Advice for newbie [on basic questions]

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taaray
Posts: 36
Joined: Mon Oct 25, 2021 12:03 am

Advice for newbie [on basic questions]

Post by taaray »

Hi all - intro / advice request thread here. I'm halfway through reading Simple Path to Wealth and have read dozens of threads on the forum here over the last couple of weeks. I've listened to podcasts about Jack Bogle and am glad to have found the forum.

I feel like I'm late to learning about all this stuff (turn 37 next year) but had a work related windfall earlier this year that has motivated me to learn and get organized. However, I severely lack time as evidenced by letting this deposit sit as cash in a 0% interest checking account. For that reason, I am considering Vanguard's PAS or working with a local fee-only advisor to give me a plan to implement. All I've done to this point is pick target date index funds in my 401k, roth and traditional IRA's and contribute religiously.

I'm very comfortable with a set it and forget it investment philosophy but am having trouble with seemingly basic questions about budgeting, charitable giving, and even just understanding how to think about the 401k vs everything else. Are there other books or resources I could use to build my knowledge? Lack of time is a real problem and is one reason I am considering help while I try to learn on my own. I also rather spend rare free time with family but want to ask for advice from more experience investors here.

Please let me know if any information would be helpful and look forward to participating here.

T

------edit: followed the Asking Portfolio Questions directions and have pasted a summary below!------

Emergency funds: Yes, 6 months worth in a very low interest rate checking account. I need to revisit my expenses and add to this if needed.

Debt: Mortgage balance $389k @4.125% -- working on getting a refinance started. So much to do, so little time!

Tax Filing Status: Single

Tax Rate: 32% Federal, 0% State

State of Residence: WA

Age: 36

Desired Asset allocation: Trying to figure this out
Desired International allocation: Trying to figure this out

The below analysis is based on current accounts and total less than $100k. My first question at the bottom is how to invest a windfall several times this number.

Current retirement assets

Taxable: Brokerage1
8% random stocks that I've had forever, less than $10k

401k
10% FIAM Index Target Date 2050 Commingled Pool Class T (FIAM INX TD 2050 T) (0.07%)

Company match? Yes 100% of the first 3% + 50% of the next 2% of pay you contribute to the Plan.

Roth IRA
70% Vanguard Target Retirement 2045 Fund (VTIVX) (0.15%)

Traditional IRA
13% Vanguard Target Retirement 2055 Fund Investor Shares (VFFVX) (0.15%)

Contributions

New annual Contributions: New to automating this. This is my first year with a 401k, in the past I've just maximized my IRA contribution.

* 401k -- I am doing 6% pre-tax, and in the months I've had it have contributed $5,100

* For either IRA, I've just put the max in that my income level allows when I do my taxes each year.

Available funds

Funds available in 401(k)

TARGET DATE FUNDS
FID 500 INDEX (FXAIX) (0.015%)
FID CONTRAFUND POOL (0.43%)
FID MID CAP IDX (FSMDX) (0.025%)
TRP MID CAP GROWTH I (RPTIX) (0.61%)
FID SM CAP IDX (FSSNX) (0.025%)
VANG EXPLORER ADM (VEXRX) (0.3%)
FIAM INX TD 2005 T (0.07%)
FIAM INX TD 2010 T (0.07%)
FIAM INX TD 2015 T (0.07%)
FIAM INX TD 2020 T (0.07%)
FIAM INX TD 2025 T (0.07%)
FIAM INX TD 2030 T (0.07%)
FIAM INX TD 2035 T (0.07%)
FIAM INX TD 2040 T (0.07%)
FIAM INX TD 2045 T (0.07%)
FIAM INX TD 2050 T (0.07%)
FIAM INX TD 2055 T (0.07%)
FIAM INX TD 2060 T (0.07%)
FIAM INX TD 2065 T (0.07%)
FIAM INX TD INCOME T (0.07%)
VANG TOT BD MKT INST (VBTIX) (0.035%)

PASSIVE FUNDS
VANG TOT INTL STK IS (VTSNX) (0.08%)

ACTIVE FUNDS
COL DIVIDEND INC I (GSFTX) (0.67%)
JPM MIDCAP VALUE L (FLMVX) (0.84%)
GS SM CAP VALUE INST (GSSIX) (0.99%)
FID DIVERSIFD INTL K (FDIKX) (0.94%)
NYL ANCHOR ACCOUNT (0.35%)
LOOMIS CORE PL BD N (NERNX) (0.38%)

Questions:
I'm just getting started so may not be asking smart questions but...
1. How should I invest $500k+ cash?
2. How much should I contribute into my 401k and which fund?
3. My work 401k is administered through Fidelity and I hear good things about it as a brokerage (though this work 401k interface is terrible). I am all about streamlining things. Is it overly complicated to have IRA's in Vanguard and open a taxable investment account in Fidelity? Or is it better to have a single place so you reach higher account tiers quicker?
4. I don't have a question yet but would like to figure out how much I need to be saving and what I can actually spend each month and on longer-term items (like vacation). I'm very confused about that part but hope this exercise yields clarity. I'm newly out of the 'student' phase and not used to having cash flow.

You wonderful folks have added resources for me to check out so hope to have better/smarter questions soon. Thank you.
Last edited by taaray on Wed Nov 10, 2021 11:58 pm, edited 2 times in total.
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FiveK
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Re: Advice for newbie [on basic questions]

Post by FiveK »

taaray, welcome to the forum.
taaray wrote: Tue Nov 02, 2021 12:29 am All I've done to this point is pick target date index funds in my 401k, roth and traditional IRA's and contribute religiously.
That's an excellent start! :)

It would likely be worth your time to assemble the information needed for Asking Portfolio Questions - whether you then share that here, with an advisor, or just for your own self-study. What do you think?
Alex Frakt
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Re: Advice for newbie [on basic questions]

Post by Alex Frakt »

Big Picture
What are your goals and how large was the windfall? If you are thinking about retirement, a rough estimate is that you want to have investment assets worth about 25x your required annual income in order to retire. Note that the 25x is for the investment income you'll need. Stuff like social security, pensions and rental income reduce your income needs, but don't get added to the 25x. Also note that if you are very young, you'll either want a bigger buffer such as 30x or be willing and able to continue to work at least part time if the need arises.

Budget
You obviously need a handle on how much you spend each month to figure out the "x" that you need to multiply by 25 to get your retirement number. A formal budget will help with this, but it's not a requirement. The simplest starting point is your take home pay. If you regularly invest outside of payroll deductions you can subtract that from your income needs. You then have to estimate how much you'll save by not working and then the additional costs of covering your own health insurance. Big changes in cost of living due to relocating or moving to a less expensive home also need to get factored in.

Retirement Accounts
Most people will have to invest 10-15% of their income to get to that point in a reasonable working lifetime of 30 to 40 years. A 401(k)-type plan makes it relatively easy to do that and segregates the funds so they are less likely to get used for ongoing expenses. The US government encourages the use of such plans by offering tax breaks. But any large windfall means you are going to have to think about investing in a non-tax advantaged account. Investing for retirement in a taxable account is fairly straightforward, especially if you have tax advantaged space which allows you to do any necessary rebalancing without incurring capital gains taxes.

Charitable Giving
Charitable giving is about what you want to do. Some people like to give a fixed percentage of their income. Others want to make sure their retirement or other savings goals are on track and then give if there is a surplus. Comparing your total investment assets (windfall + retirement accounts) to where you need to be to hit that 25x goal at retirement will give you an idea of what you can afford to give.

Now what?
I'm going to suggest posting your current portfolio using the format suggested here: viewtopic.php?t=6211

You can also get more thorough answers to most of the types of questions you seem to have over on our wiki. The best place to start is on the aptly names: https://www.bogleheads.org/wiki/Getting_started.
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Miriam2
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Re: Advice for newbie [on basic questions]

Post by Miriam2 »

taaray wrote: Tue Nov 02, 2021 12:29 am Hi all - intro / advice request thread here. I'm halfway through reading Simple Path to Wealth and have read dozens of threads on the forum here over the last couple of weeks. I've listened to podcasts about Jack Bogle and am glad to have found the forum.

