Retirement Account(s) Conundrum

[TheSaver]

Hi all,

Long time reader, first time poster. On the mustachian scale of 1 to 10 (with 10 being the most hardcore mustachian possible), I'm about a 7.

I'm at the point in my life where I need to clean up my retirement accounts and really figure out what the next best step(s) is. I started a Roth IRA with Charles Schwab a number of years ago and have been contributing the max to it every year. I bounced around jobs a number of years ago and therefore have had to rollover the 401ks from those jobs into Roth IRAs. So in total I have 3 Roth IRAs in Charles Schwab currently. Does it make sense (and is it allowed) to combine the 3 accounts into 1 Roth?

The other issue I'm facing is that I'm now above the income limit to contribute to a Roth (income is $200K+). My understanding is that I can open a traditional IRA and contribute the max to that every year, but I won't be eligible for the deduction come tax time. Am I incorrect?

I also contribute the max to my current job's 401k (will be $18,000 this year). My savings rate is high, so I have funds that need to be allocated somewhere. I'm hesitant to funnel them to a regular brokerage account because when I rebalance my holdings every year, I'll be hit with capital gains tax on the earnings (I think?).

Sorry for all the information/questions. I'm trying to wrap my head around the best course of action.

Any advice is greatly appreciated. Thanks in advance!

[FrugalSpendthrift]

I'm at the point in my life where I need to clean up my retirement accounts and really figure out what the next best step(s) is. I started a Roth IRA with Charles Schwab a number of years ago and have been contributing the max to it every year. I bounced around jobs a number of years ago and therefore have had to rollover the 401ks from those jobs into Roth IRAs. So in total I have 3 Roth IRAs in Charles Schwab currently. Does it make sense (and is it allowed) to combine the 3 accounts into 1 Roth?

You can certainly consolidate the accounts.  Call them and ask about it.

The other issue I'm facing is that I'm now above the income limit to contribute to a Roth (income is $200K+). My understanding is that I can open a traditional IRA and contribute the max to that every year, but I won't be eligible for the deduction come tax time. Am I incorrect?

You could also do a quick recharacterization to turn it into a ROTH.  Look up backdoor roth.  Make sure you understand the tax consequences if you have other funds in traditional accounts that were deducted from your income.

I also contribute the max to my current job's 401k (will be $18,000 this year). My savings rate is high, so I have funds that need to be allocated somewhere. I'm hesitant to funnel them to a regular brokerage account because when I rebalance my holdings every year, I'll be hit with capital gains tax on the earnings (I think?).

You should certainly take steps to minimize taxes, but don't let the taxes steer your investment decisions too much.  If you do sell funds in a brokerage account, you would have to pay capital gains (or capture a loss), but that isn't a reason to avoid using a taxable brokerage account.  Just put one of your core funds that is tax efficient in the brokerage account and you may be able to do all of the rebalancing in the deferred accounts.  Or put your international fund in the brokerage account in an attempt to capture some foreign tax credit.

[dividendman]

You can still contribute to your traditional IRA with $5500 (for 2014 and/or 2015) with *after tax* dollars and then do the "backdoor roth" which is immediately requesting your broker convert the trad IRA into your roth account. I think all brokers will do this.

I also save a significant amount and worry a bit about the cap gains on rebalancing. There are a couple of things I do:
1) Use new contributions to "rebalance". This works until your portoflio gets so large that new funds aren't enough to balance it out, but it's still effective when the markets aren't going crazy or if you rebalance/add new funds only once or twice a year since that will be a substantial amount

2) Try to do the rebalance in your 401k/IRA if possible (i.e. treat all of your accounts as one big account). So, your non-tax advantaged accounts will look more and more out of whack but overall your allocation will be OK. This is not always possible given 401k options and IRA fund limitations, but the simpler your asset allocations the easier it will be.

3) Use tax loss harvesting! If you only have a few funds that makeup your portfolio they all likely have similar but not "substaintally equivalent" funds that you can swap out when you have a loss and then switch back after 31 days. Then, if you need to do a bigger rebalance you'll have a bit of capital losses to write-off those gains.

