401(k) and general questions

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Topic Author
notebook
Posts: 7
Joined: Sat Sep 25, 2021 8:11 pm

401(k) and general questions

Post by notebook »

Hello Bogleverse-

Occasional forum visitor, first-time poster here. I am near the beginning of my professional career and investing life. For better or for worse, I began investing and learning about investing at the same time, which caused me to change strategies repeatedly. As a result, my portfolio is a bit messy, for lack of a better word. My financial stats are below, followed by a few questions. Thank you in advance for your time and wisdom.

Emergency funds: yes, enough to cover six months of expenses
Debt: none
Tax filing status: single
Marginal tax rate: 22% federal (excluding FICA), 7% state
Age: 27
Desired asset allocation: 100% stocks / 0% bonds (at least for the next decade or so)
Desired international allocation: 25% of stocks

Current portfolio size: ~$142,000

Current retirement assets

Taxable
18% Vanguard ESG U.S. Stock ETF (ESGV) (.12%)
14% various securities, funds, and crypto, each with a value <$1,000
12% Vanguard Total Stock Market ETF (VTI) (.03%)
4% Invesco S&P 500 Quality ETF (SPHQ) (.15%)
4% Vanguard Total International Stock ETF (VXUS) (.08%)
4% Vanguard ESG International Stock ETF (VSGX) (.15%)
3% Vanguard FTSE All-World ex-US ETF (VEU) (.08%)
2% iShares Core S&P 500 ETF (IVV) (.03%)
2% Vanguard Total Bond Market ETF (BND) (.04%)
1% Vanguard Intermediate-Term Bond ETF (BIV) (.05%)
1% PIMCO 15+ Year US TIPS Index ETF (LTPZ) (.20%)

401(k)/Roth 401(k)
7% American Funds Europacific Growth A Fund (AEPGX) (.82%)
6% Vanguard 500 Index Admiral Fund (VFIAX) (.04%)
5% TIAA-CREF Social Choice Equity Institutional Fund (TISCX) (.18%)
4% SmallCap S&P 600 Index R6 Fund (PSPIX) (.16%)
2% MidCap S&P 400 Index R6 Fund (PMAPX) (.16%)
1% Dodge and Cox Income Fund (DODIX) (.42%)
1% Fixed Income Guaranteed Option
1% T. Rowe Price New Horizons Fund (PRNHX) (.75%)
<1% AB Global Bond Z Fund (ANAZX) (.50%)

Roth IRA
7% Vanguard ESG U.S. Stock ETF (ESGV) (.12%)
2% Vanguard ESG International Stock ETF (VSGX) (.15%)
_______________________________________________________________
101% (over 100 due to rounding)

Contributions

New annual contributions
$19,500 to Roth 401(k), plus ~$2,600 in employer matching contributions
$6,000 to Roth IRA
$variable to taxable

Available funds

Funds available in 401(k)
Fixed Income Guaranteed Option
AB Global Bond Z Fund (ANAZX) (.50%)
Calvert Bond I Fund (CBDIX) (.53%)
Dodge and Cox Income Fund (DODIX) (.42%)
Vanguard Inflation-Protected Securities Admiral Fund (VAIPX) (.10%)
American Funds American Mutual A Fund (AMRMX) (.59%)
LargeCap Growth I Inst Fund (PLGIX) (.68%)
TIAA-CREF Social Choice Equity Institutional Fund (TISCX) (.18%)
Vanguard 500 Index Admiral Fund (VFIAX) (.04%)
Janus Henderson Small Cap Value I Fund (JSCOX) (1.01%)
John Hancock Disciplined Value Mid Cap I Fund (JVMIX) (.86%)
MassMutual Mid Cap Growth I Fund (MEFZX) (.71%)
MidCap S&P 400 Index R6 Fund (PMAPX) (.16%)
SmallCap S&P 600 Index R6 Fund (PSPIX) (.16%)
Real Estate Securities Inst Fund (PIREX) (.91%)
T. Rowe Price New Horizons Fund (PRNHX) (.75%)
American Funds Capital World Growth and Income R5 Fund (RWIFX) (.47%)
American Funds Europacific Growth A Fund (AEPGX) (.82%)
Harding Loevner Emerging Markets Institutional Fund (HLMEX) (1.10%)

Questions:
1. This is a series of questions: Given my overall desired asset allocation (75 percent total U.S. stock market, 25 percent total international stock market, with an ESG bent), what funds and allocations would you recommend I use in my 401(k)? I like to invest in ESG funds that are market-cap-weighted, inexpensive, and well diversified, like ESGV and VSGX. TISCX lags on those latter two criteria, so I'm thinking of dropping it. How sensible would it be to try to recreate a total U.S. stock market fund with VFIAX, PMAPX, and PSPIX or to put my entire U.S. allocation in VFIAX? The steep expense ratios for AEPGX and the other international funds on offer make me wonder if I should stick to U.S. funds in my 401(k) and invest in international funds only in my Roth IRA and taxable accounts. What do you think of this idea?

1a. This is less a question than a statement: I've read other threads in which forum members suggested that, instead of investing in ESG funds, investors invest in total market funds and donate money to the causes they care about. I appreciate this suggestion. However, I prefer to avoid profiting from certain industries; if this leaves me with slightly lower returns, I'm OK with that. I am intrigued by the idea of funds as vehicles for activist investing, like the new Transform 500 ETF (VOTE) from Engine No. 1; a longer track record of moving the needle on ESG issues may make these funds more attractive to ESG investors.

