Guidance on 401k Funds

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Topic Author
robert411
Posts: 10
Joined: Wed Mar 13, 2019 7:56 pm

Guidance on 401k Funds

Post by robert411 » Wed Mar 13, 2019 10:24 pm

Hello Bogleheads,

I am (unfortunately) new to the world of investing, but educating myself full speed. I have just finished Jack Bogle's The Little Book of Common Sense, learned a lot, now reading JL Collins' The Simple Path to Wealth, then on to the Bogleheads Guide series. I'm amazed of the wealth of information on this site, including the wiki, so I will be studying that as well.

I would like to ask for some guidance with my 401k funds. A few years back I had signed up for the managed account option with my employer's 401k provider (Empower), which cost .31% at my current band. On my recent path to enlightenment I started questioning the benefit, especially since it looks to me that the basic TR fund would yield very similar returns, so I ended up canceling the managed option.

So my question is:
Would I be better off with going with a Vanguard TR 2040 or 2045 fund, or stay in the current funds the Advisors put me in? I realize that I'd need to rebalance myself since the account is now self managed.

Emergency funds: about 3 to 4 months of expenses, soon to be 5
Debt: the only debt is a 30yr mortgage @ 4.625%
Tax Filing Status: Single
Tax Rate: 24% Federal, 5.75% State
State of Residence: Virginia
Age: 46
Desired Asset allocation: TBD, but probably in line with Vanguard TR 2045? IRA is 90% stocks / 10% bonds
Desired International allocation: xx% of stocks - still contemplating on this, have not chosen it yet based on the advice from books I've been reading; but do realize that Bogleheads recommends ~ 30%


Current retirement assets

401k (~$130k)
12.83% American Funds New Perspective R6 International Funds (RNPGX) 0.45%
30.11% BlackRock MSCI ACWI ex-U.S. Index M International Funds - 0.09%
8.89% BlackRock Russell 2000 Index-M Small Cap Funds - 0.05%
35.20% BlackRock Russell 1000(R) Index M Large Cap Funds - 0.02%
12.97% BlackRock US Debt Index M Bond - 0.04%
Company match 10k/yr

Traditional IRA at Vanguard (~$74k)
90% Vanguard Total Stock Market (VTSAX) (0.04%)
10% Vanguard Total Bond Market (VBTLX) (0.05%)


Contributions

New annual Contributions
$10k his 401k (10k co match); will be increasing this to $15k this month (10k co match)
$xx his IRA/Roth IRA - I just rolled over an old 401k to traditional IRA, have not contributed yet but planning on it

Available funds

Funds available in his 401(k)
The Vanguard Target Retire Inc Trust I
The Vanguard Target Retire 2015 Trust I
The Vanguard Target Retire 2020 Trust I
The Vanguard Target Retire 2025 Trust I
The Vanguard Target Retire 2030 Trust I
The Vanguard Target Retire 2035 Trust I 0.07%
The Vanguard Target Retire 2040 Trust I 0.07%
The Vanguard Target Retire 2045 Trust I 0.07%
The Vanguard Target Retire 2050 Trust I
The Vanguard Target Retire 2055 Trust I
The Vanguard Target Retire 2060 Trust I
The Vanguard Target Retire 2065 Trust I
American Funds New Perspective R6 International Funds RNPGX 0.45%
BlackRock MSCI ACWI ex-U.S. Index M International Funds N/A 0.09%
MFS(R) International Equity CIT -Cl4 International Funds N/A 0.72%
Templeton International Smaller Co CF International Funds N/A
BlackRock Russell 2000 Index-M Small Cap Funds N/A 0.05%
DFA US Small Cap I Small Cap Funds DFSTX 0.37%
BlackRock Russell 1000(R) Index M Large Cap Funds N/A 0.02%
T Rowe Price Blue Chip Growth Trust-T4 Large Cap Funds N/A 0.40%
Vanguard FTSE Social Index-Inst Large Cap Funds VFTNX 0.12%
BlackRock Total Return Bond Fund T Bond N/A 0.22%
BlackRock US Debt Index M Bond N/A 0.04%
Vanguard Shrt-Term Infl-Prot Sec Idx Ins Bond VTSPX 0.04%
T. Rowe Price Stable Value Common Trst A Stable Value N/A 0.30%
BlackRock Short Term Investment W Money Market N/A 0.08%
Empower SDB Sweep Program Brokerage N/A
Empower SDB Sweep Program Roth Brokerage N/A
Empower SDB Securities Brokerage N/A


Thank you so much in advance.

