AA when you run out of tax-advantaged account space

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JeuneCracoucas
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AA when you run out of tax-advantaged account space

Post by JeuneCracoucas »

Hello,

My spouse is facing an asset allocation issue and I'm not sure how to resolve it. She's 38, in a high tax bracket, in California, and has no mega-backdoor conversion offered by her employer's 401k plan.

This year, and for the first time in her life, she started contributing to 2 retirement accounts. On top of that she's able to save quite a lot every month (~$6.5k/month) and she wants to invest it in a taxable brokerage account. The goal is to have a 90/10 stock/bond AA for the next few years, then add more bonds, etc. The 90/10 might appear risky for her age, but she just started investing and needs to catch up.

By the end of 2022, she will have:
- Roth IRA: $6k, invested right now in Vanguard target retirement 2045 (AA: 90/10)
- 401k: $20.5k, invested right now in Vanguard target retirement 2050 (AA: 91/9)
- Taxable account: $78k. So how do you invest the $78k to maintain the 90/10 AA while controlling your taxes? 

I see different options for the taxable account:
1) Invest in a retirement target fund.
- Pros: simple to maintain
- Cons: not tax efficient, no THL, etc.

2) Invest in a total US/international stock.
- Pros: pretty tax efficient
- Cons: The AA breaks down very quickly given the amount of $ in the taxable account. 
I could add more bonds in the tax-advantaged accounts: should I then switch to a target fund with a closer retirement date (2030?), or just buy a total bond fund? Also, isn't it a waste to have tax-advantaged accounts that will quickly be dominated by bonds whereas you could have high-growth stocks tax-free in these accounts?

3) Invest in a total stock fund and some bonds/bond funds at 90/10. That's what I'm leaning towards based on what I've learned out here.
- Pros: rather simple. You also keep adding stocks to the tax-advantaged accounts (tax-free growth).
- Cons: bonds in a taxable account can be tax inefficient unless I focus on low-yield bonds and/or tax-exempt bonds: (in-state) muni bonds, T-bonds/bills, etc. For simplicity, I was thinking of a mix of intermediate and long-term tax-exempt bond funds such as VWITX and VCAIX. What do you guys think? Should I also consider I-bonds and EE-bonds in taxable? 

Thank you!
wolf359
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Re: AA when you run out of tax-advantaged account space

Post by wolf359 »

You have three options:

1) Use tax exempt bonds in the taxable account.

2) Don't sweat it. Use normal bonds in the taxable account. Bond interest rates are so low, it's not really that much of a tax impact.

3) Use equities only in the Roth and taxable accounts. Combine all the assets in all the accounts and treat it as one big portfolio for asset allocation purposes. Have both equities and all the bonds in the 401k. Do rebalancing as necessary only in the 401k.

4) Combine all assets in all accounts (yours and hers) and treat that as one big portfolio for asset allocation purposes. My spouse has a lousy 401k with only one good choice. I do all rebalancing in one of my accounts.
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Re: AA when you run out of tax-advantaged account space

Post by JoMoney »

I like Series I Savings bonds, they're very tax efficient (at least for the 30 years you can let the interest compound in them deferred.)

After maxing out tax deferred accounts, and having a reasonably good 'emergency fund', I'd be considering buying a house (if I expected to live in the area for more than a few years.) When in doubt with what to do with extra after-tax money owning a home can suck up a lot of that including extra payments trying to pay off early.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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grabiner
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Re: AA when you run out of tax-advantaged account space

Post by grabiner »

In a high tax bracket in CA, the best way to manage the asset allocation is to use CA munis in the taxable account.

The reason CA munis are attractive for her is that she has a higher tax cost for stocks in the taxable account than most investors do, but the same tax cost on CA munis (the difference between muni and taxable yields of comparable risk).
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Re: AA when you run out of tax-advantaged account space

Post by catchinup »

I've been thinking about the same problem as your wife's, however I'm farther down the road in terms of how much money I have already invested. If you want to see my financial details, visit this thread
viewtopic.php?f=1&t=366899

If I could do it all over, I would NOT have put equities in taxable -especially in international. While the asset location thread in the wiki advises to put equities in taxable, I can tell you that it's quite painful for me to pay taxes each year on an extra 18K of income during my peak earning years. I wish I had put the international fund in my Roth IRA. I've turned off reinvesting on that fund and am hoping for a TLH opportunity to arise that would allow me to shift the international allocation into the Roth .