2. To avoid incurring capital gains taxes, I have refrained from selling certain funds and securities in my taxable accounts even though I'm no longer that interested in holding them and would rather invest the $ elsewhere. How should I think about this question, of whether to keep my existing investments or to eat the tax penalty in exchange for a simpler portfolio and potentially stronger future performance? I might like to sell off VEU, SPHQ, individual securities, etc. and add to my positions in ESGV and VSGX, but I don't know if it's worth it. Thoughts?

-- Charley Joyce (a pseudonym)
Last edited by notebook on Mon Sep 27, 2021 6:13 pm, edited 1 time in total.
tashnewbie
Posts: 4284
Joined: Thu Apr 23, 2020 12:44 pm

Re: 401(k) and general questions

Post by tashnewbie »

Welcome to the forum!

You're doing great to be 27 with no debt and making maximum annual contributions to 401k and Roth IRA!

FYI, I don't know if it's intentional or something you did before you determined your desired asset allocation, but you do have some fixed income in both taxable (BND) and the 401k (the guaranteed income fund).

1. In the 401k, I would use just VFIAX or TIAA-CREF Social Choice Equity Institutional Fund (TISCX) (.18%), if TISCX fits your desire to invest in ESG funds (I'm not familiar with the fund, so I don't know if it meets the ESG criteria or if it's some other type of fund). I would put desired international stock exposure in the Roth IRA (and taxable, when you start adding to it again), until you have a better int'l option in the 401k.

2. Are you in the 0% long term capital gains tax bracket? I would look to see if you have some space to sell LT holdings with unrealized gains within the 0% LTCG bracket. If you do have space, I would sell holdings that you don't want to hold for the long term and reinvest proceeds in funds that you do or use the proceeds to fund Roth IRA contributions. You can obviously sell any lots with unrealized losses, and then sell lots with an equivalent amount of gains to offset the losses. You only need 1 or 2 funds in taxable right now, at the most -- a US total stock market fund and an international one (you can use ESG versions if you like).
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ruralavalon
Posts: 26353
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: 401(k) and general questions

Post by ruralavalon »

Welcome to the forum :).

Your employer's 401k plan offers many good funds with low expense ratios, you are fortunate.

It's good to see you starting young, making maximum annual contributions to your tax-advantaged accounts, using very diversified index funds with low expense ratios.

You are off to a great start.


notebook wrote: Sun Sep 26, 2021 3:05 pmQuestions:
1. This is a series of questions: Given my overall desired asset allocation (75 percent total U.S. stock market, 25 percent total international stock market, with an ESG bent), what funds and allocations would you recommend I use in my 401(k)?
In my opinion the better funds to consider using in your employer's 401k plan include:
1) Vanguard 500 Index Admiral Fund (VFIAX) (.04%) plus TIAA-CREF Social Choice Equity Institutional Fund (TISCX) (.18%);
2) American Funds Europacific Growth A Fund (AEPGX) (.82%); and
3) Dodge and Cox Income Fund (DODIX) (.42%), or perhaps Fixed Income Guaranteed Option.

What is the interest rate currently being paid in the "Fixed Income Guaranteed Option", and what rate is guaranteed?


notebook wrote: Sun Sep 26, 2021 3:05 pmI like to invest in ESG funds that are market-cap-weighted, inexpensive, and well diversified, like ESGV and VSGX. TISCX lags on those latter two criteria, so I'm thinking of dropping it.

An expense ratio of 0.18% is a low expense ratio, just not a very low expense ratio.

TIAA-CREF Social Choice Equity Institutional Fund (TISCX) invests in stocks of 605 companies, and so is well diversified. For comparison Vanguard Total Stock Market Index Fund (VTSAX) invested in stocks of 3980 , so is very well diversified


notebook wrote: Sun Sep 26, 2021 3:05 pmHow sensible would it be to try to recreate a total U.S. stock market fund with VFIAX, PMAPX, and PSPIX or to put my entire U.S. allocation in VFIAX?
In my opinion Vanguard 500 Index Fund Admiral Shares (VFIAX) ER 0.04% is good enough by itself for investing in U.S. stocks. It covers over 80% of the U.S. stock market investing in stocks of selected large-cap and mid-cap U.S. companies.

In the 29 years since the creation of the first total stock market index fund the two types of funds have had almost identical performance. Sometimes one type was a little bit ahead, some the other. Portfolio Visualizer, 1993-2021.

