Portfolio Advice - recently relocated to the US

[4BcEJ9Q3]

Hello all,

I have been a reader of this forum for some time and was hoping for some advice. I recently relocated permanently to the US and just got a job so I am trying to figure out how to allocate my savings between the 401k and other taxable and tax efficient accounts. I have included a brief profile and some questions below. Any suggestions or guidance you could offer would be greatly appreciated. Thank you all so much for your time.


Questions

My employer's fund options are limited particularly in relation to bonds. They only seem to offer actively managed bond funds. I am unsure how to address this issue:

- Would it be reasonable to put all my 401k contributions into one of the equity US market index funds (e.g. Vanguard Totl Stck Mkt Index Fd Adm) and make my bond (considering BND) and international stock allocation (considering something like VFWAX) outside of the 401k with after tax dollars, in either an IRA or ROTH IRA?

- Or would it be more efficient to contribute to one of the target retirement funds that has bonds built into the fund and then make up the rest of my bond and international allocation outside of the 401k?

For my savings, outside of the 401k, with after tax dollars:

- Should I prioritize ROTH IRA contributions over a traditional IRA given contributions will be after tax?

- If I were to invest in BND (or similar) would it best to prioritize keeping these inside an IRA / ROTH IRA over equities?

Notes:
- I will be taking advantage of my employer's match at a minimum.
- I get health insurance through my partner's plan. A HSA is not an option on our plan.
- I like the simplicity of the 3 fund approach and aim to emulate this.

Profile:

Emergency funds: Six months in place.

Debt: No debt

Tax Filing Status: Married Filing Jointly

Tax Rate: 22% Federal, 3.23% State

State of Residence: Indiana

Age: 31

Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation of stocks:30% (flexible on this)

Total portfolio: $31,000
I have recently relocated to the US permanently (I have permanent resident status) so the above is currently held as cash to be reinvested.
Other money is set aside for the purchase of a house in the next 5 years and an emergency fund is in place.

Employer's retirement plan:

Both pre-tax 401(k) and post-tax Roth plans are available.

My employer offers a 3% non-elective contribution to every qualifying employee. In addition, the company will match 0.25% for each full percentage point that I contribute up to 4% of salary, an additional 1% match.



Current retirement assets:
- 5 years contribution to a public sector (NHS) pension in the UK.
- $31,000 currently held in cash, due to relocation to the US. This was previously invested in VWRL with the intention for it to act as a bridge fund for retirement.

Employer’s fund offerings through Voya retirement plans:

I have included all the funds but I am mainly considering the index funds.


PIMCO Real Return Fund Inst
Net Prosp Exp Ratio 0.47% of fund assets
Management Fee 0.45%

PIMCO Income Fund Inst
Net Prosp Exp Ratio 0.51% of fund assets
Management Fee 0.50%

BrandywineGLOBAL Glbl Opp Bnd Fd IS
Net Prosp Exp Ratio 0.56% of fund assets
Management Fee 0.50%

Voya Intermediate Bond Fund R6
Net Prosp Exp Ratio 0.29% of fund assets
Management Fee 0.27%

PGIM High Yield Fund R6
Net Prosp Exp Ratio 0.38% of fund assets
Management Fee 0.36%

Target retirement date funds


Putnam Dynamic Asset Alloc Bal Fd R6
Net Prosp Exp Ratio 0.61% of fund assets
Management Fee 0.52%

Putnam Dynamic Asset Alloc Con Fd R6
Net Prosp Exp Ratio 0.64% of fund assets
Management Fee 0.52%

Putnam Dynamic Asset Alloc Grw Fd R6
Net Prosp Exp Ratio 0.69% of fund assets
Management Fee 0.59%

*** MyCompass Ind Conservative 2055 Fd R
NET Expense ratio is 0.152%

*** MyCompass Ind Moderate 2055 Fd R
NET Expense ratio is 0.152%

*** MyCompass Ind Aggressive 2055 Fd R
NET Expense ratio is 0.152%

American Funds Am Balanced R6
Net Prosp Exp Ratio 0.25% of fund assets
Management Fee 0.21%

LARGE CAP VALUE/BLEND

Vanguard Totl Stck Mkt Index Fd Adm
Net Prosp Exp Ratio 0.04% of fund assets
Management Fee 0.04%

American Funds Wash Mutual Inv R6
Net Prosp Exp Ratio 0.27% of fund assets
Management Fee 0.23%

