Year-end portfolio check-up

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Topic Author
Triple digit golfer
Posts: 3432
Joined: Mon May 18, 2009 5:57 pm

Year-end portfolio check-up

Post by Triple digit golfer » Sat Nov 30, 2019 10:43 pm

Emergency funds: 5 months of expenses in savings plus $200k+ taxable investment account.

We are a one-income household.

Debt: $317k left on 30 year, 3.50% fixed rate mortgage
Tax Filing Status: Married Filing Jointly
Tax Rate: 22% Federal, 4.95% State
State of Residence: IL
Age: Both 34
Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 30% of stocks

Total portfolio: $763k, excluding $26k in savings for short-term savings goals. Can also double as emergency fund.

Approximately broken down as follows:
$390k tax-deferred
$140k tax-free/Roth
$205k taxable
$28k 529 plan

Current retirement assets

Taxable
15.2% Vanguard Total Stock Index (VTSAX) (0.04%)
11.7% Vanguard FTSE All-World ex US Index (VFWAX) (0.11%)

His 401k
9.9% Vanguard 500 Index (0.05%)
Company match 2%
I am a highly-compensated employee and our plan does not pass nondiscrimination tests. Therefore, I receive a refund of my contribution each year. Last year it was approximately $8k, which I then invested in my taxable account.

His Roth IRA at Vanguard
8.4% Vanguard Total Stock Index (VTSAX) (0.04%)
5.2% Vanguard Total International Stock Index (VTIAX) (0.11%)

His Rollover IRA at Vanguard
5.9% Vanguard Total Stock Index (VTSAX) (0.04%)
21.6% Vanguard Total Bond Index (VBTLX) (0.05%)

Her Traditional IRA at Vanguard
12.7% Vanguard Total Stock Index (VTSAX) (0.04%) <---Rollover IRA from previous job
0.9% Vanguard Total International Stock Index (VTIAX) (0.11%) <---just started funding Traditional IRA after my wife quit her job to stay at home with our daughter. It is deductible.

Her Roth IRA at Vanguard
4.8% Vanguard Total International Stock Index (VTIAX) (0.11%) <---no longer funding after wife quit her job to stay home with our daughter; funding Traditional IRA instead for tax deduction.

Illinois BrightStart 529 Plan
3.8% Index Age Based Moderate 0-2 (0.12% ER) <---this is 60% U.S. equities, 30% international equities, 10% bonds, using all Vanguard index funds

Contributions

New annual Contributions
$14k his 401k ($19k plus $3k company match, less $8k refund due to nondiscrimination testing)
$6k her Traditional IRA
$6k his Roth IRA
$11.5k taxable investments for retirement
$2.4k 529 plan

No bonds being purchased currently because we have about a 78/22 split now and a desired 80/20. It will take a few years of contributions as listed above in order to get back to 80/20. The reason is that we had cash on hand for a couple of big purchases that are now complete. I could rebalance, but I am more comfortable doing it with new contributions. I'm happy buying equities until we're at 80/20.

Funds available in his 401(k), excluding everything with a 0.75% ER or higher:
Vanguard 500 Index (0.05% ER)
Vanguard Small Cap Index (0.08% ER)
Vanguard Mid Cap Index (0.08% ER)
Vanguard Intermediate Term Bond Index (0.07% ER)

The plan itself charges a 1.05% annual fee in addition to the expense ratios of the individual funds. :x

Questions:

1. Does it make sense that we are using a Traditional IRA (it is deductible) for my wife's contribution instead of a Roth? The logic is that I am unable to max my 401k due to the nondiscrimination testing refund, we have a large taxable account and Roth accounts already, and we will have no pensions in retirement. Therefore, a significant portion of our retirement income will not be taxable and we therefore would currently like to invest as much as we can in tax-deferred accounts.

2. We have both international and domestic equities in all three account types (tax-deferred, tax-free, and taxable). We have U.S. heavily in tax-deferred and international heavily in tax-free. Is it worth exchanging in both account types to get a more even balance, or should I not care? Is there any reason I should spend any time caring about the split of domestic and international in the three account types, or is the logic that both domestic and international equities are tax-efficient and suitable/appropriate/good choices for all account types?

3. Another poster said that Roth conversions are worth it when the market is down because you benefit from future growth tax-free. This very well could work, but it seems like an attempt at market timing to me. What is the Boglehead consensus on this, if any?

