End of Year Portfolio Review

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Topic Author
fixieclimber
Posts: 22
Joined: Wed Apr 17, 2019 6:16 pm

End of Year Portfolio Review

Post by fixieclimber »

Hello all and Early Happy New Year!

I've come a long way since my initial posts - trying to soak in as much knowledge as I can. Thanks to this site, I'd like to think I have a concrete foundation of this personal finance concept. Been slowly cleaning my accounts up and now finally would like your input. I'll try and respond tonight, but if not, will follow up tomorrow! Thanks in advance!

Emergency funds: One year emergency fund sitting in Vanguard Treasury MM (VUSXX) in brokerage account

Debt: Car lease for another two years (regretting it after this forum but will purchase an older car once our lease is up)

Tax Filing Status: Single, but newly engaged.

Tax Rate: 24% Federal, 9.3% State

State of Residence: CA

Age: 31

Desired Asset allocation: 100% stocks / 0% bonds (slowly exchanging bonds to stocks)
Desired International allocation: 20-30% of stocks (slowly buying more to achieve desired %)

Current total portfolio: low six-figures (note percentages are from our combined savings)

Joint Taxable - Vanguard
21% cash (Vanguard Federal MM - VMFXX - savings for wedding/down payment)

His 401k at TRowe - both just started new jobs and old 401k's have been rolled over
3% Vanguard Inst Index, Plus S&P 500 - VIIIX (.02%)
Company match? - 6%

His Roth IRA at Vanguard
14% Vanguard 500 Index Admiral - VFIAX (0.04%)
6% Vanguard Total Int'l Stock - VTIAX (0.11%)
14% Vanguard Total Stock -VTSAX (0.04%)

His Rollover IRA at Vanguard
2% Vanguard REIT - VGSLX (0.12%)
11% Vanguard Total Bond Market - VBTLX (0.05%)
16.0% Vanguard Total Stock - VTSAX (0.04%)

Her 401k at TRowe
1% Schwab S&P 500 - SWPPX (0.02%)
Company match? - 6%

Her Roth IRA at Vanguard
2% Vanguard Target Date 2065 - VLXVX (0.15%) - will move to VTSAX once we have the minimum for the mutual fund

Her Rollover IRA at Vanguard
9% Vanguard Total Bond Market - VBTLX (0.05%)
2% Vanguard Total Stock -VTSAX (0.04%)
_______________________________________________________________

Contributions

New annual Contributions - we're looking to max out the contributions, but with our new jobs, not sure what our adjusted MAGI will be for the income limits (question below re: backdoor)
$19.5K + $6K match his 401k
$19.5K + $6K match her 401k
$6K his IRA/Roth IRA
$6K her IRA/Roth IRA
$1.2K his HSA
$0.24K her HSA

+ anything we can throw into taxable post-wedding contributions.

I didn't list the available funds in our 401k as these were the best options based off the diversification and expense ratio. If needed, please let me know and I will list them.

Questions:

1a. Could you critique my portfolio as it stands? More specifically:
  • Our short-term savings in the money market account? Once we hit $50K, we'll put it under Vanguard Treasury MM (VUSXX). Is there a better place for this?
    My REITs fund
    My slow conversion (DCA) of bonds to VTSAX (I feel like I'm kinda timing the market, but trying to convert $1K/mo)
    Tax Efficiency?
1b. For holding both total stock and S&P500 indexes, my original investments were in S&P 500 and I never wanted to exchange them (even though there's no taxable event). Are there any benefits to do so outside of the additional diversification?

2a. Based off what I've learned, is the following order of buckets correct for my situation?
  • Max 401k's first
    Max IRA (roth)
    HSA (follow up question below)
    Taxable
2b. Based off what I was reading, HSA in CA seems a bit complicated and troublesome. From what I gathered, it sounds like I have to track and report to the IRS earnings and contributions each year separately. Is this true? Should I max this out annually or simply stop contributing and move towards taxable? Feel like since I'm dipping my toes in, might as well go one way or another.

3. With a new job, we received bonuses + relocation so I've been worried about contributing to a Roth IRA. I know we can simply reclassify my contributions, if needed, but is there a deadline? Going into 2020, should I contribute monthly and reclassify later, if needed, or wait until the end of the year and contribute the full amount? Any pros and cons outside of time?

