Fund Placement for beginners

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
Topic Author
LTCM
Posts: 22
Joined: Wed Sep 09, 2020 3:58 am

Fund Placement for beginners

Post by LTCM »

Hi, been reading the forum for about a week and I just finished the The Bogleheads' Guide to Investing book. I have some questions!

Emergency funds: Yes.

Debt: SBA EIDL loan. $25,000 at 3.75% over 30 years. (Taken on the chance it's reduced to 1% within 2 years, if not will be paid off)

Tax Filing Status: Head of Household

Tax Rate: 12% Federal, 0% State in 2019. Possibly 22% in 2020.

State of Residence: WA

Age: 43

Desired Asset allocation: 80% stocks / 20% bonds (I scored 68 on the vanguard test)
Desired International allocation: 50% of stocks

Current portfolio is $14,250. Own $600k home outright. Savings account $45,000.

Current retirement assets

Taxable
none

My individual 401k at Vanguard
21% Vanguard LifeStrategy Growth Fund (VASGX) (0.14)
$3000

My individual Roth-401k at Vanguard
0% Vanguard LifeStrategy Growth Fund (VASGX) (0.14)

My Roth IRA at Vanguard
70% "Risk value 8" pending transfer from Wealthfront
$10,000

My Children's 529
9% 10/30/30/30 bonds/US large cap/US stock/international stock TBIIX(0.12)/TISPX(0.06)/TIEIX(0.06)/TCIEX+TEQLX(0.10)
$1250

_______________________________________________________________
Note: Total percentage of all the above accounts together (not each account individually) should equal 100%.

Contributions

New annual Contributions
$0-50,000 my 401k (self employed)
$0-50,000 my Roth-401k (self employed)
$6000 my Roth IRA
$6000 my children's 529

Questions:
1. I read in the book about taxable accounts and tax advantaged accounts. To clarify...I currently have 1 tax deferred account (401k) and 3 tax free accounts (Roth-401K, Roth IRA, 529) correct? What is the best way to allocate my money/funds between these accounts? Should I stick with what I have for now and just keep going until I have enough to be able to re-balance all of them to VBTLX/VTSAX/VTIAX and if so should I have them in different accounts or does it not matter until I start needing to use taxable accounts due to lack of space?

2.What is the math I need to do to work out whether I should contribute money to the Roth or standard 401k? Should I just wait until I file my taxes and then throw the lump sum required to get 2020 taxes as low as possible into the employer 401k? I would prefer to CDA the deposits because while this is new to me dropping large lump sums into the market is a little too close to market timing and therefor a bit scary.

Additional info/story format version...

I'm 43, 2 kids, married to non resident alien and own my own business that earned approx $21,000 in 2018 and $36,000 in 2019. The business is growing and I expect 2020 taxes to be higher with the exact amount depending on how much inventory I purchase and retirement investments I claim for. I own my own home of value approx 600k (inherited in 2005 at approx 300k stepped up value). No mortgage. Only debt is a $25,000 SBA EIDL disaster loan 30 years at 3.75% which I took in the hope that they convert it to a 1% loan within the next 2 years and if they don't then I'll pay it off. Credit rating 800. Cash balance approx $45,000.

I started saving into a Roth IRA with Wealthfront (risk: 8) last year and contributed $6000 but took out $1000 to pay a credit card bill that was in danger of generating an interest charge. So $5000 in last year. This year I have been putting in $250 twice a month. I chose Roth IRA because my tax band seems low and I wanted the flexibility of pulling out money if I needed it for the business. I only just found out about the saver tax credit and wish H&R block had offered me that one. Current balance approx $10,000. I'm waiting for the transfer to Vanguard to complete.

I just opened an Individual 401(k) with Vanguard too. It seems to have 3 deposit options. Employee Individual 401(k), Employer Individual 401(k) and Employee Roth Individual 401(k). I have deposited $3000 via employer so far and its pending going into the Vanguard LifeStrategy Growth Fund (VASGX).

I also have $1250 in my son's 529 (age 7) and $0 in daughter's 529 (age 4) with both scheduled to receive $250 per month. Currently both are 10/30/30/30 bonds/US large cap/US stock/international stock. I can only change allocation twice per year.

My aim is to have a 3 fund portfolio of 20/40/40 Bonds/US Stock/non-US stock VBTLX(0.04%)/VTSAX(0.04%)/VTIAX(0.11%) but this didn't seem possible with the $3000 minimum for admiral shares so I went with VASGX(0.14%) which is approx 20/50/30.

