Author Topic: New T.IRA from Rollover - Please review my agressive allocation plan  (Read 10744 times)

Cheddar Stacker

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Hi there! Who wants to play "financial advisor for a day?"

A couple months ago I discovered my 401K plan allows for "in-service distributions" and I plan to create a new Vanguard Traditional IRA next month by transferring my entire 401K balance into it. I think I will continue to do in-service distributions into this account each year once all the EE and ER contributions reach my account, and 2014 will be fully funded next week.

Relevant facts:
1) This account is ~65-70% of our (I'm married) net worth and I expect it to stay roughly in that range for a while, so I don't want to F$!# this up.
2) I want really aggressive investments, but within reason. In other words no bonds, heavy mid & small caps, but not individual start-up stock picks.
3) I don't care that the market is "at an all time high" because I don't intend to use this money until at least 10 years from now.
4) I attempted to pick funds with a relatively long track record vs. ones that started in 2011.
5) I'm doing this to reduce overall fees, and to expose myself to whatever funds I want to pick. Current 401K has some Vanguard, but a 0.50% admin fee.

Current plan:

TickerNameClassExpense
Ratio
My
Allocation
1-yrSince
Inception
VTSAXTotal Stock Market Index AdmiralLarge Blend0.05%20%16.35%5.42%
VIMAXMid-Cap Index AdmiralMid Blend0.09%25%16.48%10.14%
VTMSXTax-Managed Small-Cap AdmiralSmall Blend0.12%30%11.09%10.78%
VTIAXTotal Intl Stock Index AdmiralInternational0.14%15%15.22%7.38%
VGSLXREIT Index AdmiralREIT0.10%10%12.52%11.53%
Weighted Averages:0.10%100%14.25%9.11%


What am I missing? Do you need any more information to analyze this? Is there any way (within reason) I can make it more aggressive?

Thanks for reading, I appreciate any additional thoughts/insights/warnings/nit picks anyone might have.

GGNoob

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #1 on: August 27, 2014, 02:17:30 PM »
Why VTMSX and not VSMAX? This is in a 401k so I don't see the reason for a tax-managed fund.

I still consider myself new so I don't really have any advice for you. But I like the allocation.

My current allocation goal is this (100% stocks):

VFIAX: 45%
VIMAX: 15%
VSMAX: 10%
VTIAX: 30%

But using Personal Capital, I'm realizing there's not as much in small/mid caps as I would want. Replacing VIMAX and VSMAX with VEXAX actually gives me more exposure to the small and mid cap market (at least according to PC). So I may use VEXAX instead and increase my allocation to that while decreasing my allocation to VFIAX. I'm still on the fence about adding a REIT, but I think I really want to.

Cheddar Stacker

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #2 on: August 27, 2014, 02:33:12 PM »
Thanks for the reply logant1337. There was no particular reason why I chose VTMSX vs. VSMAX. I guess I went with VTMSX because of a slightly higher return since inception (in hindsight that's arbitrary since their inception dates are 1.5 years apart during a bull market), but VSMAX beat it in every other category. Also because I liked the "tax-managed" part in the name but it's unnecessary as you mentioned since it will be in a tax deferred account.

So, I will swap out VTMSX with VSMAX and leave all else the same for now. I have about a week before I make this happen so I will be doing more research on my options. Any other thoughts logant or others?

GGNoob

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #3 on: August 27, 2014, 02:58:57 PM »
Just one thing I noticed and wanted to share...when trying to look at the "Since Inception" returns, it may help if you look at the Investor Shares and not the Admiral Shares, since most Invest Shares were created way before the Admiral Shares. Just gives you a longer time horizon to compare to.

For example, VTSAX shows 5.61% since inception. But VTSMX shows 9.60%.

Scandium

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #4 on: August 27, 2014, 03:08:05 PM »
You're tilting heavily mid and small cap. Any reason why?

I know theory says small value has outperformed and all that, but personally I kept it simple and did broad market and added ~20% small blend. Higher risk, hopefully higher return. That's 4 founds; total US/international and SC for each of those, plus REITS if you want.