I feel like I'm late to learning about all this stuff (turn 37 next year). . .
Welcome to the Bogleheads! You're not too late! You have decades of investing ahead of you - just continue packing it into your investment accounts 8-)
taaray wrote:. . . but had a work related windfall earlier this year that has motivated me to learn and get organized. However, I severely lack time as evidenced by letting this deposit sit as cash in a 0% interest checking account.
You learned your lesson! We all learn this way. Move on, enjoy life and continue investing.
taaray wrote:. . . For that reason, I am considering Vanguard's PAS or working with a local fee-only advisor to give me a plan to implement. All I've done to this point is pick target date index funds in my 401k, roth and traditional IRA's and contribute religiously.
What do you mean that's all you've done? That's all there is to do!

That's the essence of basic good investing, you got it down. You may not need any advisor, just don't make any rash or stupid moves and simply read all you can and listen to podcasts and Bogleheads presentations, and ask Qs here on the forum. You'll learn the reasons for the basics and then, as you build your portfolio into a larger amount, you can consider PAS if you think you really need it. Or ask PAS now, there's no obligation.
taaray wrote:. . . I'm very comfortable with a set it and forget it investment philosophy but am having trouble with seemingly basic questions about budgeting
Look at www.YouNeedABudget.com

Here is an hour video from the Bogleheads Starting Out Life Stage Chapter featuring Mike Piper on "Getting Started with Investing," designed for those like you just getting started with investing. Mike also wrote a great little book, "Investing Made Simple." Also look for "The Bogleheads Guide to Investing." Here is the link to the Bogleheads Calendar of Events with all the upcoming zoom meetings you can attend anonymously, and scroll down the calendar to the Subscriptions and subscribe to receive the notice and zoom link for all upcoming meetings.
Topic Author
taaray
Posts: 36
Joined: Mon Oct 25, 2021 12:03 am

Re: Advice for newbie [on basic questions]

Post by taaray »

FiveK wrote: Tue Nov 02, 2021 12:56 am taaray, welcome to the forum.
taaray wrote: Tue Nov 02, 2021 12:29 am All I've done to this point is pick target date index funds in my 401k, roth and traditional IRA's and contribute religiously.
That's an excellent start! :)

It would likely be worth your time to assemble the information needed for Asking Portfolio Questions - whether you then share that here, with an advisor, or just for your own self-study. What do you think?
Thank you! And I appreciate the advice. It took me a few days (but I did learn the difference between a taxable investment account and 401k!). I updated my original post with current portfolio information.
Alex Frakt wrote: Tue Nov 02, 2021 1:26 am Big Picture
What are your goals and how large was the windfall? If you are thinking about retirement, a rough estimate is that you want to have investment assets worth about 25x your required annual income in order to retire. Note that the 25x is for the investment income you'll need. Stuff like social security, pensions and rental income reduce your income needs, but don't get added to the 25x. Also note that if you are very young, you'll either want a bigger buffer such as 30x or be willing and able to continue to work at least part time if the need arises.

Budget
You obviously need a handle on how much you spend each month to figure out the "x" that you need to multiply by 25 to get your retirement number. A formal budget will help with this, but it's not a requirement. The simplest starting point is your take home pay. If you regularly invest outside of payroll deductions you can subtract that from your income needs. You then have to estimate how much you'll save by not working and then the additional costs of covering your own health insurance. Big changes in cost of living due to relocating or moving to a less expensive home also need to get factored in.

Retirement Accounts
Most people will have to invest 10-15% of their income to get to that point in a reasonable working lifetime of 30 to 40 years. A 401(k)-type plan makes it relatively easy to do that and segregates the funds so they are less likely to get used for ongoing expenses. The US government encourages the use of such plans by offering tax breaks. But any large windfall means you are going to have to think about investing in a non-tax advantaged account. Investing for retirement in a taxable account is fairly straightforward, especially if you have tax advantaged space which allows you to do any necessary rebalancing without incurring capital gains taxes.

Charitable Giving
Charitable giving is about what you want to do. Some people like to give a fixed percentage of their income. Others want to make sure their retirement or other savings goals are on track and then give if there is a surplus. Comparing your total investment assets (windfall + retirement accounts) to where you need to be to hit that 25x goal at retirement will give you an idea of what you can afford to give.

Now what?
I'm going to suggest posting your current portfolio using the format suggested here: viewtopic.php?t=6211

You can also get more thorough answers to most of the types of questions you seem to have over on our wiki. The best place to start is on the aptly names: https://www.bogleheads.org/wiki/Getting_started.
Thanks for the response.
Big Picture
Good point, I need to think about my goals and I expect that to change as life develops.
Budget
I like your simpler approach. It's the health insurance bit that always confuses me.
Retirement Accounts
Copy - I assume investing in a Total Market Index is one approach but being new to investing, I'm trying to get comfortable with the idea of putting all that capital at risk. Is that 10-15% pre-tax?
Charitable Giving
Makes sense!
Now what?
My original post now has more information and questions which I will continue to refine as the discussion evolves. I will read and digest your Investment Planning link as well.
Miriam2 wrote: Tue Nov 02, 2021 1:47 am
taaray wrote: Tue Nov 02, 2021 12:29 am Hi all - intro / advice request thread here. I'm halfway through reading Simple Path to Wealth and have read dozens of threads on the forum here over the last couple of weeks. I've listened to podcasts about Jack Bogle and am glad to have found the forum.

I feel like I'm late to learning about all this stuff (turn 37 next year). . .
Welcome to the Bogleheads! You're not too late! You have decades of investing ahead of you - just continue packing it into your investment accounts 8-)
taaray wrote:. . . but had a work related windfall earlier this year that has motivated me to learn and get organized. However, I severely lack time as evidenced by letting this deposit sit as cash in a 0% interest checking account.
You learned your lesson! We all learn this way. Move on, enjoy life and continue investing.
taaray wrote:. . . For that reason, I am considering Vanguard's PAS or working with a local fee-only advisor to give me a plan to implement. All I've done to this point is pick target date index funds in my 401k, roth and traditional IRA's and contribute religiously.
What do you mean that's all you've done? That's all there is to do!

That's the essence of basic good investing, you got it down. You may not need any advisor, just don't make any rash or stupid moves and simply read all you can and listen to podcasts and Bogleheads presentations, and ask Qs here on the forum. You'll learn the reasons for the basics and then, as you build your portfolio into a larger amount, you can consider PAS if you think you really need it. Or ask PAS now, there's no obligation.
taaray wrote:. . . I'm very comfortable with a set it and forget it investment philosophy but am having trouble with seemingly basic questions about budgeting
Look at www.YouNeedABudget.com

Here is an hour video from the Bogleheads Starting Out Life Stage Chapter featuring Mike Piper on "Getting Started with Investing," designed for those like you just getting started with investing. Mike also wrote a great little book, "Investing Made Simple." Also look for "The Bogleheads Guide to Investing." Here is the link to the Bogleheads Calendar of Events with all the upcoming zoom meetings you can attend anonymously, and scroll down the calendar to the Subscriptions and subscribe to receive the notice and zoom link for all upcoming meetings.
Thank you for the welcome, positive feedback, and link to resources! Right now it seems stressful but I look forward to learning and feeling more comfortable once I have a plan.
tashnewbie
Posts: 4284
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Re: Advice for newbie [on basic questions]

Post by tashnewbie »

taaray wrote: Tue Nov 02, 2021 12:29 am Questions:
I'm just getting started so may not be asking smart questions but...
1. How should I invest $500k+ cash?
2. How much should I contribute into my 401k and which fund?
3. My work 401k is administered through Fidelity and I hear good things about it as a brokerage (though this work 401k interface is terrible). I am all about streamlining things. Is it overly complicated to have IRA's in Vanguard and open a taxable investment account in Fidelity? Or is it better to have a single place so you reach higher account tiers quicker?
4. I don't have a question yet but would like to figure out how much I need to be saving and what I can actually spend each month and on longer-term items (like vacation). I'm very confused about that part but hope this exercise yields clarity. I'm newly out of the 'student' phase and not used to having cash flow.
Welcome to the forum!

