Author Topic: Go all Roth? Overexposed to S&P?  (Read 1368 times)

audifanatic518

  • 5 O'Clock Shadow
  • *
  • Posts: 8
Go all Roth? Overexposed to S&P?
« on: November 22, 2021, 09:07:21 PM »
Long story short, I'm 29, single, debt-free, and still at home due to a health condition. I've had a few stints in the software engineering world, but I was miserable. Fortunately, my degree (computer engineering) also allows me to be an electrical engineer. So I switched over to the dark-side (can't have lights or software without electricity) and now I'm doing electrical engineering for an architecture firm. I took a bit of a pay haircut (80k to 60k), but A) I'm inexperienced and B) the particular sector my company deals with (schools) doesn't particularly pay big bucks for mega projects. I may do some freelance coding or other side-hustle when I get the hang of my new job first. But for once the people are good, I don't hate anybody in the office, the work environment is friendly. There's very little else I can ask for. At this moment, I wouldn't want to retire from there. So for the time being, I think my goal isn't to reach FIRE, but to at least hit FI. I'm almost 5 months in, so my tolerance level could change lol.

Anyway, I've been maxing out my Roth IRA since 2018 ($24k invested, $12k unrealized gain) and I also have a taxable brokerage account ($29k invested, 16k unrealized gain). Both of those are all in VTSAX with Vanguard

I have a separate taxable Schwab account that I opened in September and threw $50k into it. I had it lying around in my savings account for a while as I was (very) overly cautious of an emergency given my job situation. Unfortunately, I missed the bull rally and could've made some huge gains with that. Water under the bridge now. I'm sitting on about $2k unrealized gains there. All of that is in SWTSX (which may as well be VTSAX).

I'm sitting on another 35k cash at the moment.

I've got 4 shares of Tesla, unrealized currently about $1k

$100 in BitCoin, down like $5, just play money.

I've got some Disney and AT&T stock floating around out there from my grandparents when I was born. I'm not even sure what it's worth tbh lol. I really need to settle those funds.

And, as much as I hate to think about the day it'll happen, I'll be inheriting a fair amount of real estate shared among my two siblings. When I do eventually move out I'm thinking of buying my aunt's half of my grandfather's house (dad is gifting me the other half), he sadly passed during the pandemic. It's in an excellent neighborhood, taxes aren't terrible (considering it's Long Island, NY) and it's a bike ride away from where I currently live.

My current employer has both a Traditional and a Roth 401k, but no company match, but I'll supposedly get a bonus at the end of the year instead. The plan selections are meh (see attached) in my opinion (I tried and I'm still trying to lobby for more plans). In the meantime, I went with the Roth and am currently in EQPGX with around $2k in it so far.

-----

Back to the original question, my former employer had a Traditional 401k that I had about $5500 in. My mom, a CPA, told me to roll it over into a traditional IRA instead of doing the Roth conversion. I had my doubts thinking that I may be in a higher tax bracket when I retire (especially with the real estate income; their goal is to sell most of it and buy more property in Florida, we'll see if that happens, so state income tax is friendlier there). I see other people on the web saying it's a good idea to have a mix of both Roth and Traditional. I want to get the opinions of some fellow Mustachians. I listened to her like a good son. I'm wondering if I should convert it, it's currently sitting in a money market account.

Also, I'm obviously invested heavily in the S&P (between VTSAX and SWTSX) Granted, VTSAX has made me a killing (18% since inception, 40% YTD). SWTSX is new to me, but $2k in 2 months isn't bad. Given the mess that the economy is in, am I overexposed in the S&P?




Morning Glory

  • Magnum Stache
  • ******
  • Posts: 3601
  • Location: The Garden Path
Re: Go all Roth? Overexposed to S&P?
« Reply #1 on: November 22, 2021, 09:23:13 PM »
Welcome! The dark side is the source of the light,  I like it.

