Help with Roth IRA selections... and advice on portfolio

[ChristopherMD20]

Hello all. My wife and I are relatively new to the investment world. I am finishing up my fellowship and she is in practice as a clinical pharmacist. This is the first year for the Backdoor Roth IRA. We are doing it through Vanguard so they have a 7 day hold on our account before we can transfer to our existing Roth IRA (we first did a "regular" Roth 10/2017), so we have some time to choose our funds. Neither of us really know exactly what we are doing but from reading the WCI book, forum and other sites we gave it our best shot in October. We intended to do the Boglehead's 3 fund portfolio, but we don't want to do Bonds at this point in life (she is 29 and I am 30). We just picked the the target funds because it seemed like a good option from the $1000 minimum accounts that were left after putting $3000 into a stock market index and international stock market index each.

 

Our Roth IRA portfolio currently looks like this:

VTTSX (Target Retirement Account 2060) 23%

VGTSX (Total Internation Stock Market Index) 27%

VFIFX (Target Retirement Account 2050) 23%

VTSMX (Total Stock Market index Fund) 28%

 

QUESTIONS: What would you all recommend we do with the $11k we are investing through the backdoor method this year?

 

Bonus Question: My wife is changing jobs and will be transferring her ~$50k from her 403b from Fidelity to Prudential. We did not do anything to manage that account, but now we are educating ourselves we would like to figure out what to do with that account to optimize returns, minimize fees and optimize tax efficiency of our asset allocations. Any advice on reading material that we can do for a Fidelity account would be greatly recommended. When I start my attending job in August, I will be figuring out what to do with my 403b, 457 and HSA , but I will leave those questions for another time!

 

Thank you for your time.

[ajm184]

Not sure I'm a not a huge fan of having both target date and the total stock/total international combo, so I would tend to move out of one approach and keep the other.  A question; If you choose to move out of for example the target date funds and go to some split between total stock and total international, would the account be in position to utilize Admiral share cost/pricing?

For your wife, I would tend to look to keeps the existing 401k assets either with her old employer or roll into a 'rollover IRA' either at Fidelity or Vanguard (if options/ER is not good).  I would not be enthused with Prudential as your new 401k administrator until the fund selection/cost proves otherwise.

[Hank]

What does your written Investment Policy Statement (IPS) say your asset allocation should be?

https://www.whitecoatinvestor.com/how-to-write-an-investing-personal-statement/

https://www.physicianonfire.com/you-need-an-investor-policy-statement/

[ChristopherMD20]

Hank- I assume you mean Section #6 of WCI IPS. When we drew that up our plan was to allocate Equity 95% and Bonds 5%. In terms of the components of the equity that is where we "got lost" and decided to choose the funds that we did as they were stock heavy. We wanted about 1/3 in the VGTSX and VTSMX, but we did not know what to do with the final 1/3 so we just said "this one looks good and it has a relatively low expense ratio" closed our eyes and clicked on the target date funds.

[ChristopherMD20]

@Ajm184 No we will only have $22k in our Roth IRA. I believe the minimum on the Admiral Shares is like $50k. I think that is where I got derailed a bit when I was selecting. One of the resources on here or another site sang the praises of the Admiral accounts. However, I was taken aback when I saw the minimum investments for those funds! I got scared to put all $5500 for me into VGTSX and $5500 for my wife in VTSMX, which in retrospect probably would've been ideal.

 

We planned to rollover her existing 403b into the Prrudential since that what her new employer will use. I think that is easiest approach although it may not be the smartest based on your comment.

[ajm184]

On the Vanguard site, I see a 10K minimum for Total Stock (VTSAX)/Total International (VTIAX) for Admiral class shares.  Sorry didn't realize it was a 403B, I have no idea this account type on the ability to either keep or roll into Fidelity/Vanguard.  I would still 'do nothing' with Prudential until you have a clearer understanding of the asset choices/costs with your wife's new employer.

Perhaps someone else knows about/can detail your the potential options (or lack thereof) with a 403B in case choices/costs with your wife's new employer are not good.  Hopefully you will find your comment about investing 5.5K in one fund investment humorous in future years  .

[ChristopherMD20]

@ajm184 I appreciate your insight and guidance.

I may just switch it up and do $11k in each of those Admiral funds pending further reading on my own.

I recognize the absurdity of my worry about a relatively small amount. But in my defense I was losing my "stock market virginity." Ironically, all those tests and assessments say that I am very risk tolerant; however, when it came to actually pushing the button I was frozen stiff like running my first code as an intern.

[ChristopherMD20]

Hello @Hank and @ajm184

 

I want to thank you guys for enlightening me on one of my many huge financial knowledge gaps. Your challenging questions and commentary compelled me to educate myself further. My response is serving moreso to allow me to type this out to organize myself therefore feel free to ignore the text that follows.