A portion of my taxable account is invested in long term CA muni fund VCLAX. I'm concerned right now about continuing to invest my extra money into a long term bond fund. I put money in there a few years ago, but since then I'm starting to formulate retirement plans and changes where it'd be good to have some extra cash available on a shorter time horizon. So I'm trying to figure out which bond fund to use in taxable starting now.

In summary, I personally would do option 3 of wolf359's options, and take grabiner's advice regarding CA munis in taxable.
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JeuneCracoucas
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Re: AA when you run out of tax-advantaged account space

Post by JeuneCracoucas »

Thank you all for the great advices. I just looked at my spouse's 401k plan and the only low cost funds are the retirement target date ones. So I can't control the AA on the 401k unless I get an expensive bond fund.

Moreover, it's nice to think of the 401k as the only plan you can rely on at retirement - whatever happens to the other accounts by then. By adding bonds to the 401k to maintain the overall AA, we could end up with a 401k largely dominated by bonds to balance for the stocks in the taxable. Isn't that an issue come retirement? We don't want a 90/10 AA by then, but do we want a 10/90 AA either? In a way, isnt it better to just let Vanguard TDF do its job in the 401k?

As a result, we are basically left with having bonds in the taxable or Roth. It's probably good to use the Roth for stocks only instead of the current TDF. And in the taxable we will add stocks and tax-exempt bonds to maintain the overall AA of the portfolio.

It doesn't seem too complicated to execute.

Does it make sense?
buyer
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Re: AA when you run out of tax-advantaged account space

Post by buyer »

You might also consider switching the 401(k) to a later an earlier target date year, one containing a higher percentage of bonds as needed to bring your overall AA to 90/10.
Last edited by buyer on Mon Jan 24, 2022 1:03 am, edited 1 time in total.
dcabler
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Re: AA when you run out of tax-advantaged account space

Post by dcabler »

wolf359 wrote: Thu Jan 20, 2022 9:12 pm You have three options:

1) Use tax exempt bonds in the taxable account.

2) Don't sweat it. Use normal bonds in the taxable account. Bond interest rates are so low, it's not really that much of a tax impact.

3) Use equities only in the Roth and taxable accounts. Combine all the assets in all the accounts and treat it as one big portfolio for asset allocation purposes. Have both equities and all the bonds in the 401k. Do rebalancing as necessary only in the 401k.

4) Combine all assets in all accounts (yours and hers) and treat that as one big portfolio for asset allocation purposes. My spouse has a lousy 401k with only one good choice. I do all rebalancing in one of my accounts.
I vote #4 since this is what we do. We didn't always do this and it took a little time to turn the oil tanker to get there but we've been there for a while now. We're also able to do all of the rebalancing in one account - my IRA. Now it doesn't have infinite capacity for rebalancing if, for example, I need to sell stock to buy more bonds. It is conceivable that in such a situation I would run out of stock to rebalance out of. In such a situation if I choose to keep my target AA, then would consider muni's in my taxable account given our tax bracket.

Cheers.
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Re: AA when you run out of tax-advantaged account space

Post by Calc_is_Easier »

JeuneCracoucas wrote: Thu Jan 20, 2022 9:05 pm - Cons: bonds in a taxable account can be tax inefficient unless I focus on low-yield bonds and/or tax-exempt bonds: (in-state) muni bonds, T-bonds/bills, etc. For simplicity, I was thinking of a mix of intermediate and long-term tax-exempt bond funds such as VWITX and VCAIX. What do you guys think? Should I also consider I-bonds and EE-bonds in taxable? 
A thought on EE-Bonds. If you are planning to retire in 20 years and deferring your SS until age 70, you might consider laddering EE-Series bonds to provide an income floor. You can defer the federal taxes and they are exempt from state taxes. I-Bonds, also state tax exempt, are also a good place to right now to stash cash you don't need for at least 12 months. A thread discussing EE-Series is here: viewtopic.php?t=358793 and I-Bonds here: https://retirementincomejournal.com/art ... ?pdf=13017
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JeuneCracoucas
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Re: AA when you run out of tax-advantaged account space

Post by JeuneCracoucas »

grabiner wrote: Thu Jan 20, 2022 9:15 pm In a high tax bracket in CA, the best way to manage the asset allocation is to use CA munis in the taxable account.

