Late 20s questions about investment allocation over next few years

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mrk4794
Posts: 7
Joined: Mon May 03, 2021 8:11 pm

Late 20s questions about investment allocation over next few years

Post by mrk4794 »

Hi all. First of all, thanks for your time in reading another one of these basic personal finance threads. Posting in bogleheads for the first time because a) extraordinary difficulty in getting this post past the r/personalfinance automoderator, and b) I'm a believer in passive investing. Please let me know if this post belongs on a different forum on this site.

I am fortunate enough to be in a solid position financially, but have some big investment decisions on the horizon and would like your input on how to allocate and invest for maximum efficiency over the next few years. I have 3-5 primary questions for the group. I'll try to keep the setup as streamlined as possible:

Age: 28
Income: ~$250K

Assets/net worth:
• Betterment IRA (post-tax contributions): $200K
• 401k from previous employer: $150K
• Cash: $95K
• Misc. brokerage accounts: $10K in AMZN, $10K in a SPAC (bought close to NAV)
• Another $10K between an old Vanguard IRA and my HSA account
• Debt: $30K in student loans
• Will need to contribute $30-40K to my employer over the next ~2 years as an investment for equity

Implied net worth in the $425-450K range. I give the detailed breakdown to inform the questions below.

1. My primary/largest question is how to invest for a down payment in ~3 years. I live in a high-cost area and as of now, would anticipate buying a home in the $600-800K range. Should I dump ~$50K of cash into my Betterment account now? I am fully aware of inflated valuations in the stock market right now, but am also a firm believer of time in the market beats timing the market (despite my SPAC investment...). My hesitation comes from the fact that I don't want to lose principal over the next 3 years if we enter a correction. That said, I see the fed holding interest rates low for a long time and the broader global economy positioned for takeoff in 2H '21 and beyond. The size of the down payment is open for discussion, too; I always had the impression that a larger payment is better (to avoid interest) but in a low rate environment that may not always be true. Let me know your thoughts.

2. My current employer does not offer a 401k plan (I have equity instead). I do not know if the employer will offer a 401k in the future either due to promotion or a firm-wide policy change. I anticipate making more money in the future than I do now (higher tax rate). Should I roll over my old 401k this year? If so, into what? My Betterment account is a target retirement date fund (w/ aggressive stock allocation) and has yielded 11.7% annualized time weighted returns over the past 5 years. If I "roll over", can I "un-roll" later and put funds back into a 401k if I have the option?

3. I'll be buying an engagement ring in the next few months for probably $30-35K. A coworker recommended putting this all on an interest free credit card. Thoughts? Any suggestions for a card to use? What's the catch here? I have Chase and Amex cards now. I could probably just pay this down from my ordinary income.

4. I have a bit under $30K of federal student loans from grad school. I took these out beginning this year given the zero-interest environment and freeze on interest accrual through 9/30/21. I am inclined to not pay these until at least the beginning of the interest accrual period and am holding out for an outside chance that the Biden administration forgives some or all of these. Let me know what you think about this - I am done with school and will not accrue any more loans.

5. Misc. question - 529c? Should I start one of these when I have kids? Any reason not to? Seems like the tax benefits outweigh the cons. Also, should I be maxing out my HSA?

Thanks all.
PowderDay9
Posts: 405
Joined: Fri Oct 12, 2018 12:29 pm

Re: Late 20s questions about investment allocation over next few years

Post by PowderDay9 »

Congrats, you're in a great position and an exciting time in your life.

What does IRA (post-tax) mean? Is this a Roth IRA or a taxable brokerage account?

1. If you want to buy a house in a few years then I'd be conservative with that money. If you put it in the market, are you okay if you have to delay the home purchase if the stock market drops? I'd also consider getting rid of betterment and doing a simple brokerage account with a few funds. It is lower cost and you can better control your taxes since you're heading for the higher tax brackets. The size of your down payment will vary depending on a lot of factors. What your available cash is, interest rates, home prices, local/state laws, tax impacts if you need to sell funds, etc. For HCOL, I lean towards less down but it all depends.

2. If you like your fund options in your 401k and costs are low, I'd leave it where it's at. The 401k has strong creditor protections. If you roll to IRA then you may be able to roll into a new 401k if that new plan allows but I'd prefer to keep it in the 401k if it makes sense.

3. Most bogleheads are going to recommend not spending $30-35k on an engagement ring. If you really want to do that I'd just pay cash. No interest isn't that great when savings accounts are paying 0.5%. Others might have a suggestion on a no interest credit card if you want to do that.

4. What's your interest rate on your student loans? There probably is a chance that some relief may come for student loans but less of a chance for somebody making $250k. There will probably be income limits but who knows! I wouldn't pay the loans until interest accrues though.

