Basic questions about taxable accounts

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sacmd
Posts: 3
Joined: Thu Apr 26, 2018 2:27 pm

Basic questions about taxable accounts

Post by sacmd » Fri May 18, 2018 6:38 am

Hello,

Please bear with me as I am new to all of this and just starting to learn about the basics.

I am 40 years old and have saved little for retirement (about 60K in 401k's and 403b's combined). I just recently have maxed out my 401k with a 4% match this year, and did Roth conversion ("backdoor") for 2017 and 2018. I make 100K a year in a relatively low COL area.

I am starting a new job in a few months that will see a 65K salary increase (I'll be making 165K annually). I plan/hope to: max out my 401K to 18,500 at my new job, which has a 6% match with TRP (don't like the ER on the Target funds but there are a few index funds available), convert 5500 to a Roth annually, and put more into a taxable account. I also plan on rolling over my existing funds into a traditional IRA (I currently have one with Vanguard that has no money in it). Overall I hope to contribute 30% of my gross income to retirement from now on with a target retirement of 65 yrs old.

I have no debt except for a mortgage of 2200/month that I pay with my husband.

There is the option of contributing to a 457b at my new job, but from what I've heard the investment options are lousy.

Would you:
a) contribute to a 457b once other tax-deferred accounts are maxed out; or
b) forget it since options are lousy, and put extra into a taxable account? And what taxable accounts specifically would you recommend? I have been reading about tax-efficient strategies and am a little confused about how to distribute my stocks and bonds, have heard to do most stocks (I would do low-cost index funds) in taxable accounts.

Not sure if that's enough information. Currently my assets overall are distributed about 80/20 stocks/bonds throughout, with 100% of my Roth invested in VTSAX. Thanks for the advice.

Edited to add: I think I will have to wait until I start and re-post with more specifics. In the 401k are 7 stock options, 1 bond option, and 2 money market investments available from what I can tell. Only one index, Equity Index trust class c, PREIX, ER 0.22%. The TRP target funds have ER of 0.67%. I will worry about it when I start and post then. Thanks for all the replies.
Last edited by sacmd on Fri May 18, 2018 4:59 pm, edited 1 time in total.

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Pajamas
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Re: Basic questions about taxable accounts

Post by Pajamas » Fri May 18, 2018 10:20 am

sacmd wrote:
Fri May 18, 2018 6:38 am

Would you:
a) contribute to a 457b once other tax-deferred accounts are maxed out; or
b) forget it since options are lousy, and put extra into a taxable account? And what taxable accounts specifically would you recommend? I have been reading about tax-efficient strategies and am a little confused about how to distribute my stocks and bonds, have heard to do most stocks (I would do low-cost index funds) in taxable accounts.

Not sure if that's enough information.
Consider waiting until you know for sure what the options are to make a decision. Some plans have lots of lousy options with high fees and then a few great options. You probably won't have to make the decision instantly.

Nate79
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Location: Portland, OR

Re: Basic questions about taxable accounts

Post by Nate79 » Fri May 18, 2018 10:26 am

Are you doing backdoor Roth or just converting an existing traditional IRA to Roth each year? These are not the same thing. It is best to not have any existing traditional IRA's so that you can do a clean backdoor Roth. It probably doesn't make sense to convert an existing traditional IRA to a Roth as you would be paying taxes on the conversion which is not ideal unless you are in a lower tax bracket now than when you will be in retirement. If you can either leave the old 401k alone or roll it into the new account that may be an option instead of rolling it to a traditional IRA.

soccerrules
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Re: Basic questions about taxable accounts

Post by soccerrules » Fri May 18, 2018 10:42 am

a quick few thoughts.
1) At 40 and as you acknowledged you are a little behind on retirement savings. The good news is you have 20 years to make it happen and still retire early at 60 (if you want). START NOW
2) I would push yourself to save all $65K increase with your new job. I know that is probably pretty extreme, but why not ? Let's say you net $45K a year. In 5 years you will have $225K plus gains on top of your $92.5K from maxing 401K. Add in Roth contributions and you are over $350K plus gains in only 5 years. 457 is another avenue as well-- check out the separation rules on this plan
3) Not sure what your goals are ? Are you and your spouse making plans together ? If you are, then make financial plans together and consider your money and spouses money as 1 bucket. Spouse should eb maxing tax deferred space as well.
4) Make a plan about when you want to retire and what you think your expenses might be taking into considerations those that will be gone (kids, mortgage, work related) and those potentially added (healthcare, travel etc)

Best of luck
Don't let your outflow exceed your income or your upkeep will be your downfall.