My advice is don't bother adding to Vanguard 500 Index Fund Admiral Shares (VFIAX) ER 0.04%.


notebook wrote: Sun Sep 26, 2021 3:05 pmThe steep expense ratios for AEPGX and the other international funds on offer make me wonder if I should stick to U.S. funds in my 401(k) and invest in international funds only in my Roth IRA and taxable accounts. What do you think of this idea?
I agree.

notebook wrote: Sun Sep 26, 2021 3:05 pm1a. This is less a question than a statement: I've read other threads in which forum members suggested that, instead of investing in ESG funds, investors invest in total market funds and donate money to the causes they care about. I appreciate this suggestion. However, I prefer to avoid profiting from certain industries; if this leaves me with slightly lower returns, I'm OK with that. . . . .
We use very diversified index funds and contribute heavily to charitable causes we endorse. We think that has a more substantial impact than ESG investing could possibly have. Just one opinion.


notebook wrote: Sun Sep 26, 2021 3:05 pm2. To avoid incurring capital gains taxes, I have refrained from selling certain funds and securities in my taxable accounts even though I'm no longer that interested in holding them and would rather invest the $ elsewhere. How should I think about this question, of whether to keep my existing investments or to eat the tax penalty in exchange for a simpler portfolio and potentially stronger future performance? I might like to sell off VEU, SPHQ, individual securities, etc. and add to my positions in ESGV and VSGX, but I don't know if it's worth it. Thoughts?
Please see this wiki article: Paying a tax cost to switch funds.

I would try to simplify to use just these stock index ETFs, if I wanted to include ESG investing:
Vanguard Total Stock Market ETF (VTI) (.03%);
4% Vanguard Total International Stock ETF (VXUS) (.08%);
4% Vanguard ESG International Stock ETF (VSGX) (.15%); and
Vanguard ESG U.S. Stock ETF (ESGV) (.12%).

In a taxable account it's generally best to use only very tax-efficient stock index funds or stock index exchange traded funds (ETFs).

Wiki article Tax-efficient fund placement.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
JBTX
Posts: 11228
Joined: Wed Jul 26, 2017 12:46 pm

Re: 401(k) and general questions

Post by JBTX »

notebook wrote: Sun Sep 26, 2021 3:05 pm Hello Bogleverse-

Occasional forum visitor, first-time poster here. I am near the beginning of my professional career and investing life. For better or for worse, I began investing and learning about investing at the same time, which caused me to change strategies repeatedly. As a result, my portfolio is a bit messy, for lack of a better word. My financial stats are below, followed by a few questions. Thank you in advance for your time and wisdom.

Emergency funds: yes, enough to cover six months of expenses
Debt: none
Tax filing status: single
Effective tax rate: 12% federal (excluding FICA), 5% state
Age: 27
Desired asset allocation: 100% stocks / 0% bonds (at least for the next decade or so)
Desired international allocation: 25% of stocks

Current portfolio size: ~$142,000

Current retirement assets

Taxable
18% Vanguard ESG U.S. Stock ETF (ESGV) (.12%)
14% various securities, funds, and crypto, each with a value <$1,000
12% Vanguard Total Stock Market ETF (VTI) (.03%)
4% Invesco S&P 500 Quality ETF (SPHQ) (.15%)
4% Vanguard Total International Stock ETF (VXUS) (.08%)
4% Vanguard ESG International Stock ETF (VSGX) (.15%)
3% Vanguard FTSE All-World ex-US ETF (VEU) (.08%)
2% iShares Core S&P 500 ETF (IVV) (.03%)
2% Vanguard Total Bond Market ETF (BND) (.04%)
1% Vanguard Intermediate-Term Bond ETF (BIV) (.05%)
1% PIMCO 15+ Year US TIPS Index ETF (LTPZ) (.20%)

401(k)/Roth 401(k)
7% American Funds Europacific Growth A Fund (AEPGX) (.82%)
6% Vanguard 500 Index Admiral Fund (VFIAX) (.04%)
5% TIAA-CREF Social Choice Equity Institutional Fund (TISCX) (.18%)
4% SmallCap S&P 600 Index R6 Fund (PSPIX) (.16%)
2% MidCap S&P 400 Index R6 Fund (PMAPX) (.16%)
1% Dodge and Cox Income Fund (DODIX) (.42%)
1% Fixed Income Guaranteed Option
1% T. Rowe Price New Horizons Fund (PRNHX) (.75%)
<1% AB Global Bond Z Fund (ANAZX) (.50%)

Roth IRA
7% Vanguard ESG U.S. Stock ETF (ESGV) (.12%)
2% Vanguard ESG International Stock ETF (VSGX) (.15%)
_______________________________________________________________
101% (over 100 due to rounding)

Contributions

New annual contributions
$19,500 to Roth 401(k), plus ~$2,600 in employer matching contributions
$6,000 to Roth IRA
$variable to taxable

Available funds

Funds available in 401(k)
Fixed Income Guaranteed Option
AB Global Bond Z Fund (ANAZX) (.50%)
Calvert Bond I Fund (CBDIX) (.53%)
Dodge and Cox Income Fund (DODIX) (.42%)
Vanguard Inflation-Protected Securities Admiral Fund (VAIPX) (.10%)
American Funds American Mutual A Fund (AMRMX) (.59%)
LargeCap Growth I Inst Fund (PLGIX) (.68%)
TIAA-CREF Social Choice Equity Institutional Fund (TISCX) (.18%)
Vanguard 500 Index Admiral Fund (VFIAX) (.04%)
Janus Henderson Small Cap Value I Fund (JSCOX) (1.01%)
John Hancock Disciplined Value Mid Cap I Fund (JVMIX) (.86%)
MassMutual Mid Cap Growth I Fund (MEFZX) (.71%)
MidCap S&P 400 Index R6 Fund (PMAPX) (.16%)
SmallCap S&P 600 Index R6 Fund (PSPIX) (.16%)
Real Estate Securities Inst Fund (PIREX) (.91%)
T. Rowe Price New Horizons Fund (PRNHX) (.75%)
American Funds Capital World Growth and Income R5 Fund (RWIFX) (.47%)
American Funds Europacific Growth A Fund (AEPGX) (.82%)
Harding Loevner Emerging Markets Institutional Fund (HLMEX) (1.10%)