JPMorgan U.S. Equity Fund R6
Net Prosp Exp Ratio 0.44% of fund assets
Management Fee 0.40%

BlackRock Equity Index Fund 1
NET Expense ratio is 0.015%

LARGE CAP GROWTH

JPMorgan Lrg Cp Growth Fnd R6
Net Prosp Exp Ratio 0.44% of fund assets
Management Fee 0.45%

SMALL/MID/SPECIALTY

Vanguard Mid-Cap Index Fund Adm
Net Prosp Exp Ratio 0.05% of fund assets
Management Fee 0.04%

Vanguard Small-Cap Index Fund Adm
Net Prosp Exp Ratio 0.05% of fund assets
Management Fee 0.04%

DFA Real Estate Securities Port Inst
Net Prosp Exp Ratio 0.18% of fund assets
Management Fee 0.17%


Thanks again for your time.

[lakpr]

You did not say what your annual contributions will be. Assuming that you max out your 401(k) and your Roth IRA, it would put you at $29k annually. Are you able to come up with another $7k per year for a total of $36k in investments?

If you can swing that $36k annually,
- you can max out the 401(k) plan, completely in equities. Pick the cheapest option available, very likely it would be an S&P 500 index fund. That is $22,500
- Max out your Roth IRA, for $6,500, invest in international equities only. Given the lower limit of the Roth IRA is approximately one-third of the 401(k) plan limit (+ employer match!), your equities allocation is going to be more or less 70:30 US vs international, or perhaps 75:25 if employer match is included
- For the bonds, buy I bonds. You can buy $10k per year, and the interest on it is tax deferred up to 30 years. Think of I-bonds as extended tax advantaged space, albeit you can only buy bonds here.

Your overall allocation would be approximately 60% US, 20% International and 20% bonds

Since the max purchase limit of I bonds is $10k, to maintain your 80:20 asset allocation, your 401(k) contributions + employer match + Roth IRA max should be less than $40k annually. As long as this condition remains satisfied, you can fulfill your entire bond portfolio within I bond space. ZERO expense ratio.

[4BcEJ9Q3]

Thank you so much for getting back to me and sorry for omitting my annual saving rate.

With my current expenses at most I can save $18,000 per year so I will not be able max out my 401k. In light of this would the following priority be reasonable ?

- 401k all equities
- Roth IRA maxed out with international allocation and rest of the equity allocation
- I bonds to fill my bond allocation

I currently have all my money in cash and I am struggling to figure the best way to reinvest it. I can definitely fill the Roth limit but will still have money left over. In this case should I just invest, the cash left over, in taxable accounts? Or is there a more efficient way to deal with it that I am missing? Any insight or suggestions would be greatly appreciated.

[lakpr]

Thank you so much for getting back to me and sorry for omitting my annual saving rate.

With my current expenses at most I can save $18,000 per year so I will not be able max out my 401k. In light of this would the following priority be reasonable ?

- 401k all equities
- Roth IRA maxed out with international allocation and rest of the equity allocation
- I bonds to fill my bond allocation

I currently have all my money in cash and I am struggling to figure the best way to reinvest it. I can definitely fill the Roth limit but will still have money left over. In this case should I just invest, the cash left over, in taxable accounts? Or is there a more efficient way to deal with it that I am missing? Any insight or suggestions would be greatly appreciated.

I think it is reasonable. If $18k is all you can save, it just so happens that $18k is half of the $36k figure I mentioned above, so just take my previous post and halve the number to be invested in each option. [ So $11k in 401(k), $3.5k in Roth IRA, $3.5k in I-bonds ]. If you find you have cash left over, I would prioritize filling out the 401(k) over Roth IRA or the I-bonds; yes it will go towards all equities for now, but you can rebalance later when you get settled. Important thing right now, when you are just about starting investing, is to invest as much as you can and as frequently as you can.

For newbie investors I usually suggest to eschew any investing (except for getting the match in 401-k plan) until an emergency fund is established. In your case, though, your first post says you have $31k that was previously invested in VWRL. Invest this money in a safe high-yield savings account (or VUSXX, which is Vanguard US treasuries fund, yielding more than 5%). Mentally earmark this as your Emergency Fund (EF, as it's abbreviated on this forum).

