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Help with starting taxable account with Target Date Fund in Tax Protected Accounts

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  • Help with starting taxable account with Target Date Fund in Tax Protected Accounts

    Hello!

    I am a W2 employee hospitalist age 34 (non traditional) in my second year out who is about done paying off student loan and saving down payments and am going to start retirement saving in a taxable account in the near future. I just started saving in a backdoor roth this year, and am planning on obviously maxing out my traditional 403b and backdoor roth moving forward. We have an option for a 457b but it is non governmental and I am not ok taking on that risk.

    Currently all of my 403b and Roth 403b are invested in an Vanguard Institutional Target Date Fund 2050 which has a year to date return of 20% with an ER 0.09%. The breakdown is as follows
    53% Domestic Stock
    35% foreign stock
    9.86% bonds
    1.62% Short Term
    0.07% Other


    My account balances are:
    Roth 403b $2818 (left over from residency)
    Traditional 403b $45050.69


    My Backdoor Roth IRA is also with vanguard, in the VFIFX Target Date Retirement 2050 with a higher (but still low) ER of 0.15%
    The break down is as follows:
    Vanguard Total Stock Market Index Fund Investor Shares 53.90%
    Vanguard Total International Stock Index Fund Investor Shares 36.00%
    Vanguard Total Bond Market II Index Fund† 7.10%
    Vanguard Total International Bond Index Fund Investor Shares 3.00%
    Vanguard Market Liquidity Fund 0.00%

    My account balance is $6566.92

    I also have a pension with $21000 vested (can cash out if I leave this job).

    At this point I really want to keep things simple and not screw up over time, focusing on my savings rate and putting money away without fretting about the details of the AA. If I had my way I much rather keep things in a Target Date funds bascially forever down the line. However I recognize if I were to invest in taxable a target date fund may have tax drag that I would regret or in the future I may have different feelings about asset allocation. Now I am so busy working and with life I dont want to have to worry about it.

    So my question is, for someone like me starting out and getting into taxable, should I start by ditching the Target Date funds, change my investments to individual index funds, and coming up with an asset allocation that could hold across all 3 accounts, keeping in mind potential tax ramifications now in order to save me trouble down the line? What would be the best resource (best WCI post for example) to see examples of what that looks like? Or is there a way I could smartly invest in taxable with less effort (eg putting my taxable in the target date fund as well for now and deal with it all later if I want to)? Or am I thinking about this wrong?

    Thanks

  • #2
    You can certainly have some tax drag, however, not every portfolio can achieve 100% efficiency. It really depends on what your main preference is. If a target date fund meets your requirements and you feel that its change in underlying asset allocation meets your expected risk tolerance as you age, I think it's a great choice. Not everyone likes thinking about their retirement accounts and how their next contribution needs to be allocated. You can certainly meet your financial goals with a target date fund.

    If you enjoy this kind of stuff then I wouldn't suggest a target date fund so you have more control. You'll gain more efficiency but it'll cost you some more time, although likely not a significant amount of time.

    Comment


    • #3
      It is not too hard or time consuming to maintain a 3 fund portfolio across those accounts assuming you have the needed funds in your tax deferred.

      I would try to increase the bonds and international in the retirement plan and just put vtsax or something like that in taxable. It would save some fees and a little bit of tax.

      However as mentioned above you can definitely reach your financial goals using the target date fund if you want a more hands off approach.
      Good luck.

      Comment


      • #4
        Or leave the target date funds in the tax deferred accounts and use 3 fund portfolio in taxable with a domestic index fund, international index fund and tax exempt bond index fund. Can look at overall asset allocation using something like Personal Capital and make adjustments in taxable as needed with new money and dividends. Have dividends sweep to money market fund rather than reinvesting in the taxable account (reinvesting fine in tax deferred).