The reason CA munis are attractive for her is that she has a higher tax cost for stocks in the taxable account than most investors do, but the same tax cost on CA munis (the difference between muni and taxable yields of comparable risk).
From a tax perspective, with only CA muni in my taxable, I will quickly get the majority of my fixed income in CA muni, given how much more $ is going into the taxable every year vs the limited space of the 401k. To have a 90/10 AA, the 401k (2050 TDR) will have about $2k of total bonds and the taxable about $8k of CA muni. I could change the 401k fund to a 2030 TDR plan with more bonds in order to have like $4k instead of $2k of total bonds in the 401k and $6k of CA muni instead of $8k in taxable. Still, it's a lot of CA muni vs total bonds.

It just seems like in a high-tax bracket high-state tax situation, there's no free lunch if your taxable space is much larger than your tax-advantaged space. The only way to have diversification in bonds and tax efficiency is to load the 401k with total bonds. But then it poses a new question: you're not taking advantage of tax-free growth you could enjoy with stocks in the 401k. But do you want your 401k to grow too much since you'll have to empty it at retirement and possibly at a high tax rate if you are forced to make large withdrawals.

It all comes down to prioritization I guess. Maybe it's just simpler to mirror our AA with total bonds in all accounts. I feel like I'm circling around lol.
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Re: AA when you run out of tax-advantaged account space

Post by grabiner »

JeuneCracoucas wrote: Sun Jan 23, 2022 8:04 pm
grabiner wrote: Thu Jan 20, 2022 9:15 pm In a high tax bracket in CA, the best way to manage the asset allocation is to use CA munis in the taxable account.

The reason CA munis are attractive for her is that she has a higher tax cost for stocks in the taxable account than most investors do, but the same tax cost on CA munis (the difference between muni and taxable yields of comparable risk).
From a tax perspective, with only CA muni in my taxable, I will quickly get the majority of my fixed income in CA muni, given how much more $ is going into the taxable every year vs the limited space of the 401k. To have a 90/10 AA, the 401k (2050 TDR) will have about $2k of total bonds and the taxable about $8k of CA muni. I could change the 401k fund to a 2030 TDR plan with more bonds in order to have like $4k instead of $2k of total bonds in the 401k and $6k of CA muni instead of $8k in taxable. Still, it's a lot of CA muni vs total bonds.
You can reduce the CA muni effect with a 50/50 split between Vanguard Limited-Term Tax-Exempt and CA Long-Term Tax-Exempt. This puts only half the bonds in CA, but more than half the bond interest is exempt from CA tax.
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Re: AA when you run out of tax-advantaged account space

Post by placeholder »

Change the target fund for one with some more fixed in it and not sweat it too much.
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JeuneCracoucas
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Re: AA when you run out of tax-advantaged account space

Post by JeuneCracoucas »

Ok. And as far as the proportion of muni (CA and all states) w.r.t. the entire fixed income, what is considered a maximum for diversification? 50% of all bond types? 30%?
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Re: AA when you run out of tax-advantaged account space

Post by Mel Lindauer »

JeuneCracoucas wrote: Sun Jan 23, 2022 9:30 pm Ok. And as far as the proportion of muni (CA and all states) w.r.t. the entire fixed income, what is considered a maximum for diversification? 50% of all bond types? 30%?
IMO, you should put the first $25k (or more per year if you have trusts) in I Bonds, since they offer both tax-deferral for up to 30 years and freedom from state and local taxation. In addition to being free from state and local taxation, they're paying more than CA tax-exempts and have no risk. Once you maximize your allowable annual purchase of I Bonds, then you might consider the tax-exempts temporarily, until the next year in which case you can buy more I Bonds. Rinse and repeat. And, should things look better somewhere else down the road, you can always redeem the I Bonds after one year and buy whatever you think is better.
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Navillus1968
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Re: AA when you run out of tax-advantaged account space

Post by Navillus1968 »

JeuneCracoucas wrote: Thu Jan 20, 2022 9:05 pm Hello,

My spouse is facing an asset allocation issue and I'm not sure how to resolve it. She's 38, in a high tax bracket, in California, and has no mega-backdoor conversion offered by her employer's 401k plan.

This year, and for the first time in her life, she started contributing to 2 retirement accounts. On top of that she's able to save quite a lot every month (~$6.5k/month) and she wants to invest it in a taxable brokerage account. The goal is to have a 90/10 stock/bond AA for the next few years, then add more bonds, etc. The 90/10 might appear risky for her age, but she just started investing and needs to catch up.

