Author Topic: Doing a Roth Conversion ("Backdoor Roth") + a broader asset allocation question  (Read 2994 times)

bleumanchu

  • 5 O'Clock Shadow
  • *
  • Posts: 19
Seeking advice from the collective wisdom. I’m currently in the process of doing a Roth conversion from a Traditional IRA for my wife and me(so-called “backdoor Roth”, as our earnings disqualify us from Roth contributions via the typical route), but I’m trying to make a sensible decision on what assets to put in our Roths.

I will outline some of our pertinent financials below, and will give any additional details I neglect to provide if prompted to do so. Note that I’m trying to keep things relatively simple for myself as I’m still fairly new to investing in general, and have been contemplating a portfolio of just three categories of low-cost index funds—US Stock, International Stocks, and US Bonds. Having said that, I’m open to discussion of other options as well as adjusting my current percentages allocated as well.

Other current assets (with allocation breakdowns where appropriate; rounded to the nearest hundred dollars for simplification):

My 401(k): $26,000; 70% VTSSX (Total US  Stock Market Index), 10% VTSGX (Total International Stock Index), 20% VBTSX (Total US Bond Index)

DW’s 401(k): $31,200; Same as above

My 457(b) [JUST discovered I had this available one pay cycle prior]: $670; Percentages are the same as my 401(k)

An old 403(b) of mine still sitting in an Fidelity account: $8200; 60% Spartan Total US Stock Index, 20% Spartan International Stock Index, 10% Spartan US Bond Index

HSA: $2683.89 [not enough here to start investing yet, but soon]

Emergency fund: Probably overfunded, but a discussion for another day

Real Estate: $0—we rent, and own no other properties at present

I am currently maxing out my 401(k), as is DW, and I will be set to max out my 457(b) starting in 2015. I will be putting the max allowable into our IRAs for 2014, and plan to do so annually henceforth. We are at least 10-15 years from any real consideration of FIRE as I still have approximately $150k in medical school loans to pay off (which I am doing aggressively).  Also we’re expecting our first child (it’s a girl!) in late December, and DW just switched to part-time and will be transitioning to SAHM status for at least a while; these upcoming changes will likely add a bit of new complication into our household finances.

So, back to my original question: I have heard advice ranging from “put all your bonds into your Roth” to “put all your bonds into your taxable accounts”, however I haven’t yet stumbled across what to put where when it comes to 401(k) versus Roth. While I hope to open a taxable account in the not-too-distant future, I don’t imagine I’ll have the extra resources for a taxable account for at least another 2-years (timeline for paying off loans). Any thoughts on how best to proceed with the Roth conversion, and any other thoughts are most appreciated. Also, don't hesitate to dumb it down for me. Thanks!

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
I favor investing the most tax inefficient AND high growth assets in my Roth, since the  more you make, the more taxes you will eventually save upon withdrawal.

For me this means REITS, value funds, and momentum funds.

bleumanchu

  • 5 O'Clock Shadow
  • *
  • Posts: 19
That makes sense, thanks! Also after posting this I finally stumbled across a Boglheads wiki post that helped me make more sense of my options and what was most logical in my situation. Link is below if it can help anybody else.

http://www.bogleheads.org/wiki/Asset_allocation_in_multiple_accounts#Portfolio_2_-_Mirrored_asset_allocation

Thegoblinchief

  • Guest
Any particular reason you're doing a Roth conversion now? Presumably you're going to take a massive haircut with income tax, whereas if you keep everything in the tax deferred accounts until retirement, your taxable income will be much lower, and thus you can recharacterize or use a SEPP with much greater tax efficiency.

bleumanchu

  • 5 O'Clock Shadow
  • *
  • Posts: 19
Our tax deferred account options are maxed out or will soon be maxed out. The Roth conversion is from a Traditional Roth I set up strictly for the purpose of a "Backdoor Roth" so I had somewhere to put an additional bit of after-tax savings (our annual income disqualifies us from a traditional route to contributing to a Roth and I can't deduct my Traditional IRA contributions). The plan is to contribute $11,000 ($5,500 me, $5,500 DW) annually to traditional IRA and then turn right around and move it to our Roths. I had no IRA of any kind prior to this year, only our 401(k)s.

Not sure if I'm explaining myself clearly, and perhaps I didn't answer your question fully, but I'm happy to provide additional details and certainly open to more discussion on this.

Thegoblinchief

  • Guest
Ah, okay. I wasn't reading carefully enough. Carry on.

bleumanchu

  • 5 O'Clock Shadow
  • *
  • Posts: 19
No worries, appreciate the questions and thoughts. I still have much to learn, so I always appreciate input from the more senior mustachians!