For your questions:
Trad vs Roth: I'm on team traditional. Here's why:

https://www.madfientist.com/traditional-ira-vs-roth-ira/

Your S&P question: no, you're not overexposed.  Read this:

https://jlcollinsnh.com/stock-series/

MustacheAndaHalf

  • Magnum Stache
  • ******
  • Posts: 4454
Re: Go all Roth? Overexposed to S&P?
« Reply #2 on: November 22, 2021, 09:36:59 PM »
You own VTSAX, which is a total stock market fund, not the S&P 500.  And U.S. stock markets are 59% of the world's stock market cap.  So it's a safe choice.  Do you have any international investments, to diversify?

You mentioned $60k/yr income, which is $47.5k after the standard deduction.  That's about $7k into the 22% bracket, which is borderline for Roth conversion... I'd say your mom breaks the tie, and avoid it.

If the expense ratios are decent, I'd contribute to the non-matching Traditional 401(k) at your current work.  It's tax deductible, and if you contribute $12.5k or more, that leaves room to do a Roth Conversion in the 12% bracket.

Radagast

  • Handlebar Stache
  • *****
  • Posts: 2046
  • One Does Not Simply Work Into Mordor
Re: Go all Roth? Overexposed to S&P?
« Reply #3 on: November 22, 2021, 10:36:10 PM »
A couple points:
SWTSX is not as tax efficient as it could be. It would have been better as SCHB (an ETF) or VTSAX.

Wow it's been a while since I saw a 401k that bad! Usually they at least have a low-ish cost S&P500 fund.

This is the absolute best place to start:
https://forum.mrmoneymustache.com/investor-alley/investment-order/
Look into HSA and IRA contributions. You can also use savings bonds for some modest tax advantages, and if you want bonds right now they are as good as anything. Series I savings bonds are definitely better than cash.

You don't have enough invested to be worried about diversification, but on the other hand now is as good a time as any to start. I usually recommend a 3-fund portfolio of US stock, International stock, and bonds; or a 4-fund portfolio which is those plus a small-cap-value stock fund. Emphasize the stock portion when getting starting.

Sounds like a great job. There is a lot of need for electrical engineers and programmers doing boring sounding jobs, especially out in the sticks. You will not lack for employment if you keep your eyes open. Though it likely won't pay as well as some flashy city jobs.

audifanatic518

  • 5 O'Clock Shadow
  • *
  • Posts: 8
Re: Go all Roth? Overexposed to S&P?
« Reply #4 on: November 23, 2021, 11:11:44 AM »
A couple points:
SWTSX is not as tax efficient as it could be. It would have been better as SCHB (an ETF) or VTSAX.

Wow it's been a while since I saw a 401k that bad! Usually they at least have a low-ish cost S&P500 fund.

Yeah, it's terrible!. Unfortunately, the fund manager is a grump and the fact that I can still pass for 20 (normally a good thing) doesn't help me here; He kept going "Where are you getting your information from?!?" was his rebuttal to everything I would say. Guy's a bully and until I can step up my assertiveness game I don't think I'll get very far with him.  As for VTSAX vs. SWTSX, I would imagine it's still probably best to stay in it now than incur the short-term capital gain tax?

This is the absolute best place to start:
https://forum.mrmoneymustache.com/investor-alley/investment-order/
Look into HSA and IRA contributions. You can also use savings bonds for some modest tax advantages, and if you want bonds right now they are as good as anything. Series I savings bonds are definitely better than cash.

Thanks, I'll start there. Maybe it'll give me a better leg to stand on with Olde Grumpy. Unfortunately I don't have an HSA either (my company doesn't offer it nor would I be eligible anyway due to my health. I have epilepsy (looking at possible surgery within the coming years) so I definitely want a good plan. I'll look into the bonds. and the diversification plan. Thanks.


You don't have enough invested to be worried about diversification, but on the other hand now is as good a time as any to start. I usually recommend a 3-fund portfolio of US stock, International stock, and bonds; or a 4-fund portfolio which is those plus a small-cap-value stock fund. Emphasize the stock portion when getting starting.