1. As a starting point, it might be helpful to get more foundational knowledge of personal finance and investing. Read the BH wiki page widely for some information. A good place to start, aptly named, would be the "Getting Started" wiki. Eventually it'd probably be worth creating an investment policy statement (see wiki article about this). Part of that will be figuring out your desired asset allocation (AA), what accounts to use, what funds to use, when to buy and sell, etc. The asset allocation is a critical starting point. It will inform a lot of your investing decisions. Nobody on this forum can tell you what it should be. You'll have to assess your own risk tolerance. Vanguard has an investor's questionnaire that you can take to give you a sense of what might be a decent AA for you. But, one comment I've seen on this forum that really stuck with me is that an investor really doesn't know their personal risk tolerance until they've experienced a true bear market. Given that, it's probably wise to have some fixed income (e.g., bonds) in your AA in the beginning of your investing journey. Then once you experience a bear market, you can assess how you feel and adjust the AA accordingly.

2. For the 401k: In your high tax bracket, I think you should get all the tax-deferral you can get. I would max traditional 401k contributions for 2021 (if you have enough time through the end of the year); that's $19.5k. It's $20.5k for 2022. The target date funds are great options. I would select the year that allows you to get to your desired asset allocation (percentage of stocks and bonds).

3. It's not overly complicated to have different accounts at different providers. If you like Fidelity, it might be worth consolidating everything there to streamline things. If you decide to do that, then you should liquidate the Vanguard IRA holdings before transferring to Fido, because there's probably a fee ($50-75) to sell at Fido (confirm that; ask Fido if it'd reimburse you for those fees).

4. I think you should at a minimum be maxing the 401k and a Roth IRA (via backdoor method) every year. For 2021 that's $19.5k + $6k ($20.5k + $6k in 2022). After that, you probably could afford to invest substantial amounts into a taxable account. One possibility: Figure out how much you roughly spend each month and add a buffer (whatever amount would make you comfortable), and then set up monthly auto-investments of the rest of your take-home money into a taxable account. If things get a little tight, you could reduce the auto-investment or adjust your spending. You can play around with Monte Carlo simulators to get a sense of what annual contributions you need to make to reach your desired portfolio goals within your desired time frame (Portfolio Visualizer has one).

One caveat: because you're in the 32% bracket (is that only for 2021 because of the windfall?), you're not eligible to make direct contributions to a Roth IRA. People in that situation can consider using the "backdoor Roth" method to get money into a Roth IRA. BUT, your pretax balance in the Traditional IRA would complicate that and make it unadvisable. I recommend moving the TIRA into your 401k, if it will accept it. Then you'd be set up to do easy backdoor Roths (see wiki for more information about that process), if you wanted. If the high tax bracket in 2021 is temporary, and you don't want to bother with moving the TIRA, then forgo 2021 contributions. You might be eligible for direct Roth IRA contributions in the future, but you should watch the income eligibility limits.

5. The $500k: I would at least set aside $12k for 2021 and 2022 Roth IRA contributions ($6k each).
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retiredjg
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Re: Advice for newbie [on basic questions]

Post by retiredjg »

taaray wrote: Tue Nov 02, 2021 12:29 am Age: 36

Desired Asset allocation: Trying to figure this out
Desired International allocation: Trying to figure this out
This may be asking something much simpler than you think. The first question is asking what you want your stock to bond ratio to be.

My guess is you are currently about 90% stocks and 10% bonds - I didn't look up all those target funds but they are probably near 90/10.

Have you been comfortable with that? If yes, then maybe that should be your answer. Common AA's for a 36 year old would be 65% stocks/35% bonds (on the conservative end) up to 90% stocks/10% bonds (on the aggressive end). My recommendation would be 80% stocks and 20% bonds unless you consider yourself very conservative or very aggressive.

As for how much international to use, right now probably about 40% of your stocks are in foreign stocks. Recommendations run from using 0% to 50% in foreign stocks.
The below analysis is based on current accounts and total less than $100k. My first question at the bottom is how to invest a windfall several times this number.
So in reality, your taxable account is not 8% of the portfolio because you have $500k that is not invested. (I'm assuming this $500k will be in your taxable account.) I'd estimate your taxable account is about 45% to 50% of the entire portfolio when you add that $500k in.


The simplest portfolio for you would hold total stock index and total international index in the taxable account (most or all of your $500k would go into these two) while holding bond funds in the 401k and traditional IRA. But this will depend on what you decide about your stock to bond ratio (your AA).

Traditional IRA
13% Vanguard Target Retirement 2055 Fund Investor Shares (VFFVX) (0.15%)
This is an account that needs special attention. Have you made any non-deductible contributions to this traditional IRA? If yes, have those contributions been documented on Form 8606 so far? If you have no idea what I'm talking about, just ask.

The answer to most of your questions will be easy once you make the decision about your stock to bond ratio (and amount of international).
Woodpecker
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Re: Advice for newbie [on basic questions]

Post by Woodpecker »

Traditional IRA
13% Vanguard Target Retirement 2055 Fund Investor Shares (VFFVX) (0.15%)
This is an account that needs special attention. Have you made any non-deductible contributions to this traditional IRA? If yes, have those contributions been documented on Form 8606 so far? If you have no idea what I'm talking about, just ask.
[/quote]

I hope it's not rude to jump in on this thread but this is something I am very curious about. How far back can you go with Form 8606? I am not familiar with it. In 2013 my wife left her company and we rolled her 401k and a pension balance into a traditional roll-over IRA. We made non-deductible contributions to it from 2013-2020 and a portion of 2021 before I realized we should have just left it alone and opened a separate Roth IRA and contributed to that instead. We are MFJ and do our taxes with TurboTax. I do recall entering the contributions in TurboTax and having it tell me that they cannot be deducted and as far as I remember I did not complete a Form 8606. I also do not know if TurboTax kept a record of this. I looked at some of my returns for those years I and don't see anything obviously related to these contributions. When we opened her Roth IRA earlier this year I looked into whether or not I could go back and swap all of the contributions from the rollover to the Roth but it didn't not seem that I could. I still kick my self when I think about this but it's all part of the learning process I suppose. If only I have know about this forum back then..... :happy
Last edited by Woodpecker on Thu Nov 11, 2021 9:54 am, edited 1 time in total.
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Miriam2
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Re: Advice for newbie [on basic questions]

Post by Miriam2 »

Woodpecker wrote:
retiredjg wrote:Traditional IRA
13% Vanguard Target Retirement 2055 Fund Investor Shares (VFFVX) (0.15%) . . . This is an account that needs special attention. Have you made any non-deductible contributions to this traditional IRA? If yes, have those contributions been documented on Form 8606 so far? If you have no idea what I'm talking about, just ask.
I hope it's not rude to jump in on this thread but this is something I am very curious about. How far back can you go with Form 8606? I am not familiar with it. In 2013 my wife left her company and we rolled her 401k and a pension balance into a traditional roll-over IRA. We made non-deductible contributions to it from 2013-2020 and a portion of 2021 before I realized we should have just left it alone and opened a separate Roth IRA and contributed to that instead. We are MFJ and do our taxes with TurboTax. I do recall entering the contributions in TurboTax and having it tell me that they cannot be deducted and as far as I remember I did not complete a Form 8606. I also do not know if TurboTax kept a record of this. I looked at some of my returns for those years I and don't see anything obviously related to these contributions. When we opened her Roth IRA earlier this year I looked into whether or not I could go back and swap all of the contributions from the rollover to the Roth but it didn't not seem that I could. I still kick my self when I think about this but it's all part of the learning process I suppose. If only I have know about this forum back then..... :happy
Hi Woodpecker! Welcome to the Bogleheads :happy