[4BcEJ9Q3]

Thanks agains for the advice this all make sense. One thing I should clarify, the $31k , previously in vwrl, is ear marked for long term savings (20+ years). I had to take it out, before I moved, as from what I understand it would have been classified as a Passive foreign investment company and taxed unfavourably. My intention was for this money to be reinvested in an equivalent fund domiciled in the US. This is the main issue I am having as I have a lot of cash ear marked for equities but not sure the best way to put it all back in the market in a tax efficient way. I assume most of this money will just have to go in taxable accounts as it will exceed the Roth limit and I think I can only make 401k contributions through payroll?

Also I have a separate 6 month of expenses emergency fund already in place so I don’t need to build that further at this time.

[lakpr]

Thanks agains for the advice this all make sense. One thing I should clarify, the $31k , previously in vwrl, is ear marked for long term savings (20+ years).<<snip the rest>>

Also I have a separate 6 month of expenses emergency fund already in place so I don’t need to build that further at this time.

If you already do have a 6-month emergency fund, then I would suggest that you put this $31k into 401(k) indirectly. Meaning that you attempt to max out the 401(k) for the full $22.5k (either this year or next year), and draw the shortfall in your living expenses from this $31k. So this particular $31k still goes into a HYSA (High Yield Savings Account) or VUSXX (Vanguard US Treasury Money Market fund), for now; except that it wouldn't STAY invested in those accounts as your EF, it gets drawn down gradually.

OR,

as long as you earned (or will earn before Dec-31-2023) at least $13k, not counting the 401(k) contributions, max out your Roth IRA and your spouse's Roth IRA right now. It will have that much additional time in the market. Repeat for another $13k next year. And put the $5k remaining in I-bonds. This would skew your investment portfolio a bit away from the 60:20:20 asset allocation you said you desired, but that's temporary. As you keep adding to the 401(k) monthly, including your employer contributions, it would get back to that ratio, and may be you can rebalance it *IF* the asset allocation deviates more than 5% from this 60:20:20

[4BcEJ9Q3]

Thank you, I had not considered the indirect approach you suggested for the 401k contribution. If I opted for this strategy where would I put my international allocation? Would this go in the ROTH IRA? Based on my numbers below I think I would be eligible for a ROTH. That is if I have calculated it correctly :S

With my over all allocation of 80:20 equites:bonds (70:30 US /international equites). Do these numbers look roughly correct?

I am quite unsure about the shortfall I need to draw from the $31k being indirectly put into the 401k.

My numbers:
Annual salary: $60,000
Gross Bi weekly pay: $2308
BI weekly 401k contributions (37%): $854
Bi weekly Gross pay - 401k contribution: $1454
Gross US pay in 2023 to date: $4616
Pay periods remaining: 7
Pay still to be earned in 2023 - 401k contributions: $10,179
Total pay in 2023 (gross pay to date + pay still to be earned): $14,795

Bi-weekly 401k contribution to US equities : $854
Bi-weekly international equity : $366
Total bi-weekly equity contribution : $1220
Bi weekly low risk asset / bonds (20%): $305
Note: I would purchase the international allocation and bonds in one go rather than bi-weekly to avoid a lot of transaction fees.

Total annual equity contribution (80%): $31,720
Total low risk / bonds (20%): $7930
Total Annual savings (with indirect 401k investment): $39,650

Actual goal savings rate for the year: $18,000
Shortfall to draw from the $31k in HYSA: $21,650

Sorry for all the questions. Previously my portfolio was very easy for me to mange in the UK. Trying to factor in the 401k and US tax laws has proven quite a difficult adjustment for me. I am very appreciative of the help you are offering.

[lakpr]

1) I do not see an international equities fund within your 401(k) list of funds in the original post, UNLESS you mean the Brandywine Global Opportunities fund with an expense ratio of 0.5%. I would not choose it if I were you; I would, yes, hold VTIAX in Roth IRA instead. There are equivalent total-international-stock-index funds or ETFs available with Fidelity and Schwab too, if Vanguard is not your preferred broker.

Actually thinking more about it, Vanguard requires $3,000 minimum for VTIAX, but Fidelity requires a minimum of only $1 for its FTIHX fund, and I believe Schwab also has $1 min. You may be better off opening your Roth IRA at Fidelity / Schwab for flexibility reasons.