Sounds like a great job. There is a lot of need for electrical engineers and programmers doing boring sounding jobs, especially out in the sticks. You will not lack for employment if you keep your eyes open. Though it likely won't pay as well as some flashy city jobs.

Honestly not as boring as you'd think. Unlike being a programmer, here I get to go out into the field and visit construction sites. I'm not in the office 100% of the time which is nice. Of course Murphy's Law happened and I started having a bunch of seizures just when I got the job (long after I was capable of driving), so that's been a struggle. But I'm managing.

Morning Glory

  • Magnum Stache
  • ******
  • Posts: 3601
  • Location: The Garden Path
Re: Go all Roth? Overexposed to S&P?
« Reply #5 on: November 23, 2021, 11:18:52 AM »
OMG you need to fire old grumpy right now and transfer your funds to a self-managed account at Vanguard,  Fidelity,  or Schwab. No need to argue with him,  just transfer then close your account.

audifanatic518

  • 5 O'Clock Shadow
  • *
  • Posts: 8
Re: Go all Roth? Overexposed to S&P?
« Reply #6 on: November 23, 2021, 01:37:30 PM »
OMG you need to fire old grumpy right now and transfer your funds to a self-managed account at Vanguard,  Fidelity,  or Schwab. No need to argue with him,  just transfer then close your account.

Tell that to my boss and HR; we're talking about my 401k here. All my other funds are self-managed at Schwab and Vanguard as I mentioned; I hold my Tesla stocks with Ally, my bank.

 Sadly I think I'm stuck with grumpy. I was at my boss' mother-in-law's funeral last week and he was there. It seems like he's good friends with my boss (surprising given how great of a guy my boss is).

audifanatic518

  • 5 O'Clock Shadow
  • *
  • Posts: 8
Re: Go all Roth? Overexposed to S&P?
« Reply #7 on: November 23, 2021, 01:38:54 PM »
OMG you need to fire old grumpy right now and transfer your funds to a self-managed account at Vanguard,  Fidelity,  or Schwab. No need to argue with him,  just transfer then close your account.

Tell that to my boss and HR; we're talking about my 401k here, I can't transfer them. All my other funds are self-managed at Schwab and Vanguard as I mentioned; I hold my Tesla stocks with Ally, my bank.

 Sadly I think I'm stuck with grumpy. I was at my boss' mother-in-law's funeral last week and he was there. It seems like he's good friends with my boss (surprising given how great of a guy my boss is).

yachi

  • Pencil Stache
  • ****
  • Posts: 925
Re: Go all Roth? Overexposed to S&P?
« Reply #8 on: November 23, 2021, 03:23:46 PM »
Partway between electrical engineering in architecture and software engineering you'll find PLC programming of industrial equipment.  I've seen a bunch of it in municipal water/wastewater engineering.  It could be something interesting to consider as a future freelance gig.

audifanatic518

  • 5 O'Clock Shadow
  • *
  • Posts: 8
Re: Go all Roth? Overexposed to S&P?
« Reply #9 on: November 23, 2021, 05:26:29 PM »
Yeah, I'm very vaguely familiar with them. A semiconductor company I used to work for used them a lot. According to my brother, who does sales engineering for a big industrial design firm, they're stupid easy to learn.

If I can go from learning TO code (C, C++, C#, yada yada) to learning THE Code (NEC, NFPA, asbestos/lead stuff, SED requirements, etc) I guess I can learn ladder logic "coding" fairly easy lol

boarder42

  • Walrus Stache
  • *******
  • Posts: 9171
Re: Go all Roth? Overexposed to S&P?
« Reply #10 on: November 23, 2021, 06:43:11 PM »
Yeah, I'm very vaguely familiar with them. A semiconductor company I used to work for used them a lot. According to my brother, who does sales engineering for a big industrial design firm, they're stupid easy to learn.