        Comment


        • #5
          Originally posted by Bmac View Post
          Or leave the target date funds in the tax deferred accounts and use 3 fund portfolio in taxable with a domestic index fund, international index fund and tax exempt bond index fund. Can look at overall asset allocation using something like Personal Capital and make adjustments in taxable as needed with new money and dividends. Have dividends sweep to money market fund rather than reinvesting in the taxable account (reinvesting fine in tax deferred).
          With this type of approach, would it make sense to essentially mimic the AA of my target date funds in my taxable account except making sure the bond component is tax-exempt? Which would basically mean my AA would be the same across all my accounts but I would only have to balance my taxable?

          Comment


          • #6
            I would think of the portfolio as one big pie as far as asset allocation goes. If your money is held at Vanguard then look at the asset allocation tools on their site. It is easy. If you have money held at multiple institutions then use personal capital. Your new contributions fill any holes that develop. This is easy to do really.

            Comment


            • #7
              Originally posted by Duckworth View Post
              Hello!
              hi

              Originally posted by Duckworth View Post
              I am a W2 employee hospitalist... about done paying off student loan and saving down payments and am going to start retirement saving in a taxable account ... maxing out my traditional 403b and backdoor Roth moving forward. We have an option for a 457b but it is non governmental
              risk is 1 part, also fund options and distribution options are another consideration. dont write it off just yet but totally fine to just start with max 403, bdrIRA.

              Originally posted by Duckworth View Post
              Currently all of my 403b and Roth 403b are invested in an Vanguard Institutional Target Date Fund 2050 which has a year to date return of 20% with an ER 0.09%. The breakdown is as follows: 88% stocks, 12% FI.
              1- time to stop looking at yearly returns. they are meaningless. of course you got 20%. thats what an 88:12 split with 40% intl will get you.....we all got that if we had the same asset allocation. the joy of indexing....


              Originally posted by Duckworth View Post
              My account balances are:
              Roth 403b $2818 (left over from residency)
              Traditional 403b $45050

              My Backdoor Roth IRA is also with vanguard, in the VFIFX Target Date Retirement 2050 with a higher (but still low) ER of 0.15%
              The break down is as follows: 90:10

              My account balance is $6566

              I also have a pension with $21000 vested (can cash out if I leave this job).
              so you have 54,400 in retirement assets. the pension is not counted here as you cannot re-allocate it i assume.

              Originally posted by Duckworth View Post
              At this point I really want to keep things simple and not screw up over time, focusing on my savings rate and putting money away without fretting about the details of the AA.
              well the first question is, what is your AA? looks like ~90:10 was your goal.

              Originally posted by Duckworth View Post
              If I had my way I much rather keep things in a Target Date funds basically forever down the line. However I recognize if I were to invest in taxable a target date fund may have tax drag that I would regret or in the future I may have different feelings about asset allocation. Now I am so busy working and with life I dont want to have to worry about it.
              good news everybody.....you still can (kind of). and with just 10 minutes every month, you can keep doing mostly what you are doing.

              Originally posted by Duckworth View Post
              So my question is: should I start by ditching the Target Date funds, change my investments to individual index funds, and coming up with an asset allocation that could hold across all 3 accounts, keeping in mind potential tax ramifications now in order to save me trouble down the line?
              yes......but youll get there. thats what 99% of us do.

              Originally posted by Duckworth View Post
              What would be the best resource (best WCI post for example) to see examples of what that looks like? Or is there a way I could smartly invest in taxable with less effort (eg putting my taxable in the target date fund as well for now and deal with it all later if I want to)? Or am I thinking about this wrong?
              but until then, you basically need to keep your taxable 100% stock, and adjust your 401k fixed income portion of the TDF to balance it out.
              so you have 54,400 in assets. you want a 90:10 split. therefore you need ~5400 in bonds. i hate seeing bonds in rIRA, but fine youre gonna stick with a TDF, and same with your r403.
              - rIRA + r403 = 9380. a TDF that is 90:10 gives you 930 in FI.
              - 5400 - 930 = 4470 left in bonds you need.
              - your t403 is 45,050. oh look, 10% is 4500.

