Help needed with AA

[Matto00]

Good afternoon,

I am new to this forum and am very happy to have found it. I am trying to figure out the proper allocations for my retirement and kids college education.

I am 43. Income of $135k per year. 2 kids ages 11 and 9. I live in Colorado. I plan to save around 28k per year in the 401k after company match.

I have $340k in my 401k. Split as follows.

VIIIX-46% vanguard institutional index
VEMPX-10% vanguard middle market
TQAIX-5% TIA CREF small market
VTPSX-20% Vanguard international
VBTIX-19% vanguard total bond

I am happy with an 80-20 allocation (although the Cape/Schiller multiple on the US market has me nervous).

We recently inherited $180k. I have put 170k in Wealthfront on risk level 6, but now I realized my error and want to move to Vanguard or Fidelity. We have around 50k in iras/Roth’s which I have tried to put at an 80/20 split as well.

We have a minimal amount saved in 529’s for college.

My questions are:

Can I improve my 401k allocation?
Should I allocate the inheritance to the kids college using Vanguard time based mutual funds/etf’s or should I match the 80%/20% retirement split and fund as I go along?
Would it ever make sense to go 100% tax exempt bonds in the inheritance and increase the risk in 401k and ira’s?

Also, I also am 2 years out from stage 4 lymphoma. My prognosis is good, but suffice it to say that the actuaries would estimate a lower life expectancy for me. My wife would receive $1.5mm in life insurance if I passed before age 56 which I have no plans to do:). Regardless, I need to at least acknowledge this factor.

Lastly, we are open to retiring in a less expensive location including Europe. I’d like to retire at 59 if at all possible.

Please let me know if I missed out an any key information to share.

Thanks for any feedback.

[retired@50]

You should probably update your original post to include the full names of the mutual funds you are using... The ticker symbols just force those in the forum to look up each one. Use the pencil icon in the upper right of your post.

Regards,

[mhalley]

If you edit your post to include fund names and ER, you will get more response as everyone doesn’t know fund symbols off the top of their head. If you include all the funds available that would also help.
529 and retirement funds have different time horizons, so should be invested at different aa. An age based portfolio is good if it has a low ER.
Bonds in general are better in tax advantaged accounts. If you want to have some portion in taxable, that’s ok. At your tax bracket I don’t think munis are best. Whether to use the money for kids college vs retirements depends on whether your projections for retirement are on track using something like firecalc.

[JoeRetire]

Also, I also am 2 years out from stage 4 lymphoma. My prognosis is good, but suffice it to say that the actuaries would estimate a lower life expectancy for me.

I wish you well.

Lastly, we are open to retiring in a less expensive location including Europe. I’d like to retire at 59 if at all possible.

It will certainly be possible. There are lots of low cost of living locations in eastern Europe.

[fortfun]

Here's what the VG 2035 TDF holds:

https://www.morningstar.com/funds/xnas/vtthx/portfolio

[Matto00]

Names added to original post. Nearly all Vanguard. Actually happy with quality of these options on the 401k.

[lakpr]

@Matto00, Welcome to the forum!

I am 43. Income of $135k per year. 2 kids ages 11 and 9. I live in Colorado. I plan to save around 28k per year in the 401k after company match.

I have $340k in my 401k. Split as follows.

VIIIX-Vanguard Institutional Index Fund 46%
VEMPX-Vanguard Extended Market Index fund 10%
TQAIX-T Rowe Price US Small Cap Growth Fund 5%
VTPSX-Vanguard Total International Stock Institutional Fund 20%
VBTIX-Vanguard Total Bond Market Index 19%

I have added the full names of the fund tickers you posted in red. Looks excellent, except that I would not have bothered with TQAIX, but if you want to take a slight tilt towards Small Cap funds, I suppose it won't hurt. The funds held in this TQAIX fund are also included in the VEMPX fund, so it's actually an overweight of small cap funds. You can, without much difference to your returns, split this into VIIIX and VEMPX; make the ration as 48:12 between those two funds.

Are you sure you are not a Boglehead in disguise? The fund selection looks excellent, based on approximately 1:4 ratio between Institutional Index fund and Extended Market index fund. This ratio is suggested so as to replicate the US Total Stock Market index in your portfolio by Market Cap.