If I can go from learning TO code (C, C++, C#, yada yada) to learning THE Code (NEC, NFPA, asbestos/lead stuff, SED requirements, etc) I guess I can learn ladder logic "coding" fairly easy lol

Ladder logic is extremely simple to learn. The harder thing and more fun thing to learn is the logic of how to control the systems. I did this for 6 years. And once the mechanical and process engineers are done and they built it how they think it will work it's on you the programmer to make that all run. Bc it's easier to type some 1s and 0s than to tear apart a physically built system.  Understanding control systems is much more an art than an exact science. Throw in non Newtonian fluids and now even the process engineer is working in theoretical land.

Radagast

  • Handlebar Stache
  • *****
  • Posts: 2046
  • One Does Not Simply Work Into Mordor
Re: Go all Roth? Overexposed to S&P?
« Reply #11 on: November 23, 2021, 06:56:58 PM »
A couple points:
SWTSX is not as tax efficient as it could be. It would have been better as SCHB (an ETF) or VTSAX.

Wow it's been a while since I saw a 401k that bad! Usually they at least have a low-ish cost S&P500 fund.

Yeah, it's terrible!. Unfortunately, the fund manager is a grump and the fact that I can still pass for 20 (normally a good thing) doesn't help me here; He kept going "Where are you getting your information from?!?" was his rebuttal to everything I would say. Guy's a bully and until I can step up my assertiveness game I don't think I'll get very far with him.  As for VTSAX vs. SWTSX, I would imagine it's still probably best to stay in it now than incur the short-term capital gain tax?
Definitely worth skipping short term cap gains. Keep an eye out, and if there is a big drop then try and convert to SCHB. Also, Vanguard's patent on the low-tax-dual-etf-mutual-fund structure apparently runs out in 2023, and you can bet Schwab will copy it. Hard to say how that will play out for people already in though. Otherwise, you'd need to figure out if ongoing taxes over years or decades will outweigh the upfront tax hit.

Quote
This is the absolute best place to start:
https://forum.mrmoneymustache.com/investor-alley/investment-order/
Look into HSA and IRA contributions. You can also use savings bonds for some modest tax advantages, and if you want bonds right now they are as good as anything. Series I savings bonds are definitely better than cash.
Thanks, I'll start there. Maybe it'll give me a better leg to stand on with Olde Grumpy. Unfortunately I don't have an HSA either (my company doesn't offer it nor would I be eligible anyway due to my health. I have epilepsy (looking at possible surgery within the coming years) so I definitely want a good plan. I'll look into the bonds. and the diversification plan. Thanks.
If your work place offers it, I wouldn't be so fast to rule out the high deductible health plan. In my experience an HDHP is best for both low spenders and high spenders, people who exceed the out-of-pocket-maximum. "Good plans" are usually only best for a narrow range of health costs, as an example between $3,000 and $5,000. If you haven't yet, you really need to do the math to see.
Quote
You don't have enough invested to be worried about diversification, but on the other hand now is as good a time as any to start. I usually recommend a 3-fund portfolio of US stock, International stock, and bonds; or a 4-fund portfolio which is those plus a small-cap-value stock fund. Emphasize the stock portion when getting starting.

Sounds like a great job. There is a lot of need for electrical engineers and programmers doing boring sounding jobs, especially out in the sticks. You will not lack for employment if you keep your eyes open. Though it likely won't pay as well as some flashy city jobs.

Honestly not as boring as you'd think. Unlike being a programmer, here I get to go out into the field and visit construction sites. I'm not in the office 100% of the time which is nice. Of course Murphy's Law happened and I started having a bunch of seizures just when I got the job (long after I was capable of driving), so that's been a struggle. But I'm managing.
Maybe not so much boring as unglamorous. I have worked with a few people in this line.

audifanatic518

  • 5 O'Clock Shadow
  • *
  • Posts: 8
Re: Go all Roth? Overexposed to S&P?
« Reply #12 on: November 23, 2021, 08:08:41 PM »
Yeah, I'm very vaguely familiar with them. A semiconductor company I used to work for used them a lot. According to my brother, who does sales engineering for a big industrial design firm, they're stupid easy to learn.