You can google back door roth and tax loss harvesting or just browse http://www.madfientist.com to find out more info.


 

[GrowingMyStache]

Regarding your extra funds that need to be allocated somewhere, my personal choice was to put most of mine into Betterment.  After reading about Betterment in several places (MMM, JohnnyMoneyseed , JLCollins, among others) and doing additional research, I decided to open an account and haven't looked back since.

It's simple to sign up, they have a great interface, management fees are low (0.15% with over $100k invested), no trading fees, automatic rebalancing with every deposit, tax loss harvesting with over $50k invested and best of all, almost all the investments are made in low-cost Vanguard index funds.  Additionally, at the time I signed up they were offering free trial periods based on your initial investment.  I actually had an issue with this because I had used an affiliate link and they didn't correctly combine the free periods but a very quick phone call with a very friendly support person took care of that.

Of course you could continue to maintain an account somewhere else doing your own rebalancing and tax loss harvesting, but it's hard to beat 0.15% fees to have all of this done automatically. 

So far I've been very please and I'm confident that I will be sticking with Betterment for the long term.

[iamlindoro]

Regarding your extra funds that need to be allocated somewhere, my personal choice was to put most of mine into Betterment.  After reading about Betterment in several places (MMM, JohnnyMoneyseed , JLCollins, among others) and doing additional research, I decided to open an account and haven't looked back since.

It's simple to sign up, they have a great interface, management fees are low (0.15% with over $100k invested), no trading fees, automatic rebalancing with every deposit, tax loss harvesting with over $50k invested and best of all, almost all the investments are made in low-cost Vanguard index funds.  Additionally, at the time I signed up they were offering free trial periods based on your initial investment.  I actually had an issue with this because I had used an affiliate link and they didn't correctly combine the free periods but a very quick phone call with a very friendly support person took care of that.

Of course you could continue to maintain an account somewhere else doing your own rebalancing and tax loss harvesting, but it's hard to beat 0.15% fees to have all of this done automatically. 

So far I've been very please and I'm confident that I will be sticking with Betterment for the long term.

[GrowingMyStache]

I understand your concern but I'm disappointed in the response to my first ever post.  If that is the welcome I am going to get from the community, I makes me wonder if I even want to bother with it.  Granted, it is my personal opinion but that is why I posted links to the articles from the 3 blogs including MMM himself.  If it was a shill, I would have made the Betterment link an affiliate link, which it is not.  If this isn't the place to share personal experiences, then I don't know what is.  Did you have some advice to share or were you just wanting to bully a new member?

[arebelspy]

If it was a shill, I would have made the Betterment link an affiliate link, which it is not.

Not necessarily; you could be affiliated with the company in other ways.

Your post sounds very spammy, thus the reaction. Stick around and lurk for awhile and you might have a warmer reception when you do decide to post substantive stuff.

Welcome to the forums!

[iamlindoro]

I understand your concern but I'm disappointed in the response to my first ever post.  If that is the welcome I am going to get from the community, I makes me wonder if I even want to bother with it.  Granted, it is my personal opinion but that is why I posted links to the articles from the 3 blogs including MMM himself.  If it was a shill, I would have made the Betterment link an affiliate link, which it is not.  If this isn't the place to share personal experiences, then I don't know what is.  Did you have some advice to share or were you just wanting to bully a new member?

No bullying intended.  If you end up sticking around and contributing long term I'll be the first to admit I was wrong, and to offer an apology.  The tone of your first post just seemed a little overly effusive, and Betterment in particular is a hot button issue here (including MMM's article on the topic).  I'm among the group of people who feel like there's not quite enough of a value add there to justify the extra expense, but acknowledge that there are plenty of people who disagree with me.

As to whether you would offer an affiliate link, that might be the case, unless you somehow stood to benefit otherwise (by being an employee, shareholder, etc.).  But that's neither here nor there...

[GrowingMyStache]

Not necessarily; you could be affiliated with the company in other ways.

Full disclosure: I have no affiliation with Betterment other than having an account there.