Robert.

wetgear
Posts: 18
Joined: Thu Apr 06, 2017 10:14 am

Re: Guidance on 401k Funds

Post by wetgear » Wed Mar 13, 2019 11:59 pm

I'd go with one of the TR funds (good, easy, reasonable international allocation, low cost) but I'd personally look at the 2030 or 2035 options. 90/10 at 46 is quite aggressive. If that fits your risk tolerance that's fine but you are likely in the minority there. The general advice is to ignore the dates on the TR funds and instead pick one that matches your desired AA.

I'd also consider rolling the IRA into your 401k plan and putting that all in the same TR fund. This helps with simplicity and also allows you to do backdoor Roth contributions. You'll want VTSAX in the Roth and maybe some total international eventually but it will be a small portion of your total portfolio initially so it won't matter much at first.

lakpr
Posts: 3054
Joined: Fri Mar 18, 2011 9:59 am

Re: Guidance on 401k Funds

Post by lakpr » Thu Mar 14, 2019 9:42 am

The comment "I rolled over an old 401k to a traditional IRA" concerns me. If you are in the 24% tax bracket, you are very close to not being able to contribute to a Roth IRA directly, and would have to take the path of the "Backdoor Roth".

What the backdoor Roth -- you can look it up on the Wiki page, link is at the top of the web page you are looking at -- is a two step process.
1. Contribute a non-deductible amount to a traditional IRA (there are no income limits for doing this)
2. Convert within the next day or two after the funds settled, to a Roth IRA.

Before you can do that, though, your existing traditional IRA balances should be 0. Otherwise, what's known as a pro-rata rule comes into play.
If you have $95,000 in the traditional IRA, say; and you contributed $5K as non-deductible contribution to this IRA. Then you convert $5k to Roth. What the IRS would look at this as $5000 basis in a $100,000 IRA; proportionally that's $250 basis in a $5000 conversion, so $4750 of your conversion is taxable.

Had you $0 in the traditional IRA, then $5000 conversion had a $5000 basis, so your taxable amount is 0, and tax is 0.

What you should do: contact your current 401k plan, and ask if you can roll these funds over into your current 401k plan.

Topic Author
robert411
Posts: 10
Joined: Wed Mar 13, 2019 7:56 pm

Re: Guidance on 401k Funds

Post by robert411 » Thu Mar 14, 2019 11:52 am

@wetgear

Thanks so much for the response. When taking the 'questionnaire' on Vanguard's site, their recommendation was 85/15, which seems to be in line with the TR fund most closely matching my target retirement date. I think I've heard it on one of the Jack Bogle interviews that the TR funds are on the conservative end, and also recall a recommendation I came across online from Warren Buffet where he suggests a 90/10 split. That is how I arrived to the more aggressive allocation, though I do realize that the basis of the decision may not be sound. What I thought about is to keep the 401k in a more conservative 85/15 split, and go more aggressive on the IRA with 90/10. Does this sound unreasonable?

Regarding my risk tolerance, that is something I'm having a hard time defining, and hope that by educating myself I'll be better positioned in answering. At a very high level my understanding so far is that risk tolerance relates to how likely one is to freak out and sell off investments when the market goes down. If that is true, my firm belief is that I will not touch these investments until retirement, regardless of what the market does, short of the the occasional re-balancing of allocation. "Staying the course" so to speak.

