Transitioning to Boglehead strategy.

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
shyplastic
Posts: 36
Joined: Mon Aug 23, 2021 1:11 pm

Transitioning to Boglehead strategy.

Post by shyplastic »

What's the right strategy to transition to "VT/BND/pension And Chill"?

In the early '00s, I took some of the money left over from the college fund (taxable, not 529 ) and allocated half to SPY, and half to "companies I believed in." (I think this was a Motley Fool suggested strategy.) I didn't understand the advantages/differences around IRAs, Roth, etc and just kept things in a taxable account with those funds. At my public sector work, I picked a defined benefit plan (which I am now vested in, having been there 20+ years), and also started to contribute to a no-match 401(k). Married after those early allocations, no kids, mid-40s, both earning steady 100-125k/year, no plans to retire for a decade or two.

Of the "companies I believed in," I was extraordinarily lucky and a few of them have done very well. I sold off all the losers over the years and reinvested into broad market indexes. Of late I have become convinced of the Boglehead strategy and am considering a final transition.

I haven't been diligent about contributing to IRA/Roth, but I mean to get on that train now, though I have been increasing my 401(k) allocations (over the years, currently up to 8.4k/year). Luckily, the investment options available and I use are low-expense index funds (e.g. 0.03% ratio for the large cap index option), so they're about as good as I would get in my Roth/IRA options, and it keeps the money from even briefly touching my spendable accounts.

Assets in my name:
  • $280k in taxable accounts, including 135k in AAPL (with a cost basis of $3.5k!), 16k in ADBE (cost basis $600!), 10k QQQ (cb 2k), most of the rest in broad market indices SPY/IVV/VXF/VXUS (no bonds)
  • $300k in a 401(k) that's about 90/10 broad market indexes/bonds
  • $25k in Roth IRA (90/10 VT/BND)
  • $10K in IRA (90/10 VT/BND).
  • $150k is the reported 'value' of the pension, vested, using as substitute for bonds in portfolio tilt.
Spouse:
  • separate 401(k) with sane, low-cost allocations: mix of VIRSX (vanguard 2040 fund) and FFNOX (~70-85 equities/bonds): 650k [edited to correct]. Not hitting the contribution limits yet, but match is completely fulfilled.
  • Also good about Roth/IRA contributions (planning a back-door this year), not sure of value ~50k?.
  • Has a smattering of sanely allocated taxable investments, but no more than 40-50k total.
Emergency fund established and appropriate in size.

Debts:
  • Mortgaged house: jointly owe $140k @ 3.5%, property 'worth' 360k, paid 220k. Paying off extra 1.8 payments to principal a year)
  • Car loan: jointly owe $10k at 2%, value 40k. (other car owned outright, worth ~10k)
  • No student loans for either of us.
  • CC's paid off in full monthly.
Future expected need: We plan to buy another car by 2023, but I would be surprised if interest rates aren't still super low by then.

Assets (investments, house, cars) - debts (mortgage, car) = 1.7 million. So high risk individual stocks are about 10% of that total.

The Big Question: How do I efficiently transition the individual stocks to lower risk, broad market indices? (I'm a fan of the 2 fund portfolio.)

Do I just sell them off tomorrow, take the 15% tax hit this year, and put the rest into VT? The taxable capital gains on them would be higher either of our annual income, but lower than them combined. Would it make sense to wait until December so I don't need to pay some kind of estimated taxes or penalties? The capital gains won't put us up into the 20% bracket.

Should I sell off to fully-fund both of our 401(k)'s and make sure we both max out a back-door Roth? (I don't know if either of us can do a "mega backdoor Roth" at our employers, but I could check if that's possible).

Live off the proceeds while that's happening?

Do that over this and next tax year?

I don't think I should pay-off the debts: with the rates on the mortgage and car loan, I am willing to bet the returns will outpace the cost of debt service.

We don't have high enough deductions on the mortgage to itemize after the previous tax changes.

What should I/we be doing?

[minor edits to better specify spouse's accounts]
Last edited by shyplastic on Tue Aug 31, 2021 9:52 am, edited 1 time in total.
pasadena
Posts: 2337
Joined: Sat Jul 02, 2016 1:23 am
Location: PNW

Re: Transitioning to Boglehead strategy.