Questions:
1. This is a series of questions: Given my overall desired asset allocation (75 percent total U.S. stock market, 25 percent total international stock market, with an ESG bent), what funds and allocations would you recommend I use in my 401(k)? I like to invest in ESG funds that are market-cap-weighted, inexpensive, and well diversified, like ESGV and VSGX. TISCX lags on those latter two criteria, so I'm thinking of dropping it. How sensible would it be to try to recreate a total U.S. stock market fund with VFIAX, PMAPX, and PSPIX or to put my entire U.S. allocation in VFIAX? The steep expense ratios for AEPGX and the other international funds on offer make me wonder if I should stick to U.S. funds in my 401(k) and invest in international funds only in my Roth IRA and taxable accounts. What do you think of this idea?

I like the idea of using the cheap domestic funds in the 401k and international in Roth and taxable.
1a. This is less a question than a statement: I've read other threads in which forum members suggested that, instead of investing in ESG funds, investors invest in total market funds and donate money to the causes they care about. I appreciate this suggestion. However, I prefer to avoid profiting from certain industries; if this leaves me with slightly lower returns, I'm OK with that. I am intrigued by the idea of funds as vehicles for activist investing, like the new Transform 500 ETF (VOTE) from Engine No. 1; a longer track record of moving the needle on ESG issues may make these funds more attractive to ESG investors.
It's a philosophical issue. The issues to me with ESG are

1. It is subjective
2. It could be possible that a firm in a "dirty" industry is doing more to progress change than one that fits the criteria. To each his own.
2. To avoid incurring capital gains taxes, I have refrained from selling certain funds and securities in my taxable accounts even though I'm no longer that interested in holding them and would rather invest the $ elsewhere. How should I think about this question, of whether to keep my existing investments or to eat the tax penalty in exchange for a simpler portfolio and potentially stronger future performance? I might like to sell off VEU, SPHQ, individual securities, etc. and add to my positions in ESGV and VSGX, but I don't know if it's worth it. Thoughts?

-- Charley Joyce (a pseudonym)
If you are in 12% bracket you should have 0% capital gains. You can either recognize gains up to the top of the 12% bracket each year or since you aren't at a high tax bracket (yet) bite the bullet and get it out of the way.
RetiredAL
Posts: 3537
Joined: Tue Jun 06, 2017 12:09 am
Location: SF Bay Area

Re: 401(k) and general questions

Post by RetiredAL »

notebook wrote: Sun Sep 26, 2021 3:05 pm Hello Bogleverse-

Occasional forum visitor, first-time poster here.

401(k)/Roth 401(k)
7% American Funds Europacific Growth A Fund (AEPGX) (.82%)

-- Charley Joyce (a pseudonym)
AEPGX may be an extremely poor chioce. Typically, the "A" in Growth A Fund stands for class A, a loaded fund. A load is a buying charge. This fund's listed buying charge is 5.75%. Think of it like a sales tax charge. On a $1000 buy order, you only got $942 of the fund. As a comparison, VFAIX charges no load.

There is a chance your 401K plan receives a load waver, so read your 401K documents. American Funds has many Classes including classes that don't charge loads. If a load was not assessed, I would expect the fund title to specify a different class. In general, loads are bad news to the cost conscious investor because it forces you start out in a valuation hole.

I commend you on being where you are already.
Topic Author
notebook
Posts: 7
Joined: Sat Sep 25, 2021 8:11 pm

Re: 401(k) and general questions

Post by notebook »

tashnewbie wrote: Mon Sep 27, 2021 8:02 am Welcome to the forum!

You're doing great to be 27 with no debt and making maximum annual contributions to 401k and Roth IRA!

FYI, I don't know if it's intentional or something you did before you determined your desired asset allocation, but you do have some fixed income in both taxable (BND) and the 401k (the guaranteed income fund).
Thank you for the welcome and the encouragement!

It's more the latter. I've held off on selling my fixed income assets to avoid incurring capital gains taxes with my taxable accounts and because I wanted to have a more well-thought-out plan before resetting the allocation in my 401(k).
tashnewbie wrote: Mon Sep 27, 2021 8:02 am 1. In the 401k, I would use just VFIAX or TIAA-CREF Social Choice Equity Institutional Fund (TISCX) (.18%), if TISCX fits your desire to invest in ESG funds (I'm not familiar with the fund, so I don't know if it meets the ESG criteria or if it's some other type of fund). I would put desired international stock exposure in the Roth IRA (and taxable, when you start adding to it again), until you have a better int'l option in the 401k.