Another question that has been puzzling me is this:
. if bonds are there to smooth out the curve as the market fluctuates
. assuming that one doesn't sell stocks until retirement, which for me is about two decades away
. wouldn't it make more sense to just go all in with stocks and forgo the bond allocation?
In other words why would one want bonds in the short term if the investments will not be touched for decades? I do see the benefit of bonds in retirement, as one can sell those first in a down market. But couldn't one start gradually shifting from a 100% stock allocation to a stock/bond split when say within 5-8 years of retirement? Perhaps each year to allocate more and more towards bonds? Wouldn't this be more advantageous versus having a stock/bond split from the get go? Please forgive my ignorance.

The reason I rolled my old 401k into an IRA vs my current 401k is because the advice I received was that an IRA allows better investment choices and flexibility, so it appeared to be the right choice at the time. A Roth IRA is no longer an option due to my income, but I was aware at a very high level of the IRA backdoor. What I was told by an advisor was that it doesn't make sense for me because if I were to convert the old 401k to Roth IRA, I'd have a huge tax liability at my income level. Hence the rollover to IRA & VTSAX. I will explore your suggestion further though.

I wish I had found this forum sooner, thanks again!

Topic Author
robert411
Posts: 10
Joined: Wed Mar 13, 2019 7:56 pm

Re: Guidance on 401k Funds

Post by robert411 » Thu Mar 14, 2019 12:16 pm

@ lakpr

Thanks so much for responding. Unfortunately I am over the phaseout limit for contributing to a Roth IRA. With that in mind, would your suggestions still apply?

Based on prior advice, I thought Roth IRA isn't feasible as converting the old 401k to Roth IRA would come with a very large tax bill. And that it's something I could look at tackling when/if I'm in a lower tax bracket later in life.

But I did not realize this can be done with a smaller initial investment. But if I can't contribute to it, it still wouldn't make sense, would it?

Lastly, could you elaborate on the benefits of moving the IRA into my current 401k? Other than the convenience of having everything in one place and easier management? One of the main reasons I moved the old 401k to IRA was to be able to invest in low cost index funds and more flexibility (based on books & podcasts, etc), of course not realizing at the time that my current 401k does have Vanguard TR funds, which are essentially comprised of these funds.

Thanks again!

lakpr
Posts: 3054
Joined: Fri Mar 18, 2011 9:59 am

Re: Guidance on 401k Funds

Post by lakpr » Thu Mar 14, 2019 12:41 pm

@robert411,
robert411 wrote:
Thu Mar 14, 2019 12:16 pm
@ lakpr

Thanks so much for responding. Unfortunately I am over the phaseout limit for contributing to a Roth IRA. With that in mind, would your suggestions still apply?
Yes it will still apply
robert411 wrote:
Thu Mar 14, 2019 12:16 pm
Based on prior advice, I thought Roth IRA isn't feasible as converting the old 401k to Roth IRA would come with a very large tax bill. And that it's something I could look at tackling when/if I'm in a lower tax bracket later in life.

But I did not realize this can be done with a smaller initial investment. But if I can't contribute to it, it still wouldn't make sense, would it?
I believe you have confused yourself thoroughly between Roth conversions (which would, as you said, trigger that huge tax bull) and the Backdoor Roth (which would NOT generate a tax bill, or at least, a tiny bit more). But the pre-requisite is that balances in Traditional IRA should be 0

To meet this pre-requisite, I'd advise you to please contact your current 401-k plan, and ask them if you are able to roll in funds from your previous 401k plan that you have now rolled into Traditional IRA. Most plans are able to do that, if your specific plan is one of those rare ones that does not accept incoming roll overs, yes you are stuck.

Once you roll over those funds into your 401k plan -- presto, your traditional IRA balances are ZERO.

After that step is taken care of: you contribute $5500 (for 2018) or $6000 (for 2019) to the Traditional IRA. Bear in mind that this is non-deductible, you cannot deduct this money on your tax return. In tax-speak, this contribution becomes your "basis". Contrasting it with the funds in the traditional IRA rolled in from your 401k -- you took a deduction on those contributions remember? -- so the basis is 0.