Post by pasadena »

What do your expenses look like? With an income of $200k-$250k, low mortgage and no student loans, you should be able to max out 2 401(k) and 2 Roth IRAs without having to rely on your investments.

And if you do that, you have more room to sell your individual stocks without risking additional tax.
livesoft
Posts: 86075
Joined: Thu Mar 01, 2007 7:00 pm

Re: Transitioning to Boglehead strategy.

Post by livesoft »

You can consider your individual stocks in the taxable account "dead money." Then you can get a tax break by donating the shares to charity via a Donor Advised Fund piecemeal over the next couple of decades. Read the rules on all that. You will have to itemize to get the tax break, but that should not be a problem since you can donate big time and that would allow you to include your other itemized deductions (mortgage interest, property taxes, SALT, etc.) on Schedule A as well.

If you tell me that you will never donate to charity for the rest of your life, then I will be sad.
Wiki This signature message sponsored by sscritic: Learn to fish.
Topic Author
shyplastic
Posts: 36
Joined: Mon Aug 23, 2021 1:11 pm

Re: Transitioning to Boglehead strategy.

Post by shyplastic »

pasadena wrote: Mon Aug 23, 2021 4:26 pm What do your expenses look like? With an income of $200k-$250k, low mortgage and no student loans, you should be able to max out 2 401(k) and 2 Roth IRAs without having to rely on your investments.

And if you do that, you have more room to sell your individual stocks without risking additional tax.
I guess the fact that I can't come up with immediate numbers tells me that we should spend time coming up with a specific budget.

We do spend on restaurants, travel, and entertainment. Since the pandemic, a bit of that has shifted (and lowered) into groceries and streaming serivces. I spend too much shopping (especially at Amazon).

The balances are going in the right direction, but not as fast as they could be.
Topic Author
shyplastic
Posts: 36
Joined: Mon Aug 23, 2021 1:11 pm

Re: Transitioning to Boglehead strategy.

Post by shyplastic »

livesoft wrote: Mon Aug 23, 2021 4:32 pm You can consider your individual stocks in the taxable account "dead money." Then you can get a tax break by donating the shares to charity via a Donor Advised Fund piecemeal over the next couple of decades. Read the rules on all that. You will have to itemize to get the tax break, but that should not be a problem since you can donate big time and that would allow you to include your other itemized deductions (mortgage interest, property taxes, SALT, etc.) on Schedule A as well.

If you tell me that you will never donate to charity for the rest of your life, then I will be sad.
So, for example, if we were going to donate $xxx cash to a charity, we could instead donate $xxx worth of stock and buy $xxx worth of a sane equity?

We do donate small amounts regularly to various charities already.
livesoft
Posts: 86075
Joined: Thu Mar 01, 2007 7:00 pm

Re: Transitioning to Boglehead strategy.

Post by livesoft »

shyplastic wrote: Mon Aug 23, 2021 5:22 pmSo, for example, if we were going to donate $xxx cash to a charity, we could instead donate $xxx worth of stock and buy $xxx worth of a sane equity?

We do donate small amounts regularly to various charities already.
Yes. See https://www.bogleheads.org/wiki/Donor_advised_fund for more info. With your wealth and income, maybe $xxxxx to a DAF every other year to "bunch deductions" and then from there to many charities.
Wiki This signature message sponsored by sscritic: Learn to fish.
pasadena
Posts: 2337
Joined: Sat Jul 02, 2016 1:23 am
Location: PNW

Re: Transitioning to Boglehead strategy.

Post by pasadena »

shyplastic wrote: Mon Aug 23, 2021 5:14 pm
pasadena wrote: Mon Aug 23, 2021 4:26 pm What do your expenses look like? With an income of $200k-$250k, low mortgage and no student loans, you should be able to max out 2 401(k) and 2 Roth IRAs without having to rely on your investments.

And if you do that, you have more room to sell your individual stocks without risking additional tax.
I guess the fact that I can't come up with immediate numbers tells me that we should spend time coming up with a specific budget.

We do spend on restaurants, travel, and entertainment. Since the pandemic, a bit of that has shifted (and lowered) into groceries and streaming serivces. I spend too much shopping (especially at Amazon).