VTSAX already has 18% mid and 9% small cap
http://portfolios.morningstar.com/fund/summary?t=VTSAX&region=usa&culture=en-US

If you don't mind managing it guess it's not a big deal, but there is some overlap compared to the total market.

Cheddar Stacker

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #5 on: August 27, 2014, 03:23:31 PM »
I like the name change Logan, very stealth and it confused me at first. Thanks for the tip on the "Since inception" ROR.

Scandium, thanks for chiming in. As I mentioned, I'd like to get more aggressive than I've been in the past. The 401k currently has 15% bonds which in hindsight was a mistake, but it was hard for me to change for some reason. No more, I want crazy aggressive.

I wasn't aware the "Large cap" index held mid and small cap companies, so thanks for pointing that out. I based my preliminary decision on historical returns. The link below compares these 3 large, mid, and small cap funds and you'll see the 10 year returns for the small and mid caps are ~10% while the large cap is ~8%. 10 > 8, so I weighted heavier into small and mid cap. I do this in my 401K as well, so it's nothing new for me. I've always thought it was just a more aggressive play, and I tend to lean that way.

https://personalp.vanguard.com/us/funds/vanguard/compare?navigatingFrom=6

Scandium

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #6 on: August 27, 2014, 03:41:20 PM »
I don't really look at past returns. Sure small and mid did better in last 10 years, but in the 90s large cap was the winner. Impossible to predict. I subscribe to the bogleheads philosophy of total market, but cheat a little by adding some small cap. This is more volatile but should give higher return. Like I said only a 20% tilt though. Personally I think your tilt is a bit much, but that's just IMO. Just don't get distracted by past returns.

ioseftavi

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #7 on: August 27, 2014, 03:53:38 PM »
What am I missing? Do you need any more information to analyze this? Is there any way (within reason) I can make it more aggressive?

Thanks for reading, I appreciate any additional thoughts/insights/warnings/nit picks anyone might have.

If you want to make this more aggressive, you can tilt your international piece towards emerging markets.  VTIAX is more than 80% in developed foreign markets. 

Vanguard's 'emerging markets' fund is VEMAX.  It's heavily weighted towards countries with less established capital markets, and it's volatile as fuck.  To give you an example, in 2008, this fund lost you nearly 54%.  In 2009, it was up almost 80%.

Now...I don't particularly recommend this.  But if you really want to make the individual pieces of your portfolio more aggressive, in addition to a high level aggressive mix of stock / bonds in your asset allocation, you could take your "international" allocation and assign a piece to emerging markets. 

As an example, you could put 12% in VTIAX (which itself has 18.5% in emerging markets).  You could then put 3% in VEMAX.  Your international portfolio would now be - if you drilled down - 5.775% emerging markets, and 9.225% developed international markets.  You're still at overall "15% international exposure", but the overall sub-weighting that I'm giving you as an example is much, much more aggressive.

Please note that this will substantially increase your volatility.  Many people have thought that they wanted to tilt their portfolios like this and then find that - at the worst possible time - they are really profoundly uncomfortable with single year drops that can be 40%+.

Also, I agree with the previous poster who said you don't need a tax-managed fund in a tax-deferred account.  Tax-managed funds or muni bonds are usually very very very unnecessary in a retirement account.


GGNoob

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #8 on: August 27, 2014, 04:11:54 PM »
If you want a true large blend fund, then VFIAX may be better. Still a 0.05% ER, but 87% large-cap with the rest mid-cap (compared to the 74% large-cap of VTSAX).

Cheddar Stacker

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #9 on: August 27, 2014, 05:03:35 PM »
@ ioseftavi, thank you for your insights. I am ok with volatility as long as in the long-term it's in the general direction of up. ; )   I have heard emerging markets have the biggest potential growth upside, but I have no idea where I heard it or if it's true. It makes sense on the surface.