Two days after the contribution is settled, you contact the provider again, and ask that Traditional IRA to be converted to Roth IRA. With Vanguard this can be done online by yourself. Let's say that your traditional IRA has gained a few dollars with being in the market, say your balance now became $5510. When you convert, you will have converted $5510 to Roth IRA. When you file the taxes next year, you will report a basis of $5500, a conversion amount of $5510, so taxable income of $10 and you will owe taxes on $10.
robert411 wrote:
Thu Mar 14, 2019 12:16 pm
Lastly, could you elaborate on the benefits of moving the IRA into my current 401k? Other than the convenience of having everything in one place and easier management? One of the main reasons I moved the old 401k to IRA was to be able to invest in low cost index funds and more flexibility (based on books & podcasts, etc), of course not realizing at the time that my current 401k does have Vanguard TR funds, which are essentially comprised of these funds.
The benefit of moving the IRA back into the 401k is to avoid the dreaded pro-rata rule I explained in my previous post. See my previous paragraph. It's basically clearing the decks to be able to make Backdoor Roth for years to come. Based on a very conservative 4% growth rate, a $5500 contribution today will give you $6545 in gains at the end of 20 years. [ $5500 (1 + 0.04)^20 - $5500 = $6545 ]
Last edited by lakpr on Thu Mar 14, 2019 12:54 pm, edited 1 time in total.

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ruralavalon
Posts: 16675
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Location: Illinois

Re: Guidance on 401k Funds

Post by ruralavalon » Thu Mar 14, 2019 12:47 pm

Welcome to the forum :) .

It's good to see that you are debt free other than the mortgage note. Those are good choices in reading material.

You have excellent funds offered in your 401k, you are fortunate.

In my opinion it's a good idea to drop the management fee of 0.31%, you can manage this yourself.


robert411 wrote:Age: 46
Desired Asset allocation: TBD, but probably in line with Vanguard TR 2045? IRA is 90% stocks / 10% bonds
Desired International allocation: xx% of stocks - still contemplating on this, have not chosen it yet based on the advice from books I've been reading; but do realize that Bogleheads recommends ~ 30%
At age 46 I suggest around 30% in bonds (or other fixed income like CDs). Wiki article "Asset allocation". Wiki article Bogleheads Investment Philosophy, "Never bear too much or too little risk".

I suggest around 20-30% of stocks in international stocks. Historically 20% of stocks in international stocks would have captured about 85% of the maximum diversification benefit, and 30% of stocks in international stocks would have captured about 99% of the maximum diversification benefit. Vanguard paper "Considerations for Investing in Non-U.S Equities", p. 6.

That works out to about 30% bonds, 20% international stocks, and 50% domestic stocks. Asset allocation is a very personal decision which you must make based on your own ability, willingness and need to take risk.


Accounts and contributions.
robert411 wrote:The reason I rolled my old 401k into an IRA vs my current 401k is because the advice I received was that an IRA allows better investment choices and flexibility, so it appeared to be the right choice at the time. A Roth IRA is no longer an option due to my income, but I was aware at a very high level of the IRA backdoor. What I was told by an advisor was that it doesn't make sense for me because if I were to convert the old 401k to Roth IRA, I'd have a huge tax liability at my income level. Hence the rollover to IRA & VTSAX. I will explore your suggestion further though.
Your current 401k offers excellent fund choices, I don't see a need to rollover the old 401k to anywhere other than the current 401k.

I agree with webgear and lakpr, and suggest rolling over the traditional IRA into your current 401k plan in order be able to do the backdoor Roth IRA.

"If you cannot contribute to a Roth IRA because your income exceeds the income eligibility limit, you can still choose to contribute indirectly through a two step process known informally as the Backdoor Roth. To do the backdoor Roth, you:

(1) Make a nondeductible (i.e. taxed and not deducted) contribution to a Traditional IRA.
(2) Then convert the Traditional IRA to a Roth IRA." Wiki article "Backdoor Roth IRA"

The suggestion is that you make both the annual maximum employee contribution ($19k) to your 401k, and also annual maximum IRA contribution ($6k) using Backdoor Roth IRA. That's a total $25k from you, if that amount is practical for you.