By the end of 2022, she will have:
- Roth IRA: $6k, invested right now in Vanguard target retirement 2045 (AA: 90/10)
- 401k: $20.5k, invested right now in Vanguard target retirement 2050 (AA: 91/9)
- Taxable account: $78k. So how do you invest the $78k to maintain the 90/10 AA while controlling your taxes? 

Thank you!
I don't think you've mentioned your own retirement accounts. Are you taking advantage of your wife's high income to max out both your 401k & IRA? That's one way to increase space in tax-advantaged accounts- both of you maximize IRAs & 401ks.

What is your Fed & state tax bracket? If DW is contributing to a Roth IRA, your MAGI is <$214k, which is 24% Fed, yes? That's not that high considering there are three tax brackets above 24%. Granted, I assume CA is robbing you blind at the state level, probably 9.3%, correct?
My point- you need to do the math to make sure that municipal bonds make sense at your marginal tax rate- it's not necessarily a slam dunk, since muni yields are lower.

Also- I assume you are newlyweds is the reason she is only now funding her IRA? If you're familiar with the Crazy/Hot Matrix, DW waiting until late until her fourth decade of life to think about retirement is more than a little crazy, so I'm guessing she is very hot? jk :-D

FWIW, I don't think 90/10 AA is too risky for a 38 year old, not at all. I'd keep that AA until 50 or later (assuming retirement in your 60s). YMMV
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Re: AA when you run out of tax-advantaged account space

Post by MattB »

I'll suggest what I consider a balance between simplicity and efficiency.

1. Direct 401k contributions to a target date fund of your choosing.

2. Direct all Roth IRA contributions to a total market stock fund, e.g., Vanguard's VTSAX. (Some here will argue for international exposure. Use VTWAX if that's your cup of tea. I don't think it really matters in the scheme of things. Pick whichever you like.)

3. Purchase 20k in i-bonds in January of each year for the foreseeable future. You'll have to purchase 10k in your name and 10k in hers.

4. Directed all taxable contributions to a total market stock fund, e.g., Vanguard's VTSAX.

You can afford to have an aggressive AA when you can save $20k in your 401k + $12k in your Roth IRA's + $20k in i-bonds + $50(ish)k in taxable each year. And you may do better from a behavioral perspective having a set investment plan that doesn't worry about AA.

Doing the above for 20 years will leave you with $400k (+interest) in i-bonds + a very stable 401k, which should be sufficient to protect the equity portion of your portfolio through a protracted bear market early in retirement.

It will also allow your DW to do Roth conversions between 58 and 72, and thus to minimize taxes on the investments in her 401k.
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JeuneCracoucas
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Re: AA when you run out of tax-advantaged account space

Post by JeuneCracoucas »

First of all, I really appreciate the detailed response. It's really helpful. I agree I should have expanded on our situation, and my assets.

I'm from Europe. 41 year old. Became a US citizen a couple of years ago. It's only recently that I've looked into this financial planning. I never contributed to a retirement plan. I only started doing a Roth IRA last year. I started a tech business in Aerospace here, so my wealth is mostly in shares in my company ;-). We don't offer a 401k plan but we will change that once we fundraise - hopefully this year. So here's my situation:
- W2 income: $60k/year for 2021, maybe it will increase to $120k after fundraise.
- Cash: $110k on a HYSA.
- Roth IRA: $6.5k in VTWAX from 2020. Need to do 2021 and 2022.
- No debt (no house, no student loan).

She has double citizenship, US & European passport. Born and raised in LA. After college, she worked in LA for a couple of years. Then, as a European, she decided to go to med school in Holland, which is free. She only has some student debt from college. She came back to CA for her residency and fellowship. Hence why she's so "old". She comes from a modest background. She was raised to be financially responsible, but she doesn't know much about financial planning. Her situation:
- W2 income: $220k for 2022. She started her job end of 2021.
- Cash: $20k on HYSA.
- 403b: $10k right now on VTIVX.
- IRA: $2.2k from a long time ago.
- Roth IRA: $6.5k in VFIFX (2020 Roth contribution I made for her as a Xmas gift last year lol - she was a fellow and had a rather low salary). She needs to do a 2021 contribution, and for 2022 she will have to do a backdoor Roth, once we make sure we can transfer her IRA $ to her 403b to avoid the pro-rata rule. $2.2k is a small amount anyway.
- About $10k of student debt. No mortgage either.
- I'd say she's an 8/10 lol. I don't know where she lands on the matrix.

