401K, Roth, Brokerage, what goes where?

[engineerjourney]

After paying off all my and my husband’s student loans over 4% interest, my car loan, and the mortgage enough to get rid of PMI we will have around $80,000 to invest from my inheritance from my grandpa. 

Our plan is to increase both of our 401K contributions to the max (still less out of our paychecks than all the loans we just paid off) and to each open a Roth IRA and max it out, leaving $69,000 to invest otherwise this year.  Obviously we will also be saving more per month take home but for simplicity sake we will concentrate on the lump sum for now. 

I have been doing a lot of reading, on this site and others about what to invest in.  My company’s 401K is through Fidelity and actually has some decent funds, with ERs of 0.04% to 0.51% that we are invested in already.   

I am leaning toward opening the Roths and a brokerage account through Vanguard.  What I can’t seem to differentiate is what kind of funds/stocks/bonds should be distributed through the 401K, the Roth, and the brokerage account. 

Currently the 401K is split among a Target  2050 Fund (based on our age of 26), S&P 500 Equity Index, SM/MID Cap Equity Index, Domestic Bond Index, Large Cap equity Fund, Fixed Income Fund and GD Stock Fund.  Pretty diversified.   The only three I would potentially add to it would be another target fund (for sooner retirement?), the bond plus fund or the international equity index fund.   Let me know if you need/want specific ERs or life of fund %.   The 401K actually has lots of options but maybe its too diversified now?

For the Roth it seems like the Vanguard Target fund(s) are highly recommended but would we want to do that if we are already in one through the 401K? 

Looking at the brokerage account, it seems like it would be good to start with some index funds like the VTSMX and then start some large stable company funds as well. 

Please let me know if this sounds like we are on the right track or if we are missing something!  Thanks

[seattlecyclone]

A couple of tips to help you maximize your tax efficiency:
* If you want to invest in REITs to get some exposure to real estate, I recommend investing in those through a tax-advantaged account such as an IRA or 401(k). The reason is that REIT dividends in a taxable account are taxed at your normal income tax rate, rather than the lower rate that you pay on qualified dividends and capital gains. REITs tend to pay high dividends, so this difference can add up over time. It's better to have the REIT in the IRA and other corporate stock in a taxable account than vice versa.
* Most foreign countries will withhold tax from dividend payments if you own stock in a corporation based in that country. If this stock is held in a taxable account you can often get a "foreign tax credit" for some or all of this withheld tax. I do not believe this tax credit is available for stock that is held in a tax-advantaged retirement account.

As to your 401(k) split, I would look at why you are investing in each of those funds. The target retirement fund already invests in a couple of stock and bond index funds, and will automatically re-balance its asset allocation away from stocks and toward bonds over time. Remember: investing in five different S&P 500 index funds makes you no more diversified than investing in a single one does; it just complicates things. Unless you think the target retirement fund is allocating too much (or too little) to one asset class, you really don't gain anything by putting part of your money into the target retirement fund and part into the other index funds.

[Iron Mike Sharpe]

Here's how you should manage your different accounts in regards to the placement of assets and their tax efficiency:

http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement


You need to come up with an overall plan for your asset allocation:

http://www.bogleheads.org/wiki/Asset_allocation


And you need to pick the funds that will allow you to meet that allocation.  It seems like you are all over the place right now.

Here's some simple portfolios, obviously you will need to find the Fidelity equivalents:

http://www.bogleheads.org/wiki/Lazy_portfolios


Either go with all target funds, or go with individual funds and maintain your asset allocation that way.

You have the right idea with using Vanguard for your Roth and your brokerage accounts.  They will have lower fees than anyone else.  And low fees are very important to your success.

[engineerjourney]

Okay I have done a lot more research now and realize first that my current 401K distributions are all over the place (once looking into what the funds are they are not very diversified) and that I have to have an asset allocation figured out first before fixing my 401K, making a Roth, and potentially opening a taxable account. 
  I have learned some general rules of thumb:
  - Don't put bonds in a taxable account.
  - Don't put REIT in a taxable account.
  - Foreign funds are okay in a taxable account. 
  - Low turnover stocks are good in taxable account, high turnover stocks are not.

