mon Aug 05, 2013 10:23 pm

Re: Military Pilot- 8/10 yrs to FIRE, need help! BONDS/ Taxes

Post by Sophia1884 » Sat Nov 03, 2018 1:29 pm

Fishing50 wrote:
Sat Nov 03, 2018 7:23 am
Duckie's portfolio is an excellent goal. With taxable, IRA, and TSP accounts you can take advantage of asset location better without lifecycle funds.

Priority 1, Bonds in TSP. Use inter fund to transfer L 2050 to G Fund to hit your target bond allocation.
Consider adding F Fund because it outperforms G Fund over the long run.
Is there a G Fund/F Fund mix you'd recommend?
Determine your basis and capital gains for taxable holdings.
What does this mean? How would one do this?
In taxable, I recommend selling Cerner (CERN), Vanguard Healthcare Index (VGHAX), Vanguard REIT (VGSLX), and Vanguard Wellington (VWELX) for broader diversification and tax efficiency.
How would this add diversification and tax efficiency?
During low taxable income years, harvest capital gains at 0% taxes in the 12% tax bracket to simplify taxable holdings.
Sorry, what does this sentence mean and how is it accomplished?
Roth IRA should be stocks. If you want Vanguard Healthcare Index (VGHAX), Vanguard REIT (VGSLX) hold them in Roth IRA accounts.
I was under the impression that REIT is recommended for most accts, thoughts? Also, I'd like to keep the Healthcare Index, I had bought it low and if I sell it now in taxable, it would drive up our fed tax rate AND I'd have to rebuy them at a higher price. Is there a way of MOVING the fund from taxable to tax-sheltered? Backdoor ROTH?

Thank you so much Fishing50-a lot of food for thought!

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Duckie
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Re: Military Pilot- 8/10 yrs to FIRE, need help! BONDS/ Taxes

Post by Duckie » Sat Nov 03, 2018 6:49 pm

Sophia1884 wrote:Duckie, would you recommend TSP G or TSP F or a mix? Why? It seems that TSP F has higher returns (even with higher risk) and since we're not looking at immediate retirement/need for safety/income, it may be worth it?
The G Fund is almost a "free lunch". It pays higher intermediate-term rates on short-term assets and can never lose money. That's why in my example I set up 12% G Fund and 6% F Fund with your TSP space.
Since W/W are best kept in tax-sheltered, why not keep them there to avoid a hike in our fed tax, stop reinvesting, and just contribute going forward to TSP G or F
I left Wellington in taxable for now to avoid more taxes now but in your tax-sheltered accounts you can easily choose better options without tax issues.
Why would you recommend selling the Wellington in tax-sheltered but keep it (with tax-loss harvesting) in the taxable?
Because you can sell it all in tax-sheltered without tax consequences and I don't know if you have any losses in taxable. If you do have losses, sell them.
Would you recommend this (Roth IRA) in the event we need the funds before the official retirement age?
If you need money before retirement age you can take your contributions out of the Roth IRA at any time for any reason. Earnings are different. Before 59.5 they are not only taxed but have a 10% penalty on top. If you use a Traditional IRA it's all taxable plus there's a penalty for early withdrawal. So for a Roth IRA at least you can get your contributions out without taxes.
Where did you input the numbers Duckie? I'll need to see what the actual sums are
I'm not sure what you mean by "input" but I got the dollar amounts from your opening post, then figured the percentages.
Sorry, what tax issue should I be aware of outside of selling in taxable=hike in fed taxes
That's it. My example has you selling CERN and the REITs now and depending on your cost basis there will probably be some taxable gains.
Would you suggest a plan of action Duckie? The first/easiest start seems to be 1. move the LifeCycle funds to TSP G or F or mix, then 2. move Her Rollover IRA to Traditional TSP G/F or mix.
Definitely 1 but you don't need to do 2 unless your joint income is too high. If you choose to do 2 then her TSP could be something like:
  • Her Thrift Savings Plan -- $122K -- 12%
    4% (N/A) C Fund (0.033%)
    8% (N/A) F Fund (0.033%)
What then?
In taxable turn off automatic reinvesting. Then you need to find the cost basis for all six items in the taxable account so you'll have an idea what the gains/losses are and what the potential tax cost might be.
Sophia1884 wrote:
Fishing50 wrote:Determine your basis and capital gains for taxable holdings.
What does this mean? How would one do this?
Your brokerage probably has it listed as unrealized gains or something like that. You add up every dollar you spent to buy a fund/stock plus any reinvested dividends minus any sales. For example if you bought 100 shares of CERN for $50 a share seven years ago, have reinvested dividends totaling $2000 since then, and have never sold, your basis would be $7000. Since it's now $8554 you have a taxable gain of $1554. In your tax bracket that would be $1554 X 0.15% = $233 in taxes.
In taxable, I recommend selling Cerner (CERN), Vanguard Healthcare Index (VGHAX), Vanguard REIT (VGSLX), and Vanguard Wellington (VWELX) for broader diversification and tax efficiency.
How would this add diversification and tax efficiency?
CERN, VGHAX and VGSLX are all focused, not broad-based. VWELX is somewhat broad-based but not as much as total market index funds. And VGSLX and VWELX kick out a lot of non-qualified dividends.
During low taxable income years, harvest capital gains at 0% taxes in the 12% tax bracket to simplify taxable holdings.
Sorry, what does this sentence mean and how is it accomplished?
In the 12% federal tax bracket capital gains are taxed at 0%. Above that it's 15% and 20% so Fishing50 is recommending you sell gains when your tax bracket is low.
Roth IRA should be stocks. If you want Vanguard Healthcare Index (VGHAX), Vanguard REIT (VGSLX) hold them in Roth IRA accounts.
I was under the impression that REIT is recommended for most accts, thoughts?
REITs are required by law to distribute almost all their income in dividends. That's a lot of taxable non-qualified (meaning you pay taxes at your highest rate) dividends. REITs absolutely do not belong in a taxable account.
Also, I'd like to keep the Healthcare Index, I had bought it low and if I sell it now in taxable, it would drive up our fed tax rate AND I'd have to rebuy them at a higher price.
Well, you wouldn't have to rebuy them. In my previous example I left them in your account to avoid the tax-hit.
Is there a way of MOVING the fund from taxable to tax-sheltered? Backdoor ROTH?
No. The only ways to avoid tax gains are by waiting until your income goes way down to sell or by donating the shares to a charity. (Well, there are two other ways: you could hope the fund shares go down and wipe out your gains, but that's not a good hope or you could die and your beneficiaries would get a stepped-up basis, but I doubt you want that anytime soon.)