I'm not sure I did things well, but I started a Roth IRA for each of us because I figured we would be in the high-income zone moving forward, with no possibility to contribute to a traditional IRA. My idea was to do backdoor Roth conversions in the future... but maybe this will all be over soon with the BBB Act. In 2022, we'll be moving close to the 32% federal tax bracket, and 9.3% CA tax bracket.

The plan was:
- Build an ADU in 2022. We think it's ridiculous to buy a $1M house and we don't have the downpayment, but we have the option to do an ADU since her parents offered (they have a big lot in the back of their place). My savings should help to start things. And with her savings, we will still have some emergency funds.
- Do all the Roth IRA contribution we can, sooner than later.
- For her Roth IRA, move towards stocks only.
- Keep things simple and stick to the 2050 target date retirement plan in her 401k (91/9 AA right now).
- And then yeah the question is about the taxable: as you guys just mentioned, if we purchase i-bonds, we won't need any muni (yet) in the taxable and can have only total stocks.
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JeuneCracoucas
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Re: AA when you run out of tax-advantaged account space

Post by JeuneCracoucas »

I meant her 403b
MattB
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Re: AA when you run out of tax-advantaged account space

Post by MattB »

JeuneCracoucas wrote: Mon Jan 24, 2022 12:58 pm - Do all the Roth IRA contribution we can, sooner than later.
- For her Roth IRA, move towards stocks only.
- Keep things simple and stick to the 2050 target date retirement plan in her 401k (91/9 AA right now).
- And then yeah the question is about the taxable: as you guys just mentioned, if we purchase i-bonds, we won't need any muni (yet) in the taxable and can have only total stocks.
This is a good plan. Good luck with your business.
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Re: AA when you run out of tax-advantaged account space

Post by Navillus1968 »

JeuneCracoucas wrote: Mon Jan 24, 2022 12:58 pm First of all, I really appreciate the detailed response. It's really helpful. I agree I should have expanded on our situation, and my assets.

I'm from Europe. 41 year old. Became a US citizen a couple of years ago. It's only recently that I've looked into this financial planning.
Tout est clair maintenant! BTW, your English is annoyingly fluent- congrats.
I never contributed to a retirement plan. I only started doing a Roth IRA last year. I started a tech business in Aerospace here, so my wealth is mostly in shares in my company ;-). We don't offer a 401k plan but we will change that once we fundraise - hopefully this year. So here's my situation:
- W2 income: $60k/year for 2021, maybe it will increase to $120k after fundraise.
- Cash: $110k on a HYSA.
- Roth IRA: $6.5k in VTWAX from 2020. Need to do 2021 and 2022.
- No debt (no house, no student loan).

She has double citizenship, US & European passport. Born and raised in LA. After college, she worked in LA for a couple of years. Then, as a European, she decided to go to med school in Holland, which is free. She only has some student debt from college. She came back to CA for her residency and fellowship. Hence why she's so "old". She comes from a modest background. She was raised to be financially responsible, but she doesn't know much about financial planning. Her situation:
- W2 income: $220k for 2022. She started her job end of 2021.
- Cash: $20k on HYSA.
- 403b: $10k right now on VTIVX.
- IRA: $2.2k from a long time ago.
- Roth IRA: $6.5k in VFIFX (2020 Roth contribution I made for her as a Xmas gift last year lol - she was a fellow and had a rather low salary). She needs to do a 2021 contribution, and for 2022 she will have to do a backdoor Roth, once we make sure we can transfer her IRA $ to her 403b to avoid the pro-rata rule. $2.2k is a small amount anyway.
I would bite the bullet & convert DW's entire TIRA to Roth when you do her Backdoor Roth for 2021/2022. It's a small amount either way, You'll have more & better investment options in the Roth IRA compared to what's available in her 403b & the fees will be smaller.
NB- For future reference: the IRS Form 8606 is slightly easier to fill out if you make your TIRA contribution in the same year as the tax year they are for. IOW, don't contribute for 2021 in 2022. Not a huge deal, just a bit less hassle when done in the same year.
- About $10k of student debt. No mortgage either.
- I'd say she's an 8/10 lol. I don't know where she lands on the matrix.
Obviously, I was joking about the crazy/hot matrix thing- you married a pretty doctor? She sounds like a 9.5! The only way it gets better is if her dad owns a liquor store!
I'm not sure I did things well, but I started a Roth IRA for each of us because I figured we would be in the high-income zone moving forward, with no possibility to contribute to a traditional IRA. My idea was to do backdoor Roth conversions in the future... but maybe this will all be over soon with the BBB Act. In 2022, we'll be moving close to the 32% federal tax bracket, and 9.3% CA tax bracket.
I think you're doing great.
Technically, TIRA contributions can be done at any income. What phases out is the *tax deduction* of the contribution above MAGI of about $129k MFJ. Note- except for Backdoor Roth contributions (which don't stay in the TIRA), many/most people think non-deductible TIRA contributions are not worth the trouble. Better to put that money in taxable.
Also- BBB is dead for the moment & will likely stay dead (touche du bois/knock on wood!).
The plan was:
- Build an ADU in 2022. We think it's ridiculous to buy a $1M house and we don't have the downpayment, but we have the option to do an ADU since her parents offered (they have a big lot in the back of their place). My savings should help to start things. And with her savings, we will still have some emergency funds.
- Do all the Roth IRA contribution we can, sooner than later.
- For her Roth IRA, move towards stocks only.
- Keep things simple and stick to the 2050 target date retirement plan in her 401k (91/9 AA right now).
- And then yeah the question is about the taxable: as you guys just mentioned, if we purchase i-bonds, we won't need any muni (yet) in the taxable and can have only total stocks.
You don't mention whether DW's 403b offers a Roth option. If so, I would stay away- your combined Fed/CA marginal rate is 33.3%- tax deferral beats Roth at those rates. Remember, you can always convert to Roth in retirement after you move to Florida (no state income tax). In a perfect world, you'd be doing deductible TIRA contributions as well, but the way the law works, (Backdoor) Roth IRA is your best IRA option.