2. Are you in the 0% long term capital gains tax bracket? I would look to see if you have some space to sell LT holdings with unrealized gains within the 0% LTCG bracket. If you do have space, I would sell holdings that you don't want to hold for the long term and reinvest proceeds in funds that you do or use the proceeds to fund Roth IRA contributions. You can obviously sell any lots with unrealized losses, and then sell lots with an equivalent amount of gains to offset the losses. You only need 1 or 2 funds in taxable right now, at the most -- a US total stock market fund and an international one (you can use ESG versions if you like).
1. Morningstar calls TISCX a "quasi-index fund that provides exposure to the broad U.S. stock market at a relatively cheap price." It's performed well enough historically, and the expense ratio (.18%) is tolerable. What gives me pause is that it doesn't track an index, which makes it seem more like an actively managed fund than a passively managed one.

2. I'm in the 15% long-term capital gains tax bracket. I gave my effective tax rates in my original post, which I just edited to include my marginal tax rates of 22% federal and 7% state. Is selling assets with equivalent unrealized losses and gains an example of tax-loss harvesting? That could be a good way for me to redirect some of my invested funds without generating a tax bill.

---
ruralavalon wrote: Mon Sep 27, 2021 9:11 am Welcome to the forum :).
Thanks very much! I appreciate your reply
ruralavalon wrote: Mon Sep 27, 2021 9:11 am What is the interest rate currently being paid in the "Fixed Income Guaranteed Option", and what rate is guaranteed?
The current crediting rate is 1.55%, which is set through the end of November. It resets December 1 and semiannually afterward. I don't know that I want to hold any fixed income right now, but when I do, I understand a 401(k) or other tax-advantaged account would be a smart place to do so.
ruralavalon wrote: Mon Sep 27, 2021 9:11 am In my opinion Vanguard 500 Index Fund Admiral Shares (VFIAX) ER 0.04% is good enough by itself for investing in U.S. stocks. It covers over 80% of the U.S. stock market investing in stocks of selected large-cap and mid-cap U.S. companies.

In the 29 years since the creation of the first total stock market index fund the two types of funds have had almost identical performance. Sometimes one type was a little bit ahead, some the other. Portfolio Visualizer, 1993-2021.

My advice is don't bother adding to Vanguard 500 Index Fund Admiral Shares (VFIAX) ER 0.04%.
I figured an S&P 500 index fund and a total U.S. stock market fund would have performed similarly, and this visualization confirms it. Very helpful!
ruralavalon wrote: Mon Sep 27, 2021 9:11 am We use very diversified index funds and contribute heavily to charitable causes we endorse. We think that has a more substantial impact than ESG investing could possibly have. Just one opinion.
I hear you, and you may well be right.
ruralavalon wrote: Mon Sep 27, 2021 9:11 am Please see this wiki article: Paying a tax cost to switch funds.
Thanks for the article link. The spreadsheet calculator is neat and will help me think through which investments to unload when.

---
JBTX wrote: Mon Sep 27, 2021 10:06 am If you are in 12% bracket you should have 0% capital gains. You can either recognize gains up to the top of the 12% bracket each year or since you aren't at a high tax bracket (yet) bite the bullet and get it out of the way.
Thanks for your ideas. I am in the 22% marginal tax bracket. What do you mean by "recognize gains up to the top of the 12% bracket?" My understanding is the long-term capital gains tax rate is the same for earners between $40,001 and $441,450.

---
RetiredAL wrote: Mon Sep 27, 2021 10:39 am AEPGX may be an extremely poor chioce. Typically, the "A" in Growth A Fund stands for class A, a loaded fund. A load is a buying charge. This fund's listed buying charge is 5.75%. Think of it like a sales tax charge. On a $1000 buy order, you only got $942 of the fund. As a comparison, VFAIX charges no load.

There is a chance your 401K plan receives a load waver, so read your 401K documents. American Funds has many Classes including classes that don't charge loads. If a load was not assessed, I would expect the fund title to specify a different class. In general, loads are bad news to the cost conscious investor because it forces you start out in a valuation hole.
Gosh, thanks for pointing this out! The ticker does seem to correspond to the fund's "A" share class, and the prospectus gives the same maximum sales charge/ load that you cited (5.75%). What more should I know about loads? I gather Vanguard funds don't have them, which is reassuring.
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ruralavalon
Posts: 26353
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: 401(k) and general questions

Post by ruralavalon »

You are correct, Vanguard funds do not have loads.

As already mentioned by others A class fund shares have front-end sales loads, but loads are often waived in a 401k plan. You need to read the Summary Plan Description or Plan Document, or ask HR, to see what happens in your employer's 401k plan.

"What more should I know about loads?"

See Investopedia, Share Class Definition.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
JBTX
Posts: 11228
Joined: Wed Jul 26, 2017 12:46 pm

Re: 401(k) and general questions

Post by JBTX »

notebook wrote: Mon Sep 27, 2021 6:13 pm Thanks for your ideas. I am in the 22% marginal tax bracket. What do you mean by "recognize gains up to the top of the 12% bracket?" My understanding is the long-term capital gains tax rate is the same for earners between $40,001 and $441,450.
Sorry for some reason I thought I read you were in 12%. My mistake.

The top of the 12% tax bracket roughly corresponds to the beginning of 15% cap rate.
tashnewbie
Posts: 4284
Joined: Thu Apr 23, 2020 12:44 pm

Re: 401(k) and general questions

Post by tashnewbie »

notebook wrote: Mon Sep 27, 2021 6:13 pm 1. Morningstar calls TISCX a "quasi-index fund that provides exposure to the broad U.S. stock market at a relatively cheap price." It's performed well enough historically, and the expense ratio (.18%) is tolerable. What gives me pause is that it doesn't track an index, which makes it seem more like an actively managed fund than a passively managed one.

