High Yield Dividend Stock in i401k

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Topic Author
lmldm
Posts: 22
Joined: Mon Feb 03, 2020 12:13 pm

High Yield Dividend Stock in i401k

Post by lmldm » Thu Feb 13, 2020 2:52 pm

Hi Bogleheads,

I have another post about being fairly new to investing, but this is a separate topic. I've been doing a lot of reading, and what I am seeing is that many financial analysts feel that when in retirement, it's a better bet to have preferred stock (or high yield dividend funds) providing income during retirement. How do you feel about these DRIPS (or high yield dividend funds) if they are put into a ROTH portion of an i401k? I am about to switch up my husband's funds from Target Retirement 2045 to other funds. Since I manage the money in the family, and I made all the contributions into the i401k, it never gave me the option to do ROTH or Traditional 401k. I believe this is because of the fund that we are in. We have about 72k in his i401k, and we have reached out to Vanguard to try and change the funds and see why it didn't give the option to contribute to Roth.

I was told before that Bond ETF (BND) was a great bet for the employee contribution in a roth or traditional i401k. If it's Roth and is taxed now, would it be better to have a high yielding dividend fund and not get slammed with taxes, capital gains and earn income? The Target 2045 Fund I believe is too aggressive, since we are aggressive in our taxable account.

What fund would you add for the Employer contribution? VTSAX?
Any advice or opinions on income funds and what to put in an employer 401k (fund wise) would be greatly appreciated.

Thank you!

sycamore
Posts: 457
Joined: Tue May 08, 2018 12:06 pm

Re: High Yield Dividend Stock in i401k

Post by sycamore » Thu Feb 13, 2020 5:24 pm

lmldm wrote:
Thu Feb 13, 2020 2:52 pm
Hi Bogleheads,

I have another post about being fairly new to investing, but this is a separate topic. I've been doing a lot of reading, and what I am seeing is that many financial analysts feel that when in retirement, it's a better bet to have preferred stock (or high yield dividend funds) providing income during retirement. How do you feel about these DRIPS (or high yield dividend funds) if they are put into a ROTH portion of an i401k? I am about to switch up my husband's funds from Target Retirement 2045 to other funds. Since I manage the money in the family, and I made all the contributions into the i401k, it never gave me the option to do ROTH or Traditional 401k. I believe this is because of the fund that we are in. We have about 72k in his i401k, and we have reached out to Vanguard to try and change the funds and see why it didn't give the option to contribute to Roth.

I was told before that Bond ETF (BND) was a great bet for the employee contribution in a roth or traditional i401k. If it's Roth and is taxed now, would it be better to have a high yielding dividend fund and not get slammed with taxes, capital gains and earn income? The Target 2045 Fund I believe is too aggressive, since we are aggressive in our taxable account.

What fund would you add for the Employer contribution? VTSAX?
Any advice or opinions on income funds and what to put in an employer 401k (fund wise) would be greatly appreciated.

Thank you!
It sounds like you've got a few questions in there.

Question one is what funds should you invest in. You will find lots of debates here about preferences for "tilting" to one corner of the stock market or another:
- high-flying growth/tech stocks
- small-cap value
- some other factor (like momentum, liquidity, or quality)
- world cap-weighted versus home-country preference
- preferred stocks
- and perhaps everyone's favorite -- "dividend stocks." The debates often focus on why dividends aren't "free" money. They're not. Dividend-focused funds aren't inherently bad either, but they come with trade-offs. I would not invest in them because some financial analysts suggested them. Ask yourself whether their reasons for such funds make any sense? If not, don't use them.

The typical boglehead approach for equities is to use a cap-weighted stock fund like Total Stock Market (VTSAX). That fund includes all kinds of companies, including those that have a high yield payout.

For bonds, Total Bond Market (as either a mutual fund or the BND ETF) is great.

A Target Retirement fund which combines Total Stock and Total Bond and their international versions is also a great choice. I support using such a fund until you work out for sure why you want to focus on specific subsets of the stock market.


Question two is what funds should go in which account. Typically a Roth 401k or IRA is for the fund with higher expected growth (stocks). And a Traditional 401k or IRA is for the fund with lower expected growth (bonds). There's nothing wrong with having some bonds in a Roth account. The main thing is to have the right mix (asset allocation) of stocks and bonds that you're comfortable with. Then you can pick which funds go in which accounts.

You mentioned a taxable account. Ideally you would list all your accounts so we can give better suggestions about which funds go in which accounts. For sure you want to get your AA right across the whole portfolio.