From this post and previous ones of yours IIRC you work in finance right? So a follow up question for you: how aggressive is your portfolio, and do you have any clients you build an ultra-aggressive portfolio for?  If you knew there was no need to use this money for at least 10 years (likely closer to 20-25) would you consider a plan like mine after adding in a bit of emerging markets?

I'm fairly certain I can take the swings but obviously won't know for sure until they happen. I've read enough here and elsewhere though to know it would just be a buying opportunity.

wtjbatman

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #10 on: August 27, 2014, 06:53:39 PM »
I know you want to tilt mid and small cap, but you should replace your 20% in VTSAX (the total market fund, which includes some mid and small cap) with 20% in VFIAX (S&P 500). That gives you an asset allocation more in line with what your numbers say. With your current AA you are even more heavily weighted to mid and small cap than it looks like at first glance.

Otherwise I really like your allocation. Stick with it long term and your stash is going to do very well.

edit: Edited for clarification
« Last Edit: August 27, 2014, 06:55:42 PM by wtjbatman »

Cheddar Stacker

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #11 on: August 27, 2014, 07:18:17 PM »
Good suggestion batman, thanks. I'm surprised you didn't recommend the vanguard large cap dividend fund though. I thought about including that and still may eventually as a replacement for all or part of VTSAX.

wtjbatman

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #12 on: August 27, 2014, 07:26:34 PM »
Good suggestion batman, thanks. I'm surprised you didn't recommend the vanguard large cap dividend fund though. I thought about including that and still may eventually as a replacement for all or part of VTSAX.

I try not to "force" my dividend strategy on anyone else, lol.

There's definitely nothing wrong with Vanguard's large cap dividend fund though. Did you know that with dividend paying stocks have outperformed non-dividend paying stocks over the last 100 years? Just saying ;)

GGNoob

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #13 on: August 27, 2014, 07:27:18 PM »
Good suggestion batman, thanks. I'm surprised you didn't recommend the vanguard large cap dividend fund though. I thought about including that and still may eventually as a replacement for all or part of VTSAX.

Or use the small/mid-cap funds in VTSAX to your advantage. Up your VTSAX allocation and lower the small/mid-cap index fund allocation. Doing so would lower your overall fee (not that its much in the first place).

BlueHouse

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #14 on: August 28, 2014, 04:13:23 AM »

A couple months ago I discovered my 401K plan allows for "in-service distributions" and I plan to create a new Vanguard Traditional IRA next month by transferring my entire 401K balance into it. I think I will continue to do in-service distributions into this account each year once all the EE and ER contributions reach my account, and 2014 will be fully funded next week.

Very exciting news for me as I've been looking for a way to do this. A little research later and I see a restriction saying you MUST be 59.5 to do this. How will you get around this seemingly unbend able rule? 

ioseftavi

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #15 on: August 28, 2014, 08:19:09 AM »
@ ioseftavi, thank you for your insights. I am ok with volatility as long as in the long-term it's in the general direction of up. ; )   

Yes, the general direction is up.  But remember that this can include decade-long periods (or more, occasionally) where markets bounce around and are ultimately flat - excepting dividends, which I'm sure WTJBatman will tell you help out a great deal during these periods.  Over a 15 - 20+ year timeframe, it starts to become pretty damn certain that equities will have been your best bet.

I have heard emerging markets have the biggest potential growth upside, but I have no idea where I heard it or if it's true. It makes sense on the surface.

From the papers I have read and what I've seen, this is true.  My understanding is that frontier / developing markets grow faster for a few reasons:
  • faster population growth in these regions (by far one of the biggest variables in impacting GDP growth, which - in essence - is really all the stock market indices are showing you)
  • The economies are starting out from a far lower base in terms of GDP / capita (For the US to grow its economy 10% in a year would be extremely difficult, but for India, this might be attainable with a few key structural reforms and advances in tech, infrastructure, etc)
  • The capital markets in these countries (legal, governmental, and financial framework governing investments) are far less developed.  Disclosure is worse.  Corruption may be rampant.  The government might enact rules that are extremely harmful to foreign investors.  You have a much higher than average of getting screwed, to put it bluntly.  So investors demand higher-than-average returns to compensate for this risk.