How far back for Form 8606? My 8606 forms go back to 1981 :D

But don't panic - even many tax preparers fail to properly use Form 8606. My suggestion is to start your own thread with your details - you will receive specific information on your situation. If you have difficulty finding the button to start a new thread, go to the sub-forum "Personal Investments," and click on the "New Topic" button at the top.
CajunTiger6
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Re: Advice for newbie [on basic questions]

Post by CajunTiger6 »

I would recommend “The Bogleheads guide to Investing” and “the little book of common sense investing”, if you are looking for books. You can find everything you need here on the forum, but the books bring it down to a more easily digestible format. I am relatively new to investing, and just finished the first mentioned and really enjoyed it and found it useful. It is not a “tell you what to do” book, but rather a breakdown of why you do things, if that makes sense. Obviously everyone’s situation is different and therefore there is no “one size fits all” scenario.

The recommendations above are very solid pertaining to your situation IMO.
Topic Author
taaray
Posts: 36
Joined: Mon Oct 25, 2021 12:03 am

Re: Advice for newbie [on basic questions]

Post by taaray »

tashnewbie wrote: Thu Nov 11, 2021 8:33 am
taaray wrote: Tue Nov 02, 2021 12:29 am Questions:
I'm just getting started so may not be asking smart questions but...
1. How should I invest $500k+ cash?
2. How much should I contribute into my 401k and which fund?
3. My work 401k is administered through Fidelity and I hear good things about it as a brokerage (though this work 401k interface is terrible). I am all about streamlining things. Is it overly complicated to have IRA's in Vanguard and open a taxable investment account in Fidelity? Or is it better to have a single place so you reach higher account tiers quicker?
4. I don't have a question yet but would like to figure out how much I need to be saving and what I can actually spend each month and on longer-term items (like vacation). I'm very confused about that part but hope this exercise yields clarity. I'm newly out of the 'student' phase and not used to having cash flow.
Welcome to the forum!

1. As a starting point, it might be helpful to get more foundational knowledge of personal finance and investing. Read the BH wiki page widely for some information. A good place to start, aptly named, would be the "Getting Started" wiki. Eventually it'd probably be worth creating an investment policy statement (see wiki article about this). Part of that will be figuring out your desired asset allocation (AA), what accounts to use, what funds to use, when to buy and sell, etc. The asset allocation is a critical starting point. It will inform a lot of your investing decisions. Nobody on this forum can tell you what it should be. You'll have to assess your own risk tolerance. Vanguard has an investor's questionnaire that you can take to give you a sense of what might be a decent AA for you. But, one comment I've seen on this forum that really stuck with me is that an investor really doesn't know their personal risk tolerance until they've experienced a true bear market. Given that, it's probably wise to have some fixed income (e.g., bonds) in your AA in the beginning of your investing journey. Then once you experience a bear market, you can assess how you feel and adjust the AA accordingly.

2. For the 401k: In your high tax bracket, I think you should get all the tax-deferral you can get. I would max traditional 401k contributions for 2021 (if you have enough time through the end of the year); that's $19.5k. It's $20.5k for 2022. The target date funds are great options. I would select the year that allows you to get to your desired asset allocation (percentage of stocks and bonds).

3. It's not overly complicated to have different accounts at different providers. If you like Fidelity, it might be worth consolidating everything there to streamline things. If you decide to do that, then you should liquidate the Vanguard IRA holdings before transferring to Fido, because there's probably a fee ($50-75) to sell at Fido (confirm that; ask Fido if it'd reimburse you for those fees).

4. I think you should at a minimum be maxing the 401k and a Roth IRA (via backdoor method) every year. For 2021 that's $19.5k + $6k ($20.5k + $6k in 2022). After that, you probably could afford to invest substantial amounts into a taxable account. One possibility: Figure out how much you roughly spend each month and add a buffer (whatever amount would make you comfortable), and then set up monthly auto-investments of the rest of your take-home money into a taxable account. If things get a little tight, you could reduce the auto-investment or adjust your spending. You can play around with Monte Carlo simulators to get a sense of what annual contributions you need to make to reach your desired portfolio goals within your desired time frame (Portfolio Visualizer has one).

One caveat: because you're in the 32% bracket (is that only for 2021 because of the windfall?), you're not eligible to make direct contributions to a Roth IRA. People in that situation can consider using the "backdoor Roth" method to get money into a Roth IRA. BUT, your pretax balance in the Traditional IRA would complicate that and make it unadvisable. I recommend moving the TIRA into your 401k, if it will accept it. Then you'd be set up to do easy backdoor Roths (see wiki for more information about that process), if you wanted. If the high tax bracket in 2021 is temporary, and you don't want to bother with moving the TIRA, then forgo 2021 contributions. You might be eligible for direct Roth IRA contributions in the future, but you should watch the income eligibility limits.

5. The $500k: I would at least set aside $12k for 2021 and 2022 Roth IRA contributions ($6k each).
It takes me some time to go read and do more homework but well, now I have new (and hopefully better questions).

1. Thanks, reading through the wiki was helpful. I think I've arrived at a desired allocation about 80% stock / 20% bonds, not sure what % should be international.

2. I don't know if I can adjust my 401k contribution % quick enough to get closer to the max this year. I'm on track for about $10k in contributions. This is my first year with 401k so I just set a 6% contribution and forgot about it. It's all in FIAM INX TD 2050 T which is a low 0.07% expense ratio, 55% US equities, 35% non-US equities, and 10% bonds. Does that seem like a high % of non-US equities? I'm wondering if I ramp up my 401k contribution next year whether it is worth investigating another of the available funds in the 401k.

3. Thanks, I haven't gotten there yet. I haven't had any issues with Vanguard but it seems like people prefer Fidelity for their taxable account on this board.

4. Thanks for simplifying the "account flow process" into something I can understand. In the past I've only thought about the IRA's at tax time but will look to maximize both going forward. Am I understanding correctly that I should max the 401k first, then IRA? My prior year income has been under contribution limits so haven't had to do a back-door but will read up on it. On your caveat: 32% is not because of the windfall but because of a new position/company. What is the advantage of moving the TIRA into the 401k? I can check if it is possible but let me finish digesting the wiki first. Here it is if anyone else is reading: https://www.bogleheads.org/wiki/Backdoor_Roth
retiredjg wrote: Thu Nov 11, 2021 9:05 am
taaray wrote: Tue Nov 02, 2021 12:29 am Age: 36

Desired Asset allocation: Trying to figure this out
Desired International allocation: Trying to figure this out
This may be asking something much simpler than you think. The first question is asking what you want your stock to bond ratio to be.

My guess is you are currently about 90% stocks and 10% bonds - I didn't look up all those target funds but they are probably near 90/10.

Have you been comfortable with that? If yes, then maybe that should be your answer. Common AA's for a 36 year old would be 65% stocks/35% bonds (on the conservative end) up to 90% stocks/10% bonds (on the aggressive end). My recommendation would be 80% stocks and 20% bonds unless you consider yourself very conservative or very aggressive.

As for how much international to use, right now probably about 40% of your stocks are in foreign stocks. Recommendations run from using 0% to 50% in foreign stocks.
The below analysis is based on current accounts and total less than $100k. My first question at the bottom is how to invest a windfall several times this number.
So in reality, your taxable account is not 8% of the portfolio because you have $500k that is not invested. (I'm assuming this $500k will be in your taxable account.) I'd estimate your taxable account is about 45% to 50% of the entire portfolio when you add that $500k in.


