Roth IRA Allocation Help Needed

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Topic Author
xjs
Posts: 3
Joined: Wed Oct 02, 2019 11:57 pm

Roth IRA Allocation Help Needed

Post by xjs » Tue Oct 08, 2019 6:07 pm

Emergency funds:
12 Months

Debt:
Mortgage= 149K @ 3.25%
Child College Fund: $20K Per Year (Will be out of pocket funded by monthly contributions from wifes and I paychecks)

Tax Filing Status: Married Filing Jointly

Tax Rate: 24% Federal, 9.3% State

State of Residence: California

Age: 38, Wife 40

Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: 20% of stocks

Current Retirement Assets:

His Annuity:
38.22% S CA IBEW-NECA Core Fund
16.54% AB Global Bond FD I
7.69% IBEW-NECA Equity Index Fund
6.57% ULLICO Diversified Intl Eq LP
4.97% AQR Risk Parity Fund I
4.96% Bentall Kennedy Deaily Value F
4.72% AFL-CIO HIt Daily Valued Fund
4.71% PIMCO All Asst All Authority I
4.19% Vanguard Inf-Prot Secs (Inst)
3.81% Longview MidCap 400 Index Fund
3.62% MainStay MK HY Corp Bond I

Her 401K:

$6K in portfolio, but do not know allocations. Trying to find that info out.


Questions:
I work as a Union Low Voltage member for the International Brotherhood of Electrical Workers and our only retirement plan is a annuity that does not allow us to pick our own investments. I roughly contribute $800 pretax and I just last year I started learning about investing for retirement and open a Roth IRA account with Vanguard. I only have contributed $4,500 since late last year.

1. How should I allocate my Vanguard existing and future contributions based on the portfolio model that my union is investing in? Currently I'm holding VTI, VXUS and BND ETF FUNDS and trying to mimic the Vanguard Target 2045 retirement fund. Which timeline shows the first five years as a 90% stock / 10% bonds.

2. I will be opening my wife's Roth IRA this month and should I invest in different ETF funds then the ones I hold in Vanguard or keep them the same?

We both plan to max out our Roth IRA accounts from now on.

Any advice is greatly appreciated.

retired@50
Posts: 172
Joined: Tue Oct 01, 2019 2:36 pm

Re: Roth IRA Allocation Help Needed

Post by retired@50 » Tue Oct 08, 2019 6:37 pm

I'd use the same funds in the Roth IRA for both spouses. I wonder about the annuity... The $800 is that per month, or per year? If you have no control over it, then I guess you'd have to treat it like a "black box" that will hopefully have value when you retire, kind of like Social Security. You pay in, but you never really know if you'll get the future dollars that you're hoping for, or perhaps have been promised.

Can you add more to the annuity or is it a fixed percentage of your wage? If you put more in, I presume you're supposed to get more out at retirement time?
Regards,

TravelforFun
Posts: 1879
Joined: Tue Dec 04, 2012 11:05 pm

Re: Roth IRA Allocation Help Needed

Post by TravelforFun » Tue Oct 08, 2019 6:42 pm

Since my Roth money would be the last thing I touch and its gains are tax-free, I invest all of it in stock funds. Bond funds are in my traditional IRA accounts.

TravelforFun

Topic Author
xjs
Posts: 3
Joined: Wed Oct 02, 2019 11:57 pm

Re: Roth IRA Allocation Help Needed

Post by xjs » Tue Oct 08, 2019 6:49 pm

retired@50 wrote:
Tue Oct 08, 2019 6:37 pm
I'd use the same funds in the Roth IRA for both spouses. I wonder about the annuity... The $800 is that per month, or per year? If you have no control over it, then I guess you'd have to treat it like a "black box" that will hopefully have value when you retire, kind of like Social Security. You pay in, but you never really know if you'll get the future dollars that you're hoping for, or perhaps have been promised.

Can you add more to the annuity or is it a fixed percentage of your wage? If you put more in, I presume you're supposed to get more out at retirement time?
Regards,
$800 per month. $9,600 per year.

It's by the hour. $5 per hour worked and it can only increase if all the members agree to add to the hourly rate. Last negotiations the union and contractors came to an agreement of $10 over the next 5 years. So members vote each year to allocate $2.00 either check, medical and retirement. All this was our last year before entering negotiations again and members voted all five years $1.25 to check, $.50 retirement and $.25 medical.

retired@50
Posts: 172
Joined: Tue Oct 01, 2019 2:36 pm

Re: Roth IRA Allocation Help Needed

Post by retired@50 » Tue Oct 08, 2019 7:00 pm

xjs wrote:
Tue Oct 08, 2019 6:49 pm
retired@50 wrote:
Tue Oct 08, 2019 6:37 pm
I'd use the same funds in the Roth IRA for both spouses. I wonder about the annuity... The $800 is that per month, or per year? If you have no control over it, then I guess you'd have to treat it like a "black box" that will hopefully have value when you retire, kind of like Social Security. You pay in, but you never really know if you'll get the future dollars that you're hoping for, or perhaps have been promised.

Can you add more to the annuity or is it a fixed percentage of your wage? If you put more in, I presume you're supposed to get more out at retirement time?
Regards,
$800 per month. $9,600 per year.