5. At your income you should be maxing out the HSA and doing a backdoor Roth IRA. Save the 529 until you you have kids.

If you provide your state and information about your future spouses financial picture that may lead to better advice.
chassis
Posts: 440
Joined: Tue Mar 24, 2020 4:28 pm

Re: Late 20s questions about investment allocation over next few years

Post by chassis »

Congratulations on the financial journey.

- spend whatever you want on the engagement ring. She will appreciate it as long as you live. My wife does.

- pay off the student loans

- build up your down payment. I like US growth equities plus a high yield savings account. An equity index find would be a lower risk choice if growth equities aren’t your style.

- be aggressive in your 401k holdings. Your portfolio will thank you in 30 years.
tashnewbie
Posts: 1588
Joined: Thu Apr 23, 2020 12:44 pm

Re: Late 20s questions about investment allocation over next few years

Post by tashnewbie »

1. What does Betterment IRA (post-tax) mean? Is it a Roth IRA, Traditional IRA, or a brokerage account? Where are your "misc. brokerage accounts" held? Also at Betterment?

FYI, if your Betterment IRA (post-tax) is a Roth or Traditional IRA, you can't just dump $50k in it at any given time. IRA limits are currently $6k/year for someone your age.

At your income level and in your tax bracket, you could and should be doing annual backdoor Roth IRA contributions. However, your old Vanguard IRA (and possibly the Betterment IRA) would complicate the backdoor maneuver. I wouldn't do backdoor Roth contributions until you figure out what to do with the old Vanguard IRA and the Betterment IRA. You may be able to move the old Vanguard IRA into your former 401k, but probably not. The Vanguard IRA has a low balance, so you could just convert the whole thing and pay taxes on the pretax growth in it. If the Betterment IRA is a Traditional IRA that you've made after-tax contributions to (what we'd call a non-deductible Traditional IRA), you could also convert it to Roth IRA by paying taxes on pretax growth, but that probably wouldn't be advisable because of the sizeable balance. You may be stuck not being able to do easy backdoor Roths, because of the Betterment IRA. Just do taxable investing instead, if you can't get rid of that IRA.

I would get out of Betterment and move to a brokerage house like Fidelity, Schwab, or Vanguard. Lower costs and greater control.

If I were going to buy a house in 3 years, I'd want to try to preserve principal so would be more conservative with at least some percentage of the DP money. With your income, you can save a lot of money relatively quickly, so I don't think you have to worry about it taking 3 years to save the DP.

2. I would leave the old 401k where it is, assuming investment options are good and fees are low.

3. It's probably not worth using a zero percent interest credit card to buy the ring. If you want to go that route, you could look into something like CIti's Double Cash Back Card or Alliant Credit Union's 2% no-fee card. They both have intro 0% promo periods of 12-18 months.

4. I would definitely start paying off the SL when the 0% interest period ends.

5. Definitely max a HSA if you have access to a HSA-eligible high deductible health plan and using it makes sense in your situation with your health needs. Don't start 529s until you have children.
Topic Author
mrk4794
Posts: 7
Joined: Mon May 03, 2021 8:11 pm

Re: Late 20s questions about investment allocation over next few years

Post by mrk4794 »

Thanks all, very helpful comments. A few points to clarify:

1. The Betterment account is an "individual taxable account." I have been putting post-tax proceeds in and understand that I will pay capital gains on any withdrawals. I have tax loss harvesting set up as well.

2. Yeah, the ring is probably more than I would like to spend. But, expectations are set and in the grand scheme of things it isn't a fortune.

3. My 401k is through Empower Retirement and is invested entirely into a Vanguard 2050 target retirement date fund (possibly a tad early for me re: retirement). I selected the earlier date to be a bit more aggressive. 14.75% annualized return over the past 3 years. Thoughts on this allocation? My understanding is that the target retirement funds basically track the market and scale aggressiveness up and down from there based on the target date.

Also, I recently started in my role and am thus only working a partial year (i.e. lower 2021 income than 2022). Isn't there some potential tax benefit to cashing this out now, paying tax (capital gains? aren't these going up too?) now and rolling into a different vehicle? Apologies if this is an elementary question but I was discussing it recently with friends.

4. Tashnewbie, thanks for the advice on the backdoor Roth. I was familiar with the concept but had not researched it extensively. So, here's the situation in summary (laying this out for my own benefit as well):

-my 401k contributions were pre-tax, taxable as ordinary income when I retire
-my Betterment IRA contributions were post-tax into an individual taxable account (automatic deposits coming from my bank account), I pay cap gains when I withdraw at any time (right?)
-my Vanguard account is a Roth IRA with $7K in it. 100% invested in VTSAX. I haven't used it for years - my income after graduation from college was right at the Roth contribution limit, so I went with Betterment individual taxable account for my investments, no Roth (alongside my first employer's 401k)

As I mentioned above, since I am working a partial year this year, 2021 may be a good time to take any potential tax penalty. So, given the above, would the simplest way to do a backdoor Roth be to convert my Betterment account? It has $60K+ of gains on top of principal. When I do a backdoor Roth, will the account stay with Betterment? Or a brokerage of my choosing? Could I combine it with my old Vanguard Roth?