I have so many other questions around roth conversion ladders, doing my own taxes, my parents finances, etc but I think this should be enough for now as a gutcheck on my own progress. Will post those other questions in the new year! Have a safe NY!

S
Last edited by fixieclimber on Thu Jan 02, 2020 12:06 pm, edited 1 time in total.
Topic Author
fixieclimber
Posts: 22
Joined: Wed Apr 17, 2019 6:16 pm

Re: End of Year Portfolio Review

Post by fixieclimber »

Sorry, wanted to bump this!
User avatar
sometimesinvestor
Posts: 1271
Joined: Wed May 13, 2009 6:54 am

Re: End of Year Portfolio Review

Post by sometimesinvestor »

If T.Rowe Price capital appreciation is an available fund option in your 401k you should consider a partial investment in that fund. If you google that fund on this site you will find its well thought of in spite of the expense ratio. . The managers have a very good record of making good asset allocation decisions (and there have been several different managers
stan1
Posts: 9920
Joined: Mon Oct 08, 2007 4:35 pm

Re: End of Year Portfolio Review

Post by stan1 »

1a) Federal Money Market or Treasury Money Market are fine for expenses (such as wedding costs, down payment). The difference is not a lot but all of the interest in Treasury MMF is exempt from CA income tax. Once you have $50K in Treasury Money Market you do not need to keep $50K in it.

I would just move into the asset allocation you want and not worry about DCA.

1b) Sorry but I don't understand why you would hold both S&P 500 and TSM in an IRA. They perform almost exactly the same. Pick one and only one. I would not build a personal attachment to what you hold. Go with what's best for you.

2a)
Max 401Ks up to match
Max Roth IRA (front door or back door)
Max Rest of 401K up to limits
HSA
Taxable or do Roth 401K instead of Traditional 401K. Because of your tax rate I think you'll generally want to do Traditional 401K contributions but maybe you'll some of both Roth and Traditional. There's no way to predict which will do best over decades of market performance, tax rate changes, relocations to different states, and tax law changes.

3) Just do a backdoor if you aren't sure whether you'll be over the income limit for a front door Roth IRA contribution. You'll have to rollover your existing IRA accounts into your 401Ks before you do the conversion though. It looks like your 401K accounts have decent investment choices.
HomeStretch
Posts: 6050
Joined: Thu Dec 27, 2018 3:06 pm

Re: End of Year Portfolio Review

Post by HomeStretch »

Congratulations on your recent engagement!

+1 on advice, above.

If you car loan rate exceeds the after-tax rate on your EF account, consider using a portion of your emergency fund to payoff the car loan. Replenish the EF with the monthly loan savings.

Do your and SO’s 401k plans accept rollovers in? If so, consider rolling over the traditional IRAs into the 401k plans. This will allow you each to do a backdoor Roth without being subject to the pro rata rule. BH wiki page on Backdoor Roth:
https://www.bogleheads.org/wiki/Backdoor_Roth

Check into whether your 401k plans offer mega Backdoor Roth (MBR). The MBR involves making an after-tax (non Roth) contribution with either an in-plan Roth rollover or an in-service distribution to a Roth IRA. For long-term savings, consider the MBR before contributing to a Taxable account as Roth accounts grow tax free. BH wiki page on After-Tax 401k:
https://www.bogleheads.org/wiki/After-tax_401(k)
Topic Author
fixieclimber
Posts: 22
Joined: Wed Apr 17, 2019 6:16 pm

Re: End of Year Portfolio Review

Post by fixieclimber »

sometimesinvestor wrote: Wed Jan 01, 2020 7:31 pm If T.Rowe Price capital appreciation is an available fund option in your 401k you should consider a partial investment in that fund. If you google that fund on this site you will find its well thought of in spite of the expense ratio. . The managers have a very good record of making good asset allocation decisions (and there have been several different managers
The ER seems a bit high for my taste at the moment, but appreciate the recommendation. I'll look into this once I have a more complete understanding of investing.
stan1 wrote: Wed Jan 01, 2020 8:03 pm 1a) Federal Money Market or Treasury Money Market are fine for expenses (such as wedding costs, down payment). The difference is not a lot but all of the interest in Treasury MMF is exempt from CA income tax. Once you have $50K in Treasury Money Market you do not need to keep $50K in it.

