401k options -- give your recommendation

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Topic Author
jordan54321
Posts: 5
Joined: Sun Feb 09, 2020 12:43 am

401k options -- give your recommendation

Post by jordan54321 » Tue Feb 11, 2020 9:53 pm

Emergency funds: yes, 3 months expenses in a separate MM account.

Debt: mortgage @ 3.75%. Will refinance soon for 15% fixed @ hopefully ~3%.

Tax Filing Status: Married

Tax Rate: 22% Federal, 3.8% State

State of Residence: OH

Age: 24

Desired Asset allocation: TBD
Desired International allocation: TBD

Current retirement assets: mid 5 figures

His 401k
5% me, 4% employer starting in September

His Roth IRA at American Funds
AMCAP FUND - A (02)
NEW WORLD FUND - A (36)
SMALLCAP WORLD FUND - A (35)
WASHINGTON MUTUAL INVESTORS FUND - A (01)

Her ROTH IRA at Vangaurd
Just opened -- tbd -- likely will be VTSAX/VTIAX/VBTLX with 33% to each

His ROTH IRA at Vangaurd
Will be opening soon -- likely same funds as above.

New annual Contributions
$6000 his Vangaurd Roth IRA
$6000 her Vangaurd Roth IRA
$0 to his American Funds Roth IRA
$1500 his 401k

Questions:
1) Would you all care to aid me in picking the funds for my 401k? This link are my fund options and fee structures: https://drive.google.com/open?id=1dImMc ... X1I2-dQ39r

2) I've been itemizing the last 2 years and will this year also. So that places me soundly in the 12% tax bracket. My assumption is then that Roth is the best decision for me. Convince me I'm right or wrong.

3) do you agree with my Vangaurd Roth selection of VTSAX/VTIAX/VBTLX?

Statement:
At a later date I'll transfer the AF to Vanagurd.

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Brianmcg321
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Re: 401k options -- give your recommendation

Post by Brianmcg321 » Tue Feb 11, 2020 10:04 pm

80% in Fidelity 500 index
20% in Fidelity International Index.

Once you hit seven figures then add some bonds.

Get rid of all those american funds in your roth and transfer the assets to vanguard.

Given your age and tax bracket I would go Roth 100%
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.

lakpr
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Re: 401k options -- give your recommendation

Post by lakpr » Tue Feb 11, 2020 10:15 pm

1. Saw the line up of funds, pretty much all of them suck except the Fidelity funds.
- Fidelity 500 Index fund
- Fidelity Mid Cap Index fund
- Fidelity Small Cap Index fund
- Fidelity International Index fund

I would suggest a 60:15:25 split between Fidelity 500 index fund, Fidelity Small Cap index fund and Fidelity International Index fund. The first two funds together (in a 4:1 ratio between them) approximate the total US stock market fund, and the last one is an excellent international index fund.

2. Your bond funds are bad with quite high expense ratios, if I were you I would make use of only the four funds above for your 401k contributions. You are 24 years old, and while not having bonds in your portfolio at this time is a bit riskier, I also don't see that to be a big drawback either. At age 24, I would have recommended no more than 15% of the allocation to bonds. But unless your total portfolio balance reaches 6 figures, I would not suggest bonds in your portfolio.

If you MUST invest in bonds, pick the PGIM Total Return Bond fund. That's the least dirty among the bad bond fund choices.

3. Bonds especially in a Roth account is a no-no. The defining feature of Roth is that all future earnings are tax free (subject to only age 59.5 rule). Why do you want to constrain that growth? Bonds belong in your 401k, never in Roth accounts.

4. You are only deferring 5% of your paycheck to 401k? That's very little. Your first aim should be to max out the 401k limit of $19,500 every year. If you do that, you get almost one Roth account for free (19,500 * 0.258 = $5031, 0.258 being the combined tax rate of Federal and State).

5. Yes, move your Roth IRA away from American Funds to Vanguard or Fidelity.

mattshwink
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Re: 401k options -- give your recommendation

Post by mattshwink » Tue Feb 11, 2020 10:17 pm

So you list in the first part of your post that your Tax rate is 22% Federal but then in the notes it is 12%. Both of those cannot be true :)

Also, it seems to me you are not maxing your 401k ($19,500 for 2020 for those under 50). So with that if you are not maxing Roth is a moot point. You want to do do Traditional 401k, which reduces your salary less for the same contribution (because it offsets some taxes). I would take that offset and increase your contribution. Let's assume your effective tax rate is 15% (which is different than your marginal rate). If you are contributing $300 a paycheck to your 401k, with Roth your pay is reduced $300. But if you contribute $300, your pay is only reduced $255 because of the tax advantage of the traditional, so you could up your contribution to $352.94 and your pay would only be reduced ~$300. So you could save more, likely outweighing any benefit you may get from Roth.

As for funds, your allocation is what you need to figure out first. It seems your asset allocation is a little haphazard (33% domestic stock, 33% international stock, 33% bonds). At your age you will be invested a good long time. I would tilt more towards stocks. 100% stocks would be fine at your age, but it seems you want some bonds, so I would go with a max of 20%, and slowly slide to 60-40 as you get older. So your total asset allocation (among all accounts - spouse included) to something like 64% domestic stocks, 16% foreign stocks, and 20% bonds). Your 401k has a good cheap S&P 500 option, which I would use. I would then balance the IRAs, looking at total assets to get to an asset allocation to the above.