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ruralavalon
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Location: Illinois

Re: Basic questions about taxable accounts

Post by ruralavalon » Fri May 18, 2018 11:10 am

Welcome to the forum :) .

Congratulations on your new job with the salary increase.

It's good to see that you are debt free other than the mortgage note.

A savings rate of 30% would be excellent.

sacmd wrote:
Fri May 18, 2018 6:38 am
Hello,

Please bear with me as I am new to all of this and just starting to learn about the basics.

I am 40 years old and have saved little for retirement (about 60K in 401k's and 403b's combined). I just recently have maxed out my 401k with a 4% match this year, and did Roth conversion ("backdoor") for 2017 and 2018. I make 100K a year in a relatively low COL area.

I am starting a new job in a few months that will see a 65K salary increase (I'll be making 165K annually). I plan/hope to: max out my 401K to 18,500 at my new job, which has a 6% match with TRP (don't like the ER on the Target funds but there are a few index funds available), convert 5500 to a Roth annually, and put more into a taxable account. I also plan on rolling over my existing funds into a traditional IRA (I currently have one with Vanguard that has no money in it). Overall I hope to contribute 30% of my gross income to retirement from now on with a target retirement of 65 yrs old.

I have no debt except for a mortgage of 2200/month that I pay with my husband.

There is the option of contributing to a 457b at my new job, but from what I've heard the investment options are lousy.

Would you:
a) contribute to a 457b once other tax-deferred accounts are maxed out; or
b) forget it since options are lousy, and put extra into a taxable account? And what taxable accounts specifically would you recommend? I have been reading about tax-efficient strategies and am a little confused about how to distribute my stocks and bonds, have heard to do most stocks (I would do low-cost index funds) in taxable accounts.

Not sure if that's enough information. Currently my assets overall are distributed about 80/20 stocks/bonds throughout, with 100% of my Roth invested in VTSAX. Thanks for the advice.
More information is needed to answer your questions. It all comes down to the quality of funds offered, and the expense ratios and fees.

The description of funds as "lousy" isn't precise enough to be the basis for a decision. Don't assume that only index funds are useful in a tax-advantaged account, sometimes an actively managed fund can be a good choice in a 401k or 457b plan.

1) What are the expense ratios on the T. Rowe Price target date funds in your new 401k? What are the funds in offered in your new 401k? (If the list is lengthy just list the 4-5 funds offered with the lowest expense ratios.) Please give fund names, tickers and expense ratios.

2) Will your new 401k plan accept an incoming rollover from your old 401k? What funds are you currently using in your old 401k? What are the funds offered in your old 401k? (If the list is very lengthy just list the 4-5 funds offered with that lowest expense ratios.) Please give fund names, tickers and expense ratios. Is there an account maintenance fee charged if you leave your old 401k where it is?

3) What are the funds offered in the 457b plan? (Don't simply rely on what you have heard, find out.) (If the list is lengthy just list the 4-5 funds with the lowest expense ratios.) Please give fund names, tickers and expense ratios. Is the 457b plan with a governmental employer, or with a non-profit?

Please simply add this to your original post using the edit button (the pencil icon near the upper right corner of your post) it helps a lot if all of your information is in one place. Please see the post "Asking Portfolio Questions" for format and information needed.

In general it's often better to make use of all tax-advantaged accounts, if the funds offered are decent, before using a taxable account. Please see the Wiki article "Prioritizing investments".

If you use a taxable account use the account at Vanguard, and invest in very tax-efficient stock index funds. Examples include Vanguard Total Stock Market Index Fund and Vanguard Total International Stock Index Fund. Please see the Wiki article "Tax-efficient fund placement".
Last edited by ruralavalon on Fri May 18, 2018 2:20 pm, edited 7 times in total.
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guyesmith
Posts: 200
Joined: Fri Mar 23, 2018 11:16 am

Re: Basic questions about taxable accounts

Post by guyesmith » Fri May 18, 2018 11:22 am

soccerrules wrote:
Fri May 18, 2018 10:42 am
2) I would push yourself to save all $65K increase with your new job.
+1 You're already living without it. Avoid lifestyle creep and pretend it never happened. (Until you retire and reap the benefits that is.)