I would just move into the asset allocation you want and not worry about DCA.

1b) Sorry but I don't understand why you would hold both S&P 500 and TSM in an IRA. They perform almost exactly the same. Pick one and only one. I would not build a personal attachment to what you hold. Go with what's best for you.

2a)
Max 401Ks up to match
Max Roth IRA (front door or back door)
Max Rest of 401K up to limits
HSA
Taxable or do Roth 401K instead of Traditional 401K. Because of your tax rate I think you'll generally want to do Traditional 401K contributions but maybe you'll some of both Roth and Traditional. There's no way to predict which will do best over decades of market performance, tax rate changes, relocations to different states, and tax law changes.

3) Just do a backdoor if you aren't sure whether you'll be over the income limit for a front door Roth IRA contribution. You'll have to rollover your existing IRA accounts into your 401Ks before you do the conversion though. It looks like your 401K accounts have decent investment choices.
Thanks for the responses.

1a. Confirming once I have $50K and invest in Treasury MM, I can then simply reduce it back down to something <$50K?
1b. I originally had S&P and just didn't want to sell it and exchange things around. There's no taxable events exchanging in 401K or IRA correct?
2a. Based off other threads I read here, my understanding was to max my 401K first, then move to the roth IRA. Should I go based off your priority solely because of the tax advantage of the roth? Re: the HSA, is this a lower priority because I'm in CA?
3. Will rollover those my tIRA into my current 401K this month.
HomeStretch wrote: Wed Jan 01, 2020 10:13 pm Congratulations on your recent engagement!

+1 on advice, above.

If you car loan rate exceeds the after-tax rate on your EF account, consider using a portion of your emergency fund to payoff the car loan. Replenish the EF with the monthly loan savings.

Do your and SO’s 401k plans accept rollovers in? If so, consider rolling over the traditional IRAs into the 401k plans. This will allow you each to do a backdoor Roth without being subject to the pro rata rule. BH wiki page on Backdoor Roth:
https://www.bogleheads.org/wiki/Backdoor_Roth

Check into whether your 401k plans offer mega Backdoor Roth (MBR). The MBR involves making an after-tax (non Roth) contribution with either an in-plan Roth rollover or an in-service distribution to a Roth IRA. For long-term savings, consider the MBR before contributing to a Taxable account as Roth accounts grow tax free. BH wiki page on After-Tax 401k:
https://www.bogleheads.org/wiki/After-tax_401(k)
Thank you!
After reading your response, I realized I was incorrect. I have a car lease for another two years. :(
Yes, we were looking to rollover our tIRA into our 401k this month, so we can initiate the backdoor roth (we were waiting to see what our MAGI was this year, but based off the earlier comment, I should just proceed with backdoor roth regardless).

Thanks, I read the link, but dumb follow-up question, but what is the main difference between a backdoor roth and the MBR? Just the total contribution limit?
stan1
Posts: 9920
Joined: Mon Oct 08, 2007 4:35 pm

Re: End of Year Portfolio Review

Post by stan1 »

fixieclimber wrote: Thu Jan 02, 2020 12:58 pm
stan1 wrote: Wed Jan 01, 2020 8:03 pm 1a) Federal Money Market or Treasury Money Market are fine for expenses (such as wedding costs, down payment). The difference is not a lot but all of the interest in Treasury MMF is exempt from CA income tax. Once you have $50K in Treasury Money Market you do not need to keep $50K in it.

I would just move into the asset allocation you want and not worry about DCA.

1b) Sorry but I don't understand why you would hold both S&P 500 and TSM in an IRA. They perform almost exactly the same. Pick one and only one. I would not build a personal attachment to what you hold. Go with what's best for you.

2a)
Max 401Ks up to match
Max Roth IRA (front door or back door)
Max Rest of 401K up to limits
HSA
Taxable or do Roth 401K instead of Traditional 401K. Because of your tax rate I think you'll generally want to do Traditional 401K contributions but maybe you'll some of both Roth and Traditional. There's no way to predict which will do best over decades of market performance, tax rate changes, relocations to different states, and tax law changes.

