How to invest after maxing out 401k, Roth, HSA

[questionasker]

Hi everyone. I posted this over at Bogleheads, but I'd love any advice from the crowd here too.

Background
Salary + bonus for 2016: ~ $210k
Monthly expenses: ~ $3,400 relatively fixed, plus food, entertainment, etc.
Emergency funds: $10k
Debt: $24k in student loans, interest rate of 2.625% (paying ~ $100/mo)
Deductible charitable contributions: 10% of gross income
Personal Property: Not much (and no car)
Real Property: None
Credit Cards: I pay balances in full each month.
Tax Filing Status: Single
Tax Rate: 28% Federal (~21% effective, based on last year's AGI), 8.5% State (~7.1% effective, based on last year's AGI)
State of Residence: DC
Age: 33, but I'm not terribly concerned with buying a home unless it'd be a good investment.
Desired Asset allocation: 95% stocks, 5% bonds, but I'm open to changing my mind.
Desired International allocation: I'm relatively unconcerned with this after reading up on jlcollinsnh Part XI. Open to changing my mind.

Current retirement assets

Taxable (~ $32k)
12% cash (for investing – does not include emergency funds)
0.8% Vanguard Total Stock Market ETF (VTI) (0.05%)
13% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.05%)

401k (~ $69k)
27% Vanguard Institutional Target Retirement 2045 Fund (VITLX) (0.10%) (still in former employer's plan) (no match)
29% Vanguard Institutional Index Fund (I) (VINIX?) (0.04%) (current employer's plan) (no match)

(Backdoor) Roth IRA at Vanguard (~ $18k)
15% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.05%)

HSA at Elements Financial / TD Ameritrade (~ $3.4k)
0.8% Cash
2% Vanguard Total Stock Market ETF (VTI) (0.05%)

Contributions

New annual Contributions (~ $45k)
$18k in 401k (elective), plus ~$17k (automatic) (no match)
[Note: This is basically my employer forcing me to divert a certain percentage of my salary and bonus into the 401k. Regardless of how much I elect to contribute ($0-18k), a certain percentage of my salary and bonus are automatically diverted to the 401k (subject to total contributions not exceeding the IRS limit of $53k).]
$5,500 backdoor Roth IRA
$3,350 HSA
~ $1k taxable (for retirement, not short term goals)

Available funds

Funds available in former employer's 401(k)
AllianzGI Technology Fund Institutional Class (DRGTX)
American Beacon Small Cap Value Fund Class Institutional (AVFIX)
American Funds EuroPacific Growth Fund® Class R-6 (RERGX)
DFA International Small Company Portfolio Institutional Class (DFISX)
John Hancock Funds Disciplined Value Mid Cap Fund Class I   (JVMIX)
Lazard Emerging Markets Equity Portfolio Institutional Shares
MFS International Value Fund Class R5   (MINJX)
MainStay Large Cap Growth Fund Class I (MLAIX)
MassMutual Select Mid Cap Growth Equity Fund II Class I (MEFZX)
Metropolitan West Total Return Bond Fund Plan Class (MWTSX)
PIMCO CommodityRealReturn Strategy Fund Institutional Class (PCRIX)
T. Rowe Price New Horizons Fund (PRNHX)
T. Rowe Price Real Estate Fund
Vanguard Extended Market Index Fund Admiral Shares   (VEXAX)
Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX)
Vanguard Institutional Index Fund Institutional Shares   (VINIX)
Vanguard Institutional Target Retirement 2010 Fund   (VIRTX)
Vanguard Institutional Target Retirement 2015 Fund   (VITVX)
Vanguard Institutional Target Retirement 2020 Fund   (VITWX)
Vanguard Institutional Target Retirement 2025 Fund   (VRIVX)
Vanguard Institutional Target Retirement 2030 Fund   (VTTWX)
Vanguard Institutional Target Retirement 2035 Fund   (VITFX)
Vanguard Institutional Target Retirement 2040 Fund   (VIRSX)
Vanguard Institutional Target Retirement 2045 Fund   (VITLX)
Vanguard Institutional Target Retirement 2050 Fund   (VTRLX)
Vanguard Institutional Target Retirement 2055 Fund   (VIVLX)
Vanguard Institutional Target Retirement 2060 Fund   (VILVX)
Vanguard Institutional Target Retirement Income Fund (VITRX)
Vanguard Retirement Savings Trust (n/a?)
Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)
Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
Vanguard Windsor II Fund Admiral Shares (VWNAX)   