There is a boring paper or two that says this in so many words.  I'll link it if I can remember where to find it.

From this post and previous ones of yours IIRC you work in finance right? So a follow up question for you: how aggressive is your portfolio...

Yes, I work in finance. 

My portfolio (combined with my fiancees - we run our accounts as if they were one large pot, since it's all for our retirement)  is about 75% stocks, 25% bonds/cash.  A 'neutral' allocation for me would probably be more like 80% or 85% in stocks.  So I'm currently a bit underweight in stocks, but me and the fiancee are both still maxing out our retirement accounts, and the vast majority of those contributions are still going towards stocks - despite my small underweighting. 

Basically, I'm comfortable calling stocks "historically expensive" at this point, but the most I will allow myself to do is tilt my asset allocation by 5 or 10%.  That's enough to satisfy my inner finance nerd, without doing something that could be a big, Stache-fucking mistake.  I don't think I would ever allow myself to deviate by more than that amount - it would just invite dumb behavior. 

...and do you have any clients you build an ultra-aggressive portfolio for? 

If you knew there was no need to use this money for at least 10 years (likely closer to 20-25) would you consider a plan like mine after adding in a bit of emerging markets?  I'm fairly certain I can take the swings but obviously won't know for sure until they happen. I've read enough here and elsewhere though to know it would just be a buying opportunity.

I no longer work in a client-facing role, so I don't build portfolios for people professionally.  I help about a dozen friends and family members with their retirement accounts, but for the vast majority of people, I suggest a low-cost asset allocation fund that fits with what they're trying to do.  Also make sure they're using tax-advantaged accounts to their fullest, tax-loss harvesting in taxable accounts, not owning too much company stocks, blah blah blah blah blah.  Bogleheads-type stuff, for the most part.

When I did meet with clients, typically the most aggressive allocation you could agree on was, I believe, 100% stocks, with around a 30% sub-allocation to international.  Within those categories, we generally would suggest a neutral sub-mix between small/mid/large cap, value/blend/growth, developed/emerging/frontier markets.  That submix wouldn't change based on valuations or outlooks for those different pieces - only your risk tolerance might change them.  Even then, we're talking tiny tweaks.

The reason we didn't suggest sub-allocation tweaks (overweight midcap, underweight international, etc) was that we didn't want to attempt to do anything that could be construed as market timing (even a little bit) or make the kind of changes that would later need to be "undone".  Over-weighting or under-weighting an asset class now means that you need to have a goal later for when you'll undo that decision.  We couldn't be sure that the client would want to do that, when the time came. 

So the solution that my former firm (and most other firms) used was to just focus on getting people to their asset allocation and then helping them maintain it.  If you were a 50/50 stock/bond investor for your retirement accounts (let's say a couple who's just started retirement, age 60), we try to keep your retirement accounts 50/50 as best we can when we work with you.  Your asset allocation is your asset allocation is your asset allocation.  Bull markets, bear markets, "feelings" you have about what's mispriced - none of those changed your asset allocation.  The only thing that changed it was, first and foremost, your time horizon.  The second thing (less important, but a factor) was your risk tolerance / personal situation.

As far as, "Would you consider a plan like mine?":  For a 10 year time horizon, I definitely would not.  For a 15-25 year horizon, I might start to.  However (and I realize I'm going to piss off some of the folks here who don't like to make any comments about where the market is), I wouldn't enact this kind of a plan now.  VEMAX - as an example - has rewarded investors with a 14.4% annualized return for the 5 most recent calendar years (2009 - 2013).  This is a great result, but it's also unsustainable - and I suspect a lot of investors will find this out when we have a real downturn in emerging markets, and that return reverts to the average 9-11ish kind of range.  The last downturn was a mild pullback (-18%) in 2011.  When an actual recession happens and emerging markets are hit 40-60%, I think VEMAX and similar funds will find that a lot of people who were really enthusiastic to own emerging markets stocks suddenly lose their appetite for risk.