3) Just do a backdoor if you aren't sure whether you'll be over the income limit for a front door Roth IRA contribution. You'll have to rollover your existing IRA accounts into your 401Ks before you do the conversion though. It looks like your 401K accounts have decent investment choices.

1a. Confirming once I have $50K and invest in Treasury MM, I can then simply reduce it back down to something <$50K?
1b. I originally had S&P and just didn't want to sell it and exchange things around. There's no taxable events exchanging in 401K or IRA correct?
2a. Based off other threads I read here, my understanding was to max my 401K first, then move to the roth IRA. Should I go based off your priority solely because of the tax advantage of the roth? Re: the HSA, is this a lower priority because I'm in CA?
3. Will rollover those my tIRA into my current 401K this month.
1a) Correct, you need to meet the $50K minimum to open the holding in Treasury Money Market Fund. Vanguard does not require that you keep $50K in the fund after you open it so you can draw it down after that.

1b) Correct, there is no taxable event if you sell and buy inside a 401K or IRA.

2a) Here is the Wiki on where to save first. Since you are maxing all accounts not sure any of it matters much.
https://www.bogleheads.org/wiki/Priorit ... nvestments

Personally I think HSAs have a pretty high hassle factor but part of that is my employer makes them a hassle. I don't agree with the wiki that an HSA should be funded before a Roth IRA or the rest of a 401K.

I think your bigger decision is whether to to Traditional or Roth 401K contributions in California. If you plan to leave California I'd do 100% Traditional for now to maximize tax deduction and convert later after you leave California state taxes. If you plan to stay in California you might do 50/50. It's not possible to optimize without making bad assumptions. Tax laws, tax rates, and rates of return are all unpredictable. Any long term analysis that relies on tax laws staying the same is fraught with error. One lesson learned in the recent changes to the SECURE Act for Traditional IRAs is that asset location diversification is a strategy to mitigate risks of future tax law changes.
Topic Author
fixieclimber
Posts: 22
Joined: Wed Apr 17, 2019 6:16 pm

Re: End of Year Portfolio Review

Post by fixieclimber »

stan1 wrote: Thu Jan 02, 2020 1:10 pm
Personally I think HSAs have a pretty high hassle factor but part of that is my employer makes them a hassle. I don't agree with the wiki that an HSA should be funded before a Roth IRA or the rest of a 401K.

I think your bigger decision is whether to to Traditional or Roth 401K contributions in California. If you plan to leave California I'd do 100% Traditional for now to maximize tax deduction and convert later after you leave California state taxes. If you plan to stay in California you might do 50/50. It's not possible to optimize without making bad assumptions. Tax laws, tax rates, and rates of return are all unpredictable. Any long term analysis that relies on tax laws staying the same is fraught with error. One lesson learned in the recent changes to the SECURE Act for Traditional IRAs is that asset location diversification is a strategy to mitigate risks of future tax law changes.
Thanks for the responses!

For the HSA, I'll leave it as is for now and work with my accountant on it. Hoping to do my own taxes next year (going to wait since we received all those bonuses and relo), so I'll confirm what the HSA entails.

Sorry, didn't realized this was an important detail to add - we just moved to CA for jobs, but ideally would like to move back home to AZ over the next few years. Does this push me towards the t401K?
HomeStretch
Posts: 6050
Joined: Thu Dec 27, 2018 3:06 pm

Re: End of Year Portfolio Review

Post by HomeStretch »

fixieclimber wrote: Thu Jan 02, 2020 12:58 pm
HomeStretch wrote: Wed Jan 01, 2020 10:13 pm Do your and SO’s 401k plans accept rollovers in? If so, consider rolling over the traditional IRAs into the 401k plans. This will allow you each to do a backdoor Roth without being subject to the pro rata rule. BH wiki page on Backdoor Roth:
https://www.bogleheads.org/wiki/Backdoor_Roth

Check into whether your 401k plans offer mega Backdoor Roth (MBR). The MBR involves making an after-tax (non Roth) contribution with either an in-plan Roth rollover or an in-service distribution to a Roth IRA. For long-term savings, consider the MBR before contributing to a Taxable account as Roth accounts grow tax free. BH wiki page on After-Tax 401k:
https://www.bogleheads.org/wiki/After-tax_401(k)
Yes, we were looking to rollover our tIRA into our 401k this month, so we can initiate the backdoor roth (we were waiting to see what our MAGI was this year, but based off the earlier comment, I should just proceed with backdoor roth regardless).