My aim is to save enough to be able to retire and pull down a minimal amount of cash (we live pretty frugally I think) and pass on a decent sum to kids/grandkids. My spouse may or may not get a decent sized windfall at some point as well but since it requires people dying we're not counting on it. We'd also like to move to a bigger/nicer house within 5 years and I feel we need to do that before being liable for capital gains taxes at 800k house sale value.

Thanks!
Last edited by LTCM on Tue Sep 15, 2020 5:45 am, edited 3 times in total.
User avatar
Topic Author
LTCM
Posts: 22
Joined: Wed Sep 09, 2020 3:58 am

Re: Fund Placement for beginners

Post by LTCM »

LTCM wrote: Mon Sep 14, 2020 8:58 pm Questions:
1. I read in the book about taxable accounts and tax advantaged accounts. To clarify...I currently have 1 tax deferred account (401k) and 3 tax free accounts (Roth-401K, Roth IRA, 529) correct? What is the best way to allocate my money/funds between these accounts? Should I stick with what I have for now and just keep going until I have enough to be able to re-balance all of them to VBTLX/VTSAX/VTIAX and if so should I have them in different accounts or does it not matter until I start needing to use taxable accounts due to lack of space?
Answered here:
viewtopic.php?p=5493481

Put the VBTLX in 401k until it's full then put it in the 529, then the Roth-401K, then the Roth IRA
Put VTSAX/VTIAX in the exact opposite order

Right?
User avatar
Eagle33
Posts: 944
Joined: Wed Aug 30, 2017 3:20 pm

Re: Fund Placement for beginners

Post by Eagle33 »

LTCM wrote: Mon Sep 14, 2020 8:58 pm 2.What is the math I need to do to work out whether I should contribute money to the Roth or standard 401k? Should I just wait until I file my taxes and then throw the lump sum required to get 2020 taxes as low as possible into the employer 401k? I would prefer to CDA the deposits because while this is new to me dropping large lump sums into the market is a little too close to market timing and therefor a bit scary.
Read wiki topic Traditional versus Roth.

FYI - You can wait to do your IRA contribution up to the date you file your taxes, but can only contribute to 401k during the calendar year.
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.
NMBob
Posts: 362
Joined: Thu Apr 23, 2015 8:13 pm

Re: Fund Placement for beginners

Post by NMBob »

User avatar
Topic Author
LTCM
Posts: 22
Joined: Wed Sep 09, 2020 3:58 am

Re: Fund Placement for beginners

Post by LTCM »

Eagle33 wrote: Tue Sep 15, 2020 8:39 pm FYI - You can wait to do your IRA contribution up to the date you file your taxes, but can only contribute to 401k during the calendar year.
So I have to do my taxes before April to get the best contribution method?!

The horror.
User avatar
Topic Author
LTCM
Posts: 22
Joined: Wed Sep 09, 2020 3:58 am

Re: Fund Placement for beginners

Post by LTCM »

NMBob wrote: Tue Sep 15, 2020 8:55 pm Tax-efficient_fund_placement

https://www.bogleheads.org/wiki/Tax-eff ... _placement
I found that article (and the book) tough going since it seems to assume you've maxed out all your tax advantaged accounts (nice!) but I'm not close to that. There is a step that seems to apply though:

Step 4: Place high growth stock funds
If all else is equal (and it often isn't, because you may have different options in your 401(k) and your Roth IRA), it is slightly better to have the fund with the highest expected return in your Roth account or HSA, because these accounts are free from Required Minimum Distributions (RMDs), are not counted as income for making Social Security taxable, and probably are less subject to the risk of changing tax rates.
User avatar
Topic Author
LTCM
Posts: 22
Joined: Wed Sep 09, 2020 3:58 am

Re: Fund Placement for beginners

Post by LTCM »

Q3: I appear to be overweight international stocks compared to a lot of recommendations. Is the fact that it's not sensible to place the international stocks in a taxable account and claim the foreign tax credit reason to be less overweight on international? If the "standard" expense ratio on an international stock mutual fund is 0.1% what is the "effective" expense ratio if I'm not able to claim back foreign taxes? 0.15%? 0.11%? 0.101%? What order of magnitude am I dealing with here?
pasadena
Posts: 651
Joined: Sat Jul 02, 2016 1:23 am
Location: Washington State

Re: Fund Placement for beginners

Post by pasadena »