2. I'm in the 15% long-term capital gains tax bracket. I gave my effective tax rates in my original post, which I just edited to include my marginal tax rates of 22% federal and 7% state. Is selling assets with equivalent unrealized losses and gains an example of tax-loss harvesting? That could be a good way for me to redirect some of my invested funds without generating a tax bill.
I would just use VFIAX in your 401k. If your 401k's only large blend US stock option was TISCX, I think it would be tolerable, as you said, because while it's actively managed, it is low cost, which is the biggest predictor of future returns. But you have a much better passively managed option in VFIAX.

Selling assets with equivalent unrealized losses and gains isn't an example of tax loss harvesting (TLH), at least not inherently. It's an example of minimizing/eliminating capital gains in any given year, which means you wouldn't owe any or as much capital gains tax on the realized gains (because they're offset fully or at least partially by realized losses). If you were to TLH a fund that had unrealized losses, you could then sell a holding with an equivalent amount of unrealized gains to offset the losses, but the latter is not necessary to TLH. I would only sell a holding with unrealized gains if I needed the money for some reason, or if I wanted to offload funds I didn't want to hold long term tax efficiently (by using losses to offset the gains of the unwanted funds).

FYI, your gross income would need to be >~$73,000 ($40,400 taxable income is start of 15% LTCG for 2021 + $19.5k traditional 401k contribution + ~$12.5k standard deduction for single filer) to be in the 15% LTCG tax bracket.
Topic Author
notebook
Posts: 7
Joined: Sat Sep 25, 2021 8:11 pm

Re: 401(k) and general questions

Post by notebook »

ruralavalon wrote: Mon Sep 27, 2021 6:22 pm You are correct, Vanguard funds do not have loads.

As already mentioned by others A class fund shares have front-end sales loads, but loads are often waived in a 401k plan. You need to read the Summary Plan Description or Plan Document, or ask HR, to see what happens in your employer's 401k plan.

"What more should I know about loads?"

See Investopedia, Share Class Definition.
Thanks for the info. The summary plan description doesn't seem to address loads or share classes. I'll see what I can find out.
JBTX wrote: Mon Sep 27, 2021 7:01 pm Sorry for some reason I thought I read you were in 12%. My mistake.

The top of the 12% tax bracket roughly corresponds to the beginning of 15% cap rate.
You weren't mistaken! I listed my effective tax rate originally. When I realized folks were expecting my marginal tax rate, I changed it.
tashnewbie wrote: Tue Sep 28, 2021 8:20 am I would just use VFIAX in your 401k. If your 401k's only large blend US stock option was TISCX, I think it would be tolerable, as you said, because while it's actively managed, it is low cost, which is the biggest predictor of future returns. But you have a much better passively managed option in VFIAX.

Selling assets with equivalent unrealized losses and gains isn't an example of tax loss harvesting (TLH), at least not inherently. It's an example of minimizing/eliminating capital gains in any given year, which means you wouldn't owe any or as much capital gains tax on the realized gains (because they're offset fully or at least partially by realized losses). If you were to TLH a fund that had unrealized losses, you could then sell a holding with an equivalent amount of unrealized gains to offset the losses, but the latter is not necessary to TLH. I would only sell a holding with unrealized gains if I needed the money for some reason, or if I wanted to offload funds I didn't want to hold long term tax efficiently (by using losses to offset the gains of the unwanted funds).

FYI, your gross income would need to be >~$73,000 ($40,400 taxable income is start of 15% LTCG for 2021 + $19.5k traditional 401k contribution + ~$12.5k standard deduction for single filer) to be in the 15% LTCG tax bracket.
Thanks for elaborating. Re: gross income, since learning it was an option, I've been making 401(k) contributions after tax. So, it is more of a Roth 401(k), even though early contributions were pre-tax. I believe the math works out such that I'm in the 15% long-term capital gains tax bracket.
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ruralavalon
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Re: 401(k) and general questions

Post by ruralavalon »

notebook wrote: Wed Sep 29, 2021 5:30 pm . . .since learning it was an option, I've been making 401(k) contributions after tax. So, it is more of a Roth 401(k), even though early contributions were pre-tax.
Does your employer's 401k plan permit non-Roth after-tax contributions?

Does your employer's 401k plan permit Roth contributions?

IN ADDITION does your employer's 401k plan also permit:
A) EITHER the non-Roth after-tax contributions to be distributed while you are still working there (“in-service distribution”);
B) OR the non-Roth after-tax contributions to be rolled over to the Roth 401k part of the plan (“in-plan Roth rollover”)?

TFB blog post (12/8/2014), "The Elusive Mega Backdoor Roth", link. This is uncommon but very helpful if available.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
tashnewbie
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Re: 401(k) and general questions

Post by tashnewbie »

notebook wrote: Wed Sep 29, 2021 5:30 pm Re: gross income, since learning it was an option, I've been making 401(k) contributions after tax. So, it is more of a Roth 401(k), even though early contributions were pre-tax. I believe the math works out such that I'm in the 15% long-term capital gains tax bracket.
Similar to questions @ruralavalon asked above, are you just using Roth 401k instead of traditional 401k? Or does your employer's 401k allow you to make after-tax non-Roth contributions (if this is what you've been doing, it only makes sense if your employer's plan has the other feature necessary for what's known as a Mega Backdoor Roth -- in-plan Roth rollovers to Roth 401k or in-service non-hardship withdrawals to Roth IRA)?