The simplest portfolio for you would hold total stock index and total international index in the taxable account (most or all of your $500k would go into these two) while holding bond funds in the 401k and traditional IRA. But this will depend on what you decide about your stock to bond ratio (your AA).

Traditional IRA
13% Vanguard Target Retirement 2055 Fund Investor Shares (VFFVX) (0.15%)
This is an account that needs special attention. Have you made any non-deductible contributions to this traditional IRA? If yes, have those contributions been documented on Form 8606 so far? If you have no idea what I'm talking about, just ask.

The answer to most of your questions will be easy once you make the decision about your stock to bond ratio (and amount of international).
You're right, the current target date funds I'm in are all about 90/10..or more precisely 55% US equities, 35% non-US equities, 10% bonds. I like your suggestion of 80/20 as I don't think of myself as very aggressive.

Good point that the true % of the taxable account is greater. Is there a reason you chose Total Stock and Total Int'l Stock Indexes in the taxable account? I do see VBTIX in my 401k plan at only a .035% expense ratio.

On the TIRA question, to be completely frank I have no idea what you're talking about :? ...this is my first year that I'll be above the income contribution limits so I don't think I've ever done a non-deductible one.


---
Woodpecker: I hope you get the question about Form 8606 answered!
CajunTiger6: Thank you, always nice to hear from someone else also starting their journey. I digest better from books as well so appreciate the recommendations!

---
I'm going to capture a little homework for myself here if nobody minds:
1. Figure out if I can get a couple bigger 401k contributions in for the year
2. Read about backdoor Roth
3. Look at what it would take to change from Target Date funds into the 3-fund portfolio across all accounts...are there reasons that a Roth IRA should contain Bond Index vs the 401k, etc. Is it worth changing from TD in the existing accounts? Maybe apply the 3-fund strategy in the taxable only?
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retiredjg
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Re: Advice for newbie [on basic questions]

Post by retiredjg »

taaray wrote: Sun Dec 05, 2021 11:59 pm Good point that the true % of the taxable account is greater. Is there a reason you chose Total Stock and Total Int'l Stock Indexes in the taxable account? I do see VBTIX in my 401k plan at only a .035% expense ratio.
Total Stock Index and Total International Index funds are very tax-efficient. They are good funds to hold in taxable because they do not increase your taxes every year by throwing off much in the way of capital gains distributions or taxable dividends.

On the TIRA question, to be completely frank I have no idea what you're talking about :? ...this is my first year that I'll be above the income contribution limits so I don't think I've ever done a non-deductible one.
There is no "contribution" limit for a tIRA. But if your income is higher than a certain limit, the contribution is not deductible. Deductible means it reduces your taxable income. That is probably the limit you are talking about.

There is usually no reason to non-deductible contributions. Just put the money into Roth IRA instead....however, if you really are in the 32% bracket, you will not be able to do that.

Apparently your income has been low enough to make deductible contributions to tIRA and now your income has had a very large increase? Your income is now over $176k?

If yes, do not make any contribution to IRA this year at all (have you done that already?) You don't have time for using the backdoor Roth method this year because you will first have to move your tIRA into your 401k. Put the money into a taxable account instead.
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retiredjg
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Re: Advice for newbie [on basic questions]

Post by retiredjg »

Here is a very rough estimate of what your portfolio actually looks like. (I made some guesses.)

  • Taxable
    83% cash
    1% random stocks

    401k
    2% FIAM Index Target Date 2050 Commingled Pool Class T (FIAM INX TD 2050 T) (0.07%)


    Roth IRA
    11.7% Vanguard Target Retirement 2045 Fund (VTIVX) (0.15%)

    Traditional IRA
    2% Vanguard Target Retirement 2055 Fund Investor Shares (VFFVX) (0.15%)




Here is a target goal you can consider. Since your 401k is still small, you will have to hold bonds in taxable or Roth for awhile.

  • Taxable
    43% Total Stock Index
    24% Total International Index
    1% random stocks
    16% cash or an intermediate term tax-exempt bond fund <---temporary, until you can build bonds up in the 401k

    401k
    2% VANG TOT BD MKT INST (VBTIX) (0.035%)

    Roth IRA
    11.7% 500 Index

    Traditional IRA <---consider rolling this into your 401k if allowed
    2% Total bond market
This idea is about 80% stock, 20% bonds with about 30% of your stocks (24% of the portfolio) in international. The goal would be to eventually hold all the bond funds in the 401k and then you can start adding stock funds to the 401k as well.


Even if you have not made all your decisions, it is important to start getting that $500k into the market now. If you analyze this to death, that money will still be sitting there in 6 months or a year.
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Wiggums
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Re: Advice for newbie [on basic questions]

Post by Wiggums »

Change your 401k contributions now for 2022. That way you start off the new year right.
"I started with nothing and I still have most of it left."
tashnewbie
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Re: Advice for newbie [on basic questions]

Post by tashnewbie »

taaray wrote: Sun Dec 05, 2021 11:59 pm 2. I don't know if I can adjust my 401k contribution % quick enough to get closer to the max this year. I'm on track for about $10k in contributions. This is my first year with 401k so I just set a 6% contribution and forgot about it. It's all in FIAM INX TD 2050 T which is a low 0.07% expense ratio, 55% US equities, 35% non-US equities, and 10% bonds. Does that seem like a high % of non-US equities? I'm wondering if I ramp up my 401k contribution next year whether it is worth investigating another of the available funds in the 401k.
Looks like the TDF is about 33% international equity. There's no consensus ​on the forum what if any amount of international stock is advisable. Recommendations range from 0% to 50% (latter is approximately current market weight). 20-40% seems like the goldilocks position. But if you're not going to be using a TDF in the 401k, then this is a moot issue because you have more control over what amount of international stock you want and aren't limited to the TDF's allocation.

You may not have any paychecks left for 2021. If you do, I would ramp up the deferral % to the highest it'll go so that you can maximize the 2021 contributions as much as possible. Then set the 2022 deferral% to whatever it needs to be to max the 401k next year (max for your age is $20.5k).
3. Thanks, I haven't gotten there yet. I haven't had any issues with Vanguard but it seems like people prefer Fidelity for their taxable account on this board.
Different people like different things. Either place is good enough. Choose whichever you like better.
4. Thanks for simplifying the "account flow process" into something I can understand. In the past I've only thought about the IRA's at tax time but will look to maximize both going forward. Am I understanding correctly that I should max the 401k first, then IRA? My prior year income has been under contribution limits so haven't had to do a back-door but will read up on it. On your caveat: 32% is not because of the windfall but because of a new position/company. What is the advantage of moving the TIRA into the 401k? I can check if it is possible but let me finish digesting the wiki first. Here it is if anyone else is reading: https://www.bogleheads.org/wiki/Backdoor_Roth
The advantage of moving the TIRA into the 401k is that you will be able to do easy backdoor Roth without having to deal with prorated taxes on the backdoor conversion amounts. You likely don't have time to do a full and easy/clean backdoor Roth in 2021 because you probably don't have enough time to get the TIRA moved into the 401k before 12/31/21. You could do the backdoor Roth for 2021 in 2022 before April 15. BUT, I wouldn't do anything with the backdoor Roth until you understand the process and how to fill out IRS Form 8606 (because most tax preparers don't even understand it).

In your tax bracket, you should be able easily to max your tax-deferred 401k and a Roth IRA (via backdoor) each year. Probably easier to do a max Roth IRA contribution first because you don't have to do it through payroll where your deferral percentage might be limited. Be aware that there is pending legislation that may affect the availability of the backdoor Roth. I can't say anything more than that due to forum rules, but you should keep your ear to the ground about this before you attempt to do a backdoor in 2022.
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taaray
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Re: Advice for newbie [on basic questions]

Post by taaray »

retiredjg wrote: Mon Dec 06, 2021 7:45 am
Total Stock Index and Total International Index funds are very tax-efficient. They are good funds to hold in taxable because they do not increase your taxes every year by throwing off much in the way of capital gains distributions or taxable dividends.
Ah got it. Trying to understand this put me into the helpful/scary rabbit hole in the wiki: https://www.bogleheads.org/wiki/Tax-eff ... _placement
retiredjg wrote: Mon Dec 06, 2021 7:45 am
There is no "contribution" limit for a tIRA. But if your income is higher than a certain limit, the contribution is not deductible. Deductible means it reduces your taxable income. That is probably the limit you are talking about.