FWIW, I was in grad school in 2020 and had very low income in 2020 - can I still make a backdoor contribution under my 2020 taxable income? I already filed my return but am actually in the process of filing an amended return - I understand I have until 2024 to actually file the amended return (amending because I did not realize I would receive a 2020 K1 form, so had to include that).

Starting to think I should just find a financial advisor and tax consultant (within the next 18 months I will have K1 income and be getting married anyways, so tax and investment situation getting more complicated).

5. My girlfriend makes about $65K and I don't anticipate her ever topping $100K. I am not factoring her income into our long-term plans - as of now it really just helps with our operating expenses. We live in Illinois.

6. I am in excellent health. I will plan to make the $3600 max HSA contribution this year.


Thanks again everyone for your help!
wetgear
Posts: 238
Joined: Thu Apr 06, 2017 10:14 am

Re: Late 20s questions about investment allocation over next few years

Post by wetgear »

If you post in this format viewtopic.php?f=1&t=6212 you will probably get better advice as we will have all the necessary information.
Topic Author
mrk4794
Posts: 7
Joined: Mon May 03, 2021 8:11 pm

Re: Late 20s questions about investment allocation over next few years

Post by mrk4794 »

wetgear wrote: Tue May 04, 2021 5:16 pm If you post in this format viewtopic.php?f=1&t=6212 you will probably get better advice as we will have all the necessary information.

Thanks, please see below:

Emergency funds: I have ~$95K in cash. I'd like input on what you all feel is an appropriate emergency fund - no kids, no mortgage, will be married soon, kids in a few years

Annual Income: $250K

Debt: $30K student loans (federal, 0% interest per federal interest freeze)

Tax Filing Status: Single

Tax Rate: 35% federal (marginal; 28.2% effective incl. FICA), 5% state (flat)

State of Residence: IL

Age: 28

Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: n/a% of stocks; likely 0%?


Current retirement assets:

Taxable
$45K cash (excluding $50K for proposed emergency fund)
$200K individual taxable account through Betterment; 100% allocation to 2050 retirement date fund w/ tax loss harvesting
$10K AMZN
$10K SRNGU (a SPAC)


His 401k ($150K)
100% Vanguard 2050 retirement fund
No company match, rollover from previous employer

His HSA ($5K)
100% total market index fund

His Roth IRA at Vanguard ($7K)
100% Vanguard Total Market (VTSAX) (0.04%)

Girlfriend / future fiance: age 28, $65K income, 23.8% effective all-in tax rate, $12K cash, maybe $20K in Betterment individual taxable account and $20K in company 401k


Contributions

New annual Contributions
$0 his 401k (this is a rollover)
$5K her 401k
$150K taxable, combined (but would like input on how to allocate this going forward - down payment in 3 years, backdoor Roth, HSA, etc.)


Questions:
1. For someone in my position, what size of emergency fund would you recommend?

2. It sounds like I should be making backdoor Roth contributions. Given my investment portfolio structure, what would you recommend as the most tax-efficient way to do this? I think I will need to convert either my Betterment ITA or old Vanguard Roth IRA into a backdoor Roth IRA, correct?

Should I do this now, in a tax year where I will have relatively low taxable income? See my post above for all the necessary context around my specific investments now.

3. I am planning to buy a home in about 3 years - likely in the $600-800K range. How would you recommend saving for and eventually financing a down payment? Should I simply save my W2 income up to a hypothetical 20% down payment amount? Sounds like a couple of you had conflicting advice here. I am not particularly risk averse re: a market correction given that we are a few years away from buying.

4. Zooming all the way out - I consider myself to be relatively savvy when it comes to personal finance planning, at least vs. my peers. That said, I will be getting married soon, have K1 partnership income and a handful of other tax complexities. Do you recommend I find a financial advisor to help maximize our tax efficiency and/or a separate individual to actually do our taxes? I've been doing mine through TurboTax but needed help this year with my K1. On the advisor front, I have the inclination but simply not enough time to complete the necessary research to optimize my investment planning - wondering if someone my age/position should be thinking about getting an advisor or if I can pull it off myself. I know a lot of these folks are wastes of money.

In short, I know that I am on solid footing with regards to both my income and investments, but am feeling somewhat overwhelmed as I begin a new job and have little time to optimize the tax implications of my portfolio. I have a feeling that I am "leaving money on the table" by not doing a backdoor Roth, and would like to understand how to do this elegantly as well as what other substantial investment moves you all would recommend making right now. Thanks again.
wetgear
Posts: 238
Joined: Thu Apr 06, 2017 10:14 am

Re: Late 20s questions about investment allocation over next few years

Post by wetgear »

mrk4794 wrote: Tue May 04, 2021 8:08 pm
wetgear wrote: Tue May 04, 2021 5:16 pm If you post in this format viewtopic.php?f=1&t=6212 you will probably get better advice as we will have all the necessary information.