Anyway, a Target Retirement fund would be a good choice for both the 401k and the Roth. Or use the Roth for just stocks, and use the 401k to pick a fund that gives you the right balance of stocks/bonds overall.


Also, regarding your question
The "If it's Roth and is taxed now, would it be better to have a high yielding dividend fund and not get slammed with taxes, capital gains and earn income?"
The question doesn't make sense because with a Roth, any withdrawal is not taxed - you paid the taxes on your income that you used for the contributions. It doesn't matter whether your Roth account balance grew through a rise in the stock market, or from stock dividends, or from bond dividends, or from whatever.

But maybe I misunderstood what you're asking about?

Topic Author
lmldm
Posts: 22
Joined: Mon Feb 03, 2020 12:13 pm

Re: High Yield Dividend Stock in i401k

Post by lmldm » Fri Feb 21, 2020 12:42 pm

Thank you for your response Sycamore.

We are aged 43 and 42. My Husbands solo I401k is all invested in the Vanguard Target 2045 Fund. I believe the ticker is VTIVX. He can make employee and employer contributions. Apparently if we wanted to have a traditional IRA allocation and Roth allocation (which you can), we'd have to open separate accounts within the I401k. Do you think it's necessary or better to open these separate accounts, change the asset allocation from the Target Retirement Fund to add an additional Bond Fund like BND, and if I were to add the BND, should it be put in Roth or Traditional? I was thinking of changing up the whole allocation to different funds like VTSAX and BND. The Target Fund has all of these in there, but I think it might be a good idea to add more bonds or high yield index fund into a Roth.

I have my ROTH invested in VTSAX and VNQ. No bonds at all.
We also have a taxable account that has VTSAX, VTMX and 4 separate stocks (I know bogle heads frown on stocks), but they are Apple, Tesla, Teledoc and Innovative Industrial Properties. I'd like to hold long on these as I believe they are strong.

In my Roth I have:
VTSAX: 33k
VNQ: 10.5K

Taxable:
$33,850 in VTSAX and VTMFX
In stocks: $49,300 (with short term and long term capital gains for all I am up about $16,300K)

I have about $6k in the Settlement fund, and was thinking I would like to put that into my husbands I401k, because it's tax deferred. That's why I was asking about high yield dividend funds. And I believe if I do this, it would have to be in a Roth. I am not really sure if I should leave the current distribution as is, but the Target 2045 fund is 89% stock and 11% bond, which is slightly scary.

What would you do? We also have a very large portion of money in our Emergency Fund. Approx 90k. Which we need because our expenses are very high per month as my husband is self employed.

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firebirdparts
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Re: High Yield Dividend Stock in i401k

Post by firebirdparts » Fri Feb 21, 2020 2:09 pm

If you have available individual 401k, then it stands to reason that you'd never run out of tax-protected space. Based on that, any preferences based on tax consequences don't really apply to you. Basically you just need some sort of portfolio in retirement that pays you as much money as possible, given we don't have any time machine or crystal ball. That's how it seems to me. In that case, dividend stocks will be fine, but they're not all that different from the SP500 or VTSAX or total global mutual funds. Nothing unique about them as a group.

You're not really close to retirement, so maybe that's something you can put off for a later date. What you do need to think about now is how much Roth money you want. As you pull out traditional, you'll taxes on every penny. As you pull out Roth money, you'll owe no taxes. It will make no difference at all what the money was invested in. Totally irrelevant. What you would like to guess at today is just how much of each you want when you retire. Then you make a plan to get the money in there.

You are at an age where you could add bonds with the expectation that you'd rebalance between bonds and stocks. It happens to all of us eventually. You don't have to have bonds.
Last edited by firebirdparts on Fri Feb 21, 2020 2:25 pm, edited 2 times in total.
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niceguy7376
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Re: High Yield Dividend Stock in i401k

Post by niceguy7376 » Fri Feb 21, 2020 2:13 pm

Where is the i401k located? Does that provider offer a roth i401k?

sycamore
Posts: 457
Joined: Tue May 08, 2018 12:06 pm

Re: High Yield Dividend Stock in i401k

Post by sycamore » Fri Feb 21, 2020 4:05 pm

lmldm wrote:
Fri Feb 21, 2020 12:42 pm
Thank you for your response Sycamore.