You mention that your spouse is a NRA. Do you foresee that status to change in the future? What is your spouse's situation in terms of retirement?
User avatar
Topic Author
LTCM
Posts: 22
Joined: Wed Sep 09, 2020 3:58 am

Re: Fund Placement for beginners

Post by LTCM »

pasadena wrote: Tue Sep 15, 2020 9:56 pm You mention that your spouse is a NRA. Do you foresee that status to change in the future? What is your spouse's situation in terms of retirement?
It's possible. Without getting into politics we're doing wait and see right now. Things may change as soon as early next year. In terms of retirement we're both not tied to retiring in the US but if the kids are here then we'll probably stay. I'd say us leaving the US is more likely than the average but still not likely.
User avatar
Topic Author
LTCM
Posts: 22
Joined: Wed Sep 09, 2020 3:58 am

Re: Fund Placement for beginners

Post by LTCM »

Eagle33 wrote: Tue Sep 15, 2020 8:39 pm FYI - You can wait to do your IRA contribution up to the date you file your taxes, but can only contribute to 401k during the calendar year.
Sorry to question this...but I just logged into the employer side of the 401k account and when I process a contribution the system asks me if I want to contribute for the tax year 2019 or 2020. What am I missing?
User avatar
Topic Author
LTCM
Posts: 22
Joined: Wed Sep 09, 2020 3:58 am

Re: Fund Placement for beginners

Post by LTCM »

More information that you probably don't need but I'll mention anyway...

My business imports items from the EU/UK mainly and sells them in the US mainly. I might guess this means I should have more exposure to international/EU markets and less USD than the average investor?
User avatar
Eagle33
Posts: 944
Joined: Wed Aug 30, 2017 3:20 pm

Re: Fund Placement for beginners

Post by Eagle33 »

LTCM wrote: Tue Sep 15, 2020 10:26 pm
Eagle33 wrote: Tue Sep 15, 2020 8:39 pm FYI - You can wait to do your IRA contribution up to the date you file your taxes, but can only contribute to 401k during the calendar year.
Sorry to question this...but I just logged into the employer side of the 401k account and when I process a contribution the system asks me if I want to contribute for the tax year 2019 or 2020. What am I missing?
I've never been an employer, only employee. An employee has to contribute to one's 401k by end of calendar - at least that way back when I was employed.
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.
birder
Posts: 4
Joined: Fri Mar 16, 2018 9:19 am

Re: Fund Placement for beginners

Post by birder »

I've never been an employer, only employee. An employee has to contribute to one's 401k by end of calendar - at least that way back when I was employed.
I believe that in an individual 401k you have until your tax filing deadline to contribute. Presumably if Vanguard is still allowing contributions for 2019 it is under the assumption that OP has filed for an extension. If OP has has already filed for 2019 then probably it is too late to contribute for 2019.

https://www.mysolo401k.net/solo-401k-deadlines/
User avatar
Topic Author
LTCM
Posts: 22
Joined: Wed Sep 09, 2020 3:58 am

Re: Fund Placement for beginners

Post by LTCM »

birder wrote: Wed Sep 16, 2020 8:09 pm I believe that in an individual 401k you have until your tax filing deadline to contribute.
OK. Thanks for that.

2020: $19,500 for a Traditional deferral or Roth personal contribution, $37,500 for a profit-sharing/employer contribution. $57,000 limit.

So with my low tax band it seems I should max out the personal Roth contribution and then stick the rest in the employer contribution to a) make sure I stay in the low tax band, and b) stuff more money into the account. The only reason I should do non-roth personal contributions is if sales are so high the rest of the year that I bump up a tax band and need to get back down.

As long as profits don't exceed 70k I can stay in 12% and do full roth-401k (19.5k) + employer (37.5k). If I go over 70k then it probably makes sense to divert some of the 19.5k into the traditional 401k instead of the Roth.

If I can get under 51k then I can get some EITC so thats possibly reason to direct more to non-roth but I would guess not worthwhile.

Am I doing this right??! This s*** is complicated!
User avatar
Topic Author
LTCM
Posts: 22
Joined: Wed Sep 09, 2020 3:58 am

Re: Fund Placement for beginners

Post by LTCM »

Reading the fine print now.
If your business is an LLC taxed as a sole proprietorship or a partnership, you can contribute 20% of net profit from the business as the employer contribution or profit sharing contribution to your Self-Directed Solo 401(k). You can make employer contributions of up to $37,500. You'd need compensation (earned income) of $187,500 to make the full contribution of $57,000.
Darn it.
Post Reply