Thanks, please see below:

Emergency funds: I have ~$95K in cash. I'd like input on what you all feel is an appropriate emergency fund - no kids, no mortgage, will be married soon, kids in a few years

Annual Income: $250K

Debt: $30K student loans (federal, 0% interest per federal interest freeze)

Tax Filing Status: Single

Tax Rate: 35% federal (marginal; 28.2% effective incl. FICA), 5% state (flat)

State of Residence: IL

Age: 28

Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: n/a% of stocks; likely 0%?


Current retirement assets:

Taxable
$45K cash (excluding $50K for proposed emergency fund)
$200K individual taxable account through Betterment; 100% allocation to 2050 retirement date fund w/ tax loss harvesting
$10K AMZN
$10K SRNGU (a SPAC)


His 401k ($150K)
100% Vanguard 2050 retirement fund
No company match, rollover from previous employer

His HSA ($5K)
100% total market index fund

His Roth IRA at Vanguard ($7K)
100% Vanguard Total Market (VTSAX) (0.04%)

Girlfriend / future fiance: age 28, $65K income, 23.8% effective all-in tax rate, $12K cash, maybe $20K in Betterment individual taxable account and $20K in company 401k


Contributions

New annual Contributions
$0 his 401k (this is a rollover)
$5K her 401k
$150K taxable, combined (but would like input on how to allocate this going forward - down payment in 3 years, backdoor Roth, HSA, etc.)


Questions:
1. For someone in my position, what size of emergency fund would you recommend?

2. It sounds like I should be making backdoor Roth contributions. Given my investment portfolio structure, what would you recommend as the most tax-efficient way to do this? I think I will need to convert either my Betterment ITA or old Vanguard Roth IRA into a backdoor Roth IRA, correct?

Should I do this now, in a tax year where I will have relatively low taxable income? See my post above for all the necessary context around my specific investments now.

3. I am planning to buy a home in about 3 years - likely in the $600-800K range. How would you recommend saving for and eventually financing a down payment? Should I simply save my W2 income up to a hypothetical 20% down payment amount? Sounds like a couple of you had conflicting advice here. I am not particularly risk averse re: a market correction given that we are a few years away from buying.

4. Zooming all the way out - I consider myself to be relatively savvy when it comes to personal finance planning, at least vs. my peers. That said, I will be getting married soon, have K1 partnership income and a handful of other tax complexities. Do you recommend I find a financial advisor to help maximize our tax efficiency and/or a separate individual to actually do our taxes? I've been doing mine through TurboTax but needed help this year with my K1. On the advisor front, I have the inclination but simply not enough time to complete the necessary research to optimize my investment planning - wondering if someone my age/position should be thinking about getting an advisor or if I can pull it off myself. I know a lot of these folks are wastes of money.

In short, I know that I am on solid footing with regards to both my income and investments, but am feeling somewhat overwhelmed as I begin a new job and have little time to optimize the tax implications of my portfolio. I have a feeling that I am "leaving money on the table" by not doing a backdoor Roth, and would like to understand how to do this elegantly as well as what other substantial investment moves you all would recommend making right now. Thanks again.
1) The general recommendation is no less than 3 months worth of spending as an EF but no more than 2 years. That being said many here with significantly sized portfolios do away with their EF all together as they don't need something dedicated they can just pull from their taxable assets while maintaining their overall AA. You are likely on your way to a similar situation but you don't have many bonds in your taxable accounts so worst case scenario for you is having an emergency in a down market and having to sell stocks and lock in losses. Holding at least 3-6 months EF is probably prudent decision in your current situation. A HYSA or iBonds (move to these over a few years) would be an appropriate place for your EF.

2) There is no such thing as a "backdoor roth IRA" what it is, is a process by which you contribute to a normal roth IRA account through a "back door". You'll need to open a traditional IRA account (Probably easiest at Vanguard), make non-deductible (after tax) contributions to this traditional IRA and then immediately (as soon as the transfer has completed) roll those contributions over to your existing roth IRA and invest them there (they are left in cash until they land in the Roth). Repeat this process yearly.

3) 3 years is short term. Short term money needs shouldn't be invested, just stick it in a HYSA. Could an argument be made to invest it conservatively, yes but you are risking not being able to buy on the timeline you had hoped, for at best having a slightly higher down payment. Most folks here would recommend not chasing small gains at big risk.