4. When I do start adding more bonds, what's the best, most efficient, simplest way to do so? Use the intermediate term index in my 401k, or continue to use Total Bond in traditional IRA, which would require exchanges within the account every so often? The latter would keep me with the same number of funds as now and would keep bond in Total Bond instead of Intermediate Term Bond Index. Are the two basically considered interchangeable, sort of like Total Market and 500 Index?

5. Given that I cannot even contribute the full amount and my employer match is only 2%, along with 1.09% total expense ratio, is it possibly worth entertaining the idea of not even contributing and going full taxable instead? I think a strong no, but wanted to pose the question.
Last edited by Triple digit golfer on Sun Dec 01, 2019 1:25 pm, edited 1 time in total.

Topic Author
Triple digit golfer
Posts: 3432
Joined: Mon May 18, 2009 5:57 pm

Re: Year-end portfolio check-up

Post by Triple digit golfer » Sun Dec 01, 2019 10:46 am

Bumping up for the Sunday morning crowd.

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FiveK
Posts: 7815
Joined: Sun Mar 16, 2014 2:43 pm

Re: Year-end portfolio check-up

Post by FiveK » Sun Dec 01, 2019 9:52 pm

Triple digit golfer wrote:
Sat Nov 30, 2019 10:43 pm
1. Does it make sense that we are using a Traditional IRA (it is deductible) for my wife's contribution instead of a Roth?
Yes, as discussed in Tax Deferred : Taxable : Tax Free
2a. We have both international and domestic equities in all three account types (tax-deferred, tax-free, and taxable). We have U.S. heavily in tax-deferred and international heavily in tax-free. Is it worth exchanging in both account types to get a more even balance, or should I not care?
2b. Is there any reason I should spend any time caring about the split of domestic and international in the three account types, or is the logic that both domestic and international equities are tax-efficient and suitable/appropriate/good choices for all account types?
2a. Not caring seems reasonable. If you knew which would outperform, you would put that one in Roth - actually, you would use that for all your investments. Because you don't know that, ....
2b. See Tax-efficient fund placement.
3. Another poster said that Roth conversions are worth it when the market is down because you benefit from future growth tax-free. This very well could work, but it seems like an attempt at market timing to me. What is the Boglehead consensus on this, if any?
Whether the market is up or down is a secondary consideration. The primary consideration should be the marginal tax rate you would pay to convert now, vs. what you expect to pay if you convert later.

For you Q4 I defer to the more bond-knowledgable.
5. Given that I cannot even contribute the full amount and my employer match is only 2%, along with 1.09% total expense ratio, is it possibly worth entertaining the idea of not even contributing and going full taxable instead? I think a strong no, but wanted to pose the question.
It's free entertainment, but do contribute at least enough to get the match. Beyond that, see Expensive or mediocre choices for some guidance.

See also How to campaign for a better 401(k) plan. Would be nice if your employer would at least make it a Safe harbor 401(k).

rkhusky
Posts: 7560
Joined: Thu Aug 18, 2011 8:09 pm

Re: Year-end portfolio check-up

Post by rkhusky » Sun Dec 01, 2019 10:07 pm

Triple digit golfer wrote:
Sat Nov 30, 2019 10:43 pm
4. When I do start adding more bonds, what's the best, most efficient, simplest way to do so? Use the intermediate term index in my 401k, or continue to use Total Bond in traditional IRA, which would require exchanges within the account every so often? The latter would keep me with the same number of funds as now and would keep bond in Total Bond instead of Intermediate Term Bond Index. Are the two basically considered interchangeable, sort of like Total Market and 500 Index?
Vanguard Intermediate Bond is somewhat riskier than Vanguard Total Bond and has a somewhat higher return. Either is fine. And the risk difference is much less than the difference between stocks and bonds.

lakpr
Posts: 3064
Joined: Fri Mar 18, 2011 9:59 am

Re: Year-end portfolio check-up

Post by lakpr » Sun Dec 01, 2019 10:24 pm

Triple Digit Golfer,

Catching up to this thread late. On question 3, I think you are quoting me. All I will say in my defense is: If doing opportunistic Roth conversions when the market is down is seen as market timing, then so is tax loss harvesting in taxable accounts. Do not set out to be specifically market-time, but not taking the opportunity when it presents itself is also foolish.