There is usually no reason to non-deductible contributions. Just put the money into Roth IRA instead....however, if you really are in the 32% bracket, you will not be able to do that.

Apparently your income has been low enough to make deductible contributions to tIRA and now your income has had a very large increase? Your income is now over $176k?

If yes, do not make any contribution to IRA this year at all (have you done that already?) You don't have time for using the backdoor Roth method this year because you will first have to move your tIRA into your 401k. Put the money into a taxable account instead.
Thanks for the clarification. That's correct, my income was below $176k until 2021. This is the recent history of my IRA contributions.

Code: Select all

| Tax year | t-IRA                       | roth-IRA   |
|----------|-----------------------------|------------|
| 2018     | -                           | 5500       |
| 2019     | 6,000                       |            |
| 2020     | 0                           | 6,000      |
| 2021     | 2500 rollover old work 401k | ineligible |
So yes, I have one contribution via a rollover of my work 401k which ended in January 2021. The 2019 contribution was deductible I believe.

I did read through the Backdoor Roth wiki and it felt really complicated to me...not really in line with the spirit of simplicity I'm looking for. I need to learn more, including about what all is possible with my new work 401k. I'd like to avoid adding potential new tax complications for this year specifically.
retiredjg wrote: Mon Dec 06, 2021 8:16 am Here is a very rough estimate of what your portfolio actually looks like. (I made some guesses.)
  • Taxable
    83% cash
    1% random stocks

    401k
    2% FIAM Index Target Date 2050 Commingled Pool Class T (FIAM INX TD 2050 T) (0.07%)

    Roth IRA
    11.7% Vanguard Target Retirement 2045 Fund (VTIVX) (0.15%)

    Traditional IRA
    2% Vanguard Target Retirement 2055 Fund Investor Shares (VFFVX) (0.15%)


Here is a target goal you can consider. Since your 401k is still small, you will have to hold bonds in taxable or Roth for awhile.
  • Taxable
    43% Total Stock Index
    24% Total International Index
    1% random stocks
    16% cash or an intermediate term tax-exempt bond fund <---temporary, until you can build bonds up in the 401k

    401k
    2% VANG TOT BD MKT INST (VBTIX) (0.035%)

    Roth IRA
    11.7% 500 Index

    Traditional IRA <---consider rolling this into your 401k if allowed
    2% Total bond market
This idea is about 80% stock, 20% bonds with about 30% of your stocks (24% of the portfolio) in international. The goal would be to eventually hold all the bond funds in the 401k and then you can start adding stock funds to the 401k as well.

Even if you have not made all your decisions, it is important to start getting that $500k into the market now. If you analyze this to death, that money will still be sitting there in 6 months or a year.
This is so helpful -- thank you! I'm still trying to make a portfolio allocation spreadsheet of my own and getting a little stuck on how to treat the mixed asset class target date funds.

A few questions,
1. Is there a penalty from changing my 401k investment from the TD fund to VBTIX since I've had it less than one year?
2. I was able to up the contribution amount and will end the year close to $15k and will max this next year (thanks Chief Wiggums)
3. I need to check if I'm allowed to roll over the t-IRA. Do you recommend doing that even if I'm not going for a Backdoor Roth?
4. Is there a reason you chose a 500 index in the Roth vs something like VTSAX?

You are absolutely right. I tend to overanalyze so I'm hoping to have a final plan by this weekend and execute it on Monday.
tashnewbie wrote: Mon Dec 06, 2021 8:45 am
Looks like the TDF is about 33% international equity. There's no consensus ​on the forum what if any amount of international stock is advisable. Recommendations range from 0% to 50% (latter is approximately current market weight). 20-40% seems like the goldilocks position. But if you're not going to be using a TDF in the 401k, then this is a moot issue because you have more control over what amount of international stock you want and aren't limited to the TDF's allocation.

You may not have any paychecks left for 2021. If you do, I would ramp up the deferral % to the highest it'll go so that you can maximize the 2021 contributions as much as possible. Then set the 2022 deferral% to whatever it needs to be to max the 401k next year (max for your age is $20.5k).
Thanks I did just that! I won't get to max but should reach about ~$14-15k. I will bring the % back down for 2022...is it even possible to over contribute? Barring any unforeseen changes, I would plan to max in 2022 so knowing that number is helpful.
tashnewbie wrote: Mon Dec 06, 2021 8:45 am The advantage of moving the TIRA into the 401k is that you will be able to do easy backdoor Roth without having to deal with prorated taxes on the backdoor conversion amounts. You likely don't have time to do a full and easy/clean backdoor Roth in 2021 because you probably don't have enough time to get the TIRA moved into the 401k before 12/31/21. You could do the backdoor Roth for 2021 in 2022 before April 15. BUT, I wouldn't do anything with the backdoor Roth until you understand the process and how to fill out IRS Form 8606 (because most tax preparers don't even understand it).

In your tax bracket, you should be able easily to max your tax-deferred 401k and a Roth IRA (via backdoor) each year. Probably easier to do a max Roth IRA contribution first because you don't have to do it through payroll where your deferral percentage might be limited. Be aware that there is pending legislation that may affect the availability of the backdoor Roth. I can't say anything more than that due to forum rules, but you should keep your ear to the ground about this before you attempt to do a backdoor in 2022.
I'm going to keep trying to understand this process. At the moment it seems complicated to me but it's probably because I'm in the middle of too many things at once. For example, the wiki says to start with a non-deductible contribution to the TIRA which I've never done (unless my rollover counts). So does that mean, you essentially make TIRA contributions and then convert them to Roth? I assume the total IRA contribution still has to be below the limit but the advantage is that there's no tax on withdrawal? Anything tax related is where I start to get foggy.
tashnewbie
Posts: 4284
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Re: Advice for newbie [on basic questions]

Post by tashnewbie »

taaray wrote: Wed Dec 08, 2021 8:10 pm A few questions,
1. Is there a penalty from changing my 401k investment from the TD fund to VBTIX since I've had it less than one year?
3. I need to check if I'm allowed to roll over the t-IRA. Do you recommend doing that even if I'm not going for a Backdoor Roth?
4. Is there a reason you chose a 500 index in the Roth vs something like VTSAX?
I'm not @retiredjg, but these are my thoughts about your questions:

1. No tax or penalty to change investments in tax-advantaged accounts such as a 401k and IRAs. Some of the funds in your 401k might have withdrawal restrictions and preclude you from investing in a similar fund for a certain period of time. I doubt that's the case for the TDF, but you should check.
3. I would probably move the TIRA into the 401k even if you don't plan to use the backdoor Roth, because it reduces the number of accounts you have, thereby simplifying your overall portfolio, and you have good, low cost options in the 401k.
4. I would put the 500 index in the Roth IRA instead of VTSAX to make tax loss harvesting easier in the future, if you ever decide to do it when opportunities arise (holding identical funds in taxable and IRAs can cause issues with the wash sale rule). TLH isn't something you need to worry about, but putting the 500 index in the Roth IRA makes TLH easier if you decide you want to do it later. You could read the TLH wiki for more information about it.
Thanks I did just that! I won't get to max but should reach about ~$14-15k. I will bring the % back down for 2022...is it even possible to over contribute? Barring any unforeseen changes, I would plan to max in 2022 so knowing that number is helpful.
In my experience, if you stay with the same employer for the entire year, then they will cut off your contributions and won't allow you to overcontribute to the 401k. If you change employers, then the second employer wouldn't know what contributions you made at your first employer, so you would have to monitor your contributions to ensure you don't exceed the annual limit ($20.5k in 2022 for someone your age). You could confirm with your current employer that it automatically stops your contributions before you overcontribute. If you get a match, you'd want to know if your employer "true ups" your contributions or if you need to make a certain amount of contributions with each and every paycheck to get the full match.
I'm going to keep trying to understand this process. At the moment it seems complicated to me but it's probably because I'm in the middle of too many things at once. For example, the wiki says to start with a non-deductible contribution to the TIRA which I've never done (unless my rollover counts). So does that mean, you essentially make TIRA contributions and then convert them to Roth? I assume the total IRA contribution still has to be below the limit but the advantage is that there's no tax on withdrawal? Anything tax related is where I start to get foggy.
If the backdoor Roth process seems complicated, I wouldn't worry about it. Just invest the money you would've put into an IRA into taxable.