4) If you hang around here you'll likely learn enough and get enough good advice to not need an advisor. That being said if you still want an advisor get a fee-only fiduciary. It leads to transparent pricing and avoids conflicts of interest on the part of the advisor. Rick Ferri who posts around here and wrote a great book called All About Asset Allocation might be a good choice for you.

Other notes:

That 2050 retirement date fund in your taxable account is not a very tax efficient choice. If the gains on it aren't too significant it might be worth moving it to a total market fund and picking up more bonds in your 401k where they are most efficiently placed. This could be done by switching to an earlier date target retirement fund in that account. If the gains on the taxable 2050 TDF are significant then at very least stop contributing to it and buy some low cost total stock market fund.

You say that you likely want 0% international but both of your existing TDF have ~20% of equity in international. It's probably ok either way but if you want to eliminate them you may consider moving to a 2 fund portfolio to make that happen.

For someone in your tax brackets munis may make sense in your taxable sometime soon as you add more bonds.
tashnewbie
Posts: 1588
Joined: Thu Apr 23, 2020 12:44 pm

Re: Late 20s questions about investment allocation over next few years

Post by tashnewbie »

I think you're in great shape overall.

I agree with user above that it's not ideal to use a TDF in taxable. You mentioned you have Betterment TLH turned on. I don't see how there can be any TLH of a TDF. You don't need to pay Betterment a percentage of your assets to hold a TDF. You can EASILY do that yourself.

Like user above said, if the capital gains are low on the TDF (did you say they're $60k?), I'd sell the TDF and buy a total stock market fund. If the gains are $60k, I probably wouldn't sell but would turn off automatic reinvestment of dividends, stop adding new money to it, and contribute new money to a total stock market fund (VTSAX at Vanguard or VTI anywhere else, for example).

I would then also switch the Vanguard Roth IRA to VFIAX (S&P 500 index fund) so that you can easily TLH in the taxable account without having inadvertent wash sales (or, at the very least, turn off automatic reinvestment of dividends in both the taxable account and Roth IRA).

Confirm that your Betterment individual account is indeed a taxable brokerage account and not some form of IRA (individual retirement arrangement/account). If it's an individual taxable brokerage account, then it will not complicate doing backdoor Roth contributions. And because the Vanguard IRA is a Roth IRA, you don't need to convert it to Roth, it already is.

I recommend reading about the backdoor Roth process before you attempt it. See the wiki and White Coat Investor's tutorial for more info: https://www.bogleheads.org/wiki/Backdoor_Roth and https://www.whitecoatinvestor.com/backd ... -tutorial/. A lot of people get tripped up by the tax paperwork that you have to do for it (Form 8606), so really make sure you know how to complete the form before you opt to do a backdoor Roth. Even a lot of professional tax preparers don't know how to do this, so don't rely upon them to do it!

If your 2020 MAGI was <$124k, then you can make a direct Roth IRA contribution for 2020 by May 17, 2021. Definitely do this, if your MAGI wasn't above that amount.
DIYtrixie
Posts: 65
Joined: Sun Sep 13, 2020 12:11 pm

Re: Late 20s questions about investment allocation over next few years

Post by DIYtrixie »

mrk4794 wrote: Tue May 04, 2021 4:27 pm
3. My 401k is through Empower Retirement and is invested entirely into a Vanguard 2050 target retirement date fund (possibly a tad early for me re: retirement). I selected the earlier date to be a bit more aggressive. 14.75% annualized return over the past 3 years. Thoughts on this allocation? My understanding is that the target retirement funds basically track the market and scale aggressiveness up and down from there based on the target date.
I think you may have this backwards. The LATER the date on the TR fund, the MORE aggressive the AA. Closer date = closer to retirement = more conservative AA.
Topic Author
mrk4794
Posts: 7
Joined: Mon May 03, 2021 8:11 pm

Re: Late 20s questions about investment allocation over next few years

Post by mrk4794 »

Thanks all, really appreciate the clarification around the backdoor Roth. Makes more sense now. Confirmed that my Betterment account is a taxable brokerage account and not an IRA. Also, it's not a true TDF, it's 88% stocks (ETFs - total market, large cap value, mid cap, etc.) and 12% bonds (VTIP, AGG, muni bonds, some int'l). Apologies for the conflicting information.

My plan is to a) make a Roth contribution in the short term since I qualify for conventional Roth based on 2020 income and b) figure out what to do with my Betterment account. Sounds like I can recreate the Betterment portfolio in a lower fee and potentially tax advantaged way (if I do backdoor Roth). So, let me know what you think about the following steps:

Near term (before 5/17/21):

1. Since I had <$124K income in 2020, make a substantial contribution to my old Roth IRA at Vanguard (maybe $60K, leaving me with $35K cash)
-this needs to be done before 5/17, right?
-is this relevant to my 2020 tax return? As I mentioned, I am in the process of filing an amended 2020 return to include a tax loss (i.e. a refund) from my K-1 form (I made a substantial partnership contribution in 2020 w/ no distributions).