If you're making standard Roth 401k contributions, why did you decide to do that? Do you think your tax bracket will be higher in retirement (or do you expect a substantial bump in income in the near future/middle of your career)? For most (but not all) people, traditional 401k and Roth IRA is a better option than making Roth 401k contributions.
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Re: 401(k) and general questions

Post by notebook »

My employer's 401(k) plan permits "pre-tax" and "Roth (after-tax)" contributions. It does not, as far as I can tell, permit non-Roth after-tax contributions. @tashnewbie: yes, I am using the Roth 401(k) option instead of the traditional 401(k). I've made both types of contributions to this account but, as I said, have been going the Roth route lately. My tax bracket may be higher in retirement, but it's hard for me to predict with much confidence. I may also experience a bump in income in the near future. Given that I can afford the tax cost of making Roth 401(k) contributions in the present, I decided it would be preferable to ensure tax-free distributions in retirement. Should I reconsider? I've also been maxing out my Roth IRA.
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Re: 401(k) and general questions

Post by ruralavalon »

notebook wrote: Thu Sep 30, 2021 5:50 pm My employer's 401(k) plan permits "pre-tax" and "Roth (after-tax)" contributions. It does not, as far as I can tell, permit non-Roth after-tax contributions. @tashnewbie: yes, I am using the Roth 401(k) option instead of the traditional 401(k). I've made both types of contributions to this account but, as I said, have been going the Roth route lately. My tax bracket may be higher in retirement, but it's hard for me to predict with much confidence. I may also experience a bump in income in the near future [emphasis added]. Given that I can afford the tax cost of making Roth 401(k) contributions in the present, I decided it would be preferable to ensure tax-free distributions in retirement. Should I reconsider? I've also been maxing out my Roth IRA.
Tax bracket during retirement (starting several decades from now, and which which may then last several decades more) is often not easy to predict. We don't even know what the tax brackets be will be decades in the future.

Most people will likely not be in a higher tax bracket during retirement, some will.

(I see that you are 27, single, in the 22% federal tax bracket, make maximum annual contributions to both a 401k and an IRA, and currently have only ~ $37k in a traditional tax-deferred account.)

Some additional facts are important on the traditional versus Roth dilemma. Will you be eligible for both a significant pension and Social Security benefits? Are any other sources of income likely during retirement? About how long until expected retirement? (i.e. do you plan early retirement?) What is your profession or occupation?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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Re: 401(k) and general questions

Post by notebook »

ruralavalon wrote: Fri Oct 01, 2021 6:28 am Tax bracket during retirement (starting several decades from now, and which which may then last several decades more) is often not easy to predict. We don't even know what the tax brackets be will be decades in the future.

Most people will likely not be in a higher tax bracket during retirement, some will.

(I see that you are 27, single, in the 22% federal tax bracket, make maximum annual contributions to both a 401k and an IRA, and currently have only ~ $37k in a traditional tax-deferred account.)

Some additional facts are important on the traditional versus Roth dilemma. Will you be eligible for both a significant pension and Social Security benefits? Are any other sources of income likely during retirement? About how long until expected retirement? (i.e. do you plan early retirement?) What is your profession or occupation?
The stats you cited are correct, except the tax-deferred amount is about $26k. The other $11k in that account is Roth (after-tax).

At this point I will not be eligible for a traditional pension, but I will be eligible for Social Security benefits. Additional sources of retirement income may include my taxable investment accounts and some inheritance. I'm targeting retirement at age 60, but that is not firm. I'm in the nonprofit/ media industry.
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Re: 401(k) and general questions

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notebook wrote: Sun Oct 03, 2021 12:59 pm
ruralavalon wrote: Fri Oct 01, 2021 6:28 am Tax bracket during retirement (starting several decades from now, and which which may then last several decades more) is often not easy to predict. We don't even know what the tax brackets be will be decades in the future.

Most people will likely not be in a higher tax bracket during retirement, some will.

(I see that you are 27, single, in the 22% federal tax bracket, make maximum annual contributions to both a 401k and an IRA, and currently have only ~ $37k in a traditional tax-deferred account.)

Some additional facts are important on the traditional versus Roth dilemma. Will you be eligible for both a significant pension and Social Security benefits? Are any other sources of income likely during retirement? About how long until expected retirement? (i.e. do you plan early retirement?) What is your profession or occupation?
The stats you cited are correct, except the tax-deferred amount is about $26k. The other $11k in that account is Roth (after-tax).

At this point I will not be eligible for a traditional pension, but I will be eligible for Social Security benefits. Additional sources of retirement income may include my taxable investment accounts and some inheritance. I'm targeting retirement at age 60, but that is not firm. I'm in the nonprofit/ media industry.
For most people traditional deductible 401k contributions will likely be better. It looks to me like traditional 401k contributions, with the tax deduction, will likely be better for you.