If I can go from learning TO code (C, C++, C#, yada yada) to learning THE Code (NEC, NFPA, asbestos/lead stuff, SED requirements, etc) I guess I can learn ladder logic "coding" fairly easy lol

Ladder logic is extremely simple to learn. The harder thing and more fun thing to learn is the logic of how to control the systems. I did this for 6 years. And once the mechanical and process engineers are done and they built it how they think it will work it's on you the programmer to make that all run. Bc it's easier to type some 1s and 0s than to tear apart a physically built system.  Understanding control systems is much more an art than an exact science. Throw in non Newtonian fluids and now even the process engineer is working in theoretical land.

Now that I'm on the dark-side of the light-bulb (well, LED I guess these days), I definitely agree 100%. 1's and 0's are easier. But that's also because I'm new and they were straight up with me in the interview "they don't teach any of the stuff we do here in school" lol.

Figuring out how I'd do PLCs as a side-gig is another story considering those guys usually also work 9-5 and I can't imagine it's something I can do remotely but maybe I'm wrong.

boarder42

  • Walrus Stache
  • *******
  • Posts: 9171
Re: Go all Roth? Overexposed to S&P?
« Reply #13 on: November 24, 2021, 04:42:58 AM »
Yeah, I'm very vaguely familiar with them. A semiconductor company I used to work for used them a lot. According to my brother, who does sales engineering for a big industrial design firm, they're stupid easy to learn.

If I can go from learning TO code (C, C++, C#, yada yada) to learning THE Code (NEC, NFPA, asbestos/lead stuff, SED requirements, etc) I guess I can learn ladder logic "coding" fairly easy lol

Ladder logic is extremely simple to learn. The harder thing and more fun thing to learn is the logic of how to control the systems. I did this for 6 years. And once the mechanical and process engineers are done and they built it how they think it will work it's on you the programmer to make that all run. Bc it's easier to type some 1s and 0s than to tear apart a physically built system.  Understanding control systems is much more an art than an exact science. Throw in non Newtonian fluids and now even the process engineer is working in theoretical land.

Now that I'm on the dark-side of the light-bulb (well, LED I guess these days), I definitely agree 100%. 1's and 0's are easier. But that's also because I'm new and they were straight up with me in the interview "they don't teach any of the stuff we do here in school" lol.

Figuring out how I'd do PLCs as a side-gig is another story considering those guys usually also work 9-5 and I can't imagine it's something I can do remotely but maybe I'm wrong.

I know of a few companies that allow remote make your own hours that attempted to recruit me years ago. The problem is almost all of these positions will require you to travel onsite for startups with crazy hours. Like 12 hour sing shifts and you'll be out on weekends and holidays quite a bit.

audifanatic518

  • 5 O'Clock Shadow
  • *
  • Posts: 8
Re: Go all Roth? Overexposed to S&P?
« Reply #14 on: November 24, 2021, 11:33:44 AM »
I know of a few companies that allow remote make your own hours that attempted to recruit me years ago. The problem is almost all of these positions will require you to travel onsite for startups with crazy hours. Like 12 hour sing shifts and you'll be out on weekends and holidays quite a bit.

Fair enough. Granted I feel like most side work happens during weekends and holidays anyway. Travel during regular business hours isn't going to fly. As it is, the more experienced I become here, the more I'll be traveling myself around the island (sometimes upstate or CT) to different job sites. So I'm sure there's going to be some days I'll get home late, others I'll get home early. Fortunately the firm is really chill, but it's how it is.

audifanatic518

  • 5 O'Clock Shadow
  • *
  • Posts: 8
Re: Go all Roth? Overexposed to S&P?
« Reply #15 on: November 24, 2021, 11:38:22 AM »
Anywho, back on topic, after brushing through the material, I talked to my mom/CPA again and she's still all for the Roth only. As she puts it, I'm relying on a loophole and (not to get political) Biden wants to close it. She also mentioned that he wants to replace the tax deduction with tax credits, so "the math wouldn't work out" according to her. So if his bill passes, how would us FIRE and FI people be affected?

