I thought I had this stuff figured out, but I've read some articles recently that completely went against how I have been doing things. Apparently, I've been making some big mistakes and want to avoid those going forward. For instance, I've been investing in a Roth IRA and Roth 401k, not aware that you can use tax avoidance strategies if you invest in the traditional IRA/401k.
My current breakdown is:
$75,000 / year income
0% 401k match
$15,000 annual expenses
401k account:
(All funds at lowest possible .7% expense ratio. All other possible funds are 1.5% ER or higher. Very bad 401k plan.)
US Large S&P Index fund - $32,066
US Mid S&P Index fund - $30,379
US Small S&) Index fund - $30,665
----------------------------------------------------------
Vanguard:
Roth IRA
Vanguard Target Retirement 2055 Fund (VFFVX) - $21,262.06
Vanguard Total International Stock Index Fund Investor Shares (VGTSX) - $5,933
Taxable (Admiral) Acct
Vanguard Target Retirement 2055 Fund (VFFVX) - $2,400.00
Vanguard Total International Stock Index Fund Investor Shares (VGTSX) - $15,088
Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) - $11,924
Int bond fund $0
----------------------------------------------
Checking (2% annual interest up to $15,000): $20,283
HSA (on PPO now and can't contribute) - $2805.56
----------------------------------------------
Based on all these numbers, my exposure profile is:
US Stock - 62.5%
US Bond - 8%
Int Stock - 15.9%
Int Bond - 0.3%
Cash - 13.4%
I'm young, looking to retire early, but willing to work longer if stocks do poorly, so I want to invest aggressively. Something along the lines of:
US Stock - 59.85%
US Bond - 7.6%
Int Stock - 25.65%
Int Bond - 1.9%
Cash - 5% (2% return)
New discoveries:
1. I should be investing in Traditional Roth/401k, so I can significantly reduce taxes in early retirement. I plan to withdraw 25-30k/year in retirement, around age 38-40 probably. I'm 27.
2. Invest in either bonds (taxed as income) or high growth stocks in non-taxable accounts, avoiding being taxed on gains. Since bond returns are low, I am thinking of putting international stocks in my non-taxable account.
3. Maybe stop using the Vanguard 2055 fund as I can't harvest tax losses since the fund isn't an individual asset class. But, how beneficial is tax loss harvesting, and is it worth selling the fund and paying my long-term capital gains on the growth?
3b. Does it even matter if long-term capital gains are sold now and I pay tax on it now, or leave the 2055 fund there and sell it in a decade or two paying the long-term capital gains then? I am really confused on this one. Is there a benefit in delaying long-term capital gains tax? Do you make more money delaying the tax?
Sorry for so many questions. I just realized I don't know so much, and I am about to make some big stock purchases as I'm too heavy in cash. My plan in the next day or two is to create a Vanguard Traditional IRA and transfer $5,500 from cash to the Vanguard Total International Stock Index Fund (VGTSX). I want to make sure I don't make any more obvious investor mistakes.
Thank you!!!