 

In regards to our total Roth IRAs (~$11k for my wife and I) the best course of action is to adjust our accounts and place $11k into VTSAX Admiral Shares and $11k into VTIAX Admiral Shares

 

The real educational value after taking your advice and going to different forums and reading many opinion is to convert my wife's existing ~$74k 403b into a Roth IRA. The logic being that it will be nice to have a nice pot growing tax free after taking despite having to take the "hit" on our projected marginal tax rate 24% in 2018. This marginal tax rate will be the lowest it should be for many years to come given our total household gross income should be in the $400k range.

 

After that gets rolled over we hope to allocate our funds in one of the following manners:

Option #1:

VTSAX 50%

VTIAX 30%

VIMAX (MidCap Index) 10%

VSMAX (Small Cap Index) 5%

VGSLX (REIT Index) 5%

 

Option #2:

VTSAX 70%

VTIAX 30%

 

Now as the year goes on and we are contributing to our 403bs, 457s, HSA then I will try to learn more about being tax efficient and where to place certain investments. We are not going to open up a "taxable" brokerage account in 2018 because we are going to use the extra money after maxing out retirement funds to pay off the remaining balance of my student loans and start saving for next down payment.

 

Thanks again for your help. I am slowly learning. Hopefully I will get to a more acceptable knowledge base sooner rather than later.

 

-Chris

[cgossage]

ChristopherMD20 wrote:

Hello @hank and @ajm184

 

I want to thank you guys for enlightening me on one of my many huge financial knowledge gaps. Your challenging questions and commentary compelled me to educate myself further. My response is serving moreso to allow me to type this out to organize myself therefore feel free to ignore the text that follows.

 

In regards to our total Roth IRAs (~$11k for my wife and I) the best course of action is to adjust our accounts and place $11k into VTSAX Admiral Shares and $11k into VTIAX Admiral Shares

 

The real educational value after taking your advice and going to different forums and reading many opinion is to convert my wife’s existing ~$74k 403b into a Roth IRA. The logic being that it will be nice to have a nice pot growing tax free after taking despite having to take the “hit” on our projected marginal tax rate 24% in 2018. This marginal tax rate will be the lowest it should be for many years to come given our total household gross income should be in the $400k range.

 

After that gets rolled over we hope to allocate our funds in one of the following manners:

Option #1:

VTSAX 50%

VTIAX 30%

VIMAX (MidCap Index) 10%

VSMAX (Small Cap Index) 5%

VGSLX (REIT Index) 5%

 

Option #2:

VTSAX 70%

VTIAX 30%

 

Now as the year goes on and we are contributing to our 403bs, 457s, HSA then I will try to learn more about being tax efficient and where to place certain investments. We are not going to open up a “taxable” brokerage account in 2018 because we are going to use the extra money after maxing out retirement funds to pay off the remaining balance of my student loans and start saving for next down payment.

 

Thanks again for your help. I am slowly learning. Hopefully I will get to a more acceptable knowledge base sooner rather than later.

 

-Chris

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I wouldn't recommend taking the tax hit of $74,000.  It's already in an account that will grow tax free.  I would either leave it in her old plan or move it to Prudential rather than paying $17,000 in taxes today to roll it over.  That is $17,000 you could be investing now.

[ajm184]

A. Both options OP articulated at good, though like the tilt option in a. more given your age.  For option b. I would tend towards a 60/40 split versus 70/30.

B.  There are a number of 'calculators' to help with the pure financial cost/benefit of rolling into a Roth IRA.  The result will probably be less than the $17K actual tax hit you'll take, though still indicate a negative return on this decision.  That being said, between the unknown options/cost of the Prudential 403B and a 'value' of having a non-taxable Roth IRA may be worth the negative return of the decision to you/your family.  Just understand from a pure financial perspective it probably is not the 'right' decision.

[cgossage]

ajm184 wrote:

A. Both options OP articulated at good, though like the tilt option in a. more given your age.  For option b. I would tend towards a 60/40 split versus 70/30.

B.  There are a number of ‘calculators’ to help with the pure financial cost/benefit of rolling into a Roth IRA.  The result will probably be less than the $17K actual tax hit you’ll take, though still indicate a negative return on this decision.  That being said, between the unknown options/cost of the Prudential 403B and a ‘value’ of having a non-taxable Roth IRA may be worth the negative return of the decision to you/your family.  Just understand from a pure financial perspective it probably is not the ‘right’ decision.

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Have you had a bad experience with Prudential as a 401(k) administrator?  I know they aren't as large as Fidelity, but I haven't heard of any issues with Prudential.