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Personal Finance Advice and Education! (6 Viewers)
- Thread starter No. 16
- Start date
Desert_Power
Footballguy
Anyone thinking about bond/cash allocation right now should at least be putting money into I-Bonds this year. $10k a person is a pretty low limit, but unbeatable risk-free return while headline CPI stays elevated.
-OZ-
Footballguy
I've been reluctant, but if we sell our land I'll be putting $20k in (wife plus me)
Andrew74
Footballguy
jm192
Footballguy
As the world turns on the Wife's 401K.
After diving deeper. The Midcap/small cap Index funds have outstanding expense ratios--in addition to the large cap. Everything else 5-10x higher than comparable index funds on other platforms.
I'm now considering making a blend to get "Total US Market."
I found this on Bogleheads and was considering trying to do something similar to:
83% Fidelity 500 Index Fund (FXAIX)
8% Fidelity Mid Cap Index Fund (FSMDX)
9% Fidelity Small Cap Index Fund (FSSNX)
It's designed so that you can input percentages into an auto-invest mode--and it will just invest at these percentages indefinitely.
Thoughts? I considered going all large cap. But after I rebalance, this account will probably hold all of our "total market" shares. I've decided to go with 40% US Total Market. This account is about 40% of total investments at this point in time. For that reason, I'm hesitant to be without mid/small cap exposure.
After diving deeper. The Midcap/small cap Index funds have outstanding expense ratios--in addition to the large cap. Everything else 5-10x higher than comparable index funds on other platforms.
I'm now considering making a blend to get "Total US Market."
I found this on Bogleheads and was considering trying to do something similar to:
83% Fidelity 500 Index Fund (FXAIX)
8% Fidelity Mid Cap Index Fund (FSMDX)
9% Fidelity Small Cap Index Fund (FSSNX)
It's designed so that you can input percentages into an auto-invest mode--and it will just invest at these percentages indefinitely.
Thoughts? I considered going all large cap. But after I rebalance, this account will probably hold all of our "total market" shares. I've decided to go with 40% US Total Market. This account is about 40% of total investments at this point in time. For that reason, I'm hesitant to be without mid/small cap exposure.
Juxtatarot
Footballguy
Craig_MiamiFL
Footballguy
Exactly how I do with my 457. I do a lot higher % of small cap....but have recently thought of knocking that % down a bit. Want to say I'm at 25% small cap
SFBayDuck
Footballguy
jm192
Footballguy
Yeah VXUS or VGTSX.
I'd planned to tilt a little bit EM.
I was originally going to tilt 10% Small value. Then decided against it. Now I'm back on it.
Juxtatarot
Footballguy
If most everyone went crypto and the dollar collapsed, the federal government would collapse. Probably best to hold tangible things that would be valuable in a post-apocalyptic world.
Runkle
Footballguy
Generally, I fill up my Roth IRA first with all my long shots, things that could have big growth, home run swings, etc., plus REITs (no tax on dividends/distributions), dividend funds (same), and anything with frequent turnover/quick plays (no capital gains taxes). No bonds.
The 401K gets the bulk of the rest with bonds/TIPs, and whatever remaining allocation doesn't fit in the Roth due to contribution limits. A lot of index funds in here (I can allocate 50% of my 401K into individual stocks like a brokerage account, but, the other 50% has to remain in the company-selected fund options).
My HSA, unfortunately, is stuck with long-term buy-and-hold only because it's taxable and I don't want to have to withdraw money from it just to pay the taxes on winning trades. So more long-term holds go in here with an eye toward long-term growth, or, holding dividend funds if/when I retire to another state that doesn't tax the HSA.
My taxable brokerage account is stocks, long-term holds, and qualified dividends. I'm viewing it as an alternative to a savings account, really, just looking for better return than a savings account.
-OZ-
Footballguy
This seems right.To the degree you have long term holdings which don't pay dividends, those should go in your regular brokerage. Home run types go in my Roth IRA.
I don't invest for dividends, so that's not much of an issue for us. But yes, qualified dividends and things like municipal bonds should be in the regular brokerage.