I would also Roll the American Funds IRA to Vanguard to simplify.

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1789
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Re: 401k options -- give your recommendation

Post by 1789 » Tue Feb 11, 2020 10:23 pm

I am not sure how much you want in bonds but maybe this can be a good start

401k fund selections:
70% Fidelity 500 index fund
30% T. Rowe price short term bond fund

Roth IRAs
100% VTSAX
"My conscience wants vegetarianism to win over the world. And my subconscious is yearning for a piece of juicy meat. But what do i want?" (Andrei Tarkovsky)

Topic Author
jordan54321
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Joined: Sun Feb 09, 2020 12:43 am

Re: 401k options -- give your recommendation

Post by jordan54321 » Wed Feb 12, 2020 5:43 am

mattshwink wrote:
Tue Feb 11, 2020 10:17 pm
So you list in the first part of your post that your Tax rate is 22% Federal but then in the notes it is 12%. Both of those cannot be true :)
1) Marginal is 22, effective is 12%.
lakpr wrote:
Tue Feb 11, 2020 10:15 pm
1. Saw the line up of funds, pretty much all of them suck except the Fidelity funds.
- Fidelity 500 Index fund
- Fidelity Mid Cap Index fund
- Fidelity Small Cap Index fund
- Fidelity International Index fund

I would suggest a 60:15:25 split between Fidelity 500 index fund, Fidelity Small Cap index fund and Fidelity International Index fund. The first two funds together (in a 4:1 ratio between them) approximate the total US stock market fund, and the last one is an excellent international index fund.
2) I can get onboard with those allocations... They make sense to me :)

3) as it sits right now the Roth accounts would be 100% in VTSAX with 1789's recommendation.

4) maybe I just need to plot out the numbers... In my head, if my effective tax rate is 12% federal now and it'll likely be the same or higher (emphasis on higher) at retirement then I'd be better off in the Roth's now (401k and IRAs). The $1500 in my 401k is only this year because my match doesn't kick in until September. Next year I'll be at ~6k in 401k and ~7.5k across both IRAs. Note that the match is not included in the topic and at least at my last company the match was required to be in traditional, even if my contribution was Roth.

lifeisinmirrors
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Re: 401k options -- give your recommendation

Post by lifeisinmirrors » Wed Feb 12, 2020 6:03 am

The 401(k) bond choices aren't great, but that's a poor reason to hold 100% stocks. I would much rather recommend holding bonds in a Roth IRA than recommend being 100% in stocks.

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

Re: 401k options -- give your recommendation

Post by lakpr » Wed Feb 12, 2020 6:06 am

The OP is 24 years old, and deferring only $6k to $7k per year. Even at 15% bonds, that is just $1k per year. That is going to make a big difference vs 100% stocks???

bgf
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Re: 401k options -- give your recommendation

Post by bgf » Wed Feb 12, 2020 7:23 am

all good choices above. you could also just buy the 2055 Target Date fund in your 401k and hold VT (Vanguard Total World Stock) in your Roth.
No need to rebalance or do anything until you feel the need to buy bonds in Roth way down the road. just depends on how much you want to personalize and fiddle.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

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Duckie
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Re: 401k options -- give your recommendation

Post by Duckie » Wed Feb 12, 2020 5:37 pm

jordan5432 wrote:Age: 24

Desired Asset allocation: TBD
At your ages I recommend 80% stocks and 20% bonds. 90% stocks and 10% bonds would not be unreasonable.
Desired International allocation: TBD
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.

If 80/20 that would break down to 56% US stocks, 24% international stocks, and 20% bonds. If 90/10 it would be 63/27/10.
Would you all care to aid me in picking the funds for my 401k?
The best options are:
  • Fidelity 500 Index Fund (0.02%) -- Large caps, 80% of US stocks
  • Fidelity International Index Fund (0.04%) -- Developed markets, 75% of international stocks
  • T Rowe Price Short-Term Bond Fund (0.35%) -- US bonds, good fund but a little expensive
do you agree with my Vanguard Roth selection of VTSAX/VTIAX/VBTLX?
No. VTSAX and/or VTIAX yes. VBTLX no. 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. So avoid putting bonds in Roth accounts.

Yes, VBTLX is a lot cheaper than the Short-Term Bond in the 401k but 0.35% is worth avoiding bonds in your Roth IRAs.
At a later date I'll transfer the AF to Vanguard.
Good. Don't wait too long, the American Funds are expensive.