We are aged 43 and 42. My Husbands solo I401k is all invested in the Vanguard Target 2045 Fund. I believe the ticker is VTIVX. He can make employee and employer contributions. Apparently if we wanted to have a traditional IRA allocation and Roth allocation (which you can), we'd have to open separate accounts within the I401k. Do you think it's necessary or better to open these separate accounts, change the asset allocation from the Target Retirement Fund to add an additional Bond Fund like BND, and if I were to add the BND, should it be put in Roth or Traditional? I was thinking of changing up the whole allocation to different funds like VTSAX and BND. The Target Fund has all of these in there, but I think it might be a good idea to add more bonds or high yield index fund into a Roth.
lmldm,

Whether to use a traditional 401k (or IRA) versus a Roth 401k (or IRA) is a common question. The answer depends on your current marginal tax rate compared to your future/retirement marginal tax rate. That future tax rate is just a guess because it depends on what Congress does with tax rates, what your income needs will be when you retire, and other uncertain things.

The general recommendation is:
1) if your current marginal rate is more than your future marginal rate, use Traditional. This is likely the case for most people because most people will be in a lower tax bracket when they retire. This likely applies to you.

2) if your current marginal rate is less than your future marginal rate, use Roth. This is likely the case for, say, people just starting a career who have a low salary (i.e., they're in the 0 or 10% bracket).

Before making recommendations, let's double check your portfolio...
lmldm wrote:
Fri Feb 21, 2020 12:42 pm
I have my ROTH invested in VTSAX and VNQ. No bonds at all.
We also have a taxable account that has VTSAX, VTMX and 4 separate stocks (I know bogle heads frown on stocks), but they are Apple, Tesla, Teledoc and Innovative Industrial Properties. I'd like to hold long on these as I believe they are strong.

In my Roth I have:
VTSAX: 33k
VNQ: 10.5K

Taxable:
$33,850 in VTSAX and VTMFX
In stocks: $49,300 (with short term and long term capital gains for all I am up about $16,300K)

I have about $6k in the Settlement fund, and was thinking I would like to put that into my husbands I401k, because it's tax deferred. That's why I was asking about high yield dividend funds. And I believe if I do this, it would have to be in a Roth. I am not really sure if I should leave the current distribution as is, but the Target 2045 fund is 89% stock and 11% bond, which is slightly scary.

What would you do? We also have a very large portion of money in our Emergency Fund. Approx 90k. Which we need because our expenses are very high per month as my husband is self employed.
If I understand right, your accounts are:

Her Roth:
- 17%, VTSAX $33k
- 5%, VNQ $10.5k

Taxable:
- 17%, VTSAX and VTMFX $33,850
- 25%, various individual stocks $49,300

His i401k:
- 36%, Vanguard Target 2045 $72k

Excluding your emergency fund and settlement fund, that's $198.65k total, which I used to compute the % that each fund represents of the total.

Questions:

1. how much $ is in each taxable fund VTSAX and VTMFX? That way we know how much is in stocks vs bonds.
2. you have $6k in a settlement fund. You mentioned wanting to put it in the i401k, but you can only contribute to a 401k with either employee or employer contributions. Is that settlement fund in the taxable account or the Roth?
3. do you have a general idea for your desired asset allocation? What you have now is stock-heavy, which isn't necessarily bad if you intend to retire in 20-25 years.
4. what's your current marginal tax rate?

We'll be able to make better suggestions knowing the answers. Cheers!

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LadyGeek
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Re: High Yield Dividend Stock in i401k

Post by LadyGeek » Fri Feb 21, 2020 10:03 pm

This thread is now in the Personal Investments forum (help with husband's funds).

Administrative note: "ROTH" is not an acronym. It's the name of a senator. See the wiki: Roth IRA
Named after US Senator William Roth, Roth IRAs were established by the Taxpayer Relief Act of 1997.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

MoneyMarathon
Posts: 992
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Re: High Yield Dividend Stock in i401k

Post by MoneyMarathon » Sat Feb 22, 2020 5:46 am

firebirdparts wrote:
Fri Feb 21, 2020 2:09 pm
If you have available individual 401k, then it stands to reason that you'd never run out of tax-protected space.
Nitpick: almost never.

https://www.irs.gov/retirement-plans/on ... 401k-plans
"Total contributions to a participant’s account, not counting catch-up contributions for those age 50 and over, cannot exceed $57,000 (for 2020; $56,000 for 2019)."
There is a catch-up contribution allowed of an extra $6,500 for those 50 or older.

Topic Author
lmldm
Posts: 22
Joined: Mon Feb 03, 2020 12:13 pm

Re: High Yield Dividend Stock in i401k

Post by lmldm » Sat Feb 22, 2020 9:12 am

sycamore wrote:
Fri Feb 21, 2020 4:05 pm
lmldm wrote:
Fri Feb 21, 2020 12:42 pm
Thank you for your response Sycamore.