The first question, imo, is what overall portfolio do you really want? What can you hold in each? For example I cannot get individual companies in my TSP. Then look at which parts are least tax efficient. Put those in your Roth IRA. If you want to take risks on companies that could easily bust, it might make sense to put those in your regular brokerage as you can sell and get some tax relief. But then you're risking taxes on a home run.
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jm192
Footballguy
We've got 2 401K's, 2Roth IRA's and an HSA. No taxable account at this point.
To the degree you have long term holdings which don't pay dividends, those should go in your regular brokerage. Home run types go in my Roth IRA.
I don't invest for dividends, so that's not much of an issue for us. But yes, qualified dividends and things like municipal bonds should be in the regular brokerage.
The first question, imo, is what overall portfolio do you really want? What can you hold in each? For example I cannot get individual companies in my TSP. Then look at which parts are least tax efficient. Put those in your Roth IRA. If you want to take risks on companies that could easily bust, it might make sense to put those in your regular brokerage as you can sell and get some tax relief. But then you're risking taxes on a home run.
Due to expense ratios, one 401K almost has to be Large Cap/Total market funds.
I'm wanting to tilt 10% Small Cap Value and 5% EM. I also was thinking 5% REITs, though I'm not married to the REIT's. I figured all of these are good options for the Roths/HSA. My understanding on the small cap value is that it often underperforms the market, but over the long haul, have historically outperformed the markets. So I figured the tax protected growth makes sense for it. And REITs are just terribly tax inefficient. Most of our money is in the 2 401K accounts. So I won't be able to fit all of these assets into just the roth's/HSA.
So some of those will also wind up in the other 401K, along with international, and I'm considering doing 20% bonds which will also wind up in the 401K.
Is any of that thinking wrong or off? Or is that reasonable/going down the right path?
Anyone use Convertible Bonds in their portfolios? I asked in the Stock forum but haven't heard anything and figured that this is a good thread to ask, too. I'm looking at CWB and ICVT, two Convertible ETFs, and also CHY which is different in that it pays out much higher dividends. Thanks for any info or advice in this space. I learned about Convertible Bonds when studying for my SIE exam (which I passed last week, by the way) and I like what they have to offer.
ConstruxBoy
Kate's Daddy
Thanks, I appreciate it. I am an educator and have already signed on for this upcoming school year. Next for me is to take the Series 65 exam and then either hang out a shingle and moonlight while keeping my job in education or to shop for a full-time gig. Guess I need to talk to my wife about that.
McBokonon
Footballguy
I’m interested in exploring this, too. Won’t the Series 65 require a sponsor institution?
The reason the 65 is the obvious next step for me is that it specifically does NOT require sponsorship. Most others do (like the Series 7). I also like that the Series 65 is tailored for those that want to give financial advice to others, qualifies you to serve as an Investment Advisor Representative and also carries with it a fiduciary expectation. All of those things are aligned with what I want to do. I actually started studying for this over Covid but then was told to do the SIE first. Now I am back to the big book. The SIE is much shorter and easier. I won't be ready for the 65 for a month at least. Then I'll rewrite my resume (to steer towards finance and away from education) and see if there is any interest from employers. Happy to answer questions you might have about the SIE but the exam administration was clear that I am not allowed to share specific questions that appeared on it.
-OZ-
Footballguy
Other than having the bond longer so you get more interest, is there any real reason to buy quickly?
I've purchased $5k on I bonds the last week, when we sell the land we will go to $20k - which means I need to set up my wife's account, right?
The money is earmarked for her next vehicle unless it makes more sense to finance at that point. Probably 3 years away.
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Juxtatarot
Footballguy
Well, you’d also reach the 5-year penalty free withdrawal period sooner but that doesn’t seem like a big deal.
Yes, $10,000 per social so you’d have to split it up.
jm192
Footballguy
Finally did the rebalance.
After much belaboring, and anxiety, I decided to simplify it.
60% Large Caps/Total US
20% INT
20% Bonds.