I am happy with an 80-20 allocation (although the Cape/Schiller multiple on the US market has me nervous).

Do not pay any attention to any of the indexes. Decide on your risk tolerance, and stick to it. If 80:20 is making you nervous, perhaps you need to slide down to 70:30 instead.

We recently inherited $180k. I have put 170k in Wealthfront on risk level 6, but now I realized my error and want to move to Vanguard or Fidelity. We have around 50k in iras/Roth’s which I have tried to put at an 80/20 split as well.

Wealthfront robo advisor usually places your funds into a zillion categories, it's not really tax efficient. I urge you to pull the entire money out of Wealthfront and invest in Vanguard or Fidelity, and you do the allocation. You don't need to take a look at this portfolio every day. Once an year is enough, and if your portfolio is too far away from 80:20, rebalance by selling the asset class gaining by percentage and buy the asset class losing by percentage.

We have a minimal amount saved in 529’s for college.

This my friend, I think is a mistake. Being in Colorado, all amounts you put in Colorado 529 plans are completely state-tax deductible. I would really urge you to stop the taxable investing, and put in approximately $15k per year in each of your kids' names in the 529 plan.

I have also not seen a Roth IRA mentioned anywhere in your post. You should be investing $6k per year both for yourself and your wife and max out the Roth IRAs.

With the $170k that's currently in taxable, I would suggest:
- $15k for your Kid-1 529 plan
- $15k for your Kid-2 529 plan
- $6k for your Roth IRA
- $6k for your wife's Roth IRA
===============================
= $42k per year sheltered into tax-advantaged accounts. Will last you 4 years, so by the time your oldest reaches 16, their college expenses are mostly spoken for and funded fully. From then on, try to continue funding your/your wife's Roth IRA religiously.

My questions are:

Can I improve my 401k allocation?

As I said above, sell the TQAIX, and set your VIIX and VEMPX allocations in your portfolio to 48:12. TQAIX duplicates a specific slice of VEMPX

Should I allocate the inheritance to the kids college using Vanguard time based mutual funds/etf’s or should I match the 80%/20% retirement split and fund as I go along?

Yes is my answer, see my suggestion above

Would it ever make sense to go 100% tax exempt bonds in the inheritance and increase the risk in 401k and ira’s?

No. It's actually suggested that you do it other way around. Take the risk in your Roth IRA and taxable accounts (all stocks) so that you get to keep the large slice of the expected growth; and bonds completely in 401k so that the growth in the 401k plan is smothered a bit, and the government eventually gets a smaller slice of the pie.

Also, I also am 2 years out from stage 4 lymphoma. My prognosis is good, but suffice it to say that the actuaries would estimate a lower life expectancy for me. My wife would receive $1.5mm in life insurance if I passed before age 56 which I have no plans to do:). Regardless, I need to at
least acknowledge this factor.

Very sorry to hear that. But having the life insurance in place is an excellent move and really shows that you are committed to taking care of your family even if you pass.

Lastly, we are open to retiring in a less expensive location including Europe. I’d like to retire at 59 if at all possible.

You will be able to reach this goal, as long as you maximize the 401k plan and use the tax savings for a Roth IRA. With a 135k annual income, you are in the 22% Fed tax bracket and a 4.63% Colorado tax bracket. So the money you save in your 401k ($19.5k) will save you $5200 in overall taxes. Add just $800 to it, you will be able to max out one of the IRAs as Roth. Since $135k - $19.5k is less than $123k threshold, one of your IRAs can also be a Traditional IRA, which can fetch you even more tax advantage. Given this, I suggest you make your wife's IRA as Roth IRA (I assume she's not working). Then you contribute to a traditional IRA for yourself. Fund it, then roll this IRA over into your 401k plan, essentially you will have sheltered 25.5k into your 401k plan. Repeat each year. When you get to be 50 or older, contribute the additional catch up funds and repeat the exercise again.

Best of luck, my friend!

[Matto00]

Thank you for such a welcoming and thorough response. I will immediately make the 401 changes tomorrow.

Regarding your Roth question. I didn’t know if I should get too detailed but what the heck. I have a 25k roth with a 55% domestic stock allocation include shares in TTD and Microsoft. I am up 77% on TTD (TradeDesk) and 47% on Microsoft. Only 5k total though in those stocks. The rest of the account consists of Vanguard corporate long term bond and Vanguard intermediate bond ETFs.

