Portfolio Review for Novice Investors/Parents

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Topic Author
joechristmas
Posts: 23
Joined: Tue Nov 17, 2015 10:02 am

Portfolio Review for Novice Investors/Parents

Post by joechristmas »

Hello!

DW and I are in our late 30s and have been in the process of having children, changing jobs, and moving around. We are novices at investing and, with all of the shuffling about, our finances have gotten quite messy and off-track. I must confess that I have not really thought about portfolio allocation or how I was doing in several years. I understand that my absent-mindedness likely left a lot of money on the table. I was hoping for a portfolio review and some suggestions about how to proceed with getting our finances whipped into shape so that my wife and I will be able to meet our commitment to support our children and have a secure retirement.

General
Ages: 36 M / 35 F
Filing Status: Married filing jointly.
State: Texas
FIT: 24%; No State Income Tax
Desired Asset Allocation: 95% Stocks / <5% Bond under 40 (increasing 1% per year thereafter until 65 reaching 70/30)

Debt
$187.2k outstanding on Mortgage on Primary Residence at 2.75% (13 years, 10 months remaining); $104.3k equity (35.66%)
$7k for HVAC Installation at 0.00% (2 years remaining)

Cash Savings / Emergency Fund
For Deployment from Checking: $10k
Emergency Fund / “High” Yield Savings Account: $24.1k at 0.40%

Investments & Retirement – Overall Portfolio $692k (35.22% VTSAX; 31.13% VTIAX; 30.48% RFITX; 2.33% Bond Equivalent; 0.85% Individual Stocks).

Broken down in the following accounts:

Joint Taxable Brokerage Account with Schwab: $5.9k

Joint Taxable Brokerage Account with Vanguard: $22.2k
His Roth IRA with Vanguard: $107.9k
Her Roth IRA with Vanguard: $67.2k
His Traditional IRA with Vanguard: $261.8k

Account in Former Employer Pension Plan: $16.1k (this is treated as a “bond equivalent” because it earns 7% interest compounded annually and I do not have to withdraw it until RMDs)

Her 401(a): $9.4k RFITX – American Funds Target Date 2050 – expense ratio 0.39%
Her governmental 457(b): 201.5k RFITX – American Funds Target Date 2050 – expense ratio 0.39%
Her 2 accounts have been on autopilot and are in a target date fund because that was the default. I have gone through her plans and the other options available to her are as follows (Note: I have excluded all of the target date plans and expense ratio plans above 0.40%):
VWILX – Vanguard International Growth – 0.33%
RBFGX – American Funds Bond Fund – 0.21%
FXAIX – Fidelity 500 Index -0.02%

Her Pension (excluded from above Portfolio): If rolled over to an IRA today, this would have a pretax cash value of $53.4k; however, if wife continues to work and retires at 60 it will pay about 85% of her last 5 years’ salary.

Savings for Children:
529 for 6 y/o: $59.9k – Vanguard Nevada
529 for 3 y/o: $22k – Vanguard Nevada
529 for 2 y/o: $17.4k – Vanguard Nevada

New Contributions:
For 2021: $19.5k her 457(b); $5.1k her pension; $0.6k her 401(a); $28k to 529s; $9.5k to taxable; $6k to his traditional IRA; $6k to her traditional IRA (will have to fund)—I believe that our AGI will exceed Roth IRA limits this year.
Plan for 2022: $19.5k her 457(b); $5.2k her pension; $0.6k her 401(a); $19.5k to his 401(k) – new account; $28k to 529s; $6k to His Roth IRA; $6k to Her Roth IRA
Note: (1) in 2022, He should be eligible to contribute to a 401(k) (provided he is not fired or does not leave his job); (2) She is eligible to contribute up to $19,500 to a 403(b)--it may be time to learn about this product and what the costs to access that space.

Plan:
1. Rebalance to convert shares of RFITX into FXAIX in her 457(b) and her 401(a). This will reduce expense ratio from 0.39 to 0.02 and will help me achieve an asset allocation closer to what is desired.
2. Begin converting emergency funds to iBond from Treasury Direct ($10k this July, $10k July 2022, Remainder in July 2023).
3. Have DW immediately get in touch with the appropriate person at her work to start to investigate what investment options may be available in the 403(b) Plan and try to start funding that with $1,000-$2,000 per month for 2021. Plan for 2022 would be to contribute the $19,500 to his 401(k), $19,500 to her 457(b), $19,500 to 403(b).
4. As I pass the 1-year mark on emergency funds listed in number 2 above, I will transition to becoming more vigilant about not allowing cash to lay around and more active about diverting funds to taxable.

Questions (edited):

1. Does the foregoing plan seem to be a reasonable approach going forward? Are there any other suggestions that you would make?

2. The 3 529 plans currently go to Vanguard's age-targeted option based on when my children would presumably be in college. Is there a reason to change this investment election? Should this money just be in VTSAX?

Thank you in advance for your comments!
Last edited by joechristmas on Thu Jul 22, 2021 9:30 am, edited 1 time in total.
billfromct
Posts: 1292
Joined: Tue Dec 03, 2013 9:05 am

Re: Portfolio Review for Novice Investors/Parents

Post by billfromct »

You say you are going to contribute to a “traditional IRA” for 2021 because “our AGI will exceed Roth limits this year”.

Are you saying you are going to do a “back door” Roth IRA contribution?

You also say, “His traditional IRA with Vanguard: $261.8k”.