I don't love bonds, and I think I have the stomach to go to10% or even zero. But a lot of smart people insist on having some allocation in it. I'm going to start out here and see how big my stones are the next time the market tanks. I'm going to keep reading on the issue. I suspect eventually I'll cut them in half.
After much belaboring, and anxiety, I decided to simplify it.
60% Large Caps/Total US
20% INT
20% Bonds.
I don't love bonds, and I think I have the stomach to go to10% or even zero. But a lot of smart people insist on having some allocation in it. I'm going to start out here and see how big my stones are the next time the market tanks. I'm going to keep reading on the issue. I suspect eventually I'll cut them in half.
Question - I was looking at a IRA Roth with some crypto exposure, but not an expert on tax law and not sure I understand if I am eligible. From the looks of the below, I am not, but wanted to get any advice from the below notes.
From a personal standpoint, I do make more than $125K per year, but is there any 'taxable income' that would allow me to squeeze into this option and, if so, how would I confirm?
Assuming I am not eligible for this, do I have any other options to consider? I currently do individual investing, 401K, some crypto and a rainy day fund.
**
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
@choicebyKT: e there eligibility requirements & contribution limits?
- You have to have 'earned income' to be eligible
- If you're single, you have to make less than $125k annually
- Most people are only eligible to contribute $6,000 per year (DYOR)
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
From a personal standpoint, I do make more than $125K per year, but is there any 'taxable income' that would allow me to squeeze into this option and, if so, how would I confirm?
Assuming I am not eligible for this, do I have any other options to consider? I currently do individual investing, 401K, some crypto and a rainy day fund.
**
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
@choicebyKT: e there eligibility requirements & contribution limits?
- You have to have 'earned income' to be eligible
- If you're single, you have to make less than $125k annually
- Most people are only eligible to contribute $6,000 per year (DYOR)
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
BigJim®
Footballguy
I’m sure it has been beaten like a dead horse in this mega thread, but can someone high level explain why ROTH is advantageous? Common sense says I would absorb taxes at my highest tax stage, reduce the funds going into high return investments, obtaining the ability to avoid taxes when my income is at a substantially lower bracket, possibly even below the standard deduction. It makes no sense to me.
jm192
Footballguy
My understanding is the income limits, which goes by your Modified Adjusted Gross income are 140K. So if you're under that, you can do it directly.
Even if you're over that--you simply do the "back door roth IRA" where you contribute the money to a regular IRA and then convert it to a roth. Or put the money into account A and then transfer it to account B. IF you do this, there are a few things to know.
This is done with post tax dollars, so you won't owe taxes. IF you invest the money while it's in your regular or traditional IRA--when you convert it--you'll owe money on any gains. For this reason, most people convert it as cash and then invest it in the IRA.
Make sure if you do the backdoor roth, you don't have any money sitting in traditional IRA's at the end of the year. If you do the conversion but still have money in traditional Roths, you run into the pro-rata rule and then taxes will negate a lot of the benefit of having the Roth account.
jm192
Footballguy
You pay taxes on the money when it comes out of your check and never again.
So the growth is 100% tax free.
In a regular IRA: You can deduct the IRA contributions. But you'll pay money on your contributions and growth later. Tax free growth with compounding interest>Tax deduction now.
BigJim®
Footballguy
That’s what I don’t get. The tax free growth you describe is after I absorb taxes at the highest rate that could conceivably apply to it. The boogeyman in your explanation (future taxation) may be 20% and the solution is paying 30%+ on it now.
BigJim®
Footballguy
ETA: I think I see that maybe I’m overly focused on the contribution amount and not focusing enough on growth amount.
jm192
Footballguy
If you invest 6K per year for 20 years, that's 120K. If your returns are 8% per year compounded--that's 300k.
30% of 120K=36,000
20% of 300K=60,000
Even at 6% returns: You'd come out with 240,000$ and owe 48,000 on that.
I think 8% is more than reasonable, and 6% is on the conservative side.
Your break even point would be if your investments only grew to 180K after 20 years. Even at 3.5%, that comes out to 181K.