I have 9K in a traditional IRA. 62% in stock and 36% in bonds. $5,000 in TTD and $500 Fidelity Blue Chip Growth. I have $1,000 in Vanguard Total Corp bond etf and $1,200 in Vanguard corporate long term bond. Finally, I have the remaining about in Fidelity Total Bond fund.

My wife is self employed and makes around $8k/year. She has a SEP, but we haven’t funded it. I should probably fund it this year.

She also has an inherited IRA with $19k. It is split as a Boglehead. $8,600 in VTI, $3,700 in VXUS, and $6,300 in BND. Split as 46%/20%/34%.

She also has a regular IRA with a 58% domestic stock(Fidelity Total Stock Market/42% bond allocation (BND).

Should I match all these accounts to a 80/20 or 70/30 split? Thoughts on holding the individual stocks?

Last 2 questions. I have $250,000 of equity in my home. Do Bogleheads include the equity in their retirement analysis? I also have a $2,400 mortgage payment at 3.5% fixed. I was tempted to recast my mortgage with the inheritance, but am heeding the advice of time in the market at returns likely higher than 3.5%.

I also have 50k in student loans at 3.25% fixed. My payment is only $211 as I am on graduated repayment schedule. I am paying this slowly as the liability does not transfer to my wife if I passed and i also get a deduction for the interest. I think my analysis is correct on this one, but of course it would be nice for this to be extinguished.

Thanks again.

[lakpr]

I am not sure if you read the last paragraph in my previous post. I suggest that you roll your traditional IRA into your 401k. That's because the 401k plan provides you far superior ERISA protections than IRAs. I am assuming that your 401k plan allows traditional IRAs to be rolled in (most do, only a minority of plans don't, and I am of course assuming yours isn't one of those minority). So with $19.5k max allowed for your 401k, another $6k max allowed for your traditional IRA and which you would subsequently roll into your 401k, you can effectively shield $25.5k per year.

Note also that, in Colorado, the 529 plans are specifically provided much superior creditor protections. In fact asset protection lawyers advice that the 529 plans in Colorado be maxed to the hilt, and draw down the funds from 529 plans if anything is left even with 10% penalty, if there is a risk of professional liability (consider doctors and lawyers who can be sued for malpractice). Hide your inheritance money into these 529 plans as quickly as possible, while also milking the Colorado state tax deduction to the max.

When you roll over your traditional IRA into your 401k, you will also get rid of the investments into individual stocks, which is another benefit. You will rid yourself of the concentration risk, that the specific stocks you have chosen will underperform the market.

Since your wife if self-employed, perhaps it's better to open a Solo 401k in her business name. The reason for this advice is that you can contribute both as an employee (up to $19.5k), and as an employer (20% of business profits - 1/2 of self employment taxes). Granted, with only $8k income this is small potatoes, but if her business picks up and the income raises, there is a great opportunity to shelter a big chunk of that income in tax-deferred.

Roth IRAs should be 100% in stocks. The defining feature of Roth is that all future growth is tax free (subject to some minor rules on withdrawal of course). You want to maximize that tax free growth, or in other words, you should be packing the Roth IRAs with those asset class that provide the maximum growth (= equities). The way you balance out is to buy more bonds than equities in your tax-deferred vehicles (401k and tIRA), by selling the appropriate amount of equities and buying bonds instead. That means essentially your 401k account will be different than 80:20, may be more like 65:35, but that's ok. Look at your portfolio as a whole, and as long as equities in Roth + Traditional is 80% of your total portfolio, you are good.

Bonds do NOT belong in Roth accounts, especially if you have tax-deferred assets and if there is room to sell equities and buy bonds in such tax-deferred vehicles. Only in the extreme cases, where the 401k/IRA is already full of bonds and your asset allocation is out of whack than your target allocation, should you be contemplating buying bonds in Roth.