Sophia1884
Posts: 118
Joined: Mon Aug 05, 2013 10:23 pm

Re: Military Pilot- 8/10 yrs to FIRE, need help! BONDS/ Taxes

Post by Sophia1884 » Sat Nov 03, 2018 9:44 pm

Duckie wrote:
Sat Nov 03, 2018 6:49 pm

Duckie, I need to check but would your TSP recommendations change if the accts were ROTH TSP vs Traditional TSP? I think there is money in each type but I didn't consider the implications of holding bonds in Roth vs Traditional until you pointed it out. I think we have a mixture of ROTH TSP and Traditional TSP-will check.
Where did you input the numbers Duckie? I'll need to see what the actual sums are
I'm not sure what you mean by "input" but I got the dollar amounts from your opening post, then figured the percentages.

I meant to ask what type of spreadsheet you were using and if you could point me to it-we haven't been tracking allocations at all, just doing automatic investments. I'll need to find a way to track them to know now much to buy/sell

Thank you again!

Fishing50
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Re: Military Pilot- 8/10 yrs to FIRE, need help! BONDS/ Taxes

Post by Fishing50 » Sun Nov 04, 2018 3:00 am

During low taxable income years, harvest capital gains at 0% taxes in the 12% tax bracket to simplify taxable holdings. Sorry, what does this sentence mean and how is it accomplished?
Roth IRA should be stocks. If you want Vanguard Healthcare Index (VGHAX), Vanguard REIT (VGSLX) hold them in Roth IRA accounts.
I was under the impression that REIT is recommended for most accts, thoughts? Also, I'd like to keep the Healthcare Index, I had bought it low and if I sell it now in taxable, it would drive up our fed tax rate AND I'd have to rebuy them at a higher price. Is there a way of MOVING the fund from taxable to tax-sheltered? Backdoor ROTH?
Kitces does a great job explaining tax gain harvesting in the article I provided above. During deployment years with low taxable income, you may have opportunities to sell taxable shares with 0% taxes.

