Figured out AA but need help with game plan for achieving it

[photomom324]

We recently opened a Vanguard account and have been investing solely in VTSAX. We are keeping 20,000 in a 1% savings account. I know a lot of you don't agree with this but it helps my husband to sleep at night so right now it is what it is. We have figured out for our AA 48% Total Stock Market, 24% Total International Stock Market, 8% REIT, 20% bonds.

We need to open an IRA for each of us, but I'm really not sure what to do with it. I planned to have bonds and REIT's in them, but with REIT's as high as they are right now I'm just not sure if that's my smartest move. And with 20,000 in savings do I really need to be worrying about bonds right now? I had planned to use the extra from this past paycheck to open the IRA's but everytime I go to do it I am not sure of my game plan and end up not.

We have about 11,000 - 15,0000 extra each month to invest so I can open and invest in the the IRA's for 2014 next month if that's smart.

I understand AA and the importance of it and I've been reading books like mad. I guess I just don't understand what your gameplan should be for getting to your target allocation? Do I just keep putting it in VTSAX since that will be our highest AA percentage?

Thanks so much!!

[matchewed]

Place it by tax efficiency - http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement

And just do it. Not sure what you mean by a game plan. You've chosen your AA invest accordingly with tax efficiency in mind.

[seattlecyclone]

Yes, just do it.

A big purpose of setting an asset allocation is to take the short-term worries out of the equation. You've decided you should put 8% of your money into REITs, so you should put 8% of your money in REITs. If that asset class goes down 25% the day after you buy, then you'll be down to 6% REITs and will have a great chance to buy more at a discount the next time you add more cash to your portfolio.

You say you're questioning your "game plan," but it sounds like you may actually be questioning the asset allocation itself. If you're not comfortable investing 8% in REITs because you think they're overvalued, or if you're not comfortable investing 20% in bonds because of your large cash position, maybe you need to go back to the drawing board and pick an asset allocation that you would actually be comfortable implementing today.

[photomom324]

Yes, just do it.

A big purpose of setting an asset allocation is to take the short-term worries out of the equation. You've decided you should put 8% of your money into REITs, so you should put 8% of your money in REITs. If that asset class goes down 25% the day after you buy, then you'll be down to 6% REITs and will have a great chance to buy more at a discount the next time you add more cash to your portfolio.

You say you're questioning your "game plan," but it sounds like you may actually be questioning the asset allocation itself. If you're not comfortable investing 8% in REITs because you think they're overvalued, or if you're not comfortable investing 20% in bonds because of your large cash position, maybe you need to go back to the drawing board and pick an asset allocation that you would actually be comfortable implementing today.

Thanks! You're right..I think I just needed a little push off the cliff. I'm comfortable with our asset allocation I guess just getting started I am having trouble prioritizing..or feeling like I even need to. I just need to keep repeating to myself to just stay the course.

We don't qualify for a Roth IRA and we also don't qualify for the IRA contribution deduction. Should I convert from traditional to Roth every time I contribute or is it better to wait until we've contributed the maximum for 2014 and 2015? From what I think I'm understand we have to pay taxes when we convert? Is there any reason to not convert 100%?

[Financial.Velociraptor]

I am a big, big, big (BIG!) fan of municipal bond funds for any taxable account bond allocation.  I discuss NIO on my blog here: http://velociraptor.cc/blog/2015/01/26/raptoresque-bonds-nio/

Disc: hella long NIO.

[seattlecyclone]

We don't qualify for a Roth IRA and we also don't qualify for the IRA contribution deduction. Should I convert from traditional to Roth every time I contribute or is it better to wait until we've contributed the maximum for 2014 and 2015? From what I think I'm understand we have to pay taxes when we convert? Is there any reason to not convert 100%?

Are you talking about the backdoor Roth? If so, the timing of conversions is really up to you. At the time of conversion, you only pay tax on any growth that happens between the contribution and the conversion (this assumes you don't have any other pre-tax IRAs that would be messing up the backdoor Roth tactic). Whether you contribute a few times and convert all at once, or contribute a few times and convert after each contribution, or just do one big contribution and conversion doesn't make much of a difference in the grand scheme of things.

[photomom324]

We don't qualify for a Roth IRA and we also don't qualify for the IRA contribution deduction. Should I convert from traditional to Roth every time I contribute or is it better to wait until we've contributed the maximum for 2014 and 2015? From what I think I'm understand we have to pay taxes when we convert? Is there any reason to not convert 100%?

Are you talking about the backdoor Roth? If so, the timing of conversions is really up to you. At the time of conversion, you only pay tax on any growth that happens between the contribution and the conversion (this assumes you don't have any other pre-tax IRAs that would be messing up the backdoor Roth tactic). Whether you contribute a few times and convert all at once, or contribute a few times and convert after each contribution, or just do one big contribution and conversion doesn't make much of a difference in the grand scheme of things.

Yes, I'm talking about the backdoor Roth...sorry I didn't make that clear! Oh ok.. I must have missed that you only pay tax on the growth. No we do not have any other pre-tax IRA's...just my husband's 401k. So if I open a traditional IRA and then immediately convert it to a Roth we wouldn't have to pay any taxes because there wasn't any growth?

[seattlecyclone]

That's correct. You already owe tax on the amount you contributed whether it goes in an after-tax IRA or not. Only the growth counts as additional income for tax purposes, so if you convert before growth happens you don't owe any additional tax.

[Dodge]

If the $20,000 is there to help your husband sleep at night, it likely won't be used to rebalance into stocks during a market crash.  The 20k really isn't part of your portfolio, so yes I'd still recommend bonds.