Have your wife adopt a Solo 401k plan for her business (I think that may mean terminating the SEP-IRA). This adoption must happen by December 31, 2019 if your wife wants to contribute to it (the contribution itself can happen as late as April 15, 2020). But with only $8k in income for the year, I would not bother, I would suggest simply contribute $6k to a Roth IRA in her name and be done with it. The remaining $2k can be taxable income, it's no big deal. But do adopt a Solo 401k plan for 2020 and the future.

About your wife's inherited IRA, with only $19k in it, I'd feel comfortable going 80:20 or even higher. The downside is not much, even if the stocks tank 50%, that's only $9k loss in the inherited IRA, just about 1 year worth of her income (or less, if her business picks up). At 34% bonds, it's a bit too conservative to my taste.

Your student loans lastly -- it's just me, but I'd not prefer to have non-dischargeable debts in my name. Try to get rid of them as fast as possible. Yes I did read that the interest is tax deductible, but that tax deduction isn't enough for me to carry the burden of this loan forever. I would urge you to pay them off -- but ok if you choose otherwise.

[international001]

Roth IRAs should be 100% in stocks. The defining feature of Roth is that all future growth is tax free (subject to some minor rules on withdrawal of course). You want to maximize that tax free growth, or in other words, you should be packing the Roth IRAs with those asset class that provide the maximum growth (= equities). The way you balance out is to buy more bonds than equities in your tax-deferred vehicles (401k and tIRA), by selling the appropriate amount of equities and buying bonds instead. That means essentially your 401k account will be different than 80:20, may be more like 65:35, but that's ok. Look at your portfolio as a whole, and as long as equities in Roth + Traditional is 80% of your total portfolio, you are good.

Bonds do NOT belong in Roth accounts, especially if you have tax-deferred assets and if there is room to sell equities and buy bonds in such tax-deferred vehicles. Only in the extreme cases, where the 401k/IRA is already full of bonds and your asset allocation is out of whack than your target allocation, should you be contemplating buying bonds in Roth.

If you just consider the total return (and forget about legal stuff, like inheritance, RMDs).. what difference makes having whatever asset in rIRA or tIRA?

[Matto00]

Note also that, in Colorado, the 529 plans are specifically provided much superior creditor protections. In fact asset protection lawyers advice that the 529 plans in Colorado be maxed to the hilt, and draw down the funds from 529 plans if anything is left even with 10% penalty, if there is a risk of professional liability (consider doctors and lawyers who can be sued for malpractice). Hide your inheritance money into these 529 plans as quickly as possible, while also milking the Colorado state tax deduction to the max.

What do you think about super funding the 529?

https://www.savingforcollege.com/articl ... a-529-plan

[HomeStretch]

Should I match all these accounts to a 80/20 or 70/30 split? Thoughts on holding the individual stocks?

As you have Taxable/401k & tIRA/Roth IRA accounts, place holdings tax efficiently within these accounts while maintaining your overall portfolio asset allocation, rather than maintaining your asset allocation in each account.

It varies by tax situation, but generally hold equities in your Taxable account (for tax efficiency) and Roth accounts (for highest expected growth, tax free). Hold your remaining equities and all your bonds in your tax deferred accounts (401k and Traditional pretax IRA).

Link to BH wiki page on Tax Efficient Fund Placement:
https://www.bogleheads.org/wiki/Tax-eff ... _placement

[lakpr]

If you just consider the total return (and forget about legal stuff, like inheritance, RMDs).. what difference makes having whatever asset in rIRA or tIRA?

Taxes. Specifically, taxes to be paid at withdrawal. In Roth IRA, the growth is tax free. In tIRA, if the growth is high, the tax owed to the government is also high.

[lakpr]

What do you think about super funding the 529?

https://www.savingforcollege.com/articl ... a-529-plan

I would rather milk the yearly state tax deduction instead of just one year.

[sfmurph]

Since your wife if self-employed, perhaps it's better to open a Solo 401k in her business name. The reason for this advice is that you can contribute both as an employee (up to $19.5k), and as an employer (20% of business profits - 1/2 of self employment taxes). Granted, with only $8k income this is small potatoes, but if her business picks up and the income raises, there is a great opportunity to shelter a big chunk of that income in tax-deferred.

...