One thing to keep an eye on as your taxable account grow is dividends. Your MAGI with you making $60k already puts you $30K over the $250k MAGI threshold where the Net Investment Income Tax (NIIT) is applied to capital gains & dividends. NIIT is a 3.8% surcharge that makes LTCG over $250K taxed at 18.8% vice 15%.
Note- one way to lower MAGI below $250K & avoid the NIIT is to max out 401K, so if your company ever offers a 401k, you need to fill it up! (Off topic, but make sure the 401k you set up is a "safe harbor 401k" since you are the company owner! Otherwise, you can't max it out once your income is over $135K for 2022! I know it's moot for this year, but will be a factor later as your company & salary both grow)
VTI (Vanguard Total US stock ETF) has about half the dividend yield that VXUS (Vanguard Total International Stock ETF)- 1.6% vs 3.3%. Assuming $100,000 invested, your taxes from VTI would be about $300, VSUX would cost well over $600. Also, VSUX has a *much* larger % of unqualified dividends that are taxed like ordinary income compared to VTI. High levels of unqualified dividends are bad.
If you don't need the money, dividends are forced taxable income, kind of like a mini-RMD. It's painful to pay taxes on money you don't intend to spend.
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JeuneCracoucas
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Re: AA when you run out of tax-advantaged account space

Post by JeuneCracoucas »

Navillus1968 wrote: Mon Jan 24, 2022 3:41 pm
JeuneCracoucas wrote: Mon Jan 24, 2022 12:58 pm First of all, I really appreciate the detailed response. It's really helpful. I agree I should have expanded on our situation, and my assets.

I'm from Europe. 41 year old. Became a US citizen a couple of years ago. It's only recently that I've looked into this financial planning.
Tout est clair maintenant! BTW, your English is annoyingly fluent- congrats.
I never contributed to a retirement plan. I only started doing a Roth IRA last year. I started a tech business in Aerospace here, so my wealth is mostly in shares in my company ;-). We don't offer a 401k plan but we will change that once we fundraise - hopefully this year. So here's my situation:
- W2 income: $60k/year for 2021, maybe it will increase to $120k after fundraise.
- Cash: $110k on a HYSA.
- Roth IRA: $6.5k in VTWAX from 2020. Need to do 2021 and 2022.
- No debt (no house, no student loan).