You are correct to avoid taxes on the healthcare index if you want to retain the holding. I know of no way to move it into the tax sheltered account. Aside from paying taxes, buying at a higher price is inconsequential. You have $59K now which will fluctuate with share price exactly the same as any newly purchased shares.
It's perfectly legal, go ask the IRS, they'll say the same thing. I actually feel stupid telling you this, I'm sure you would've investigated the matter yourself. Andy Dufresne

pilot_error
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Re: Military Pilot- 8/10 yrs to FIRE, need help! BONDS/ Taxes

Post by pilot_error » Sun Nov 04, 2018 10:36 am

Make sure you have transferred Post 9/11 GI bill benefits to one of the children to start the additional ADSC clock. You don't want to wait and end up finding yourself committed to one extra PCS.

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BolderBoy
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Re: Military Pilot- 8/10 yrs to FIRE, need help! BONDS/ Taxes

Post by BolderBoy » Sun Nov 04, 2018 11:41 am

Sophia1884 wrote:
Fri Nov 02, 2018 1:05 pm
We reached 1 million this year...

FIRE Goal: 2.5/3 million in 10 years
I think you need to tone down your expectations a bit. Yes, continue saving / investing like fanatics, but with the outline you provided, reaching $3 million in the next 10 years is pretty optimistic.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

warner25
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Re: Military Pilot- 8/10 yrs to FIRE, need help! BONDS/ Taxes

Post by warner25 » Sun Nov 04, 2018 11:59 am

BolderBoy wrote:
Sun Nov 04, 2018 11:41 am
...reaching $3 million in the next 10 years is pretty optimistic.
True, but unnecessary in my opinion, despite the OP's comment. To have already saved $1M, they can't be spending much more than an O-4 or O-5 pension pays. Not including the pension in their plan, as the OP stated, seems equally pessimistic.

krafty81
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Re: Military Pilot- 8/10 yrs to FIRE, need help! BONDS/ Taxes

Post by krafty81 » Sun Nov 04, 2018 1:22 pm

First off congrats on your amazing savings accumulation! I served a bit longer (Naval Aviation), but would offer/underscore some points...

- Will you stay in a state that does not tax your military retirement? A plus
- Plan on keeping TSP after you retire instead of rolling it into something else. Low fees and the amazing G fund!
- Ensure your post 9/11 GI Bill is properly set up now. They keep changing it.
- Consider buying a home at some point? VA loan is the way to go.
- I think you are on a great track - fly safe!

Sophia1884
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Re: Military Pilot- 8/10 yrs to FIRE, need help! BONDS/ Taxes

Post by Sophia1884 » Sun Nov 04, 2018 3:59 pm

BolderBoy wrote:
Sun Nov 04, 2018 11:41 am
Sophia1884 wrote:
Fri Nov 02, 2018 1:05 pm
We reached 1 million this year...

FIRE Goal: 2.5/3 million in 10 years
I think you need to tone down your expectations a bit. Yes, continue saving / investing like fanatics, but with the outline you provided, reaching $3 million in the next 10 years is pretty optimistic.
I guess you don’t want to hear about my 5 million goal/plan? ;)

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Duckie
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Re: Military Pilot- 8/10 yrs to FIRE, need help! BONDS/ Taxes

Post by Duckie » Sun Nov 04, 2018 5:03 pm

Sophia1884 wrote:I need to check but would your TSP recommendations change if the accts were ROTH TSP vs Traditional TSP? I think there is money in each type but I didn't consider the implications of holding bonds in Roth vs Traditional until you pointed it out. I think we have a mixture of ROTH TSP and Traditional TSP-will check.
Roth space is better used for stocks but I have the impression that you can't split things that way in the TSP. In that case you will put bonds partly in Roth accounts. Things don't have to be perfect to work.
I meant to ask what type of spreadsheet you were using and if you could point me to it-we haven't been tracking allocations at all, just doing automatic investments. I'll need to find a way to track them to know now much to buy/sell
I don't use a spreadsheet when figuring portfolio examples. I've been doing it long enough I can do it on the fly with just a calculator.