The general idea of a backdoor Roth is it is a legal way for people whose income is too high to contribute directly to a Roth IRA to get money into a Roth IRA. The backdoor Roth consists of 2 steps: 1) non-deductible TIRA contribution. This is a contribution of after-tax money that you don't deduct on your tax return. Followed by 2) a Roth conversion which gets the money from the TIRA into a Roth IRA. Generally it's best to do step 2 within a couple days after the first step, which is generally when the money contributed in the first step has settled. Doing the second step shortly after the first step minimizes the gains on the amount contributed during step 1, which is a good thing because you will pay ordinary income taxes on any gains before the second step. Generally, most IRA custodians have a standard settlement fund that is a money market fund or something similar, so the amount of gains is going to be minimal or nil. Even if it's a few dollars, the tax owed would be negligible. At Vanguard it is very easy to do the second step of the Roth conversion; there's a button that says something like "convert to Roth IRA". I assume it's easy at other brokerages too.

Hopefully that quick summary helps. But again, I wouldn't worry about it if it seems complicated. Plus as I mentioned above, there's pending legislation that may make the backdoor process unavailable. I can't say more than that. You should research it.
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retiredjg
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Re: Advice for newbie [on basic questions]

Post by retiredjg »

taaray wrote: Wed Dec 08, 2021 8:10 pm I did read through the Backdoor Roth wiki and it felt really complicated to me...not really in line with the spirit of simplicity I'm looking for. I need to learn more, including about what all is possible with my new work 401k. I'd like to avoid adding potential new tax complications for this year specifically.
Backdoor Roth is "nice to have" for those who want to accept the challenge. However, it is not a necessity for successful investing and certainly not a necessity for a year in which you are still figuring out the basic things. Setting that aside for a future time (if at all) is fine.

This is so helpful -- thank you! I'm still trying to make a portfolio allocation spreadsheet of my own and getting a little stuck on how to treat the mixed asset class target date funds.
You would treat them as a certain percentage of stocks, bonds, etc. For example, let's say your Roth IRA is 12% of the portfolio and it contains a target fund that is 90% stocks and 10% bonds. The Roth IRA is 10.8% stocks and 1.2% bonds for a total of 12%. (Multiply 12 by .90 and by .10).

But I don't think target funds are going to be a good choice for you though - because putting a target fund into your taxable account is not very tax efficient. You need to hold as much of your bond allocation in the 401k and tIRA as you can.

1. Is there a penalty from changing my 401k investment from the TD fund to VBTIX since I've had it less than one year?
No. You can change funds inside a 401k or IRA or Roth IRA any time you want.

3. I need to check if I'm allowed to roll over the t-IRA. Do you recommend doing that even if I'm not going for a Backdoor Roth?
Since your 401k is a good one, I recommend doing this just to have 1 less account to deal with.

4. Is there a reason you chose a 500 index in the Roth vs something like VTSAX?
Yes. If you hold the exact same fund in taxable and in a Roth IRA, there is a possibility for a wash sale. The 500 index will provide the same performance but it is not the same exact fund. This is not something you need to do a deep dive on right now and if you prefer holding total stock there, you could.

You are absolutely right. I tend to overanalyze so I'm hoping to have a final plan by this weekend and execute it on Monday.
Analysis paralysis is a problem, especially for new investors. And some people just like to get everything perfect. It is plenty good to have a "good" portfolio, not a "perfect" portfolio (if that is even achievable). Don't let perfect be the enemy of good. When it comes to portfolios, good enough is good enough.
Topic Author
taaray
Posts: 36
Joined: Mon Oct 25, 2021 12:03 am

Re: Advice for newbie [on basic questions]

Post by taaray »

Alright I'm back with another installment after reading the helpful replies, learning through the wiki and more, and starting to execute on the parts of the plan I'm comfortable with. I'm also figuring out what level of involvement/effort I want (and can) afford to spend on personal finances. More on that later, but first I'd like to put my plan (based on input here) in front of the community for feedback.
  • 1. Convert 401k from current blended CIT (TDF 2050) to 100% VBTIX
    2. Convert Roth-IRA from VTIVX Target 2045 to VFIAX (500 index)
    3. Convert T-IRA from VFFVX Target 2055 to some kind of Bond Fund….I have checked that it is possible to roll the T-IRA over into my 401k…what order should I do this in? Rollover T-IRA to 401k and buy more VBTIX?
    4. Add VTSAX, VTIAX, and VBTLX to taxable account
    5. Figure out cash management. I might need a downpayment in 6 months. Looks like Fidelity makes CD ladders easy to do, open to other ideas.
Doing all this puts me at:
  • 52% US stock [VFIAX, VTSAX]
    11% INT'L stock [VTIAX]
    17% Bond [VBTLX, VBTIX] Should Series I Savings Bonds count here? I consider it part of my emergency fund though at the moment, I'm holding enough cash for that.
    20% Cash -- I know this is high but possible downpayment and I'm still new to this and risk averse.
I've tried to take into consideration both:
https://www.bogleheads.org/wiki/Priorit ... nvestments
https://www.bogleheads.org/wiki/Tax-eff ... _placement

However, taxes are where I get confused as you'll see in my questions below.

Questions and Todo
1. For 2022, I've set my pre-tax 401k contribution to reach the $20,500 maximum but I also learned my plan has a Roth-401k option which I'm not contributing to at all. Do I understand correctly that the same maximum applies if I start contributing to the Roth-401k as well? And if so, should I be contributing to both? The order of investment is getting confusing to me...I don't know what my retirement tax situation will be. I'm low on US-stock so would look for something in that category like FXAIX (500 index) which my plan offers.
2. Todo: HSA...I'm definitely not maximizing this right now. Will come back to it later, don't have my information handy to know what I can invest in.
3. Dividends: should I re-invest? I’ve read about TLH but am still a newbie and this (along with Backdoor Roth, and other tax related topics) is where I start eyeing working with an advisor or Vanguard PAS (assuming they look at all accounts and take TLH into consideration). I’ve always said yes to re-investing thus far and don’t remember what cost basis type I have set in the past. I've read the wiki and numerous discussion topics and still don't understand if there is a rule per account type, or investment type, etc.
4. Bond holdings: should I diversify beyond VBTIX and VBTLX?
5. Todo: Automate passive investing per paycheck
6. Todo: Figure out spreadsheet for tracking and rebalancing

Thanks for your thoughts as always, Happy new year!
MattB
Posts: 1228
Joined: Fri May 28, 2021 12:27 am

Re: Advice for newbie [on basic questions]

Post by MattB »

taaray wrote: Sun Dec 05, 2021 11:59 pm My prior year income has been under contribution limits so haven't had to do a back-door but will read up on it. On your caveat: 32% is not because of the windfall but because of a new position/company.
Welcome to the forum. You've received some very good advice along with a lot of homework.