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Not sure what you are doing here but I believe that you end up identical if the tax rates are the same today as they are in the future and you invest identical amounts of income (see below). For instance, if so have 20k to invest and 20% tax rate today and when retired, you either invest 16k in a Roth today and watch it grow or you invest 20k in an IRA/401k and shave 20% off when you pay the taxes in retirement. Remember that you aren’t paying taxes on everything in your traditional IRA/401k as soon as you retire just what you withdrawal so the rest continues to grow tax free until withdrawal or it’s passed on to heirs.
For me and my wife, our taxes for money we put into our 401ks is at the top tax rate so I don’t do Roth 401ks assuming my tax rate will be lower later. A key thing to remember is anything that takes away taxable income is done at your highest tax rate.
I think one of the things that makes Roths look way better now is that people do apples to oranges and take my example and instead of investing $16k in a Roth (same $20k available minus 20% taxes) they compare $20k in Roth investment to $20k in traditional which aren’t the same. In pure income terms that really means you invested $25k and lost $5k to taxes in the Roth case. That also means you have an extra $4k in after tax money to invest in a brokerage account for the traditional case because you only use $20k of income to fund the traditional IRA/401k. If you invest in a brokerage account, you should get the benefit of lower capital gains taxes.
Again, it gets messy but $20k into a Roth is not an apples to apples comparison to $20k invested in traditional because you used $5k more income to get to $20k after tax for the Roth. In my current care of dual income in our higher stages of earning, I’m all about saving on taxes now. If our tax rates in retirement are as high as they are now, I weep for high earners in the future. One other advantage we should hopefully have us that we’ve got a nice amount in taxable brokerage accounts so we should be able to make our income as low as possible to make any IRA/401k withdrawals taxed at low rates. I’ll definitely try to manage that well with SS, etc. Definitely will be checking all of that in our where do we retire trips. We’ve looked at lakes in SC and they don’t tax SS income. So many variables to be honest.
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jm192
Footballguy
There's a limit to how much can go into an IRA per person per year. 6,000 under 50, 7,000 over 50.
If you claim the deduction: that's 1800 back on taxes. (Assuming 30% tax rate in the original example).
A. That may just lower your tax bill and you won't see a dime to invest.
B. You're not going to be able to invest it into a tax protected account that you've already maxed out. Someone will argue, I'll put that 1800$ into next year's IRA contribution. OK. But assuming you have 6,000 a year to put into accounts, you've now driven 1800$ that would have gone into an IRA into a taxable account and it comes out in the wash.
In retirement, you have to now pay taxes on the 120,000$ you didn't pay taxes on. You'll have to pay taxes on the growth that you got in your traditional IRA. And you'll have capital gains taxes on the the money that went into the taxable account.
I think I did do the taxes wrong on the previous example. It should be:
You can put 120K into a roth IRA. You've already paid taxes on it.
120K at 8% compounded growth annually over 20 years will give you 300,000 that's tax free.
Traditional IRA: 120K compounded over 20 years will give you 300,000 that's not tax free. BUT
You've got another 36,000 (1,800 *20) that compounding at the same 8% will now give you 82,000.
300,000 tax free=300,000.
382,000. After you pay taxes on your 120K, assuming 20% for simplicity: you're now down to 305,6000$.
The 36,000$ that you invested will have capital gains taxes. Even at tax rate of 20% with all long term capital gains: You'll owe over 8,000$ in capital gains.
So you're now down to 297,600. This doesn't account for dividends and such.
The difference becomes increasingly dramatic with increasing amounts of time.
I'm sure there are situations where the tax deduction now works out better for some. But for most, you're better off letting uncle Sam have a bigger piece of a smaller pie.
I don’t think that’s the case. Ignore the side brokerage stuff and limits because this could be 401ks as well which allows for much larger limits and they can be Roth or not. Some folks aren’t even eligible for Roths.
If you have $x to invest and the tax rate is the same in or out, you will have the exact same amount of money in a traditional or Roth if the money sits in the account for the same time.