We are aged 43 and 42. My Husbands solo I401k is all invested in the Vanguard Target 2045 Fund. I believe the ticker is VTIVX. He can make employee and employer contributions. Apparently if we wanted to have a traditional IRA allocation and Roth allocation (which you can), we'd have to open separate accounts within the I401k. Do you think it's necessary or better to open these separate accounts, change the asset allocation from the Target Retirement Fund to add an additional Bond Fund like BND, and if I were to add the BND, should it be put in Roth or Traditional? I was thinking of changing up the whole allocation to different funds like VTSAX and BND. The Target Fund has all of these in there, but I think it might be a good idea to add more bonds or high yield index fund into a Roth.
lmldm,

Whether to use a traditional 401k (or IRA) versus a Roth 401k (or IRA) is a common question. The answer depends on your current marginal tax rate compared to your future/retirement marginal tax rate. That future tax rate is just a guess because it depends on what Congress does with tax rates, what your income needs will be when you retire, and other uncertain things.

The general recommendation is:
1) if your current marginal rate is more than your future marginal rate, use Traditional. This is likely the case for most people because most people will be in a lower tax bracket when they retire. This likely applies to you.

2) if your current marginal rate is less than your future marginal rate, use Roth. This is likely the case for, say, people just starting a career who have a low salary (i.e., they're in the 0 or 10% bracket).

Before making recommendations, let's double check your portfolio...
lmldm wrote:
Fri Feb 21, 2020 12:42 pm
I have my ROTH invested in VTSAX and VNQ. No bonds at all.
We also have a taxable account that has VTSAX, VTMX and 4 separate stocks (I know bogle heads frown on stocks), but they are Apple, Tesla, Teledoc and Innovative Industrial Properties. I'd like to hold long on these as I believe they are strong.

In my Roth I have:
VTSAX: 33k
VNQ: 10.5K

Taxable:
$33,850 in VTSAX and VTMFX
In stocks: $49,300 (with short term and long term capital gains for all I am up about $16,300K)

I have about $6k in the Settlement fund, and was thinking I would like to put that into my husbands I401k, because it's tax deferred. That's why I was asking about high yield dividend funds. And I believe if I do this, it would have to be in a Roth. I am not really sure if I should leave the current distribution as is, but the Target 2045 fund is 89% stock and 11% bond, which is slightly scary.

What would you do? We also have a very large portion of money in our Emergency Fund. Approx 90k. Which we need because our expenses are very high per month as my husband is self employed.
If I understand right, your accounts are:

Her Roth:
- 17%, VTSAX $33k
- 5%, VNQ $10.5k

Taxable:
- 17%, VTSAX and VTMFX $33,850
- 25%, various individual stocks $49,300

His i401k:
- 36%, Vanguard Target 2045 $72k

Excluding your emergency fund and settlement fund, that's $198.65k total, which I used to compute the % that each fund represents of the total.

Questions:

1. how much $ is in each taxable fund VTSAX and VTMFX? That way we know how much is in stocks vs bonds. (VTMFX= $10,050 and VTSAX=$23,633)
2. you have $6k in a settlement fund. You mentioned wanting to put it in the i401k, but you can only contribute to a 401k with either employee or employer contributions. Is that settlement fund in the taxable account or the Roth? The Settlement fund is in the brokerage account, but I can transfer it back to my bank account and put into the business 401k.
3. do you have a general idea for your desired asset allocation? What you have now is stock-heavy, which isn't necessarily bad if you intend to retire in 20-25 years. I just want to have some sort of bonds (more than 10%)
4. what's your current marginal tax rate? Our current tax rate is Federal 24% and state tax rate (NJ) 6.37%

We'll be able to make better suggestions knowing the answers. Cheers!

Topic Author
lmldm
Posts: 22
Joined: Mon Feb 03, 2020 12:13 pm

Re: High Yield Dividend Stock in i401k

Post by lmldm » Sat Feb 22, 2020 9:13 am

I added the answers in the quotations...hope this helps.

Topic Author
lmldm
Posts: 22
Joined: Mon Feb 03, 2020 12:13 pm

Re: High Yield Dividend Stock in i401k

Post by lmldm » Sat Feb 22, 2020 9:20 am

niceguy7376 wrote:
Fri Feb 21, 2020 2:13 pm
Where is the i401k located? Does that provider offer a roth i401k?
i401k is located in vanguard. they have subsets of traditional and roth but I would have to open an account in each under the i401k. (at least thats what vanguard said.

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