2. My Betterment account balance is $198K as of today - $135K contributions, $63K earnings. Contributions were made throughout the year from 3/2016 - 8/2019. So, $63K of potential capital gains tax. My 2020 income was $35K (basically just a signing bonus). Based on my 2020 income and $63K of LT capital gains, I am estimating $8-$10K of capital gains tax exposure if I were to liquidate my Betterment account BEFORE 5/17 (i.e. 2020 tax year).
-when would that $10K be due? As soon as I file the amended return before 5/17? Maybe this exposure would be offset by my K1 loss
-why would I do this now, as opposed to later this year, or before tax day next year? To minimize the tax burden (assuming continued gains in the account)? To get these funds into a Roth (via backdoor) as soon as possible? Both or neither?
-should I be trying to the Betterment over to my old 401k? As a reminder, no 401k in current position

3. Since I am filing an amended return, I only need to complete the actions above by 5/17 (if I choose to), rather than complete them AND file the return itself, correct? My tax preparer mentioned that the amended return can be filed any time before 4/15/24.

Medium term (after 5/17/21):
1. Depending on when my bonus is paid, I may actually qualify for a traditional Roth contribution in 2021 as well. Should I wait until NEXT year (January) to see if my 2021 income qualifies for Roth contributions or not? And then decide whether or not to do a backdoor Roth (in Jan. 2022)?
-applies to both my current Betterment balance and W2 earnings for rest of 2021
-this depends on the response to #2 above
tashnewbie
Posts: 1588
Joined: Thu Apr 23, 2020 12:44 pm

Re: Late 20s questions about investment allocation over next few years

Post by tashnewbie »

You can only contribute $6k/year to IRA (Roth, Traditional, or a combo). You can’t dump $35k in there for 2020 (many of us wish there was no Roth IRA contribution limit!). You can contribute $6k for 2020 (by 5/17) and $6k for 2021 all at the same time. Given that your income may exceed the limit this year, I’d just go ahead and assume it will be over and do the backdoor. BUT as I said earlier, definitely make sure you have a firm grasp of the process before you do it.
khram
Posts: 200
Joined: Sat Dec 16, 2017 1:36 am

Re: Late 20s questions about investment allocation over next few years

Post by khram »

Do you have to buy a home in 3 years? If so, don't invest down payment money. If you can wait an extra year or two, especially with your high income to be able to add to your down payment, I'd be okay with investing your money.
Topic Author
mrk4794
Posts: 7
Joined: Mon May 03, 2021 8:11 pm

Re: Late 20s questions about investment allocation over next few years

Post by mrk4794 »

tashnewbie wrote: Wed May 05, 2021 7:45 pm You can only contribute $6k/year to IRA (Roth, Traditional, or a combo). You can’t dump $35k in there for 2020 (many of us wish there was no Roth IRA contribution limit!). You can contribute $6k for 2020 (by 5/17) and $6k for 2021 all at the same time. Given that your income may exceed the limit this year, I’d just go ahead and assume it will be over and do the backdoor. BUT as I said earlier, definitely make sure you have a firm grasp of the process before you do it.
Thanks - I will plan to do the $6K max (2020) before 5/17 and a backdoor larger amount after 5/17.

Re: the backdoor, no reason why I would need to do that prior to tax day this year, correct? I think it would be relevant to the 2021 tax year (not 2020) in either case.
tashnewbie
Posts: 1588
Joined: Thu Apr 23, 2020 12:44 pm

Re: Late 20s questions about investment allocation over next few years

Post by tashnewbie »

mrk4794 wrote: Thu May 06, 2021 8:11 am
tashnewbie wrote: Wed May 05, 2021 7:45 pm You can only contribute $6k/year to IRA (Roth, Traditional, or a combo). You can’t dump $35k in there for 2020 (many of us wish there was no Roth IRA contribution limit!). You can contribute $6k for 2020 (by 5/17) and $6k for 2021 all at the same time. Given that your income may exceed the limit this year, I’d just go ahead and assume it will be over and do the backdoor. BUT as I said earlier, definitely make sure you have a firm grasp of the process before you do it.
Thanks - I will plan to do the $6K max (2020) before 5/17 and a backdoor larger amount after 5/17.

Re: the backdoor, no reason why I would need to do that prior to tax day this year, correct? I think it would be relevant to the 2021 tax year (not 2020) in either case.
You can make a full $6k direct Roth IRA contribution for 2020 if your 2020 MAGI was <$124k. You must do that by 5/17.