$100k to invest and 20% tax rate before and after is $80k in Roth and $100k in traditional. Let’s say you invest for 20 years and need all of the money right away and are 75 so no penalties. Let’s say the total ROI was 450% because you invested in the exact same thing. In Roth, you start with $80k and it grows $360k and you take out $440k with no taxes. In traditional, you start with $100k and make $450k but have to pay 20% on the $550k so you end up with $440k after taxes.
Rates, penalties, before tax income invested and ROI all being equal, there is no difference between the two. Roth grows tax free but traditional has more money to grow tax free before taxes. Many models get into trouble saying that the after tax income invested is the same because then you are ignoring that extra income that somehow disappears.
If you are young and in a lower tax bracket today, Roth is a great way to go because you aren’t benefiting from saving much in taxes. This is especially the case if it forces you to invest more, i.e. this person wouldn’t put that extra income into investing. If you are in a high tax bracket, you might be better off doing pre-tax because you could easily have lower rates later. Also, as I’m closer to retirement we are looking at future moves to states with lower income tax or capital gains rates so you could even be moving from a high income tax state like NY to TN with no income tax. For a high earner that’s a 6%+ savings with traditional. It’s easier to pix a more tax friendly state in retirement than when you are working.
There are a lot of factors but one thing that is true is that all things equal, there is no actual difference between the two methods.
Also, I know it’s not a popular thought, but if there’s a tax crunch in the future, I wouldn’t be shocked at all to some some Roth taxes for larger accounts. I can’t see the future but anecdotes like the PayPal guy using a Roth to basically shield him from ever paying taxes on his billions could resonate.
True. That said, if your RMD is massive enough to get you in a high tax bracket, you can let the little people do your taxes, carry you around and feed you grapes!
I wouldn’t get too scared of them. In order for an RMD to get you to higher than the 12% bracket (which I’d take right now in a heartbeat), your RMD at age 72 (that’s when it starts unless you are already 70+) your IRA would have to be at least $2M. It would be a real nice problem to have and the 22% bracket (ignoring deductions) would only be used for anything above that. Once I hit 59.5 and if, hopefully, we aren’t working anymore, I’d probably start taking distributions for 13 years to take as much advantage of that 10-12% tax brackets. I’d be more than happy to takeout money at 12% that went in at 30%+ pre-tax. Heck, maybe then we can put that money into Roths!
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Runkle
Footballguy
Right. Say you hit a home run by investing in some stock that grows 100x over 25 years. $10,000 becomes $1,000,000.
Have that $1M in a 401k and withdraw, it's taxed as income
Have that $1M in a Roth and withdraw at any time, tax free (other than whatever pittance few thousand you pay for taxes on $10,000 of income)
Desert_Power
Footballguy
Yeah. If I end up in this boat I would think we just haven't spent enough in prior years
One thing you miss in an apples to apples comparison is that I have more in my IRA to start because I put it all in tax free. So if my tax rate is 20% and I can invest only 15% of my income, I’ll have $1.25M in my 401k (IRA) so if I take it out of both I should still have $1M in both if my final tax rate is the same 20%. Remember that few thousand pittance you paid also went up 100x and is no longer a pittance.
I’m not advocating against Roth’s but the key with traditional is that you have more to invest to start because you didn’t have to pay taxes up front so your home run is bigger.
I can’t do a Roth right now anyway, but my taxes are high enough that I’d rather save that money now so we fully invest. I’m definitely planning to take advantage of the lower taxes after retirement and shoving some back into a Roth (like a back door) seems like a smart option. We’ve also got about 25% of our current nest egg in taxable so that gives us some flexibility.
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jm192
Footballguy
You’re ignoring the limits on IRA contributions. The “extra” will go into taxable accounts.
Not really, it’s just too complex. 401ks can get rolled over and they have much higher limits. Some people have access to IRAs, some don’t. Some have access to 401ks or the other varieties.
Also, with taxable accounts, you can completely avoid paying taxes on stocks and pass them on at a stepped up basis but even that is potentially changing. You also can have access to way more investment options like real estate, options and margin and crypto in taxable accounts. Also, if your retirement income is less than $40k, you pay 0% long term capital gains right now.