The balances are going in the right direction, but not as fast as they could be.
I know I'm not answering your big question, but yeah, it does sound like you should take a look at your expenses. Maybe start by looking at your Amazon reports - I remember doing that once and while I Knew I was spending too much there, seeing the total was eye opening. Use something like Mint or Personal Capital to track. I guess a budget is a good idea once you know where you're at.

My personal way of solving this at the time was to crank up my 401(k) contributions to max it out, and be forced to live on what's left. Surprise, I didn't even actually feel it (and appreciated the tax savings). It's better than spending your savings. Savings first, always.

You make quite a lot of money and you don't have kids. Take advantage of that.

I would also look into refinancing the mortgage for a lower rate.

As for your individual stocks, I would do the Donor Advised thing first, replacing your cash donations, and spread the rest over a couple of years.
TruckLoadsEmpty
Posts: 4
Joined: Wed Jul 28, 2021 12:46 am

Re: Transitioning to Boglehead strategy.

Post by TruckLoadsEmpty »

For the individual stocks, it may not be bad idea to sell some now say 25% and pay 15% tax on them. They can go down any time 20-30%, so selling some and diversifying is always a good idea.

If you ever plan to donate, moving them into DAF is the right thing to do, that will save some tax right away.

There are more complicated mechanisms like “Charitable Remainder Unitrusts” for case of highly appreciated stocks like you have, you can get yearly stream of income and around 10% eventuality going to charities.

Other strategy would be to gather some losses with Tax Loss Harvesting (TLH) and use the same to offset these gains. That would take years and I guess it would be only after next major crash. Therefore I guess is risky. I have reasonably diversified set of individual stocks, I plan to unwind over the years once I do some TLH. I am not in hurry mainly due to I pay lot more cap gains tax (33%)
Topic Author
shyplastic
Posts: 36
Joined: Mon Aug 23, 2021 1:11 pm

Re: Transitioning to Boglehead strategy.

Post by shyplastic »

Thanks for the advice all. It seems like Charitable Remainder Uni-trusts have a higher expectation for assets than I feel comfortable (or am able to) throw in.

We're definitely going to set up a DAF though and make our donations cleaner and more tax efficient.

I talked to our mortgage guy, and it seems like the break-even with closing costs for refinancing is several years in the future, and the total savings is around $12K over the remainder of our loan. That's not nothing, but it's also not a ton, and makes a strong bet that we'll not move.

TLH is going to be hard as it seems most of my taxable investments are in appreciated, diversified securities as I shifted most new investment to 401(k) while back. In order to have losses to harvest, that crash would have to be about 60-70% of the total market. From what I can tell, that hasn't happened since 1929, and while it's certainly not impossible to happen again, it appears that monetary policy has changed a lot since then (see 2008/2020).

My spouse and I need to go though our automated money movements (savings/investing/etc) and come up with a better plan. Maxing the 401(k)'s is smart.

Thoughts on Roth 401(k) vs regular for folks in our position?
exodusNH
Posts: 10344
Joined: Wed Jan 06, 2021 7:21 pm

Re: Transitioning to Boglehead strategy.

Post by exodusNH »

shyplastic wrote: Mon Aug 23, 2021 4:09 pm Assets in my name:
  • $280k in taxable accounts, including 135k in AAPL (with a cost basis of $3.5k!), 16k in ADBE (cost basis $600!), 10k QQQ (cb 2k), most of the rest in broad market indices SPY/IVV/VXF/VXUS (no bonds)
  • $300k in a 401(k) that's about 90/10 broad market indexes/bonds
  • $25k in Roth IRA (90/10 VT/BND)
  • $10K in IRA (90/10 VT/BND).
  • $150k is the reported 'value' of the pension, vested, using as substitute for bonds in portfolio tilt.
Not that it's a big deal, but the 10% BND in your Roth IRA is not as efficient as it could be. Sell the 10% there and put it into VT. Then, in either your IRA or 401k, buy additional bonds to make up the difference. For a bit more tax efficiency at the cost of a bit more complexity, transition VT to VTI in your IRAs/401k. Make up the international percent in your taxable account. You'll get the benefit of the foreign tax withholding credit. This only makes sense if you are able to make up the difference without incurring taxes or are OK with directing all new money to foreign stocks taxable and can get back to your desired AA relatively quickly.