It's by the hour. $5 per hour worked and it can only increase if all the members agree to add to the hourly rate. Last negotiations the union and contractors came to an agreement of $10 over the next 5 years. So members vote each year to allocate $2.00 either check, medical and retirement. All this was our last year before entering negotiations again and members voted all five years $1.25 to check, $.50 retirement and $.25 medical.
So it sounds like you're stuck with the annuity pretty much the way it is, unless the membership votes in a change. That's fine I suppose. All you can really do with this money is hope for the best, and/or, try to educate the people in charge of choosing the investments about low expense ratio choices. As far as your own selections go, they seem fine to me. You've adopted a three-fund low cost portfolio that you can adjust over the years to match your own personal risk tolerance. Keep on contributing every year and you'll most likely be amazed at what a long term investing program can accomplish. Best of luck.

lakpr
Posts: 2479
Joined: Fri Mar 18, 2011 9:59 am

Re: Roth IRA Allocation Help Needed

Post by lakpr » Wed Oct 09, 2019 1:18 pm

If you are in a 24% tax bracket, I don't believe you can contribute directly either to your own or your wife's Roth accounts. You must make a non-deductible contribution to a traditional IRA account first (each), and then convert the amount to Roth after the initial contribution settles (usually 2-days later). Of course, the BIG pre-condition is that the total amount of any Rollover IRAs, SEP-IRAs, SIMPLE-IRAs, etc. (any 'IRA' that's not prefixed by Roth) should be zero.

I also echo the recommendation that everything in the Roth IRAs should be invested only in equities, not bonds. Growth in Roth accounts is tax free, so you want to have the maximum growth ==> implies you must invest into those asset classes with highest expected growth rates, namely, equities and to a lesser extent REITs. No bonds, never bonds in Roth.

Topic Author
xjs
Posts: 3
Joined: Wed Oct 02, 2019 11:57 pm

Re: Roth IRA Allocation Help Needed

Post by xjs » Wed Oct 09, 2019 6:15 pm

lakpr wrote:
Wed Oct 09, 2019 1:18 pm
If you are in a 24% tax bracket, I don't believe you can contribute directly either to your own or your wife's Roth accounts. You must make a non-deductible contribution to a traditional IRA account first (each), and then convert the amount to Roth after the initial contribution settles (usually 2-days later). Of course, the BIG pre-condition is that the total amount of any Rollover IRAs, SEP-IRAs, SIMPLE-IRAs, etc. (any 'IRA' that's not prefixed by Roth) should be zero.

I also echo the recommendation that everything in the Roth IRAs should be invested only in equities, not bonds. Growth in Roth accounts is tax free, so you want to have the maximum growth ==> implies you must invest into those asset classes with highest expected growth rates, namely, equities and to a lesser extent REITs. No bonds, never bonds in Roth.
You are correct.We are in the 22% bracket. Gross income for 2018 was $162K combine, but that was due to lots of overtime work on my part. Normal year is around $120K.

Here are some more questions:

1. Can have and make the max contribution to our IRA if we don't make over $193k combine?

2. Can we have a Traditional and Roth IRA but are allowed only the max contribution limit between both accounts?

3. Ideally we would hold only equities in the Roth and only bonds in the traditional IRA but allocate the desire % to equal our desire portfolio model (90% stocks/10% bonds)

Once again I really appreciate all feedback

lakpr
Posts: 2479
Joined: Fri Mar 18, 2011 9:59 am

Re: Roth IRA Allocation Help Needed

Post by lakpr » Wed Oct 09, 2019 7:08 pm

xjs wrote:
Wed Oct 09, 2019 6:15 pm
You are correct.We are in the 22% bracket. Gross income for 2018 was $162K combine, but that was due to lots of overtime work on my part. Normal year is around $120K.

Here are some more questions:

1. Can have and make the max contribution to our IRA if we don't make over $193k combine?

2. Can we have a Traditional and Roth IRA but are allowed only the max contribution limit between both accounts?

3. Ideally we would hold only equities in the Roth and only bonds in the traditional IRA but allocate the desire % to equal our desire portfolio model (90% stocks/10% bonds)

Once again I really appreciate all feedback
1. Yes. If your combined income is less than $193k, you can do a direct contribution to Roth IRA, $6000 each.

2. If your combined income is over $123k, NO you cannot make a traditional IRA contribution. Well, technically you can, but the contribution will not be offsetting your income; in other words, it becomes a non-deductible contribution. No reason that I can see why you would want to make a n-d-tIRA cobtribution, you are much better off making a Roth IRA contribution.

I also don't understand your comment about combined limit. IRAs, as the abbreviation says, are Individual Retirement Arrangements. Only the eligibility criteria include the combined income limit. The contribution limits are individual, not joint. $6000 for individuals younger than 50, $7000 for individuals older than 50.

3. You are better off holding the bonds that you want to add up to 10% in a taxable account. With a 22% tax bracket, you are no better off or no worse off with holding bonds in taxable accounts. The tax efficiency of bonds in traditional accounts kicks in only at the 24% bracket, and becomes really pronounced at 32% and higher tax brackets.

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