I have "lurked" on this site long enough to read every one of MMM's posts from beginning to end and was looking forward to getting involved. Maybe I should have kept my own experience to myself and simply linked to the 3 posts that say exactly what I said. I'm sorry you don't consider my post to be substantive stuff.  What would you recommend I post in order to receive a warmer reception?

[arebelspy]

Not necessarily; you could be affiliated with the company in other ways.

Full disclosure: I have no affiliation with Betterment other than having an account there.

I have "lurked" on this site long enough to read every one of MMM's posts from beginning to end and was looking forward to getting involved. Maybe I should have kept my own experience to myself and simply linked to the 3 posts that say exactly what I said. I'm sorry you don't consider my post to be substantive stuff.  What would you recommend I post in order to receive a warmer reception?

Snark.  Lots and lots of snark.

;)

[DrF]

Welcome Growing!

Too often new usernames have come on here touting the benefits of betterment, much to the ire of longtime contributors here in the forums.

Sadly, after they post a few times about how much TLH and autorebalancing they are getting, they suddenly stop posting.

Odd...

So, don't be that guy. Simple enough.

Bring some other great ideas, pass on some knowledge, have a good time.

[GrowingMyStache]

Welcome Growing!

Thank you! I was just trying to pass along some of my own, admittedly, limited knowledge. I can see why more experienced investors would want to go the DIY route and that's completely understandable.  I wish I had the time and knowledge to do that. My excitement about the-company-not-to-be-named comes from realizing how much I was losing out to in fees in some of my other investments.  My grandparents got me started at Edward Jones when I was 18 and it has taken me this long (35 now, financially stable and more aggressively working towards FI) to learn about all of the loads, fees, expense ratios, etc that were eating into my returns.

Thank you again for the warmer welcome and I do intend to stick around and contribute more. The number of forums is a bit overwhelming and I've just started diving into them. Maybe I should find something related to DIY home improvement where I have a lot more experience.

[DrF]

Hi all,

Long time reader, first time poster. On the mustachian scale of 1 to 10 (with 10 being the most hardcore mustachian possible), I'm about a 7.

I'm at the point in my life where I need to clean up my retirement accounts and really figure out what the next best step(s) is. I started a Roth IRA with Charles Schwab a number of years ago and have been contributing the max to it every year. I bounced around jobs a number of years ago and therefore have had to rollover the 401ks from those jobs into Roth IRAs. So in total I have 3 Roth IRAs in Charles Schwab currently. Does it make sense (and is it allowed) to combine the 3 accounts into 1 Roth?

The other issue I'm facing is that I'm now above the income limit to contribute to a Roth (income is $200K+). My understanding is that I can open a traditional IRA and contribute the max to that every year, but I won't be eligible for the deduction come tax time. Am I incorrect?

I also contribute the max to my current job's 401k (will be $18,000 this year). My savings rate is high, so I have funds that need to be allocated somewhere. I'm hesitant to funnel them to a regular brokerage account because when I rebalance my holdings every year, I'll be hit with capital gains tax on the earnings (I think?).

Sorry for all the information/questions. I'm trying to wrap my head around the best course of action.

Any advice is greatly appreciated. Thanks in advance!

You should read http://www.madfientist.com/after-tax-contributions/

You could always invest in real estate.

The most important thing IMO is to have investments automatically pulled from your bank account the day you get paid. You'll never even miss it and your investments will thank you.

Edit add: also see this article http://www.fool.com/investing/general/2014/12/14/how-to-ignore-roth-ira-contribution-limits-and-put.aspx

[iamlindoro]

The most important thing IMO is to have investments automatically pulled from your bank account the day you get paid. You'll never even miss it and your investments will thank you.

Totally agree with this.  A fun (and very quick) read is "The Richest Man in Babylon," which is free, public domain, on the internet, and which covers some basic financial independence concepts in a quasi-fictional, fable-like way.  Will take maybe an hour to read, and is actually really entertaining.  The lesson that is driven home over and over there is "pay yourself first," as DrFunk mentions.  I do this too and it quickly becomes not only no big deal, but enjoyable to see your investments grow quickly.  You may even find yourself challenging yourself to find other ways to save what you consider "spending money" to augment these investments.