It’s way too complex to model every scenario, I just like to throw out that you can’t just say I invested $10k in a Roth and $10k in a traditional and compare the outputs because of course the Roth wins as it ignores the fact that it cost $12,500 of income at a 20% tax rate to put the same amount into a Roth as $10k into traditional.
Again, I’m not saying one or the other is right because there are so many variables, just that if the variables are the same, they produce identical I total returns.
Andrew74
Footballguy
I thought we were FBGs?
I only wanted to bring up another point. I’m not necessarily a Roth cheerleader. I personally have a hard time arguing Roth if one is in a 30-handle tax bracket. Under 30 I think it makes sense to “diversify”. I will probably be 75/25 traditional/Roth by retirement.
A $2mm IRA might only get you out of the 12% bracket now, but I do think tax rates will be higher in 10-20 years. There’s enough uncertainty that I’d like to have some Roth money.
Plus a $2mm IRA isn’t a hard bogey. If you start saving at 22 and retire at 62, you can have $2mm saving only $8,000/year @ 8%. If you max out at $19,500/year @ 8% you will end up with $5mm. 6% nets you $3mm.
jm192
Footballguy
I had to go back and look
You can claim the full deduction below 104,000$. A partial between 104-124,000. And no deduction above 124,000.
At this income level, the tax bracket would be 24%. If you’re at a 30% tax bracket, you won’t qualify for the deduction.
And that’s why the “I’m going to invest the deduction” doesn’t work for a lot of people.
You can claim the full deduction below 104,000$. A partial between 104-124,000. And no deduction above 124,000.
At this income level, the tax bracket would be 24%. If you’re at a 30% tax bracket, you won’t qualify for the deduction.
And that’s why the “I’m going to invest the deduction” doesn’t work for a lot of people.
Desert_Power
Footballguy
We can't do Roth either, but glad we have a few years of contributions saved that way for flexibility. There are advantages to both, but I've always prioritized saving pre-tax first since it saves a higher percentage of gross earlier in life. I hope to be able to plan the withdrawal phases fairly well. What I really need to do a better job of is putting the right investments in each category.
If “most” people ever started investing at 22, you wouldn’t get 8% a year, lol. Our economy would be in the tank. I’m going to push my boys to do that. I know I wanted to but life happened and #### was expensive. I’m glad we caught up, but most people aren’t anywhere near any of these levels, unfortunately. I think the simplest thing is that if you are in the top tax brackets, maxing out your 401k or whatever pre-tax instruments works well and if you aren’t the Roth should work.I thought we were FBGs?
I only wanted to bring up another point. I’m not necessarily a Roth cheerleader. I personally have a hard time arguing Roth if one is in a 30-handle tax bracket. Under 30 I think it makes sense to “diversify”. I will probably be 75/25 traditional/Roth by retirement.
A $2mm IRA might only get you out of the 12% bracket now, but I do think tax rates will be higher in 10-20 years. There’s enough uncertainty that I’d like to have some Roth money.
Plus a $2mm IRA isn’t a hard bogey. If you start saving at 22 and retire at 62, you can have $2mm saving only $8,000/year @ 8%. If you max out at $19,500/year @ 8% you will end up with $5mm. 6% nets you $3mm.
The RMD is a very good point to consider. You’ve got 13 years to plan and distribute/re-invest. I hate paying taxes and I will do whatever I need to to avoid them after I stop working. As a W-2 couple, you are pretty limited in tax avoidance. So glad they keep upping 401ks and added the catch ups.
wilked
Footballguy
The reality is that nobody knows the tax rates in the future. Roth IRA allows you action in both options.
-OZ-
Footballguy
A married couple can invest $51,000 between the IRAs and 401k's if both work and have those options. (Not including the mega option which many don't have)
$2 million isn't that much money now and definitely won't be in 20+ years.
The biggest reason to do the Roth option IMO is just not knowing future tax rates. For those with pensions and SS, Roth looks a lot better.
I like options so my goal is to be roughly equal in traditional and Roth accounts upon retirement.
RMDs really aren't that much unless you're balling, in which case you can handle the taxes if you find traditional better.
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