So, since my husband and I are only 26 it would make more sense for us to have a more aggressive portfolio.  (Currently the 401Ks are pretty conservative). 
  Does this allocation sounds about right?
   2% General Dynamics Stock  (one of our 401K options, would only be in the 401K)
   8% REIT index fund (does it make sense to do this if owning a house? Have no interest in being a landlord which is why its on here)
   25% Bonds
   25% International Stocks
   40% US Stocks

Will be putting as much as possible into as little funds as possible.  Most likely Vanguard index funds.   
Thanks!

[aj_yooper]

I am glad you are looking into Bogleheads.

By the way, stocks are not good everywhere.  For example, you would not want to put a fund with high turnover in taxable, like a small cap index.  Taxes are not fun when you are hoping to make money 30 years out.

[engineerjourney]

aj_yooper, you are correct!  I oversimplified that one!  The stock funds I am considering putting in a taxable account are the Vanguard Total US Market Index Fund and the Non-US Stock Market Index so I guess thats what I meant by stocks are good everywhere, haha.  I agree, you would definitely want to put a high turnover stock account in the tax-sheltered accounts.  Thanks!

Edited my post to correct it!

[VasyaPupkin]

To expand on the original question- what about distribution between Roth and 401k? Since one grows tax free and another is tax deferred, does that lend them to different types of investments? (Understandably, that will mostly matter when you start drawing out of them and paying taxes on 401k)

[aj_yooper]

If you have a value or small cap tilt in your AA, I think a Roth would be a good location for them, IMO.

[seattlecyclone]

To expand on the original question- what about distribution between Roth and 401k? Since one grows tax free and another is tax deferred, does that lend them to different types of investments? (Understandably, that will mostly matter when you start drawing out of them and paying taxes on 401k)

I could be wrong, but I don't think it matters much how you allocate investments between Roth retirement accounts and tax-deferred retirement accounts. In theory I guess you would rather have the investments that will appreciate the most be in your Roth since the withdrawals are tax free. But if you have some way of knowing in advance which investments will do better, why would you invest any money in anything else? :-)

[aj_yooper]

I could be wrong, but I don't think it matters much how you allocate investments between Roth retirement accounts and tax-deferred retirement accounts. In theory I guess you would rather have the investments that will appreciate the most be in your Roth since the withdrawals are tax free. But if you have some way of knowing in advance which investments will do better, why would you invest any money in anything else? :-)
[/quote]

To diversify the risk.

[seattlecyclone]

Yes, of course I know about diversification. The whole reason you have to do it is because you don't know which investments will do better. If you do have a good crystal ball, you would have no reason to diversify. If you can't see the future, the advice to "put the investments that will perform best into the Roth" seems a bit silly.

You can put your high-risk stock investments in the Roth, since on average they will do better than many other investments. But if they don't, you would have been better off putting your more conservative investments into the Roth.

[vespito]

One additional thought and you may already know this.  Some Vanguard funds have different types of shares, depending on how much is invested with that fund.  This can lower your expense ratios.  Ultimately I decided to hold only 3 funds in my brokerage account in order to minimize expenses* (they also compliment my allocation goals as expenses are just one of numerous things to take into account).

*I do have considerably less in my brokerage account then you will, so the above may not even matter.

[matchewed]

Yes, of course I know about diversification. The whole reason you have to do it is because you don't know which investments will do better. If you do have a good crystal ball, you would have no reason to diversify. If you can't see the future, the advice to "put the investments that will perform best into the Roth" seems a bit silly.

You can put your high-risk stock investments in the Roth, since on average they will do better than many other investments. But if they don't, you would have been better off putting your more conservative investments into the Roth.

It's not just performance risk but other forms of risk. Taxation is a risk. So read up in that link that was previously posted - http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement

For example all things being equal it will be better to put any individual stocks in a tax deferred or tax free account.

[VasyaPupkin]

I guess the key here is what goes into tax  free vs tax deferred.

Yes, of course I know about diversification. The whole reason you have to do it is because you don't know which investments will do better. If you do have a good crystal ball, you would have no reason to diversify. If you can't see the future, the advice to "put the investments that will perform best into the Roth" seems a bit silly.

You can put your high-risk stock investments in the Roth, since on average they will do better than many other investments. But if they don't, you would have been better off putting your more conservative investments into the Roth.

It's not just performance risk but other forms of risk. Taxation is a risk. So read up in that link that was previously posted - http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement

For example all things being equal it will be better to put any individual stocks in a tax deferred or tax free account.

[amha]

I use FutureAdvisor for help in both suggesting portfolios and what accounts (taxable, non-taxable) to put everything in: http://www.futureadvisor.com