Thanks, I read the link, but dumb follow-up question, but what is the main difference between a backdoor roth and the MBR? Just the total contribution limit?
Yes, the main difference is the total contribution limit. The backdoor Roth and MBR (if offered by your plans) are two separate ways of getting long-term after-tax savings into Roth accounts.

For after-tax savings, prioritize Roth over Taxable account contributions as Roth accounts grow tax free. In addition to many years of no taxes on account growth, there are a couple other benefits:
1. For FAFSA purposes, Taxable account balances are included in the calculation of expected family contributions to college costs whereas retirement accounts are excluded.
2. Qualified Roth distributions are excluded from adjusted gross income which can come in handy if one needs to manage AGI but needs cash.
Topic Author
fixieclimber
Posts: 22
Joined: Wed Apr 17, 2019 6:16 pm

Re: End of Year Portfolio Review

Post by fixieclimber »

HomeStretch wrote: Thu Jan 02, 2020 1:30 pm Yes, the main difference is the total contribution limit. The backdoor Roth and MBR (if offered by your plans) are two separate ways of getting long-term after-tax savings into Roth accounts.

For after-tax savings, prioritize Roth over Taxable account contributions as Roth accounts grow tax free. In addition to many years of no taxes on account growth, there are a couple other benefits:
1. For FAFSA purposes, Taxable account balances are included in the calculation of expected family contributions to college costs whereas retirement accounts are excluded.
2. Qualified Roth distributions are excluded from adjusted gross income which can come in handy if one needs to manage AGI but needs cash.
So it looks like I do have the option to contribute to after-tax 401k. From my benefits page:

"You also have the option of contributing to the plan with non-Roth after-tax money, up to 10% of your eligible pay, limited to $28,500 in 2020."

Let me know if I should start another thread, but a few question this MBR.

How is all this tracked on TRowe's end? Are the funds all separated by tradtitional, roth, and after-tax?
Are contributions for after-tax managed by payroll or do I contribute individually like I do my IRA?
Like a backdoor IRA, do I have to convert the contributions immediately?

Thanks!
HomeStretch
Posts: 6050
Joined: Thu Dec 27, 2018 3:06 pm

Re: End of Year Portfolio Review

Post by HomeStretch »

MBR Step 1 is to make after-tax (non Roth) 401k contributions, which your plan allows. Earnings on after-tax 401k contributions are pretax so you want to see if your plan also allows Step 2, which is (1) in-plan Roth rollovers, which moves your after-tax 401k contribution to Roth 401k where earnings are tax free, and/or (2) in-service distributions to your Roth IRA where earnings are tax free.

If your plan allows Step 2, see what the plan says in writing about it and you can talk to your 401k provider (TRP) and, if necessary, HR. Every plan administers this in their own way but generally:
1. TRP tracks the traditional/after tax/Roth contributions & earnings separately in sub-accounts. They also track the source (employee, employer).
2. You make 401k contributions via payroll withholdings and designate the type (traditional/Roth/after tax) and amount of contribution you are making to each type
3. Plans may have fees for the rollovers/conversions and/or limits on how often you can do it. Some let you do it online or schedule to do it automatically or may require you to call/submit a form.

Your post says your plan limits your after-tax contributions to the lower of 10% of pay or $28,500. Be aware that the 2020 IRS limit of $57k (under age 50) applies to the total of your employee deferrals of $xx (up to $19.5k) + employer contribution $yy + your after-tax contributions of $zz.

If your plan does not allow MBR Step 2, the ability to do Step 1 only isn’t that valuable as earnings on after-tax contributions grow pretax and are taxed at ordinary income tax rates at distribution.
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