Fund selection.
In selecting funds to use strive for a combination of both broad diversification (to decrease risk) and low expense ratios (to increase net return).

I suggest choosing funds to simulate the very well diversified, low expense ratio "three-fund portfolio". Wiki article "Three-fund portfolio". Forum discussion, "The Three-Fund Portfolio".

In my opinion these are the better funds to use in your 401k:

1) BlackRock Russell 1000(R) Index M (90% of U.S. stock market, large-cap and mid-cap companies), ER 0.02%;
2) BlackRock MSCI ACWI ex-U.S. Index M (very diversified, both developed and emerging markets), ER 0.09%
3) BlackRock US Debt Index M (a total bond market fund, uses Bloomberg Barclays U.S. Aggregate Bond Index), ER 0.04%

In your Backdoor Roth IRA you could use:
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.04%.

. . . . .

If you have any questions just ask.

I hope that this helps.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Topic Author
robert411
Posts: 10
Joined: Wed Mar 13, 2019 7:56 pm

Re: Guidance on 401k Funds

Post by robert411 » Thu Mar 14, 2019 4:22 pm

@lakpr,

thank you for setting me straight, and for walking me through it. What I was missing earlier was the fact that I can do a backdoor roth conversion each year. I had initially thought it's a one time only deal, so didn't really get the point if I still can't contribute to it periodically, due to the phaseout income limit.

But I get it now - I roll the funds from my Traditional IRA (to which I have not yet contributed) to my current 401k, which does accept this, thankfully. Then contribute 6k to the IRA and convert it to Roth. Then come next year I'm guessing I'd open another IRA account to send my yearly 6k to, since the current one will have been converted to Roth IRA? Then repeat each year :D

Thanks again, this is really helpful!

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Duckie
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Re: Guidance on 401k Funds

Post by Duckie » Thu Mar 14, 2019 4:31 pm

robert411 wrote:Would I be better off with going with a Vanguard TR 2040 or 2045 fund, or stay in the current funds the Advisors put me in? I realize that I'd need to rebalance myself since the account is now self managed.
Once you've set things up, rebalancing takes 10 minutes once or twice a year.
Age: 46
Desired Asset allocation: TBD, but probably in line with Vanguard TR 2045? IRA is 90% stocks / 10% bonds
10% bonds is very aggressive for age 46. You don't pick a target-date fund by the date in the title. You pick it based on its stock/bond ratio. At your age I'd be at least 30% bonds and maybe 35%.
New annual Contributions
$10k his 401k (10k co match); will be increasing this to $15k this month (10k co match)
Good. Try to get this up to $19K soon.
$xx his IRA/Roth IRA - I just rolled over an old 401k to traditional IRA, have not contributed yet but planning on it
Bad idea as already mentioned.
Funds available in his 401(k)
The best options are:
  • BlackRock Russell 1000 Index 0.02% -- Large/mid caps, 85% of US stocks
  • BlackRock Russell 2000 Index 0.05% -- Small caps, 15% of US stocks
  • BlackRock MSCI ACWI ex-U.S. Index 0.09% -- Almost complete international stocks
  • BlackRock US Debt Index 0.04% -- US bonds
  • Or the Vanguard Target Retirement fund 0.07% that comes closest to your desired AA
Then come next year I'm guessing I'd open another IRA account to send my yearly 6k to, since the current one will have been converted to Roth IRA?
The empty TIRA will sit there for a while and you can usually use it again the next year.
__________________

The following example has an AA of 90% stocks, 10% bonds (with which I disagree), with 30% of stocks in international. That breaks down to 63% US stocks, 27% international stocks, and 10% bonds. Right now you could have:

401k at Empower -- $130K -- 64%
23% (N/A) BlackRock Russell 1000 Index Fund M Class (0.02%)
4% (N/A) BlackRock Russell 2000 Index Fund M Class (0.05%)
27% (N/A) BlackRock MSCI ACWI ex-US Index Fund M Class (0.09%)
10% (N/A) BlackRock U.S. Debt Index Fund M Class (0.04%)

Traditional IRA at Vanguard -- $74K -- 36%
36% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)

Just some possibilities.

