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  • Backdoor Roth investment

    So we knocked out my wife's student loans back in May and have been working on debt every since. We max out our pre-tax (wife's 403) (my 401K) and are ready to start on the Roth space.  I'm 34 and my wife is 33.

    I've been looking into investing using Vanguards platform and wanted to get some feedback on a few funds. When answering some questions online it gives us the Vanguard LifeStrategy Growth Fund(VASGX).  The target date fund (VFIFX) is very similar with different percentages of the 4 major funds.

    So my question is should I choose between these two or utilize a different approach. The total stock market has performed better but is all stocks and we want a little bond exposure. Since we are investing 5,500 each I wanted to see if there is a different strategy to use. If you have any thoughts please let me know.

    Thanks!

     

     

     

     

  • #2
    This isn't the answer you're looking for, but you need an investor policy statement, or at least a chosen asset allocation that will be applied across all accounts.

    In terms of your backdoor Roth, a tax-inefficient investment would be good there. If you want REIT exposure, the Roth is a good place for it (my wife's Roth is 100% REIT). A bond fund can be good here, too. Don't worry about the asset allocation within any individual account. Look at the big picture.

    Best,

    -PoF

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    • #3
      You determine your own asset allocation.  The decision is more complex than this, but at the simple level, you may decide you want more or less in equities than bonds, more in international equities than domestic ones, more in established vs emerging markets, etc than the target date and lifecycle funds have.  Also, the target date and mixed stock/bond funds often have slightly higher expense ratios than their constituent holdings.

      Another point is tax efficiency, or as it pertains to Roth holdings, tax inefficiency - since you will not be paying taxes on your Roth holdings, it is better to hold your tax-inefficient funds in there, such as equity funds that have high turnover or dividends and bonds.

      If the target date funds roughly match your desired asset allocation at this point in time, then they are OK to hold there.  If you like to re-allocate every year to keep your overall proportions straight across all your accounts (which is a generally good idea), then you would probably benefit more from the more complex task of holding the individual funds.

      I prefer to eschew lifecycle funds because I don't want to pay them to do asset allocation for me; I'd rather do it myself and keep the money.  That doesn't make them bad; it's individual decision.

      Comment


      • #4
        You're missing the forest for the trees. I agree with the need to start at the beginning and draw up your own investor policy statement.

        https://www.whitecoatinvestor.com/how-to-be-a-do-it-yourself-investor/

        https://www.whitecoatinvestor.com/how-to-write-an-investing-personal-statement/
        Helping those who wear the white coat get a fair shake on Wall Street since 2011

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        • #5
          Hawk,

          1) the ideal time to Roth your IRAs is during years when your income tax rate is low, then draw distributions when your income tax rate is high.  What is your household income tax rate now?   If you are super high income, it may be  too late for you to reasonably recover your losses to taxes  by the time you are ready to withdraw this money. What is your marginal tax rate?  Calculate how long to regrow  your haircut back to even.

          2) your two Vanguard fund choices are age appropriate, whether you Roth or not.

          3) the 3 commenters above are DIYers.   Is rebalancing a chore you  desire to do yourself?   or pay the tiny extra basis points for Vanguard to do this for you?

          Comment


          • #6
            Rebalancing takes very little time once a year. I never understood why you would pay someone to do that

            Comment


            • #7
              Do you currently hold any non-Roth IRAs? That also hinders the backdoor conversion due to the pro-rata rule, since you have to pay taxes on anything you've already put in that wasn't taxed. That's what jz is talking about in section 1 of his post. It doesn't apply to you if you don't have any non-Roth IRAs.

              Things that aren't IRAs (401k, 403b) are non-factors in the backdoor process as well, in case you were wondering.

              Selecting funds comes last in the process after determining what you want your portfolio's allocation to be and how you want to manage it, which in turn comes after setting specific goals and factoring in home ownership, debts, charitable giving, and tying it into how it fits into your family life and needs. That's what they're talking about by making an "investor policy statement." It sounds formal and daunting, but the biggest thing about it is that it forces you to sit down, think about it, learn a bit, and draw up a plan.

              Comment


              • #8
                Hi everyone, thanks a lot for the above comments. This is why I love this site!

                Creating a IPS looks like the best place to start. Also, the comment about utilizing tax inefficient funds in your Roth space is a great comment. I need to look at our investments as a whole and not the individual 401K, Roth or taxable account.

                Our current tax rate is 33% but we may be at 35% this year. We are both W2 employees so our write offs/deductions are limited.

                We don't have any other traditional IRAs so the conversation shouldn't be an issue.

                I've read the white coat investor and just purchased Bogleheads guide to investing(haven't started yet). I want to learn more about financial products because I know how important it is. We've dealt with financial advisors and it seems that all they want to do is sell us loaded funds and whole life policies.

                Thanks again!

                Comment


                • #9
                  If you went to Kansas you may as well give up already. Just kidding. Agree with above the big picture is the main thing. Sounds like you have a long investing horizon so can afford to take risk (and reward) in Roth space. Physician on FIRE (PoF) has a nice example portfolio with this strategy. REITs and small and mid cap and value funds.

                  Comment


                  • #10
                    Simple question to tag on to this topic don't want to start a seperate thread.

                     

                    My spouse worked a very minimal part time job this year, like 2k income. Can I still do a backdoor roth for her or how exactly does that work?

                    Comment


                    • #11




                      Simple question to tag on to this topic don’t want to start a seperate thread.

                       

                      My spouse worked a very minimal part time job this year, like 2k income. Can I still do a backdoor roth for her or how exactly does that work?
                      Click to expand...


                      If you file jointly, yes, thanks to the KBH Spousal IRA Limit.  https://www.irs.gov/publications/p590a/ch01.html#en_US_2015_publink1000230412

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