She has double citizenship, US & European passport. Born and raised in LA. After college, she worked in LA for a couple of years. Then, as a European, she decided to go to med school in Holland, which is free. She only has some student debt from college. She came back to CA for her residency and fellowship. Hence why she's so "old". She comes from a modest background. She was raised to be financially responsible, but she doesn't know much about financial planning. Her situation:
- W2 income: $220k for 2022. She started her job end of 2021.
- Cash: $20k on HYSA.
- 403b: $10k right now on VTIVX.
- IRA: $2.2k from a long time ago.
- Roth IRA: $6.5k in VFIFX (2020 Roth contribution I made for her as a Xmas gift last year lol - she was a fellow and had a rather low salary). She needs to do a 2021 contribution, and for 2022 she will have to do a backdoor Roth, once we make sure we can transfer her IRA $ to her 403b to avoid the pro-rata rule. $2.2k is a small amount anyway.
I would bite the bullet & convert DW's entire TIRA to Roth when you do her Backdoor Roth for 2021/2022. It's a small amount either way, You'll have more & better investment options in the Roth IRA compared to what's available in her 403b & the fees will be smaller.
NB- For future reference: the IRS Form 8606 is slightly easier to fill out if you make your TIRA contribution in the same year as the tax year they are for. IOW, don't contribute for 2021 in 2022. Not a huge deal, just a bit less hassle when done in the same year.
- About $10k of student debt. No mortgage either.
- I'd say she's an 8/10 lol. I don't know where she lands on the matrix.
Obviously, I was joking about the crazy/hot matrix thing- you married a pretty doctor? She sounds like a 9.5! The only way it gets better is if her dad owns a liquor store!
I'm not sure I did things well, but I started a Roth IRA for each of us because I figured we would be in the high-income zone moving forward, with no possibility to contribute to a traditional IRA. My idea was to do backdoor Roth conversions in the future... but maybe this will all be over soon with the BBB Act. In 2022, we'll be moving close to the 32% federal tax bracket, and 9.3% CA tax bracket.
I think you're doing great.
Technically, TIRA contributions can be done at any income. What phases out is the *tax deduction* of the contribution above MAGI of about $129k MFJ. Note- except for Backdoor Roth contributions (which don't stay in the TIRA), many/most people think non-deductible TIRA contributions are not worth the trouble. Better to put that money in taxable.
Also- BBB is dead for the moment & will likely stay dead (touche du bois/knock on wood!).
The plan was:
- Build an ADU in 2022. We think it's ridiculous to buy a $1M house and we don't have the downpayment, but we have the option to do an ADU since her parents offered (they have a big lot in the back of their place). My savings should help to start things. And with her savings, we will still have some emergency funds.
- Do all the Roth IRA contribution we can, sooner than later.
- For her Roth IRA, move towards stocks only.
- Keep things simple and stick to the 2050 target date retirement plan in her 401k (91/9 AA right now).
- And then yeah the question is about the taxable: as you guys just mentioned, if we purchase i-bonds, we won't need any muni (yet) in the taxable and can have only total stocks.
You don't mention whether DW's 403b offers a Roth option. If so, I would stay away- your combined Fed/CA marginal rate is 33.3%- tax deferral beats Roth at those rates. Remember, you can always convert to Roth in retirement after you move to Florida (no state income tax). In a perfect world, you'd be doing deductible TIRA contributions as well, but the way the law works, (Backdoor) Roth IRA is your best IRA option.

One thing to keep an eye on as your taxable account grow is dividends. Your MAGI with you making $60k already puts you $30K over the $250k MAGI threshold where the Net Investment Income Tax (NIIT) is applied to capital gains & dividends. NIIT is a 3.8% surcharge that makes LTCG over $250K taxed at 18.8% vice 15%.
Note- one way to lower MAGI below $250K & avoid the NIIT is to max out 401K, so if your company ever offers a 401k, you need to fill it up! (Off topic, but make sure the 401k you set up is a "safe harbor 401k" since you are the company owner! Otherwise, you can't max it out once your income is over $135K for 2022! I know it's moot for this year, but will be a factor later as your company & salary both grow)
VTI (Vanguard Total US stock ETF) has about half the dividend yield that VXUS (Vanguard Total International Stock ETF)- 1.6% vs 3.3%. Assuming $100,000 invested, your taxes from VTI would be about $300, VSUX would cost well over $600. Also, VSUX has a *much* larger % of unqualified dividends that are taxed like ordinary income compared to VTI. High levels of unqualified dividends are bad.
If you don't need the money, dividends are forced taxable income, kind of like a mini-RMD. It's painful to pay taxes on money you don't intend to spend.
Merci! My father in law used to run a small donut shop, when he wasn't at school. This was in Williamsburg in the 60s. Now there's only trendy nightclubs and hipsters cafes.
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