Faith20879
Posts: 566
Joined: Fri Mar 02, 2007 10:16 am

Re: Basic questions about taxable accounts

Post by Faith20879 » Fri May 18, 2018 12:47 pm

sacmd wrote:
Fri May 18, 2018 6:38 am
...with TRP (don't like the ER on the Target funds but there are a few index funds available),
You don't need a lot index funds to build a diversified portfolio. My 401K is with TRP which also has the array of TR funds plus a couple of VG index funds. I chose the much cheaper index route (3 funds). If you list the options with the ER I am sure you will get some feedback.
sacmd wrote:
Fri May 18, 2018 6:38 am
...since options are lousy,
How lousy? Can you list the options with the ER?
sacmd wrote:
Fri May 18, 2018 6:38 am
... what taxable accounts specifically would you recommend?
It is difficult to recommend funds without knowing what you already have in your tax privileged accounts. They need to be looked at as a whole.

sacmd
Posts: 3
Joined: Thu Apr 26, 2018 2:27 pm

Re: Basic questions about taxable accounts

Post by sacmd » Fri May 18, 2018 4:42 pm

Nate79 wrote:
Fri May 18, 2018 10:26 am
Are you doing backdoor Roth or just converting an existing traditional IRA to Roth each year? These are not the same thing. It is best to not have any existing traditional IRA's so that you can do a clean backdoor Roth. It probably doesn't make sense to convert an existing traditional IRA to a Roth as you would be paying taxes on the conversion which is not ideal unless you are in a lower tax bracket now than when you will be in retirement. If you can either leave the old 401k alone or roll it into the new account that may be an option instead of rolling it to a traditional IRA.
I did backdoor Roth for 2017 and 2018. Opened a tIRA with Vanguard for this purpose, deposited 5500/year of post-tax money and then converted 1 week later. So, I cannot put my current 401k funds into that tIRA? I did not realize that.

Nate79
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Location: Portland, OR

Re: Basic questions about taxable accounts

Post by Nate79 » Fri May 18, 2018 4:45 pm

sacmd wrote:
Fri May 18, 2018 4:42 pm
Nate79 wrote:
Fri May 18, 2018 10:26 am
Are you doing backdoor Roth or just converting an existing traditional IRA to Roth each year? These are not the same thing. It is best to not have any existing traditional IRA's so that you can do a clean backdoor Roth. It probably doesn't make sense to convert an existing traditional IRA to a Roth as you would be paying taxes on the conversion which is not ideal unless you are in a lower tax bracket now than when you will be in retirement. If you can either leave the old 401k alone or roll it into the new account that may be an option instead of rolling it to a traditional IRA.
I did backdoor Roth for 2017 and 2018. Opened a tIRA with Vanguard for this purpose, deposited 5500/year of post-tax money and then converted 1 week later. So, I cannot put my current 401k funds into that tIRA? I did not realize that.
You should read the wiki on backdoor Roth's, in particular the caution section having any other balances of traditional IRA's. If you have any other balances in traditional IRA's when trying to do a backdoor Roth you will owe taxes on the prorated amount. This is why you do not want any balances in traditional IRA's when trying to do the backdoor Roth.

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

sacmd
Posts: 3
Joined: Thu Apr 26, 2018 2:27 pm

Re: Basic questions about taxable accounts

Post by sacmd » Fri May 18, 2018 4:49 pm

soccerrules wrote:
Fri May 18, 2018 10:42 am
a quick few thoughts.
1) At 40 and as you acknowledged you are a little behind on retirement savings. The good news is you have 20 years to make it happen and still retire early at 60 (if you want). START NOW
2) I would push yourself to save all $65K increase with your new job. I know that is probably pretty extreme, but why not ? Let's say you net $45K a year. In 5 years you will have $225K plus gains on top of your $92.5K from maxing 401K. Add in Roth contributions and you are over $350K plus gains in only 5 years. 457 is another avenue as well-- check out the separation rules on this plan
3) Not sure what your goals are ? Are you and your spouse making plans together ? If you are, then make financial plans together and consider your money and spouses money as 1 bucket. Spouse should eb maxing tax deferred space as well.
4) Make a plan about when you want to retire and what you think your expenses might be taking into considerations those that will be gone (kids, mortgage, work related) and those potentially added (healthcare, travel etc)