              this works out because everything is in the same 90:10 fund.

              but now you add 10K to taxable. your assets are now 65000 (rounding cause this is annoying)
              - you still have 930 in Roth accounts.
              - but now you need 5570 in your 401k. thats 12%. not 10%. so now you need to pick the next TDF up that has more bonds to make up the difference. so maybe 2050 instead of 2060, etc.
              adjust every 6 months, yearly, etc.

              annoying. yes. do-able. yes.
              have you read Mike Piper Obvious investor site? go read everything there first and youll see why.


              Originally posted by Duckworth View Post
              Thanks
              ur welcome.

              Comment


              • #8
                Originally posted by Bmac View Post
                Or leave the target date funds in the tax deferred accounts and use 3 fund portfolio in taxable with a domestic index fund, international index fund and tax exempt bond index fund. Can look at overall asset allocation using something like Personal Capital and make adjustments in taxable as needed with new money and dividends. Have dividends sweep to money market fund rather than reinvesting in the taxable account (reinvesting fine in tax deferred).
                Excuse the bump but why do you suggest sweeping dividends into money market fund rather than reinvesting in the taxable account?

                Comment


                • #9
                  Originally posted by jag44 View Post

                  Excuse the bump but why do you suggest sweeping dividends into money market fund rather than reinvesting in the taxable account?
                  rebalance, TLH

                  Comment


                  • #10
                    Originally posted by Peds View Post

                    rebalance, TLH
                    That would mean using the dividends to rebalance without triggering a taxable event correct? That makes sense but I’m not understanding how not reinvesting allows one to TLH

                    Comment


                    • #11
                      Originally posted by jag44 View Post

                      That would mean using the dividends to rebalance without triggering a taxable event correct? That makes sense but I’m not understanding how not reinvesting allows one to TLH
                      yes you always want to direct new money where it is needed.
                      well, what are the rules for TLH? thats the reason.

                      Comment


                      • #12
                        Originally posted by Peds View Post

                        yes you always want to direct new money where it is needed.
                        well, what are the rules for TLH? thats the reason.
                        I think I’m missing something. For TLH, if you decide to, you want to sell whatever lots you have that are currently at a loss in a taxable account and use those losses to offset gains or ordinary income. What I’m not getting is how non-reinvested dividends factor into TLH, because those dividends count as a gain regardless of whether or not they’re reinvested, right? I get how they help for rebalancing though

                        Comment


                        • #13
                          Originally posted by jag44 View Post

                          I think I’m missing something. For TLH, if you decide to, you want to sell whatever lots you have that are currently at a loss in a taxable account and use those losses to offset gains or ordinary income. What I’m not getting is how non-reinvested dividends factor into TLH, because those dividends count as a gain regardless of whether or not they’re reinvested, right? I get how they help for rebalancing though
                          The TLH issue is related to the wash rule. If you reinvest dividends into fund A, any dividends posted +/- 30 days of the TLH transaction will offset. Sweeping into the MM fund allows you to control the timing of the reinvestment, both for AA and TLH. As a side note, I reinvest my dividends and TLH as well. But I don’t TLH that often and it has been pretty easy to time the TLH transactions around the dividends. By the way, when TLHing don’t forget To pause any other automatic investments.

                          Comment


                          • #14
                            Originally posted by Larry Ragman View Post

                            The TLH issue is related to the wash rule. If you reinvest dividends into fund A, any dividends posted +/- 30 days of the TLH transaction will offset. Sweeping into the MM fund allows you to control the timing of the reinvestment, both for AA and TLH. As a side note, I reinvest my dividends and TLH as well. But I don’t TLH that often and it has been pretty easy to time the TLH transactions around the dividends. By the way, when TLHing don’t forget To pause any other automatic investments.
                            Ah! This makes sense. Thank you

                            Comment

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