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ruralavalon
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Re: 401k options -- give your recommendation

Post by ruralavalon » Wed Feb 12, 2020 6:50 pm

jordan54321 wrote:
Wed Feb 12, 2020 5:43 am
Next year I'll be at ~6k in 401k and ~7.5k across both IRAs.
At age 24 and just starting establishing a high rate of contributions is the most important investing decision you can make. So try to contribute more. I suggest $6k annually to each IRA, for a total of $12k to the IRAs, and at least enough to your 401k account to get the full employer match. Wiki article, "Prioritizing Investments".

jordan54321 wrote:
Tue Feb 11, 2020 9:53 pm
Questions:
1) Would you all care to aid me in picking the funds for my 401k? This link are my fund options and fee structures:
In my opinion in your employer's 401k plan the better funds to consider using include:
1) Fidelity 500 Index Fund (84% of U.S. stock market) (FXAIX) ER 0.015%;
2) Fidelity International Index Fund (developed markets only) (FSPSX) ER 0.035%; and
3) MFS Total Return Bond R6 (intermediate-term, investment-grade bonds) (MRBKX) ER 0.42%.

jordan54321 wrote:
Tue Feb 11, 2020 9:53 pm
2) I've been itemizing the last 2 years and will this year also. So that places me soundly in the 12% tax bracket. My assumption is then that Roth is the best decision for me. Convince me I'm right or wrong.
jordan54321 wrote:
Wed Feb 12, 2020 5:43 am
Marginal is 22, effective is 12%.
. . . . .
maybe I just need to plot out the numbers... In my head, if my effective tax rate is 12% federal now and it'll likely be the same or higher (emphasis on higher) at retirement then I'd be better off in the Roth's now (401k and IRAs). The $1500 in my 401k is only this year because my match doesn't kick in until September. Next year I'll be at ~6k in 401k and ~7.5k across both IRAs. Note that the match is not included in the topic and at least at my last company the match was required to be in traditional, even if my contribution was Roth.
For most people traditional deductible 401k contributions will likely be better.

The income tax code is progressive, with a lower tax rate for lower income. Retirement usually means that employment income has ended. Therefore, most people are in a lower tax bracket in retirement and for most people traditional deductible 401k contributions will probably be better.

In addition when you withdraw from your 401k in retirement, the income is not all taxed at the marginal tax rate specified for your tax bracket. TFB blog post, "The case against Roth 401k". "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)." "Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k)." I note that you have just started your401k, so have almost nothing in traditional accounts. "For people without a traditional defined benefit pension plan, it means the majority of the retirement savings should go to a Traditional 401(k), not Roth."

Will you be eligible for a substantial pension in addition to Social Security? A pension changes that analysis, so that Roth contributions are likely better if you have a significant pension coming in addition to Social Security. TFB blog post, "Most TSP participants should switch to the Roth TSP". That post discussed the effect of a federal pension, but the analysis should hold for other pensions.

Will you be eligible for a substantial pension in addition to Social Security?

What is your profession or occupation?



jordan54321 wrote:
Tue Feb 11, 2020 9:53 pm
3) do you agree with my Vangaurd Roth selection of VTSAX/VTIAX/VBTLX?
No.

The two total market stock index funds are fine in the Roth IRA. But put your bond allocation in your 401k account.


jordan54321 wrote:
Tue Feb 11, 2020 9:53 pm
Statement:
At a later date I'll transfer the AF to Vanagurd.
Do this rollover soon. The expenses are large, and I see no benefit in waiting.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Topic Author
jordan54321
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Joined: Sun Feb 09, 2020 12:43 am

Re: 401k options -- give your recommendation

Post by jordan54321 » Wed Feb 12, 2020 11:01 pm

jordan54321 wrote:
Wed Feb 12, 2020 5:43 am
Next year I'll be at ~6k in 401k and ~7.5k across both IRAs.
At age 24 and just starting establishing a high rate of contributions is the most important investing decision you can make. So try to contribute more. I suggest $6k annually to each IRA, for a total of $12k to the IRAs, and at least enough to your 401k account to get the full employer match. Wiki article, "Prioritizing Investments".
Yes, this is my plan. The 6k next year will slightly exceed my match. The other 7.5k will put me @ ~15% into retirement. Of course over half of that is post tax contributions so it will feel a little more painful than if they were pretax contributions.
In addition when you withdraw from your 401k in retirement, the income is not all taxed at the marginal tax rate specified for your tax bracket. TFB blog post, "The case against Roth 401k". "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)." "Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k)." I note that you have just started your401k, so have almost nothing in traditional accounts. "For people without a traditional defined benefit pension plan, it means the majority of the retirement savings should go to a Traditional 401(k), not Roth."
I can get on board with that explanation. I'll keep the IRAs as ROTH and do my 401k entirely as traditional.
Will you be eligible for a substantial pension in addition to Social Security?

What is your profession or occupation?
No. Electrical Engineer.

lifeisinmirrors
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Re: 401k options -- give your recommendation

Post by lifeisinmirrors » Thu Feb 13, 2020 6:03 am

lakpr wrote:
Wed Feb 12, 2020 6:06 am
The OP is 24 years old, and deferring only $6k to $7k per year. Even at 15% bonds, that is just $1k per year. That is going to make a big difference vs 100% stocks???
Fair enough, if the OP wanted to hold 100% stocks, that's a defensible decision. But they should determine the asset allocation first, then decide what to buy in each account. They shouldn't back into the allocation just because of tax efficiency and the specific bond choices in the 401(k).

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