Funds available in current employer's 401k
Prudential Stable Value (n/a) (0.37%)
Metropolitan West Total Bond Fund M (MWTRX) (0.35%)
Principal High Yield Institutional (PHYTX) (0.50%)
Janus Balanced T (JABAX) (0.60%)
Vanguard Institutional Index I (VINIX) (0.04%)
Pioneer Fundamental Growth Y (FUNYX) (0.49%)
Putnam Equity Fund Y (PEIYX) (0.50%)
Eaton Vance Atlanta Capital SMID Cap Fund A (EAASX) (0.75%)
AllianceBernstein Discovery Value I (ABSIX) (0.80%)
American Funds EuroPacific Growth R6 (RERGX) (0.49%)
Oppenheimer Developing Markets Y (ODVYX) (0.84%)
Vanguard REIT Index I (VGSNX) (0.10%)

Questions
1. Most importantly, where should I stash my extra cash? I'm inclined to dump it all into taxable VTSAX, but part of me wants to get into real estate, as I'd like to have a steady stream of rental income by the time I retire. Having said that, I live in a very expensive spot (DC), and I can only spend 0.5 days/wk on landlording duties, so I'd probably have to factor in property management fees, regardless of whether I buy here or in some less expensive spot. (Please keep in mind that have an emergency fund and am maxing out my 401k, backdoor Roth, and HSA.)

2. Should I leave my old 401k in the VITLX target date fund, or is that too expensive? I'm considering reallocating it to VINIX.

3. Should I allocate any of my current 401k to VGSNX?

4. Should I be putting more into bonds? If so, is that best for a taxable account?

5. What else should I be asking? Please point out my blind spots.

Thank you for any thoughts.

Best,
QA

[rpr]

How much is the extra cash you are talking about?

For tax efficiency, I'd put bonds in the 401K and IRAs and stocks in the taxable.

[MustacheAndaHalf]

If you divide your emergency fund by monthly expenses, it looks like 3 months worth.  It would be much better to have 8 months, but at least 6 months (20-25k).

With a REIT fund you pay 28% tax on the ordinary income, versus paying 15% on qualified dividends from a stock fund.  By "qualified" the IRS really means "from a stock fund you held 61 days" when the dividend was issued.

[TomTX]

I'm a fan of simplicity. Consolidate accounts.  Can you do a rollover (trustee transfer) from your old 401k to the new one?

[seattlecyclone]

Does your 401(k) offer the option of traditional after-tax contributions above and beyond the $18k pre-tax/Roth contribution limit. This is a key component of the "mega backdoor Roth." Consider taking advantage of these if possible. If that isn't possible, it sounds like buying VTSAX in a taxable account is a fine idea since you don't seem super enthusiastic about being a landlord.

Agree that moving your old 401(k) funds to your new 401(k) may be a good idea. The one thing that would give me pause is the lack of a cheap bond fund in that plan. Bonds make sense in your pre-tax retirement accounts for tax efficiency.

[Vagabond76]

With a REIT fund you pay 28% tax on the ordinary income, versus paying 15% on qualified dividends from a stock fund.  By "qualified" the IRS really means "from a stock fund you held 61 days" when the dividend was issued.

True but misleading.  A substantial percentage of REIT distributions is return of capital, which is untaxed but also subtracted from basis.  If you sell it becomes a long term capital gain.  If you don't sell, at death the basis steps up and the gain goes untaxed.

[questionasker]

How much is the extra cash you are talking about?

For tax efficiency, I'd put bonds in the 401K and IRAs and stocks in the taxable.

Thanks for the advice, rpr. I'll do that. Right now we're talking about roughly $15k that I'd like to invest, but I recently finished paying off higher-interest student loan debt, so my savings rate will increase.

Best,
QA

[questionasker]

If you divide your emergency fund by monthly expenses, it looks like 3 months worth.  It would be much better to have 8 months, but at least 6 months (20-25k).

With a REIT fund you pay 28% tax on the ordinary income, versus paying 15% on qualified dividends from a stock fund.  By "qualified" the IRS really means "from a stock fund you held 61 days" when the dividend was issued.