Have your wife adopt a Solo 401k plan for her business (I think that may mean terminating the SEP-IRA). This adoption must happen by December 31, 2019 if your wife wants to contribute to it (the contribution itself can happen as late as April 15, 2020). But with only $8k in income for the year, I would not bother, I would suggest simply contribute $6k to a Roth IRA in her name and be done with it. The remaining $2k can be taxable income, it's no big deal. But do adopt a Solo 401k plan for 2020 and the future.

+1 to opening an "Individual 401(k) for your wife's business. There are 2 reasons: one is that the limits are higher and the other is that a SEP IRA will interfere with doing a backdoor Roth (the backdoor isn't needed today, but may be in the future).

The limits for an Individual 401(k) are $19000 *plus* 20% of business profit (minus ½ of self-employment tax). For a SEP IRA, it's (I believe) 25% of business profit. So with $8000 in profit, she can put ~$7400 but for a SEP IRA, the limit would be $2000. With the windfall, you can replace her income and put away more into the 401(k).

There are some differences in what different 401(k) providers allow. Check the differences between Fidelity and e*trade. Some limit the kinds of rollovers that can be done. The paperwork is a little tricky, but once it's done, it's pretty straightforward.

[Matto00]

So Colorado has age- based Vanguard funds for the 529 that adjust allocation of stocks and bonds based on age and investment style. Total fee is .34% but that is what it is.

I am leaning towards a moderate risk allocation for my 11 year old and aggressive for my 9 year old.

Question is, do I basically just disregard the allocations for my investment purposes? There is a chance that my kids earn scholarships or don’t go to school(unlikely) which then means we would have to figure out what to do with the funds.

Also, we can actually put in $30k per beneficiary per year so can load these up quickly without superfunding.

[lakpr]

So Colorado has age- based Vanguard funds for the 529 that adjust allocation of stocks and bonds based on age and investment style. Total fee is .34% but that is what it is.

I am leaning towards a moderate risk allocation for my 11 year old and aggressive for my 9 year old.

Question is, do I basically just disregard the allocations for my investment purposes? There is a chance that my kids earn scholarships or don’t go to school(unlikely) which then means we would have to figure out what to do with the funds.

Also, we can actually put in $30k per beneficiary per year so can load these up quickly without superfunding.

The Vanguard funds have a too-high component of international stocks and international bonds to my taste. I did not want anything more than 20% of my stock exposure in international equities, Vanguard's funds double that. I therefore chose to invest in the funds according to my own portfolio allocation, rather than go with pre-packaged age-based portfolios. [ My plan is with New York 529, but the idea is still the same ]

I think you can withdraw from the 529 funds the amount of scholarships that your kids earn without penalty.

Yes you can load up the 529 funds without super-funding, and therefore stretch out the state tax benefit over as many years as you can (or willing to) contribute to it.

[international001]

Should I match all these accounts to a 80/20 or 70/30 split? Thoughts on holding the individual stocks?

As you have Taxable/401k & tIRA/Roth IRA accounts, place holdings tax efficiently within these accounts while maintaining your overall portfolio asset allocation, rather than maintaining your asset allocation in each account.

It varies by tax situation, but generally hold equities in your Taxable account (for tax efficiency) and Roth accounts (for highest expected growth, tax free). Hold your remaining equities and all your bonds in your tax deferred accounts (401k and Traditional pretax IRA).

Link to BH wiki page on Tax Efficient Fund Placement:
https://www.bogleheads.org/wiki/Tax-eff ... _placement

This is being questioned: viewtopic.php?f=10&t=260856
Over the long term, having stocks on tax deferred will allow the tax deferred space to grow more, what will be a better tax situation for your overall AA

[international001]

If you just consider the total return (and forget about legal stuff, like inheritance, RMDs).. what difference makes having whatever asset in rIRA or tIRA?

Taxes. Specifically, taxes to be paid at withdrawal. In Roth IRA, the growth is tax free. In tIRA, if the growth is high, the tax owed to the government is also high.

Assuming in tIRA you deduct contributions, if your tax bracket is the same at contribution and distribution, it does not matter

[HomeStretch]

Should I match all these accounts to a 80/20 or 70/30 split? Thoughts on holding the individual stocks?

As you have Taxable/401k & tIRA/Roth IRA accounts, place holdings tax efficiently within these accounts while maintaining your overall portfolio asset allocation, rather than maintaining your asset allocation in each account.

