Portfolio Advice - Taxable Acct/Early Retirement

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nicodamus
Posts: 2
Joined: Sun Oct 29, 2017 7:34 pm

Portfolio Advice - Taxable Acct/Early Retirement

Post by nicodamus » Sun Oct 29, 2017 8:27 pm

Questions:
1. We are considering investing in VIGRX (Vanguard Growth Index Fund) for the taxable account, and then expanding into some other funds; after a year we hope to have transitioned all the taxable account funds to admiral shares. We just started this account and hope to build it up to then generate income to supplement a military pension between ages 45-65 (17 years from now). At 65 we would begin withdrawals from the IRAs. We have a high risk tolerance now, and intend to stick with whatever I purchase for the long haul. We've read that growth funds are better than value funds for taxable accounts, and we figure we have exposure to international and total stock market indices in the IRAs. We want to pick funds for this account that allow us to be aggressive but that are also tax efficient choices. Please send us your thoughts and suggestions.

2. What is the best way for me to move the balance from her TRAD IRA to her ROTH IRA? Is this a good idea? Does it make sense to forego the long term gains that we could have made on the taxes that we pay on ROTH IRA deposits. Are those gains outweighed by the benefit of not having my withdrawals taxed when I am retired? I thought I had a solid grasp on this topic until I read an article recently that made me second guess my logic.

3. We don't own any real estate, but plan on buying a home on the gulf coast of Florida in 2018, and then holding onto this as a rental property. We plan to use a VA loan with 0% down. I am also considering buying a home that would work as a weekly vacation rental rather than a long-term rental. Does anyone have input in regards to the REITs I am holding? I thought the ROTH was a good place for them for tax reasons.

4. We are beginners in regards to taking a more active role in our investing beyond targeted retirement accounts. I am a sponge right now so throw any and all advice my way, please.


Portfolio:

Emergency funds: 5 months of expenses
Debt: Car Loan 1 @ 0.9% (almost complete) / Car Loan 2 @ 1.45% (4 years left)
Tax Filing Status: Married Filing Jointly
Tax Rate: 25% Federal, 5.75% State (moving to 0% state in mid 2018)
State of Residence: NC
Age: 28
Income: Low 6-figures
Desired Asset allocation: 90% stocks / 10% bonds ?? unsure
Desired International allocation: unsure
Current Portfolio Size: high 5-figures

A couple notes: We recently stopped contributing to her TRAD IRA and started her ROTH IRA. We sold his target retirement 2050 ROTH IRA shares with the plan to still invest in some of the underlying funds but at the admiral shares to get better expense ratios. All percentages are in relation to total amount across all accounts. He is active duty military and plans to receive a 50% pension at age 45.

Current assets:

Taxable
4% cash

His+Her Roth IRAs at Vanguard
25% Total Stock Market Index Admiral (VTSAX)(0.04 ratio)
16% Total International Stock Index Admiral (VITAX)(0.11 ratio)
11% REIT Index Admiral (VGSLX) (0.12 ratio)
4% Total Bond Market Index (VBMFX)(0.15 ratio)
2% Target Retirement 2045 Investor (VTIVX)(0.16 ratio)

Her TRAD IRA at Vanguard
38% Target Retirement 2045 Investor (VTIVX)(0.16 ratio)

From our calculations, including breaking down underlying funds in the 2045 retirement fund, this has us at the following overall allocations:
48% Domestic Stock
32% International Stock
12% REIT
4% Bond
4% Cash

Monthly Contributions
20% of income to Taxable Brokerage at Vanguard (NOT for retirement - goal is EARLY retirement by age 50)(this will increase to 25-30% within a year)
5% of income to High Yield Savings (1.35%)(emergency fund)
$MAX his Roth IRA
$MAX her IRA/Roth IRA

mhalley
Posts: 5135
Joined: Tue Nov 20, 2007 6:02 am

Re: Portfolio Advice - Taxable Acct/Early Retirement

Post by mhalley » Sun Oct 29, 2017 11:55 pm

Whether to convert to a Roth depends on a multitude of factors, including current and expected tax rate in retirement, retirement age,potential need for backdoor Roth In the future, amount of taxes that would need to be paid and availability of funds to pay them, etc. some gurus such as James Lange would definitely say to convert. Wait until moving to no tax state before converting. Some of the extreme early retirement gurus are not fans of the Roth, they prefer traditional then doing Roth conversions after retirement, but again this depends on your expected tax rates.
Mad fientist on trad vs Roth with rolling Roth conversions after early retirement:
http://madfientist.com/traditional-ira-vs-roth-ira/
You can run some numbers through one of the calculators out there.
http://schwab.com/public/schwab/inv ... conversion
Reits should definitely be in tax advantaged accounts.