I want to reinforce one point: Automate your investments to pay yourself first.

It appears you are now making significantly more money than you were before. "Pay yourself first" means saving (and investing) on a regular schedule instead of spending your paycheck and saving whatever is left over.

Suggest—
  • Maximize your 401k contributions.
  • Fill a traditional IRA and convert it to a Roth IRA each year. You will see this referenced as a "backdoor Roth IRA."
  • Automatically invest a consistent sum in your taxable brokerage account each month. I would suggest a total stock market index. Each of the major brokerages have one and they are all more or less interchangeable.
The most important driver of your future wealth is your long-term savings rate. The rest of the decisions you have to make, after setting up an automated investment schedule, are relatively insignificant details in the scheme of things.
MattB
Posts: 1228
Joined: Fri May 28, 2021 12:27 am

Re: Advice for newbie [on basic questions]

Post by MattB »

taaray wrote: Sun Jan 02, 2022 11:15 pm 1. For 2022, I've set my pre-tax 401k contribution to reach the $20,500 maximum but I also learned my plan has a Roth-401k option which I'm not contributing to at all. Do I understand correctly that the same maximum applies if I start contributing to the Roth-401k as well? And if so, should I be contributing to both? The order of investment is getting confusing to me...I don't know what my retirement tax situation will be. I'm low on US-stock so would look for something in that category like FXAIX (500 index) which my plan offers.
1. Stick with 20,500 in your pre-tax 401k for now. The overwhelming majority of higher earners are better served by pre-tax contributions during their working years. This takes one decision off your plate for the time being. You can revisit this in a few years once you're all set up.

2. See if your employers 401k allows for in-plan conversions of after-tax contributions to Roth contributions. This is commonly referred to here as a mega-back-door Roth, not to be confused with a (regular) backdoor Roth. See here for details: https://www.bogleheads.org/wiki/Mega-backdoor_Roth
taaray wrote: Sun Jan 02, 2022 11:15 pm 2. Todo: HSA...I'm definitely not maximizing this right now. Will come back to it later, don't have my information handy to know what I can invest in.
Small change in the scheme of things. You're fine to push this down the list.
taaray wrote: Sun Jan 02, 2022 11:15 pm 3. Dividends: should I re-invest? I’ve read about TLH but am still a newbie and this (along with Backdoor Roth, and other tax related topics) is where I start eyeing working with an advisor or Vanguard PAS (assuming they look at all accounts and take TLH into consideration). I’ve always said yes to re-investing thus far and don’t remember what cost basis type I have set in the past. I've read the wiki and numerous discussion topics and still don't understand if there is a rule per account type, or investment type, etc.
I reinvest dividends in everything that I continue to invest in. You should consider turning off dividend reinvestment for anything in your accounts that you no longer actively invest in and/or that you want to minimize over time.

I don't tax loss harvest so going to pass on that question.
taaray wrote: Sun Jan 02, 2022 11:15 pm 4. Bond holdings: should I diversify beyond VBTIX and VBTLX?
Not necessary. Most people initially overcomplicate their investments before working the rest of their lives to simplify them. You've fine to stick with vanguard's total bond index.
taaray wrote: Sun Jan 02, 2022 11:15 pm 5. Todo: Automate passive investing per paycheck
Yes.
taaray wrote: Sun Jan 02, 2022 11:15 pm 6. Todo: Figure out spreadsheet for tracking and rebalancing
Low priority. Many people do better by not tracking their investments but once per year. This avoids the temptation to tinker.
taaray wrote: Sun Jan 02, 2022 11:15 pm Thanks for your thoughts as always, Happy new year!
Congrats on what you're doing. Keep up the good work.
Topic Author
taaray
Posts: 36
Joined: Mon Oct 25, 2021 12:03 am

Re: Advice for newbie [on basic questions]

Post by taaray »

tashnewbie wrote: Thu Dec 09, 2021 8:08 am I'm not @retiredjg, but these are my thoughts about your questions:

1. No tax or penalty to change investments in tax-advantaged accounts such as a 401k and IRAs. Some of the funds in your 401k might have withdrawal restrictions and preclude you from investing in a similar fund for a certain period of time. I doubt that's the case for the TDF, but you should check.
3. I would probably move the TIRA into the 401k even if you don't plan to use the backdoor Roth, because it reduces the number of accounts you have, thereby simplifying your overall portfolio, and you have good, low cost options in the 401k.
4. I would put the 500 index in the Roth IRA instead of VTSAX to make tax loss harvesting easier in the future, if you ever decide to do it when opportunities arise (holding identical funds in taxable and IRAs can cause issues with the wash sale rule). TLH isn't something you need to worry about, but putting the 500 index in the Roth IRA makes TLH easier if you decide you want to do it later. You could read the TLH wiki for more information about it.
Thanks for your thoughts. I've learned that I am allowed to rollover the TIRA into the 401k but haven't yet. I also learned I have a Roth 401k option and another member has since mentioned I should check if I can do in-plan conversions of after-tax contributions...need to read up on that one.

Copy on the TLH opportunities. I took your suggestion in my proposed plan of action.
Hopefully that quick summary helps. But again, I wouldn't worry about it if it seems complicated. Plus as I mentioned above, there's pending legislation that may make the backdoor process unavailable. I can't say more than that. You should research it.
It did help and I plan to refer back to it often!
retiredjg wrote: Thu Dec 09, 2021 8:14 am
Backdoor Roth is "nice to have" for those who want to accept the challenge. However, it is not a necessity for successful investing and certainly not a necessity for a year in which you are still figuring out the basic things. Setting that aside for a future time (if at all) is fine.
Thanks that helps. I'll definitely come back to it in the future.
You would treat them as a certain percentage of stocks, bonds, etc. For example, let's say your Roth IRA is 12% of the portfolio and it contains a target fund that is 90% stocks and 10% bonds. The Roth IRA is 10.8% stocks and 1.2% bonds for a total of 12%. (Multiply 12 by .90 and by .10).

But I don't think target funds are going to be a good choice for you though - because putting a target fund into your taxable account is not very tax efficient. You need to hold as much of your bond allocation in the 401k and tIRA as you can.
That makes sense. Do my proposed bond choices make sense? The only change I am considering is making part of the Taxable Bond allocation more diversified than just VBTLX.

Since your 401k is a good one, I recommend doing this just to have 1 less account to deal with.
I've learned that I can do this and will execute.
Yes. If you hold the exact same fund in taxable and in a Roth IRA, there is a possibility for a wash sale. The 500 index will provide the same performance but it is not the same exact fund. This is not something you need to do a deep dive on right now and if you prefer holding total stock there, you could.
You're right - I went deep into TLH, wash sales, cost basis and haven't absorbed it all. I'll take your advice and keep learning.
MattB wrote: Mon Jan 03, 2022 1:50 am 1. Stick with 20,500 in your pre-tax 401k for now. The overwhelming majority of higher earners are better served by pre-tax contributions during their working years. This takes one decision off your plate for the time being. You can revisit this in a few years once you're all set up.

2. See if your employers 401k allows for in-plan conversions of after-tax contributions to Roth contributions. This is commonly referred to here as a mega-back-door Roth, not to be confused with a (regular) backdoor Roth. See here for details: https://www.bogleheads.org/wiki/Mega-backdoor_Roth
Thank you! I'll look into the in-plan conversion question but #1 does help simplify things. This was the thread that had me thinking about it: viewtopic.php?f=1&t=366525

I reinvest dividends in everything that I continue to invest in. You should consider turning off dividend reinvestment for anything in your accounts that you no longer actively invest in and/or that you want to minimize over time.

I don't tax loss harvest so going to pass on that question.
Makes sense to me. I turned it off for some old stocks I owned and am selling. For the newer funds I'm purchasing I'm not sure what I'll choose yet.
Congrats on what you're doing. Keep up the good work.
Thank you!
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