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BolderBoy
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Re: Military Pilot- 8/10 yrs to FIRE, need help! BONDS/ Taxes

Post by BolderBoy » Sun Nov 04, 2018 10:51 pm

Sophia1884 wrote:
Sun Nov 04, 2018 3:59 pm
BolderBoy wrote:
Sun Nov 04, 2018 11:41 am
Sophia1884 wrote:
Fri Nov 02, 2018 1:05 pm
We reached 1 million this year...

FIRE Goal: 2.5/3 million in 10 years
I think you need to tone down your expectations a bit. Yes, continue saving / investing like fanatics, but with the outline you provided, reaching $3 million in the next 10 years is pretty optimistic.
I guess you don’t want to hear about my 5 million goal/plan? ;)
Winning the lottery?
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

Sophia1884
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Re: Military Pilot- 8/10 yrs to FIRE, need help! BONDS/ Taxes

Post by Sophia1884 » Mon Nov 05, 2018 1:13 am

BolderBoy wrote:
Sun Nov 04, 2018 10:51 pm
Sophia1884 wrote:
Sun Nov 04, 2018 3:59 pm
BolderBoy wrote:
Sun Nov 04, 2018 11:41 am
Sophia1884 wrote:
Fri Nov 02, 2018 1:05 pm
We reached 1 million this year...

FIRE Goal: 2.5/3 million in 10 years
I think you need to tone down your expectations a bit. Yes, continue saving / investing like fanatics, but with the outline you provided, reaching $3 million in the next 10 years is pretty optimistic.
I guess you don’t want to hear about my 5 million goal/plan? ;)
Winning the lottery?
I'm always so hopeful but have yet to buy a ticket....maybe one day, when I've reached the first goal. What is a goal but a dream in action? :sharebeer

Sophia1884
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Re: Military Pilot- 8/10 yrs to FIRE, need help! BONDS/ Taxes

Post by Sophia1884 » Mon Nov 05, 2018 1:15 am

Duckie wrote:
Sun Nov 04, 2018 5:03 pm

I meant to ask what type of spreadsheet you were using and if you could point me to it-we haven't been tracking allocations at all, just doing automatic investments. I'll need to find a way to track them to know now much to buy/sell
I don't use a spreadsheet when figuring portfolio examples. I've been doing it long enough I can do it on the fly with just a calculator.
I guess I need a lot more math practice :) Thank you Duckie, I'll start implementing many of the ideas and come back with questions as they arise.

Sophia1884
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Re: Military Pilot- 8/10 yrs to FIRE, need help! BONDS/ Taxes

Post by Sophia1884 » Wed Nov 07, 2018 4:57 pm

Progress Report, looking for feedback please:

1. I stopped all automatic re-investments in Taxable.
2. Moved my tTSP and ROTH TSP ($60,000) to G Fund. I can not move them independent of one another.
3. Invested 20,000 into Total Stock.
4. Looked at how trading in accounts works.

Questions:
1. In the Rollover IRA, I can only Buy or Sell CERN while the mutual funds I can Exchange. What should I do with CERN? Sell it and then use the money to buy Total Stock? Where will the money from the sale go? It's $30,000 so it'll probably bump us up in the tax bracket, no short term gains.

2. In Taxable, the choices are Buy, Sell, or Exchange. I thought in Taxable you can only Sell/Buy? If I need to exchange REIT and Wellington out, are there any consequences?

3. Why should I NOT keep Wellington in ROTH? Should I keep it at all? In Taxable? I guess I'm attached to it and it seems to perform well, I'm not understanding the general advice to getting rid of it.

Thank you!

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Duckie
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Re: Military Pilot- 8/10 yrs to FIRE, need help! BONDS/ Taxes