As someone else noted, if you're able to max out the 401k, you could sell some of the stocks, allowing you to pay less tax overall this year. (15% vs your marginal bracket.) I would probably start with Adobe, then Apple, then QQQ.

Where you have about a 50/50 split of taxable vs tax-deferred, it probably makes sense to use the traditional 401k. You already have pretty good tax diversification.
Topic Author
shyplastic
Posts: 36
Joined: Mon Aug 23, 2021 1:11 pm

Re: Transitioning to Boglehead strategy.

Post by shyplastic »

exodusNH wrote: Tue Aug 31, 2021 9:33 am
Not that it's a big deal, but the 10% BND in your Roth IRA is not as efficient as it could be. Sell the 10% there and put it into VT. Then, in either your IRA or 401k, buy additional bonds to make up the difference. For a bit more tax efficiency at the cost of a bit more complexity, transition VT to VTI in your IRAs/401k. Make up the international percent in your taxable account. You'll get the benefit of the foreign tax withholding credit. This only makes sense if you are able to make up the difference without incurring taxes or are OK with directing all new money to foreign stocks taxable and can get back to your desired AA relatively quickly.

As someone else noted, if you're able to max out the 401k, you could sell some of the stocks, allowing you to pay less tax overall this year. (15% vs your marginal bracket.) I would probably start with Adobe, then Apple, then QQQ.

Where you have about a 50/50 split of taxable vs tax-deferred, it probably makes sense to use the traditional 401k. You already have pretty good tax diversification.
I'd already sold BND from the Roth.

How big is the foreign tax witholding credit as a percentage of VTI? I really like the simplicity of VT, and that's why I'd been using that.

I hadn't been adding much to taxable, and since I posted I've decreased the taxable additions to funnel more into the 401k. (not maxed yet, but could make moves to do so.)

I feel like, with the exception of the risky individual stocks, most of the moves I can make are relatively marginal optimizations, which is a pretty good place to be. Please correct me if I 'm wrong.
exodusNH
Posts: 10344
Joined: Wed Jan 06, 2021 7:21 pm

Re: Transitioning to Boglehead strategy.

Post by exodusNH »

shyplastic wrote: Tue Aug 31, 2021 10:17 am
exodusNH wrote: Tue Aug 31, 2021 9:33 am
Not that it's a big deal, but the 10% BND in your Roth IRA is not as efficient as it could be. Sell the 10% there and put it into VT. Then, in either your IRA or 401k, buy additional bonds to make up the difference. For a bit more tax efficiency at the cost of a bit more complexity, transition VT to VTI in your IRAs/401k. Make up the international percent in your taxable account. You'll get the benefit of the foreign tax withholding credit. This only makes sense if you are able to make up the difference without incurring taxes or are OK with directing all new money to foreign stocks taxable and can get back to your desired AA relatively quickly.

As someone else noted, if you're able to max out the 401k, you could sell some of the stocks, allowing you to pay less tax overall this year. (15% vs your marginal bracket.) I would probably start with Adobe, then Apple, then QQQ.

Where you have about a 50/50 split of taxable vs tax-deferred, it probably makes sense to use the traditional 401k. You already have pretty good tax diversification.
I'd already sold BND from the Roth.

How big is the foreign tax witholding credit as a percentage of VTI? I really like the simplicity of VT, and that's why I'd been using that.

I hadn't been adding much to taxable, and since I posted I've decreased the taxable additions to funnel more into the 401k. (not maxed yet, but could make moves to do so.)

I feel like, with the exception of the risky individual stocks, most of the moves I can make are relatively marginal optimizations, which is a pretty good place to be. Please correct me if I 'm wrong.
I don't have those numbers, because I've only started contributing to VXUS this tax year. The 2020 sheet is here: https://www.vanguard.com/pdf/RTFTCWS_022021.pdf, but I'm not able to make heads-or-tails of it.

Otherwise, yes, you're in great shape minus the risk of the individual stocks, which have treated you well.
Topic Author
shyplastic
Posts: 36
Joined: Mon Aug 23, 2021 1:11 pm

Re: Transitioning to Boglehead strategy.

Post by shyplastic »

Thanks for all the advice. We've set up a DAF and donated some of the appreciated assets so we should be able to itemize this year. After that , we'll be migrating our regular donations over there and upping the amounts going into our 401(k) and IRA accounts.