Topic Author
robert411
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Joined: Wed Mar 13, 2019 7:56 pm

Re: Guidance on 401k Funds

Post by robert411 » Thu Mar 14, 2019 5:43 pm

Hi @ruralavalon,

thanks so much! Also thanks for the details and the links, this is all very useful. I think I like the 50/20/30 (us stock/intl stock/bond) ratio, Jack Bogle recommended no more that 20% international, and with 30% in bonds I'd be a bit more aggressive than the age in bonds rule of thumb. So I think I'm good with that.
The suggestion is that you make both the annual maximum employee contribution ($19k) to your 401k, and also annual maximum IRA contribution ($6k) using Backdoor Roth IRA. That's a total $25k from you, if that amount is practical for you.
The above is such great information, thank you. That is what I will strive for.

In my opinion these are the better funds to use in your 401k:

1) BlackRock Russell 1000(R) Index M (90% of U.S. stock market, large-cap and mid-cap companies), ER 0.02%;
2) BlackRock MSCI ACWI ex-U.S. Index M (very diversified, both developed and emerging markets), ER 0.09%
3) BlackRock US Debt Index M (a total bond market fund, uses Bloomberg Barclays U.S. Aggregate Bond Index), ER 0.04%
Thanks for that. I have two questions, if you don't mind:
  • would you tell me the reason for your preference to the above funds, vs a Vanguard TR fund? Slightly lower ER? Or the fact that you can customize the AA?
  • I have read somewhere, that blending 90% BlackRock Russel 2000 Index with 10% BlackRock Russell 1000 Index roughly equates the Total Stock Market, which seems like a good goal. Would you say it make sense to blend those two with the BlackRock MSCI ACWI (International) Index and BlackRock US Debt Index to a 50/20/30 (us stock/intl stock/bond) AA? Or the US small cap is less relevant here as I'm already well diversified?
Thanks!

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ruralavalon
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Location: Illinois

Re: Guidance on 401k Funds

Post by ruralavalon » Fri Mar 15, 2019 8:32 am

robert411 wrote:
Thu Mar 14, 2019 5:43 pm
In my opinion these are the better funds to use in your 401k:

1) BlackRock Russell 1000(R) Index M (90% of U.S. stock market, large-cap and mid-cap companies), ER 0.02%;
2) BlackRock MSCI ACWI ex-U.S. Index M (very diversified, both developed and emerging markets), ER 0.09%
3) BlackRock US Debt Index M (a total bond market fund, uses Bloomberg Barclays U.S. Aggregate Bond Index), ER 0.04%
Thanks for that. I have two questions, if you don't mind:
  • would you tell me the reason for your preference to the above funds, vs a Vanguard TR fund? Slightly lower ER? Or the fact that you can customize the AA?
I like that you can set your own asset allocation such as the 20% international stocks, or the 30% fixed income.

The slightly lower expense ratio (a few hundredths of a percent) is a very minor attraction.

robert411 wrote:
Thu Mar 14, 2019 5:43 pm
  • I have read somewhere, that blending 90% BlackRock Russel 2000 Index with 10% BlackRock Russell 1000 Index roughly equates the Total Stock Market, which seems like a good goal. Would you say it make sense to blend those two with the BlackRock MSCI ACWI (International) Index and BlackRock US Debt Index to a 50/20/30 (us stock/intl stock/bond) AA? Or the US small cap is less relevant here as I'm already well diversified?
Thanks!
A mix of 92% Russell 1000 and 08% Russell 2000 index funds will mimic the content of a total stock market index fund. Wiki article "Approximating total stock market". (In the table this is the second to the last example.)

Since a Russell 1000 index fund covers 92% of the U.S. stock market, the performance of a Russell 1000 index fund will be very similar to a total stock market index fund.