For the record, I would consider doing Roth conversions in a "down market", if the market dropped about 8% to 10% within 12 months from a recent high. That would be a drop of about 2400 to 2800 points on the Dow from the last known high, or about 250 to 300 points drop on the S&P 500 index from the most recent high. My retirement horizon is at least 10 years out, and over the past century there has not been any 10 year period where the market dis not return to previous high and surpass it. [With a possible exception of Great Depression]

I may not be so adventurous though if I am going to retire within 5 years or so. In that case, I would rather have the government share in my misery of the loss, with the government getting a smaller tax bite at the time of withdrawals from the portfolio.

User avatar
FiveK
Posts: 7815
Joined: Sun Mar 16, 2014 2:43 pm

Re: Year-end portfolio check-up

Post by FiveK » Sun Dec 01, 2019 11:04 pm

lakpr wrote:
Sun Dec 01, 2019 10:24 pm
If doing opportunistic Roth conversions when the market is down is seen as market timing, then so is tax loss harvesting in taxable accounts.
Not following that analogy...?
I would consider doing Roth conversions...if the market dropped about 8% to 10%
Assume the market drops 10% and one can then do a Roth conversion at 24% marginal rate, or wait until retirement and do a Roth conversion at 12% marginal rate. Assume the investment has doubled after the 10% market drop.

Convert now: X * (1-24%) * 2 = 1.52X
Convert later: X * 2 * (1-12%) = 1.76X

The primary consideration should be the marginal tax rate you would pay to convert now, vs. what you expect to pay if you convert later.

If one has already decided to convert at some tax rate, then a market drop does allow conversion of a higher fraction of the account.

Topic Author
Triple digit golfer
Posts: 3432
Joined: Mon May 18, 2009 5:57 pm

Re: Year-end portfolio check-up

Post by Triple digit golfer » Mon Dec 02, 2019 12:45 pm

lakpr wrote:
Sun Dec 01, 2019 10:24 pm
Triple Digit Golfer,

Catching up to this thread late. On question 3, I think you are quoting me. All I will say in my defense is: If doing opportunistic Roth conversions when the market is down is seen as market timing, then so is tax loss harvesting in taxable accounts. Do not set out to be specifically market-time, but not taking the opportunity when it presents itself is also foolish.

For the record, I would consider doing Roth conversions in a "down market", if the market dropped about 8% to 10% within 12 months from a recent high. That would be a drop of about 2400 to 2800 points on the Dow from the last known high, or about 250 to 300 points drop on the S&P 500 index from the most recent high. My retirement horizon is at least 10 years out, and over the past century there has not been any 10 year period where the market dis not return to previous high and surpass it. [With a possible exception of Great Depression]

I may not be so adventurous though if I am going to retire within 5 years or so. In that case, I would rather have the government share in my misery of the loss, with the government getting a smaller tax bite at the time of withdrawals from the portfolio.
Lakpr,

Yes, I was referring to you. I see your point now. It's not really timing, but taking advantage of an opportunity, just like tax loss harvesting.

However, I don't see the benefit. If you convert in a tax bracket higher than the one in which you withdraw it, won't it always be a losing proposition, regardless of the performance of the investment at any time?

lakpr
Posts: 3064
Joined: Fri Mar 18, 2011 9:59 am

Re: Year-end portfolio check-up

Post by lakpr » Mon Dec 02, 2019 12:57 pm

Triple digit golfer wrote:
Mon Dec 02, 2019 12:45 pm
Lakpr,

Yes, I was referring to you. I see your point now. It's not really timing, but taking advantage of an opportunity, just like tax loss harvesting.

However, I don't see the benefit. If you convert in a tax bracket higher than the one in which you withdraw it, won't it always be a losing proposition, regardless of the performance of the investment at any time?
That's true. But there are two arguments I will make, applicable to my own case and folks like me who have at least a modest $700k to $800k in tax-deferred assets.

1. The Roth IRA / Roth 401k that I am investing in, I have mentally earmarked as my kids' inheritance. I intend to pass this funds on, without any withdrawals, to my kids when I pass. In other words, my investing horizon is more like 60 years or longer. Paying a smallish tax now is an acceptable cost.

2. As it also happens, with my portfolio of tax-deferred assets, I think I will top out the lowest or lowest-two tax brackets in retirement. (a projected $50k in SS, and a projected 4% withdrawal of another $40k per year). Assuming a very reasonable and achievable 4% to 5% REAL returns on my portfolio. Since my projected retirement is beyond 2026, the tax bracket I project to be in, will be at least 25%. Paying 24% now is at worst a break-even proposition, so no "harm" in converting right now.

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