So, with all that said: If we were currently going through some serious emerging market turmoil that had just lopped 25% or more off valuations in the space?  Yes, I might consider increasing exposure there personally, for moneys that had a 15 or 20 year time horizon.  But I would do it knowing that they could just as easily lose another 20-30% in the near term, and I would plan on it taking 3 - 10 years for my choice to work out, if it went well.  Also, my tweak would likely be pretty small (perhaps 5% more in international than my neutral allocation).

Jesus this is a long post and that's on my first cup of coffee.  Hope that helped explain my thinking.
« Last Edit: August 28, 2014, 08:23:04 AM by ioseftavi »

ioseftavi

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #16 on: August 28, 2014, 08:22:00 AM »

A couple months ago I discovered my 401K plan allows for "in-service distributions" and I plan to create a new Vanguard Traditional IRA next month by transferring my entire 401K balance into it. I think I will continue to do in-service distributions into this account each year once all the EE and ER contributions reach my account, and 2014 will be fully funded next week.

Very exciting news for me as I've been looking for a way to do this. A little research later and I see a restriction saying you MUST be 59.5 to do this. How will you get around this seemingly unbend able rule?

You don't.  It doesn't have to do with any kind of laws - it's a feature that some workplace retirement accounts offer.  If your plan provider offers it, your company either ticked the box that said "we want this as a feature" or they left that box unchecked, so to speak.  Call up your workplace retirement account provider (Schwab or whoever) and ask them if your particular plan allows for in-service rollovers to a rollover IRA, and they'll let you know if you can rollover money while still working.  Probably not - only about 10-20% of employers choose to do this, I think.

Cheddar Stacker

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #17 on: August 28, 2014, 08:52:41 AM »
@ioseftavi, that all made a ton of sense, thank you very, very much for your insights, I owe you one. If you ever have a complex tax question feel free to cash in a favor.

Thoughts in response to your novelette:

1) I do want to be stock heavy now, take some big risks for the next 10 years, and let those risks somewhat decide my fate. I make good money, I expect that good money to increase substantially over these 10 years, but I'm somewhat burned out at work and therefore want to accelerate FI in order to make RE a possibility sooner. If this portfolio slumps, I work another few years. If it returns 12-15% on average, maybe that 10 years becomes 7. Either way, this is my current desire and I believe I have the backbone to stick it out.

2) Given that my total preliminary intl allocation was only 15%, a -40% return in any given year would likely have a relatively small effect on the entire portfolio (15%*-40%=-.06) with a 6% drop. Now if that coincides with a worldwide recession, obviously it will not be a small drop.

3) I guess one advantage to being your own advisor (no offense intended to the industry-I know plenty of advisors and currently work with one personally as well) is you know your risk tolerance, your goals, your timelines, and you have only yourself to blame. As an advisor you have to attempt to learn your clients needs, then act on their behalf, but you would likely always have doubt in the back of your mind as to how they would want you to act. I don't envy that, but it sounds like you don't have that role anymore so that's good.

4) I don't mind the idea that an experienced person plays trends and has a 5-15% range they like to keep their stock/bond mix in to react to market changes. I'm open to that in the future. I will go much more conservative post FIRE, but not much lower than your current 75/25 mix. I just want to be aggressive now to (hopefully) accelerate things.

5) In my taxable accounts I will be more conservative, and I also keep some cash on hand for stock (or fund) buying opportunities, and rental real estate investment opportunities. I mention this because it will balance the retirement allocation a bit, plus it will provide access to some cash flow in the early stages of FIRE. So if I RE in 7 years, I still won't need to access this aggressive portfolio for at least another 8-12 years beyond that.

Again, thanks for the insights ioseftavi and everyone else. I think my plan might be coming together nicely with this feedback.

GGNoob

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #18 on: August 28, 2014, 02:50:35 PM »
Throwing your allocation into Personal Capital, here's what it looks like:

Funds


Overall Allocation


US Allocation


Alternatives Allocation


International Allocation

Cheddar Stacker

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #19 on: August 28, 2014, 03:04:50 PM »
Thanks Logan. I haven't messed with personal capital yet so I couldn't have done that very easily.