I asked our guy at Fidelity about a Charitable Remainder Uni-Trust (CRUT), and he seemed to think that it wasn't a good ideas for us at this level: He thought it was more of a legacy/estate vehicle than something we'd want to do here.
Topic Author
shyplastic
Posts: 36
Joined: Mon Aug 23, 2021 1:11 pm

Re: Transitioning to Boglehead strategy.

Post by shyplastic »

Thank you all again: Setting up a DAF and donating appreciated assets to it really made an enormous difference this year on our taxes.

Still in process of transitioning: I think the biggest things slowing me down are psychology and a bit of worrying about estimated taxes.
Workingmom79
Posts: 13
Joined: Mon Mar 07, 2022 1:22 pm

Re: Transitioning to Boglehead strategy.

Post by Workingmom79 »

Just want to say that I think that the advice you got here was good and I'm glad that setting up a DAF and donating some highly appreciated securities has worked out well for you.

I'm in a somewhat different but somewhat similar situation in that I have a (much, much) smaller taxable account with some individual stocks (also started a while ago based on some Motley Fool advice) that I may transition to charity or a DAF as we invest even more in the boglehead way.

Incidentally I work in the nonprofit sector and many charities (especially large charites and/or sophisticated charities) can also take donations of stock or securities directly and put them to use right away. You get the same benefits of an income tax deduction and avoiding realizing gains. I'm not disparaging DAFs at all (as I said, I may open one--- and it's a great way to be able to get a big tax deduction one year and give the funds away over time) but many of us in the nonprofit sector lament the millions of dollars sitting and growing in DAFs year after year that don't get distributed when there is such a need. So just food for thought--there are many good charitable strategies.

Glad that the DAF helped you this year.
Workingmom79
Posts: 13
Joined: Mon Mar 07, 2022 1:22 pm

Re: Transitioning to Boglehead strategy.

Post by Workingmom79 »

Also---many advisors (like the person you talked to at Fidelity) aren't super well versed in CRUTs but they can also be a great vehicle for creating income in retirement and also helping alleviate the pain of capital gains and/or helping diversify portfolios. Google a Flip CRT. Often they are larger but there are definitely charities and trustees that will create CRTs at the 50k or 100k level. You can set a specific event as to when the trust will "flip" and start creating income. IF you likely aren't having children and would be okay having the remainder go to charity after your death(s) I do tihnk this could be a good option for you.
Workingmom79
Posts: 13
Joined: Mon Mar 07, 2022 1:22 pm

Re: Transitioning to Boglehead strategy.

Post by Workingmom79 »

Also---many advisors (like the person you talked to at Fidelity) aren't super well versed in CRUTs but they can also be a great vehicle for creating income in retirement and also helping alleviate the pain of capital gains and/or helping diversify portfolios. Google a Flip CRT. Often they are larger but there are definitely charities and trustees that will create CRTs at the 50k or 100k level. You can set a specific event as to when the trust will "flip" and start creating income. IF you likely aren't having children and would be okay having the remainder go to charity after your death(s) I do tihnk this could be a good option for you.
Topic Author
shyplastic
Posts: 36
Joined: Mon Aug 23, 2021 1:11 pm

Re: Transitioning to Boglehead strategy.

Post by shyplastic »

Just for the record, my family has been giving regularly to charities over the years, and the DAF not only gave us benefits on our taxes this year monetarily, but it also will simplify our taxes going forward. Instead of looking for receipts/summaries from a dozen or so charities at the end of the year, or doing laborious record-keeping, we'll mostly just need to look at the DAF statement to find contributions there.

We also converted our regular small monthly donations to biannual donations.

Briefly searching for "Flip CRT" does make it look interesting. Thanks for the suggestion!
Topic Author
shyplastic
Posts: 36
Joined: Mon Aug 23, 2021 1:11 pm

Re: Transitioning to Boglehead strategy.

Post by shyplastic »

Thank you all again. My spouse and I have made the adjustments for us to both max out our 401k's for the first time this year.

Is there a definitive answer for the Roth 401k vs regular for someone in our situation? It seems to me that at our ages/incomes the regular is probably the better bet, but the references I see are all confusing and require many calculations and guesses to make a decision.
Post Reply