Post by Duckie » Wed Nov 07, 2018 5:47 pm

Sophia1884 wrote:I stopped all automatic re-investments in Taxable.
Good.
Moved my tTSP and ROTH TSP ($60,000) to G Fund. I can not move them independent of one another.
Okay. What about his TSP?
Invested 20,000 into Total Stock.
Is this in taxable? Did you sell something or is this part of the $50K from checking?
In the Rollover IRA, I can only Buy or Sell CERN while the mutual funds I can Exchange. What should I do with CERN?
Sell.
Sell it and then use the money to buy Total Stock?
Or Total Bond. It's an IRA so if you change your mind there are no tax consequences.
Where will the money from the sale go?
Into the IRA settlement fund.
It's $30,000 so it'll probably bump us up in the tax bracket, no short term gains.
It's an IRA. There are no tax consequences for selling inside the IRA. Only for taking money out of the IRA. (And it was $24K in your OP on November 2nd. Did its price go up drastically?)
In Taxable, the choices are Buy, Sell, or Exchange. I thought in Taxable you can only Sell/Buy?
At Vanguard you can exchange from one Vanguard fund to another. You can't exchange if one of the funds is not Vanguard. In that case you have to sell and buy.
If I need to exchange REIT and Wellington out, are there any consequences?
Taxable accounts mean tax consequences when selling.
Why should I NOT keep Wellington in ROTH?
Wellington is a balanced fund (holding both stocks and bonds). You should be trying to get to all individual funds. And Wellington's 33% bonds are not as optimal in Roth accounts.
Should I keep it at all? In Taxable?
In your IRAs you should get rid of it. In taxable, because of the taxable capital gains, you should probably hang on to it for now. Not because it's good in taxable, it's not, but because of the tax-hit if selling.

Since your taxable Wellington is over $50K you should upgrade to the cheaper Admiral shares.

Sophia1884
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Re: Military Pilot- 8/10 yrs to FIRE, need help! BONDS/ Taxes

Post by Sophia1884 » Wed Nov 07, 2018 10:41 pm

Duckie wrote:
Wed Nov 07, 2018 5:47 pm
Moved my tTSP and ROTH TSP ($60,000) to G Fund. I can not move them independent of one another.
Okay. What about his TSP?

He is currently traveling and will probably need to find/reset passwords to find out where he is invested. Once he does that, we'll move his TSP to a G/F fund split as suggested.
Invested 20,000 into Total Stock.
Is this in taxable? Did you sell something or is this part of the $50K from checking?

Part of the 50,000, reserved the rest to see where it'll be needed once things are moved around
In Taxable, the choices are Buy, Sell, or Exchange. I thought in Taxable you can only Sell/Buy?
At Vanguard you can exchange from one Vanguard fund to another. You can't exchange if one of the funds is not Vanguard. In that case you have to sell and buy.

If I exchange, will it still register as a "gain" to impact taxes or no? Thinking of the Wellington in Taxable here. Wouldn't it solve the REIT/Wellington issue in Taxable if I can exchange them for Total Stock Market?
If I need to exchange REIT and Wellington out, are there any consequences?
Taxable accounts mean tax consequences when selling.

But not exchanging? Example in Taxable: Exchange Wellington for Total Stock Index.
Why should I NOT keep Wellington in ROTH?
Wellington is a balanced fund (holding both stocks and bonds). You should be trying to get to all individual funds. And Wellington's 33% bonds are not as optimal in Roth accounts.
Should I keep it at all? In Taxable?
In your IRAs you should get rid of it. In taxable, because of the taxable capital gains, you should probably hang on to it for now. Not because it's good in taxable, it's not, but because of the tax-hit if selling.

How is Wellington and the like are used in portfolios? What is their purpose?

Since your taxable Wellington is over $50K you should upgrade to the cheaper Admiral shares.
Changed to Admiral shares.

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Duckie
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Re: Military Pilot- 8/10 yrs to FIRE, need help! BONDS/ Taxes

Post by Duckie » Thu Nov 08, 2018 5:45 pm

Sophia1884 wrote:
Duckie wrote:At Vanguard you can exchange from one Vanguard fund to another. You can't exchange if one of the funds is not Vanguard. In that case you have to sell and buy.
If I exchange, will it still register as a "gain" to impact taxes or no?
An exchange is a sell/buy without going through the two separate steps. It's just a short-cut and is only allowed for Vanguard funds. A taxable gain from an exchange will affect your taxes in the same way a taxable gain from the two-step sell/buy would.
How is Wellington and the like are used in portfolios? What is their purpose?
They are good balanced funds and are used by people who prefer their simplicity and/or don't want to use individual funds. They are best used in tax-sheltered accounts because of the non-qualified dividends that the bond portion kicks out. In the 12% tax bracket they would be suitable for a taxable account. Above that, they're not.

Since you really, really want to keep Wellington, the best way would be to sell it all now in all your IRAs and slowly sell in taxable, a small amount every year taking taxes into consideration. As you sell in taxable, buy that amount of Wellington in the rollover IRA. Eventually the entire rollover IRA could be Wellington.

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