What is your profession or occupation? Are you in a profession of occupation likely to put you in a much higher tax bracket for most of the rest of your working life? That could change my opinion.

The income tax code is progressive, with a lower tax rate for lower income. Retirement usually means that employment income has ended. Therefore, most people are in a lower tax bracket in retirement and for most people traditional deductible 401k contributions will probably be better.

Because the tax code is progressive, when you withdraw from your 401k in retirement the income is not all taxed at the marginal tax rate specified for your tax bracket. TFB blog post, "The case against Roth 401k". Because the tax code is progressive, "Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k)." You currently have just $26k in traditional tax-deferred. " For people without a traditional defined benefit pension plan, it means the majority of the retirement savings should go to a Traditional 401(k), not Roth."

A pension would change that analysis, so that Roth contributions are likely better if you have a significant pension coming in addition to Social Security. TFB blog post, "Most TSP participants should switch to the Roth TSP". That post discussed the effect of a federal pension, but the analysis should hold for other pensions.

Wiki article, "Traditional vs Roth".
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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Re: 401(k) and general questions

Post by notebook »

ruralavalon wrote: Sun Oct 03, 2021 4:23 pm For most people traditional deductible 401k contributions will likely be better. It looks to me like traditional 401k contributions, with the tax deduction, will likely be better for you.

What is your profession or occupation? Are you in a profession of occupation likely to put you in a much higher tax bracket for most of the rest of your working life? That could change my opinion.

The income tax code is progressive, with a lower tax rate for lower income. Retirement usually means that employment income has ended. Therefore, most people are in a lower tax bracket in retirement and for most people traditional deductible 401k contributions will probably be better.

Because the tax code is progressive, when you withdraw from your 401k in retirement the income is not all taxed at the marginal tax rate specified for your tax bracket. TFB blog post, "The case against Roth 401k". Because the tax code is progressive, "Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k)." You currently have just $26k in traditional tax-deferred. " For people without a traditional defined benefit pension plan, it means the majority of the retirement savings should go to a Traditional 401(k), not Roth."

A pension would change that analysis, so that Roth contributions are likely better if you have a significant pension coming in addition to Social Security. TFB blog post, "Most TSP participants should switch to the Roth TSP". That post discussed the effect of a federal pension, but the analysis should hold for other pensions.

Wiki article, "Traditional vs Roth".
Thanks for these links and explanations. I read the blog post, including the 200-plus comments, and the wiki article. I understand that comparing one's present-day tax rate to one's expected tax rate in retirement is important in deciding between traditional and Roth 401(k) contributions.

My profession may put me in the 24 percent federal tax bracket but likely no higher.

The Finance Buff published a follow-up post about the potential advantage to making Roth contributions when one maxes out one's 401(k). Using the linked spreadsheet, I plugged in my assumptions, which, granted, may be way off, and received a Roth advantage of 2.5 percent. Does maxing out my 401(k) change your thoughts on what approach I should take?
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Re: 401(k) and general questions

Post by ruralavalon »

notebook wrote: Sat Oct 09, 2021 3:57 pm
ruralavalon wrote: Sun Oct 03, 2021 4:23 pm For most people traditional deductible 401k contributions will likely be better. It looks to me like traditional 401k contributions, with the tax deduction, will likely be better for you.

What is your profession or occupation? Are you in a profession of occupation likely to put you in a much higher tax bracket for most of the rest of your working life? That could change my opinion.

The income tax code is progressive, with a lower tax rate for lower income. Retirement usually means that employment income has ended. Therefore, most people are in a lower tax bracket in retirement and for most people traditional deductible 401k contributions will probably be better.

Because the tax code is progressive, when you withdraw from your 401k in retirement the income is not all taxed at the marginal tax rate specified for your tax bracket. TFB blog post, "The case against Roth 401k". Because the tax code is progressive, "Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k)." You currently have just $26k in traditional tax-deferred. " For people without a traditional defined benefit pension plan, it means the majority of the retirement savings should go to a Traditional 401(k), not Roth."

A pension would change that analysis, so that Roth contributions are likely better if you have a significant pension coming in addition to Social Security. TFB blog post, "Most TSP participants should switch to the Roth TSP". That post discussed the effect of a federal pension, but the analysis should hold for other pensions.

Wiki article, "Traditional vs Roth".
Thanks for these links and explanations. I read the blog post, including the 200-plus comments, and the wiki article. I understand that comparing one's present-day tax rate to one's expected tax rate in retirement is important in deciding between traditional and Roth 401(k) contributions.

My profession may put me in the 24 percent federal tax bracket but likely no higher.

The Finance Buff published a follow-up post about the potential advantage to making Roth contributions when one maxes out one's 401(k). Using the linked spreadsheet, I plugged in my assumptions, which, granted, may be way off, and received a Roth advantage of 2.5 percent. Does maxing out my 401(k) change your thoughts on what approach I should take?
I defer to Harry Sit, The Finance Buff, on that.

You have exhausted my knowledge on the subject.
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Re: 401(k) and general questions

Post by notebook »

ruralavalon wrote: Sun Oct 10, 2021 6:50 am I defer to Harry Sit, The Finance Buff, on that.

You have exhausted my knowledge on the subject.
OK, you've given me lots to think about. Thanks!
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