For 2021, I would assume your 2021 MAGI will disqualify you from making a full $6k direct Roth IRA contribution. So for any 2021 contribution you want to make (again, the limit is $6k), you could use the backdoor method. That contribution has to be done by 4/15/22. But, in my opinion, it's easier and more convenient to do both steps of the backdoor Roth process - 1) non-deductible Traditional IRA contribution and 2) the Roth conversion - in the calendar year that the contribution is for (so doing both steps in 2021 for a 2021 contribution). Once you dig into the mechanics of the process and completing Form 8606, you'll see why.
tashnewbie
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Re: Late 20s questions about investment allocation over next few years

Post by tashnewbie »

mrk4794 wrote: Wed May 05, 2021 5:29 pm Near term (before 5/17/21):[/b]
1. Since I had <$124K income in 2020, make a substantial contribution to my old Roth IRA at Vanguard (maybe $60K, leaving me with $35K cash)
-this needs to be done before 5/17, right?
-is this relevant to my 2020 tax return? As I mentioned, I am in the process of filing an amended 2020 return to include a tax loss (i.e. a refund) from my K-1 form (I made a substantial partnership contribution in 2020 w/ no distributions).
A direct Roth IRA contribution for tax year 2020 will not affect your tax liability, so there is nothing you need to disclose about it in your amended return.
mrk4794 wrote: Wed May 05, 2021 5:29 pm 2. My Betterment account balance is $198K as of today - $135K contributions, $63K earnings. Contributions were made throughout the year from 3/2016 - 8/2019. So, $63K of potential capital gains tax. My 2020 income was $35K (basically just a signing bonus). Based on my 2020 income and $63K of LT capital gains, I am estimating $8-$10K of capital gains tax exposure if I were to liquidate my Betterment account BEFORE 5/17 (i.e. 2020 tax year).
-when would that $10K be due? As soon as I file the amended return before 5/17? Maybe this exposure would be offset by my K1 loss
-why would I do this now, as opposed to later this year, or before tax day next year? To minimize the tax burden (assuming continued gains in the account)? To get these funds into a Roth (via backdoor) as soon as possible? Both or neither?
-should I be trying to the Betterment over to my old 401k? As a reminder, no 401k in current position
I don't know if sales before your tax filing deadline are counted as income for the prior year (i.e., are sales before 5/17/21 counted as 2020 income?). If they are, it does appear you could sell some portion of the $63k of cap gains in the 0% LTCG bracket, so I think it'd be worth doing that at least.

Based on what you said above, this Betterment account is a taxable brokerage account. Therefore, you cannot transfer this account into your old 401k (even if the old 401k would accept incoming transfers at this point, which it probably wouldn't).

You also can't convert this money to Roth IRA (you can convert a Traditional or Rollover IRA to Roth IRA by paying ordinary income taxes on the balance). The only way to get this Betterment account money into Roth IRA is to realize the capital gains and then trickle the money in over time into the Roth IRA. I don't recommend doing that. Just make regular, annual Roth IRA contributions from your cash flow.
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mrk4794
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Re: Late 20s questions about investment allocation over next few years

Post by mrk4794 »

tashnewbie wrote: Thu May 06, 2021 9:35 am Based on what you said above, this Betterment account is a taxable brokerage account. Therefore, you cannot transfer this account into your old 401k (even if the old 401k would accept incoming transfers at this point, which it probably wouldn't).

You also can't convert this money to Roth IRA (you can convert a Traditional or Rollover IRA to Roth IRA by paying ordinary income taxes on the balance). The only way to get this Betterment account money into Roth IRA is to realize the capital gains and then trickle the money in over time into the Roth IRA. I don't recommend doing that. Just make regular, annual Roth IRA contributions from your cash flow.
I see. Could I sell out of the account this year, pay the cap gains tax on the $63K, then backdoor Roth the entire amount at once later this year? By "trickle" I assume you mean make regular Roth contributions at $6K per year, which I will not be able to do going forward (maybe this year but definitely not in 2022 due to ineligibility).

I believe that if I made the lump sum transfer, I would only be paying capital gains on the $63K and none of the future appreciation. Maybe I'm missing something...
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Re: Late 20s questions about investment allocation over next few years

Post by tashnewbie »

mrk4794 wrote: Thu May 06, 2021 2:00 pm
tashnewbie wrote: Thu May 06, 2021 9:35 am Based on what you said above, this Betterment account is a taxable brokerage account. Therefore, you cannot transfer this account into your old 401k (even if the old 401k would accept incoming transfers at this point, which it probably wouldn't).

You also can't convert this money to Roth IRA (you can convert a Traditional or Rollover IRA to Roth IRA by paying ordinary income taxes on the balance). The only way to get this Betterment account money into Roth IRA is to realize the capital gains and then trickle the money in over time into the Roth IRA. I don't recommend doing that. Just make regular, annual Roth IRA contributions from your cash flow.
I see. Could I sell out of the account this year, pay the cap gains tax on the $63K, then backdoor Roth the entire amount at once later this year? By "trickle" I assume you mean make regular Roth contributions at $6K per year, which I will not be able to do going forward (maybe this year but definitely not in 2022 due to ineligibility).