Best of luck
Thanks for the advice. Ouch on the 65k/year saving, but I know, I know...we would love a better family car, and want to redo our master bathroom at some point, bla bla bla. But that can be budgeted of course. My strategy was to save about 30% of my 165K for retirement starting in August, but I think we can push to save more.

Spouse and I don't make those plans together per se, but he saves in an IRA as well. He makes less than I do and has his own business, has been in 'survival mode' since starting the business (he's an MD) but on my insistence this year, has opened up an IRA and did backdoor Roth conversions too. He's not a saver as much as me; has a couple homes in California that he considers assets (I'm personally too risk averse to think of real estate in that way), but he's not a spender and has no debt either, so there's that. Both of us are pretty frugal and live simply.

457 rules are either lump sum or incremental payments. I won't know my options until I start the job. Thanks so much.

soccerrules
Posts: 803
Joined: Mon Nov 14, 2016 4:01 pm

Re: Basic questions about taxable accounts

Post by soccerrules » Fri May 18, 2018 5:13 pm

sacmd wrote:
Fri May 18, 2018 4:49 pm
soccerrules wrote:
Fri May 18, 2018 10:42 am
a quick few thoughts.
1) At 40 and as you acknowledged you are a little behind on retirement savings. The good news is you have 20 years to make it happen and still retire early at 60 (if you want). START NOW
2) I would push yourself to save all $65K increase with your new job. I know that is probably pretty extreme, but why not ? Let's say you net $45K a year. In 5 years you will have $225K plus gains on top of your $92.5K from maxing 401K. Add in Roth contributions and you are over $350K plus gains in only 5 years. 457 is another avenue as well-- check out the separation rules on this plan
3) Not sure what your goals are ? Are you and your spouse making plans together ? If you are, then make financial plans together and consider your money and spouses money as 1 bucket. Spouse should eb maxing tax deferred space as well.
4) Make a plan about when you want to retire and what you think your expenses might be taking into considerations those that will be gone (kids, mortgage, work related) and those potentially added (healthcare, travel etc)

Best of luck
Thanks for the advice. Ouch on the 65k/year saving, but I know, I know...we would love a better family car, and want to redo our master bathroom at some point, bla bla bla. But that can be budgeted of course. My strategy was to save about 30% of my 165K for retirement starting in August, but I think we can push to save more.

Spouse and I don't make those plans together per se, but he saves in an IRA as well. He makes less than I do and has his own business, has been in 'survival mode' since starting the business (he's an MD) but on my insistence this year, has opened up an IRA and did backdoor Roth conversions too. He's not a saver as much as me; has a couple homes in California that he considers assets (I'm personally too risk averse to think of real estate in that way), but he's not a spender and has no debt either, so there's that. Both of us are pretty frugal and live simply.

457 rules are either lump sum or incremental payments. I won't know my options until I start the job. Thanks so much.
I understand the desire to spend some and if it is budgeted it can be done. But you will not be sorry for saving more, don't let your lifestyle creep on you. In 10-15 years you will be thankful.
The fact that you and your spouse are not really on same page MAY cause problems in the future. I would strongly suggest you take some time and discuss with your spouse the current financial situation and both of your plans for the future. You don't have to 100% agree on the plan right now but it will be better to be going in the same direction and have a general idea of what that looks like. If you sit down and spouse wants one thing and you have ideas about another-- that would be a check engine light for me.
Something to think about. In 15 years your spouse has $0 money saved, lost real estate and a business that is losing money and/or severely in debt. You have saved some money and tracking toward retirement in 5-10 years -- then what ? Will YOU have enough money to "save" the both of you.
I am really not trying to rain on your parade and others may come along and have solutions for spouses living essentially 2 different financial lives.
It just concerns me, for you (and spouse)
Best of luck
Don't let your outflow exceed your income or your upkeep will be your downfall.

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