MustacheAndaHalf

  • Magnum Stache
  • ******
  • Posts: 4454
Re: Go all Roth? Overexposed to S&P?
« Reply #16 on: November 24, 2021, 12:46:48 PM »
Anywho, back on topic, after brushing through the material, I talked to my mom/CPA again and she's still all for the Roth only. As she puts it, I'm relying on a loophole and (not to get political) Biden wants to close it. She also mentioned that he wants to replace the tax deduction with tax credits, so "the math wouldn't work out" according to her. So if his bill passes, how would us FIRE and FI people be affected?
It will likely be discussed in the Taxes area when/if it passes.  I read only a bit of it, and noticed that taxpayers with AGI under $400k are excluded from lots of it.  I haven't seen anyone claim all Roth Conversions are coming to an end.  Why do you thing you're impacted?

The Mega Backdoor Roth (MBR) is when someone has income above the normal contribution limits, and sets up a non-deductible contribution to an IRA.  The IRA gets converted to a Roth IRA, avoiding tax on any gains.  I don't know the wording, but I assume people above the income limits will simply not be allowed to contribute to any IRA.

Radagast

  • Handlebar Stache
  • *****
  • Posts: 2046
  • One Does Not Simply Work Into Mordor
Re: Go all Roth? Overexposed to S&P?
« Reply #17 on: November 28, 2021, 02:41:22 PM »
Anywho, back on topic, after brushing through the material, I talked to my mom/CPA again and she's still all for the Roth only. As she puts it, I'm relying on a loophole and (not to get political) Biden wants to close it. She also mentioned that he wants to replace the tax deduction with tax credits, so "the math wouldn't work out" according to her. So if his bill passes, how would us FIRE and FI people be affected?
OK, I think you are getting bad advice and you should only do Roth in select circumstances in the 12% and lower brackets. If you have it in your power to keep yourself entirely in the 12% bracket by using a different type of retirement account, then by all means do it. It is speculative whether you will be in a 22% or higher or lower bracket when you retire, but lowering your taxable rate on all income from 22% to 12% right now is guaranteed.

Let's say that you earn $64,000 next year. Standard deduction makes that $64,000 - $12,950 = 51,050. Ignoring state taxes, but those would tend to work against Roth even more. You decide to use all Roth. You pay 10%*10,275 + 12%*31,500 + 22%*$9,275 = $6,848 in taxes, dropping income to $64,000-$6,848 = $57,152.

Suppose you maxed out a 401k, IRA, and HSA. $64,000 - $20,500 - $3,650 - $6,000 = $33,850. Minus the standard deduction $33,850 - $12,950 = $20,900 in taxable income. You pay 10%*10,275 + 12%*10,625 = $2,302.5 in taxes, dropping income to $61,697.50. Quite a bit more money then the Roth, even before any reduction in state taxes!

Additionally, if you keep yourself entirely within the 12% bracket, you pay no taxes on long term gains. So that should be an additional incentive to keep your MAGI under $41,675.

But look! Down there in the ground! Is it a worm? Is it a mole? No, it's the Saver's Tax Credit! If you maxed out all three tax-advantaged accounts, your income dropped to $33,850, low enough to get under the $34,000 needed for the Saver's Credit! The IRS straight up gives you $1,000 for being a good little citizen!

The Saver's Credit is just one example. There are many obvious thresholds where staying below it is much more advantageous than going below, but it isn't always possible to anticipate which ones will be applicable to you. So, as a general principle, it is more or less always in your best interest to max out traditional retirement accounts whenever possible. Sometimes you will be surprised at what turns up. For example, I had no idea about the Saver's Credit until Turbo Tax magically popped it up. I don't remember if there was digital confetti, but if not then there should have been. Another example was the government handouts in 2020 and 2021. We technically made too much to qualify, or maybe only at a reduced amount. But, thanks to always maximizing our 401ks, IRAs, and HSAs, we got the full amount. Several thousand more! There are others I have less experience with, potentially including FAFSA, ACA, and state taxes. If the government offers you a way to legally overlook some of your income, then I highly recommend you take it! There are many financial incentives, above and beyond the headline percentages.