[TheSaver]

Thank you all for the responses. The backdoor Roth seems a bit complicated so I'm hesistant to go that route. Thanks dividendman, for your simple, yet brilliant points below. Regarding #1, I'm still debating whether or not to add on a monthly basis or in a lump sum at the end of the year. I'm leaning towards adding on a monthly basis because the thought of my little green soldiers sitting around not working for me pains me. The only issue is that a large chunk of my income comes in the form of a bonus at year-end. Need to think through the monthly cash flow a bit more. On point #2, my asset allocation is pretty simple. 85% stocks in VTSAX and 15% bonds in VBTLX. I'm contemplating adding REITs to that equation, but this blog post by JL Collins makes me think twice.

http://jlcollinsnh.com/2014/05/27/stocks-part-xxii-stepping-away-from-reits/

Regarding betterment and the subsequent banter, I don't feel the need to pay someone a fee (even if it is 0.15%) to balance my accounts when I can just employ variations of the strategies dividendman proposed.

Thanks again all!

I also save a significant amount and worry a bit about the cap gains on rebalancing. There are a couple of things I do:
1) Use new contributions to "rebalance". This works until your portoflio gets so large that new funds aren't enough to balance it out, but it's still effective when the markets aren't going crazy or if you rebalance/add new funds only once or twice a year since that will be a substantial amount

2) Try to do the rebalance in your 401k/IRA if possible (i.e. treat all of your accounts as one big account). So, your non-tax advantaged accounts will look more and more out of whack but overall your allocation will be OK. This is not always possible given 401k options and IRA fund limitations, but the simpler your asset allocations the easier it will be.

You can google back door roth and tax loss harvesting or just browse http://www.madfientist.com to find out more info.

[dividendman]

The backdoor Roth seems a bit complicated so I'm hesistant to go that route. Thanks dividendman, for your simple, yet brilliant points below. Regarding #1, I'm still debating whether or not to add on a monthly basis or in a lump sum at the end of the year. I'm leaning towards adding on a monthly basis because the thought of my little green soldiers sitting around not working for me pains me. The only issue is that a large chunk of my income comes in the form of a bonus at year-end. Need to think through the monthly cash flow a bit more. On point #2, my asset allocation is pretty simple. 85% stocks in VTSAX and 15% bonds in VBTLX. I'm contemplating adding REITs to that equation, but this blog post by JL Collins makes me think twice.

The backdoor roth sounds more complicated than it is. I just did it today. Steps:
i) Transfer (after tax) money into your regular IRA
ii) Call broker (for wells fargo you have to fax them a form that specifies the accounts, I think with vanguard you can do the back door online) and say you want to convert the $5500 you just deposited into your IRA to your roth IRA and you do NOT want them to withhold federal or state taxes since you've already paid tax on the money

I hate my little green soldiers not working too so what I do with new deposits is simply top-up whatever is the most lagging part of my portfolio balance. I have a complicated ETF balance that is similar to the 10-speed portfolio here: http://assetbuilder.com/lazy_portfolios/Returns/couch_potato_portfolios/10_speed

So, I always just buy what is furthest from a 10% allocation as I put money in every month or so. Then when I get a bonus (which is substantial for me as well) I use it to finish off any topping up my smaller monthly investments couldn't top-up. e.g. My next manual monthly investment will go into VDE probably since that's been tanking - my 401k is on autopilot obviously.

[t-rymz]

Something that nobody seems to have mentioned:
VTSAX is one of the most tax-efficient funds to own in a taxable account. It has very low turnover and covers pretty much everything you want. Funnel your (taxed) brokerage money into VTSAX. If you have bonds (which you should), own them in the 401ks. Your asset allocation can span multiple accounts.

Also, I'm a fan of owning long term bonds instead of a whole bond market funds. It's little more volatile, but the gains are significantly higher and bond funds have never lost money on any period longer than 3 years.