My understanding is if you have a traditional tax deductible IRA & you do a “back door” Roth IRA contribution, you will be subject to the “pro rata” rule which means some (maybe all in your case) of the conversation to the “back door” Roth IRA contribution will be taxable because you have a tax deductible IRA.

It appears that your wife doesn’t have a tax deductible IRA so I guess she could do the “back door” Roth IRA contribution.

You may want to check the “back door” Roth IRA conversion process on “the google”.

bill
Topic Author
joechristmas
Posts: 23
Joined: Tue Nov 17, 2015 10:02 am

Re: Portfolio Review for Novice Investors/Parents

Post by joechristmas »

Thank you very much for this comment.
As I understand it, the backdoor roth is when you recategorize traditional ira funds as roth funds and then pay the taxes owed. Are you saying that perhaps instead of investing new money in 2021 then perhaps I should just spend that $12,000 on the tax that would be owed torecategorize $50,000 or so from the traditional ira to the roth ira?
Topic Author
joechristmas
Posts: 23
Joined: Tue Nov 17, 2015 10:02 am

Re: Portfolio Review for Novice Investors/Parents

Post by joechristmas »

I very much appreciate the comment that I received on the above plan last night. After doing some more digging on this website and the Wiki, I realized that I should edit and streamline the questions that I was asking, which I have done. If anyone else has any ideas, I would love to hear them.

Thank you!
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retired@50
Posts: 6192
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Portfolio Review for Novice Investors/Parents

Post by retired@50 »

joechristmas wrote: Wed Jul 21, 2021 8:56 pm 2. The 3 529 plans currently go to Vanguard's age-targeted option based on when my children would presumably be in college. Is there a reason to change this investment election? Should this money just be in VTSAX?

Thank you in advance for your comments!
I would stick with the age-targeted option in the 529 plans.

Haven't you got enough on your mind? Why create a future issue / question about when you would have to start to add bonds or other more conservative investments as the children near college age. Let Vanguard worry about that for you.

With regard to the traditional IRA(s) and Roth IRA(s), I'd suggest you do some reading to learn about all the various IRS quirks when it comes to these plans. Unfortunately, you nearly have to be a tax expert to understand all the various nuances.

Start here:
https://www.bogleheads.org/wiki/Traditional_IRA

https://www.bogleheads.org/wiki/Roth_IRA

https://www.bogleheads.org/wiki/IRA_recharacterization

Regards,
This is one person's opinion. Nothing more.
tashnewbie
Posts: 1654
Joined: Thu Apr 23, 2020 12:44 pm

Re: Portfolio Review for Novice Investors/Parents

Post by tashnewbie »

I think your overall plan makes sense.

I recommend not making any IRA contributions in 2021 or 2022 until you have done more research about the income limits for contributions to Roth IRA, deductibility of Traditional IRA contributions, and the backdoor Roth.

Based on your statement that you wouldn't be eligible for direct Roth IRA contributions this year (which happens for MFJ in the 24%+ bracket), then neither of you can deduct a TIRA contribution either.

The only reason I think it would make sense to make a non-deductible TIRA contribution is if it is the first step of the backdoor Roth.

For the purposes of Roth conversions (which is the second step of a backdoor Roth), all of your non-Roth IRAs are considered one big IRA, regardless of where they're located. If you have any pretax IRA balances on 12/31 of the year in which you do a Roth conversion, then you'll owe prorated taxes on the converted amount, based on the proportion of the pretax amount across all your IRAs to the non-deductible TIRA contribution. In his case, with the large TIRA balance, basically all of your $6k backdoor Roth conversion would be taxable. The wife wouldn't be subject to prorated taxes, because she doesn't have any non-Roth IRA balances, so she could easily do the backdoor Roth. Once you've learned the details of the backdoor process and how to complete Form 8606 with your tax return, she could do a backdoor Roth. Check out the White Coat Investor's blog for a tutorial for the backdoor Roth at Vanguard and how to complete Form 8606.

You mentioned converting $50k of his TIRA to Roth IRA. That probably is not a good idea, given that your tax bracket is 24%. It's probably best to hold off on those types of Roth conversions until after both spouses stop working, or when your income puts you in a lower tax bracket.

Once you have a workplace retirement plan (possibly next year), it'd be worth evaluating the plan's fees and fund options to see if it'd be worth transferring your TIRA into that plan, assuming it will accept it. If it's a good plan and it'll take the TIRA balance, then I'd move the TIRA, which would then open the way for you to do easy backdoor Roths.

See: https://www.bogleheads.org/wiki/Backdoor_Roth
Topic Author
joechristmas
Posts: 23
Joined: Tue Nov 17, 2015 10:02 am

Re: Portfolio Review for Novice Investors/Parents

Post by joechristmas »

Thank you very much for your thoughts on this. After some more study, it turns out that I was completely wrong about how to use the TIRA and that I need to direct my attention on reducing my AGI for this year (and possibly subsequent years) so that we can do direct contributions to Roth IRAs.
Once I become eligible for a 401(k), I will study my options and think about a roll over to open up the possibility of being able to do a Backdoor Roth IRA if our income continues to rise.

I think for 2021 we will try to aim to get AGI down to about $235k. In 2022, assuming I keep my current job, I think AGI will end up being a lot lower (about $181k or less). This will take me away from those contribution limits on the front end Roth IRA for now, but I agree it's important to think about my options for a situation where my income rises rapidly. It would be nice to be able to do the Backdoor without having $262k or whatever to pro rate those after tax dollars with.
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