Thanks for your reply, MustacheAndaHalf. I'll consider adding to the emergency fund. Are you recommending that I avoid REITs?

Best,
QA

[questionasker]

I'm a fan of simplicity. Consolidate accounts.  Can you do a rollover (trustee transfer) from your old 401k to the new one?

Thanks TomTX. Personally, I'm not concerned with simplicity unless there's a significant monetary gain. I believe I could do a trustee transfer, but I kind of like keeping the money in the old 401k because it has a different set of investment options (and more Vanguard funds than my current 401k). By keeping it, I have access to a broader set of tax-advantaged funds, correct? For example, I might like to increase my tax-advantage bonds by switching to an earlier target date fund in the old 401k, or maybe VBTLX, and I'd love to hear any thoughts on that.

Thanks again,
QA

[questionasker]

Does your 401(k) offer the option of traditional after-tax contributions above and beyond the $18k pre-tax/Roth contribution limit. This is a key component of the "mega backdoor Roth." Consider taking advantage of these if possible. If that isn't possible, it sounds like buying VTSAX in a taxable account is a fine idea since you don't seem super enthusiastic about being a landlord.

Agree that moving your old 401(k) funds to your new 401(k) may be a good idea. The one thing that would give me pause is the lack of a cheap bond fund in that plan. Bonds make sense in your pre-tax retirement accounts for tax efficiency.

Thanks for your thoughts, seattlecyclone. I love the idea of a mega backdoor Roth, but unfortunately my employer will not allow traditional after-tax contributions above and beyond the $18k pre-tax limit. You're correct that I'm not super enthusiastic about becoming a landlord, but I'm quite enthusiastic about building a stream of rental income before I retire. And I don't mind stepping out of my comfort zone for a while, even if it ends up costing me a bit of money (hopefully not too much).

Good point about the lack of a cheap bond fund in the new 401k plan. Do you think I should consider moving money within the old 401k to an earlier target date fund, or maybe VBTLX?

Best,
QA

[questionasker]

With a REIT fund you pay 28% tax on the ordinary income, versus paying 15% on qualified dividends from a stock fund.  By "qualified" the IRS really means "from a stock fund you held 61 days" when the dividend was issued.

True but misleading.  A substantial percentage of REIT distributions is return of capital, which is untaxed but also subtracted from basis.  If you sell it becomes a long term capital gain.  If you don't sell, at death the basis steps up and the gain goes untaxed.

Thanks for chiming in, Vagabond76. Good to know. I'm still torn on whether to try my hand at landlording or just throw some money at REITs.

Best,
QA

[rpr]

First decide on your risk tolerance and asset allocation. Based on that you can try to shuffle the money into your various accounts based on the options available. It appears that you have a good option for a bond fund in your current 401k -- MWTRX even though it has a slightly higher expense ratio. For stocks in your 401k I'd pick VINIX.

Have you tried bogleheads for portfolio help?

[questionasker]

First decide on your risk tolerance and asset allocation. Based on that you can try to shuffle the money into your various accounts based on the options available. It appears that you have a good option for a bond fund in your current 401k -- MWTRX even though it has a slightly higher expense ratio. For stocks in your 401k I'd pick VINIX.

Have you tried bogleheads for portfolio help?

Thanks, rpr. I have high risk tolerance.

Thanks for suggesting bogleheads. I have similar thread there: https://www.bogleheads.org/forum/viewtopic.php?f=1&t=192506. Someone there mentioned MWTRX as well, and I plan to seriously consider it. But for now, maybe it'd be best for me to build my bond holdings through my old 401k's VBTLX option, which will allow me to grab admiral shares without meeting the $10k minimum (unless I'm advised to buy more than that), plus it has a much lower expense ratio (0.06%) than MWTRX (0.35%). Does that sound like a good idea?

Right now I'm thinking I'll ditch the VITLX in my old 401k (ER = 0.10%) and replace it with VINIX (ER = 0.04%) and VBTLX (ER = 0.06%). I'm just not sure how much of each. I'm also curious to know whether I should think about timing when purchasing bonds, but maybe that's best left for another thread.