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FiveK
Posts: 3125
Joined: Sun Mar 16, 2014 2:43 pm

Re: Portfolio Advice - Taxable Acct/Early Retirement

Post by FiveK » Mon Oct 30, 2017 8:33 pm

nicodamus wrote:
Sun Oct 29, 2017 8:27 pm
2. What is the best way for me to move the balance from her TRAD IRA to her ROTH IRA? Is this a good idea? Does it make sense to forego the long term gains that we could have made on the taxes that we pay on ROTH IRA deposits. Are those gains outweighed by the benefit of not having my withdrawals taxed when I am retired? I thought I had a solid grasp on this topic until I read an article recently that made me second guess my logic.

Tax Rate: 25% Federal, 5.75% State (moving to 0% state in mid 2018)
Income: Low 6-figures
Current Portfolio Size: high 5-figures

He is active duty military and plans to receive a 50% pension at age 45.

Her TRAD IRA at Vanguard
38% Target Retirement 2045 Investor (VTIVX)(0.16 ratio)
In answer to #2, "wait 17 years and, at least for now, continue contributing to traditional instead of Roth."

That answer is based on these assumptions (and real returns so we're ignoring inflation):
- Current income $120K/yr, so pension income will be $60K/yr
- Current tIRA balance is ~30K and, without further contributions, will double in 17 years to $60K.
If the pension is the only income, and you withdraw 4% of the tIRA balance, after the standard deduction and 2 exemptions your taxable income will be $41,600. That gives you $34,300/yr headroom in the 15% bracket to do traditional to Roth conversions.

Of course, if assumptions are incorrect, the conclusion may change.

Fishing50
Posts: 188
Joined: Tue Sep 27, 2016 1:18 am

Re: Portfolio Advice - Taxable Acct/Early Retirement

Post by Fishing50 » Sat Nov 04, 2017 4:27 am

I recommend broad market index funds in taxable account for tax efficiency and unlimited holding period, VTSAX is perfect, if you want to be super stingy VFIAX S&P 500 index is slightly higher qualified dividends. After years of contributions and growth, you might not be comfortable with large positions in VIGRX. If you want to tilt toward Growth, I recommend keeping it in your Roth.

Wait until retirement for Roth conversions to move her TRAD IRA to her ROTH IRA. Even a retired officer, can expect some room for conversions in the 15% tax bracket in early retirement MFJ.

Be fully prepared to own rental real estate. Landlord duties are time consuming, and management companies are expensive. My friend was thousands of miles away from his rental property when federal agents called to notify him they broke down the door with a no-knock warrant. Needless to say, he found a new management company. REITs are perfect in Roth.

Consider reducing your Emergency Fund to get extra money invested or pay down the car loan. A military paycheck is incredibly stable income, so less EF is required than most. Keep enough EF for actual emergency like a car repair or last minute plane tickets home. If you are saving for a house payment, that's not an emergency.

I like 90% stocks / 10% bonds at your age. Keep the bonds in her Trad IRA and TSP for tax efficiency. /wiki/Tax-eff ... _placement

20%-40% is a good range for International allocation. Jack Bogle argues that international exposure is unnecessary, but he says if desired it should be 20% or less. I have 20%. VTIAX Vanguard Total International Stock Market index is appropriate for taxable account. It's better than I Fund in TSP because it includes emerging markets.

If you are happy paying taxes to save money in taxable, you should consider Roth TSP instead because the same amount of dollars are invested with no future tax burden. You can invest more dollars with Trad TSP. In the 25% tax bracket $18K in traditional TSP contribution, saves $4500 in taxes that can be invested in taxable. The trades offs and calculations have many assumptions, but early retirement on your pension allows some low income years before Social Security which allows for Roth Conversions and possible tax gain harvesting in taxable accounts. Some Roth and Trad TSP to complement your taxable savings is probably better than extremely high taxable savings.
It's perfectly legal, go ask the IRS, they'll say the same thing. I actually feel stupid telling you this, I'm sure you would've investigated the matter yourself. Andy Dufresne

nicodamus
Posts: 2
Joined: Sun Oct 29, 2017 7:34 pm

Re: Portfolio Advice - Taxable Acct/Early Retirement

Post by nicodamus » Sat Nov 04, 2017 1:51 pm

Thanks for the well thought out answers all - I'll be reading through and learning more about what you've written in the coming weeks and decide what actions to take. I had not considered the lower income years between retirements as an opportunity to convert to ROTH.

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