I believe that if I made the lump sum transfer, I would only be paying capital gains on the $63K and none of the future appreciation. Maybe I'm missing something...
I think one of us is missing something. I'm not quite sure who, though.

If this Betterment account is a taxable brokerage account and not some flavor of IRA (individual retirement arrangement/account), then NO, you cannot just sell the holdings in the brokerage account and lump sum the net amount into a Roth IRA. I think you need to double check and confirm the nature of the Betterment account. The fact that you're talking about capital gains in this account suggests that it is indeed a taxable brokerage account, but confirm. Contact Betterment.

If you don't have any pretax money in IRAs (Traditional, Rollover, SEP, or SIMPLE), then you can do easy backdoor Roths for tax years 2021 and beyond. I don't recall, but I don't think you mentioned having any of those pretax IRAs. Check the wiki and the WCI (both of which I linked earlier in this thread) for more info about the backdoor Roth process. Make sure you know how to do it and fill out Form 8606 before you do a backdoor.
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Re: Late 20s questions about investment allocation over next few years

Post by tashnewbie »

Also, once you are married, your spouse should max her 401k contributions ($19.5k/year), if possible with her salary. You'll want as much tax-deferral as you can get, especially since you won't have access to a 401k, at least initially. [You'll also be able to deduct a Traditional IRA contribution ($6k/year) because you won't be covered by a workplace retirement plan. I don't know if that'd be better than doing a backdoor Roth for you. I'd probably opt to deduct the TIRA contribution, then put tax savings in a taxable brokerage account. You'll save taxes by deferring the $6k TIRA contribution.]
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Re: Late 20s questions about investment allocation over next few years

Post by PowderDay9 »

A taxable brokerage account and a (backdoor) Roth IRA are two completely different things. You can't roll a taxable account into an IRA. You can only contribute $6k a year into an IRA. If you had a traditional IRA you could roll it into a Roth IRA (no dollar limit) and pay the taxes for the year in which the transaction occurs.

When you sell funds in a taxable brokerage account, the capital gains (or loses) are taxed in the year the selling takes place. You can't sell today and count those as capital gains on your 2020 taxes. They will be reported on your 2021 taxes.

Also, short-term capital gains and long-term capital gains are taxed at different rates. You should look at your betterment account to see which funds have been held for less than a year. Those will be taxed at your marginal income tax rate. My guess is betterment is doing a lot of trading in your account.
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Re: Late 20s questions about investment allocation over next few years

Post by mrk4794 »

tashnewbie wrote: Thu May 06, 2021 2:14 pm I think one of us is missing something. I'm not quite sure who, though.

If this Betterment account is a taxable brokerage account and not some flavor of IRA (individual retirement arrangement/account), then NO, you cannot just sell the holdings in the brokerage account and lump sum the net amount into a Roth IRA. I think you need to double check and confirm the nature of the Betterment account.
Why not? Sell holdings, deposit into tIRA, convert to Roth? That's the only thing that's still unclear to me.

100% confirmed that it is a taxable brokerage account, I spoke with them. I do not have any pretax IRAs.

So for Betterment, it sounds like I cannot a) roll it into my old 401k, b) cash it out and use the funds for a backdoor Roth. Sounds like I should just turn off dividend reinvestment and leave it?
tashnewbie wrote: Thu May 06, 2021 2:19 pm Also, once you are married, your spouse should max her 401k contributions ($19.5k/year), if possible with her salary. You'll want as much tax-deferral as you can get, especially since you won't have access to a 401k, at least initially. [You'll also be able to deduct a Traditional IRA contribution ($6k/year) because you won't be covered by a workplace retirement plan. I don't know if that'd be better than doing a backdoor Roth for you. I'd probably opt to deduct the TIRA contribution, then put tax savings in a taxable brokerage account. You'll save taxes by deferring the $6k TIRA contribution.]
Definitely makes sense on maxing her 401k, thanks.
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Re: Late 20s questions about investment allocation over next few years

Post by retired@50 »

mrk4794 wrote: Fri May 07, 2021 10:04 am
tashnewbie wrote: Thu May 06, 2021 2:14 pm I think one of us is missing something. I'm not quite sure who, though.

If this Betterment account is a taxable brokerage account and not some flavor of IRA (individual retirement arrangement/account), then NO, you cannot just sell the holdings in the brokerage account and lump sum the net amount into a Roth IRA. I think you need to double check and confirm the nature of the Betterment account.
Why not? Sell holdings, deposit into tIRA, convert to Roth? That's the only thing that's still unclear to me.

Here's why not.
The MAXIMUM deposit into a tIRA is $6,000 per year (for someone under 50 years old).

In other words, the rules don't allow what you're planning to do.

Regards,
This is one person's opinion. Nothing more.
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