In my opinion it's not necessary to add the Russell 2000 index fund, it's optional if you prefer to do that. In your portfolio with the desired "50/20/30 (us stock/intl stock/bond) ratio", that would mean just 4% of the portfolio in the Russell 2000 index fund, like this:

401k, including rollover of traditional IRA (100% of total; ~$204k)
46%, BlackRock Russell 1000(R) Index M, ER 0.02%
04%, BlackRock Russell 2000 Index-M, ER 0.05%
20%, BlackRock MSCI ACWI ex-U.S. Index M, ER 0.09%
30%, BlackRock US Debt Index M, ER 0.04%

It's unlikely that the 04% will make any significant difference.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Topic Author
robert411
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Joined: Wed Mar 13, 2019 7:56 pm

Re: Guidance on 401k Funds

Post by robert411 » Sun Mar 17, 2019 8:50 pm

Hi @ruralavalon,

thank you so much for the details, and for providing the wiki link. I really appreciate it.

Thanks,
Robert.

Topic Author
robert411
Posts: 10
Joined: Wed Mar 13, 2019 7:56 pm

Re: Guidance on 401k Funds

Post by robert411 » Sun Mar 17, 2019 8:59 pm

Hi @Duckie,

thank you so much for your feedback!

Thanks,
Robert.

Topic Author
robert411
Posts: 10
Joined: Wed Mar 13, 2019 7:56 pm

Re: Guidance on 401k Funds

Post by robert411 » Wed Mar 27, 2019 10:04 am

Hi All,

I have a follow-up question regarding the Backdoor Roth IRA - I understand that I need to move the pre-tax 401k funds from my Vanguard traditional IRA to my 401k before I do the Backdoor Roth IRA. However I just realized that I have a prior traditional IRA @ TRoweprice that has a small amount of post tax funds.

So my question is - once I roll the pre-tax 401k funds from my Vanguard IRA to my current 401k, can I transfer the post-tax funds from the TRowe t-IRA to the Vanguard t-IRA account without any complications (pro-rata, etc)? I was thinking of using these funds as part of the 6k post tax contribution before I do the Backdoor Roth conversion.

Or should I move those funds from the Trowe IRA elsewhere, like a taxable account before I do the Backdoor IRA?

Thank you for your time in advance.

lakpr
Posts: 3054
Joined: Fri Mar 18, 2011 9:59 am

Re: Guidance on 401k Funds

Post by lakpr » Wed Mar 27, 2019 11:38 am

If the balance in that TRowePrice account is small, convert it all to Roth IRA and be done with it. Pay taxes only on the growth, since you said it has post-tax funds.

But in general, ANY non-Roth IRA anywhere, regardless of the custodian, causes roadblocks in the Backdoor Roth process and triggers the pro-rata rule.

Topic Author
robert411
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Re: Guidance on 401k Funds

Post by robert411 » Wed Mar 27, 2019 2:45 pm

Hi @lakpr,

yes, the amount is small, about 1300. So I will roll it to the Vanguard IRA once the pre-tax funds are out of there, then contribute another 4700 and do the Backdoor Roth conversion.

Thanks again for your help.

ExitStageLeft
Posts: 1631
Joined: Sat Jan 20, 2018 4:02 pm

Re: Guidance on 401k Funds

Post by ExitStageLeft » Wed Mar 27, 2019 4:44 pm

robert411 wrote:
Wed Mar 27, 2019 2:45 pm
Hi @lakpr,

yes, the amount is small, about 1300. So I will roll it to the Vanguard IRA once the pre-tax funds are out of there, then contribute another 4700 and do the Backdoor Roth conversion.

Thanks again for your help.
You can contribute up to $6k in 2019 to the traditional IRA, provided you aren't funds-limited. There is no dollar limit on Roth conversions, so assuming that $1300 is from a prior year, you could contribute $6k and convert the total of $7.3k.

Topic Author
robert411
Posts: 10
Joined: Wed Mar 13, 2019 7:56 pm

Re: Guidance on 401k Funds

Post by robert411 » Thu Mar 28, 2019 8:03 am

Hi @ExitStageLeft,

Ahh.. that is an excellent point! Thanks so much for that nugget. :happy

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