Thanks again,
QA

[MDM]

Salary + bonus for 2016: ~ $210k
...
$18k in 401k (elective), plus ~$17k (automatic) (no match)
[Note: This is basically my employer forcing me to divert a certain percentage of my salary and bonus into the 401k. Regardless of how much I elect to contribute ($0-18k), a certain percentage of my salary and bonus are automatically diverted to the 401k (subject to total contributions not exceeding the IRS limit of $53k).]

Does the $17K come out of the $210K, or is that separate?  You mentioned "my employer will not allow traditional after-tax contributions above and beyond the $18k pre-tax limit" so it isn't clear whether the $17K is "your" contribution or an "employer" contribution.

A quick back-of-the-envelope using the case study spreadsheet shows ~$100K available after taxes and the tax-advantaged investments you mentioned.  If you have only $1K left for taxable investments, that implies you are spending $99K/yr on...?  Of course, I may have fat-fingered something in the spreadsheet entries.

[questionasker]

Thanks, MDM.

Sorry I'm having a tough time explaining the new employer's 401k plan. To clarify (I hope): The $17k is my elective portion of my 401k, and the $18k is the automatic portion (a certain percentage of my salary and bonus, which is automatically diverted to my 401k, whether I like it or not). So both come out of the $210k (salary + bonus), and they are both pre-tax.

Thanks for taking a quick crack at the case study. Unfortunately, I don't think I did a good job of explaining my situation. I think part of the confusion is because my salary and bonus increased significantly this year. Adding to the confusion, I recently finished paying off a more expensive student loan (interest rate was ~6.5%). So I now find myself with a cash flow that I'm not sure how to handle, which led me to create this thread.

Someone over at bogleheads also mentioned the need for a case study. I'll aim to knock that out once work cools off a bit.

Thanks again,
QA

[MDM]

The increased salary isn't the worst problem to have. ;)  Well done!

Just looked at your bogleheads thread and https://www.bogleheads.org/forum/viewtopic.php?f=1&t=192506#p2930364 pretty much covers what I don't understand about your situation.  In short, how can you (not counting any employer match) be contributing >$18K to a pre-tax 401k?

[questionasker]

Thanks, MDM. I'm not exactly sure of the mechanics of how the current employer's 401k works, but a certain percentage of my gross compensation automatically gets routed to my fully vested 401k account. So even if I elect to contribute nothing, I'm essentially forced to contribute that predetermined percentage of my gross compensation to the 401k (i.e., it is not a "match").  My understanding of the IRS rules is that the elective portion cannot exceed $18k, and the sum of the elective and automatic portions cannot exceed $53k. Perhaps my employer routes part of my compensation into the 401k in a manner that enables it to be classified as an employer contribution? Apologies if I'm overlooking an easier way to explain this.

Thanks again,
QA

[rpr]

One way to think about it is that it is an employer contribution to your 401 plan. I have a slightly analogous situation wherein my employer contributes a certain fixed fraction of my salary into a 401a plan. This is not part of my salary but part of the benefits that I receive. In addition, I can make elective contributions of up to 18k to a separate 403b plan.

[MDM]

Perhaps my employer routes part of my compensation into the 401k in a manner that enables it to be classified as an employer contribution?

Chances are low - but not zero - that your employer is over-deducting your 401k contribution.  Never had a problem with Megacorp's 401k administration while I worked there, but did have two instances where they were incorrect on tax & benefit regulations.

How do your "Medicare wages" compare with your "W-2 taxable wages" (i.e., W-2 box 5 vs. box 1)?  The difference is likely to be "your" 401k contribution.

[questionasker]

Thanks, rpr. That makes sense to me.

[Davids]

For your extra funds allocate to the below Vanguard ETFs

50% VTI
25% VIG
15% VNQ
5% VXUS
5% BND

[questionasker]

Thanks for pointing that out, MDM. For my 2015 W-2, the ratio of Box5:Box1 is about 1.11. I started this job in August, if that makes any difference.

Best,
QA

[questionasker]

Thanks, Davids. I'll look into those. If you don't mind, would you please share a quick overview of your rationale for that AA?

Best,
QA

[MDM]

Thanks for pointing that out, MDM. For my 2015 W-2, the ratio of Box5:Box1 is about 1.11. I started this job in August, if that makes any difference.

"Difference" might be more illuminating than "ratio".  How does the difference compare with your Box 12 Code D amount (i.e., your 401k contribution according to https://www.irs.gov/pub/irs-pdf/iw2w3.pdf) ?