2) Can you find our how much is being deducted for health care premiums from your paycheck? The reason I ask is that it looks like you are more likely in the 12% tax bracket rather than 22% as in your first post, or at least it is within reach.

the top of 12% tax bracket is $44,725 taxable income
Add the standard deduction amount of $13,850 to this
to get an adjusted gross income of $58,575.

This is barely $2k less than the $60,000 you said you are earning at your job. Surely your health care premiums are more than $2k per year, and therefore, you may be already in the 12% tax bracket. [ Health care premiums are deducted above the line, so do not figure in the income calculated for your income tax purposes ]

If you ARE in the 12% tax bracket, then I would suggest that you contribute to your 401(k) plan on a Roth basis rather than pre-tax basis. At least through the end of year 2025. As the law stands right now, the 12% bracket is going away starting 2026, when the lowest tax bracket revers to 15%; so contributing to Roth 401(k) now is like getting "3% cash back on your purchases, limited time promotional offer", or alternatively, a "25% off sale now, while supplies last!" with the IRS. Potentially more, since Roth 401(k) contributions, and growth too if you can leave it be until age 59.5, are tax free at withdrawals during retirement.

3) Points (1) and (2) are for 2024 and beyond. For 2023, your expected gross income is $14,795. I would assume given the deduction of health care premiums, is more closer to $13,000 than $14,795 you are reporting above. You said you can afford to defer 37% of this amount, or $4,800 in 2023, in the 401(k).

Given that you have $31k on hand ready to invest, you can afford to max out the Roth IRA for 2023, for $6,500.

Assuming your 401(k) and Roth IRA are to be completely in equities, your total investment is $11,300 for 2023. Split into 60:20 ratio or 3:1, this means $8,475 (or $8,500 to round up) to US equities, $2,825 (or $2,800 to round down slightly) to international equities, and you will tap an additional $2,800 to be invested in I-bonds.

$4,800 in 401(k) plan to the Blackrock Equity Index 1 fund, or the Vanguard Total Stock Market Index fund.. Roth 401(k)!!
$1,600 in Roth IRA to FTIHX at Fidelity (falls short of $3,000 min for VTIAX at Vanguard!)
$4,900 in Roth IRA to FSKAX (Fidelity's version of Total Stock Market Index)
$1,600 in purchase of I-bonds at Treasury Direct. Actually since this is a rather low amount, I might suggest skipping I-bonds for now and instead invest in FUMBX (Fidelity short term treasury bond index, yielding 4.85% now).

With only $13,000 income to report in 2023, I would expect your tax bill to be a big fat $0 to the IRS. Can't say about Indiana taxes though (I believe it's a flat-rate state). Maybe you would owe $400 there in state taxes.

Hope this helps!!

[4BcEJ9Q3]

1) I do not see an international equities fund within your 401(k) list of funds in the original post, UNLESS you mean the Brandywine Global Opportunities fund with an expense ratio of 0.5%. I would not choose it if I were you; I would, yes, hold VTIAX in Roth IRA instead.

The fidelity fund you suggested does seem like a good option. To clarify I was only intending to invest in the US equity index within my 401k. The international allocation would be within a Roth IRA. Apologies for not being clear on that.

2) Can you find our how much is being deducted for health care premiums from your paycheck? The reason I ask is that it looks like you are more likely in the 12% tax bracket rather than 22% as in your first post, or at least it is within reach.

the top of 12% tax bracket is $44,725 taxable income
Add the standard deduction amount of $13,850 to this
to get an adjusted gross income of $58,575.

This is barely $2k less than the $60,000 you said you are earning at your job. Surely your health care premiums are more than $2k per year, and therefore, you may be already in the 12% tax bracket. [ Health care premiums are deducted above the line, so do not figure in the income calculated for your income tax purposes ]

My wife’s employer has much better and cheaper insurance so all health care comes out of her pay check. I assume I can’t claim this deduction, so I would still be in the 22% bracket?

If I am still in the 22% bracket, should I stick with the employer pre tax 401k rather than the employer Roth? If I am to use the pre tax 401k I would have to open a separate Roth ira with a broker and put the rest of the US equity, international equity and bond allocation in that Roth ira. Is that correct?

These are the deductions on my last pay check:
Medicare $33.53
SS $143.39
Federal withholding $210.02
Indiana withholding $72.69
St Joseph county $80.85
Insurance (life offset)DS $4.98

Take home pay $1800.67


Once again thank you for your kindness and patience