It varies by tax situation, but generally hold equities in your Taxable account (for tax efficiency) and Roth accounts (for highest expected growth, tax free). Hold your remaining equities and all your bonds in your tax deferred accounts (401k and Traditional pretax IRA).

Link to BH wiki page on Tax Efficient Fund Placement:
https://www.bogleheads.org/wiki/Tax-eff ... _placement

This is being questioned: viewtopic.php?f=10&t=260856
Over the long term, having stocks on tax deferred will allow the tax deferred space to grow more, what will be a better tax situation for your overall AA

As I said above, it varies by each person’s tax situation (and current rate environment). In OP’s case, bonds in tax deferred may or may not make sense. The main point is that tax efficient fund placement is a good practice.

[lakpr]

If you just consider the total return (and forget about legal stuff, like inheritance, RMDs).. what difference makes having whatever asset in rIRA or tIRA?

Taxes. Specifically, taxes to be paid at withdrawal. In Roth IRA, the growth is tax free. In tIRA, if the growth is high, the tax owed to the government is also high.

Assuming in tIRA you deduct contributions, if your tax bracket is the same at contribution and distribution, it does not matter

Which is a big assumption. Tax rates are poised to go up in 2026 from current brackets, as the current tax law sunsets in 2025 (only the personal tax rates, not the corporate tax rates).

[snailderby]

Welcome to the forum, and best wishes with your lymphoma prognosis going forward.

1. The standard advice is to put bonds in tax-deferred accounts (like a traditional IRA or 401(k)) and reserve tax-exempt accounts (like a Roth IRA) for stocks. But some people prefer a mirrored asset allocation for simplicity.

2. An 80/20 asset allocation for your kids' 529 plans is probably fine for now, but given that your kids will probably start college long before you retire, I would probably maintain a different glide path for their 529 plans.

3. I would get rid of the individual stocks, as well as the Fidelity Blue Chip Growth fund, which has 30% of its assets in just 5 companies (Google, Amazon, Apple, Microsoft, and Facebook). I can't tell you whether these companies will outperform or underperform the total stock market tomorrow, but I don't like to have all my eggs in one basket.

[Matto00]

Just want to say that I love this forum. I have liquidated my Wealthfront and will fund 529 shortly. I haven’t been able to let go of my TradeDesk as I am a believer long term. I am going to convert my Roth to stock only and then adjust my 401 and traditional to get to a blended final allocation.

Some bogleheads hold on to individual stocks, right? Anybody?

[international001]

If you just consider the total return (and forget about legal stuff, like inheritance, RMDs).. what difference makes having whatever asset in rIRA or tIRA?

Taxes. Specifically, taxes to be paid at withdrawal. In Roth IRA, the growth is tax free. In tIRA, if the growth is high, the tax owed to the government is also high.

Assuming in tIRA you deduct contributions, if your tax bracket is the same at contribution and distribution, it does not matter

Which is a big assumption. Tax rates are poised to go up in 2026 from current brackets, as the current tax law sunsets in 2025 (only the personal tax rates, not the corporate tax rates).

That's why I ask the reason of your choice. If you expect taxes to go up, or your salary to grow, then go for stocks on ROth. But this is a bet, and may not be true in all cases.

[international001]

As I said above, it varies by each person’s tax situation (and current rate environment). In OP’s case, bonds in tax deferred may or may not make sense. The main point is that tax efficient fund placement is a good practice.

Then explain the assumptions. If you want to invest for 40 years, why would you add bonds in tax-deferred?

[HomeStretch]

As I said above, it varies by each person’s tax situation (and current rate environment). In OP’s case, bonds in tax deferred may or may not make sense. The main point is that tax efficient fund placement is a good practice.

Then explain the assumptions. If you want to invest for 40 years, why would you add bonds in tax-deferred?

Everyone’s tax situation is different. OP needs to model their own tax situation to see where bonds are most tax efficient. Mine is such that bonds in tax deferred are more tax efficient. That said, I hold some cash and I-Bonds. For some investors it may be a moot point as they have to place bonds where they have space.

[snailderby]

Some bogleheads hold on to individual stocks, right? Anybody?

Some do -- or did -- with varying results. See viewtopic.php?t=260479 and viewtopic.php?f=10&t=279119.