I find it very odd that a 30% allocation to Small Cap and a 25% allocation to Mid Cap would result in substantially higher mid cap holdings compared to small cap holdings. I guess it comes from the total stock market index owning other caps? Strange.

GGNoob

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #20 on: August 28, 2014, 04:26:25 PM »
Thanks Logan. I haven't messed with personal capital yet so I couldn't have done that very easily.

I find it very odd that a 30% allocation to Small Cap and a 25% allocation to Mid Cap would result in substantially higher mid cap holdings compared to small cap holdings. I guess it comes from the total stock market index owning other caps? Strange.

VSMAX has a 60% allocation to small-cap and 40% to mid-cap according to Morningstar. VIMAX has an 83% allocation to mid-cap and the rest to large-cap. So it can easily throw your total allocation off if you are just looking at the percentage of the fund.

When I was trying to do 45% S&P 500 index, 15% mid-cap index, and 10% small-cap index, my small-cap total was only about 5% and mid-cap around like 12%. I think I finally settled on a good allocation to move to that has allocations I can be happy with:

40% VTSAX (Total US Stock)
30% VEXAX (Extended Market...small/mid-cap)
30% VTIAX (Total International Stock)

It's simple, yet has about 16% small-cap, 20% mid-cap, 29% large-cap, and 5% REIT. Then the remaining in international. Since my IRA is only a little over $10k, allows me to transfer it to Vanguard since I only need $9,000 to open all 3 funds.

BlueHouse

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #21 on: August 28, 2014, 10:02:01 PM »

A couple months ago I discovered my 401K plan allows for "in-service distributions" and I plan to create a new Vanguard Traditional IRA next month by transferring my entire 401K balance into it. I think I will continue to do in-service distributions into this account each year once all the EE and ER contributions reach my account, and 2014 will be fully funded next week.

Very exciting news for me as I've been looking for a way to do this. A little research later and I see a restriction saying you MUST be 59.5 to do this. How will you get around this seemingly unbend able rule?

You don't.  It doesn't have to do with any kind of laws - it's a feature that some workplace retirement accounts offer.  If your plan provider offers it, your company either ticked the box that said "we want this as a feature" or they left that box unchecked, so to speak.  Call up your workplace retirement account provider (Schwab or whoever) and ask them if your particular plan allows for in-service rollovers to a rollover IRA, and they'll let you know if you can rollover money while still working.  Probably not - only about 10-20% of employers choose to do this, I think.

I'm not an expert, so please help me understand why every source I read says something to this effect:
Quote
So you first have to understand what the law allows and what the law prohibits. If the law doesnít allow it, donít waste time asking your plan administrator. If the law allows it, do ask. Maybe your plan allows it; maybe it doesnít.

When it comes to rolling over money from a 401k plan while still working for the employer, the law allows rolling over:

Employer contributions: match, profit sharing
Employee after-tax (not Roth) contributions
Employee pre-tax and Roth contributions only if the employee reaches age 59-1/2

milesdividendmd

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #22 on: August 28, 2014, 11:30:16 PM »
Total market is a fantastic starting point with a low expense ratio.

If you want to tilt tilt towards the factors that of been shown to deliver excess return?

Those would be: small size, value, momentum, and quality.

I am not sure what your brokerages, but some fund options that I would look at:

RZV or VYSVX US small cap value.

VNQ. EMERGING MARKETS.

ASMOX. US small cap momentum

All of which should be available through vanguard or fidelity 401K accounts.


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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #23 on: August 29, 2014, 02:51:49 AM »
Do not base asset allocation only on past returns.

1. Delete midcap.

2. Delete small cap.

3. Keep the others.

4. Buy small cap value 20%.

5. Make up the 100% by buying more total stock market.

6. Join bogleheads forum for investment advice.



« Last Edit: August 29, 2014, 02:53:43 AM by Sdsailing »

Cheddar Stacker

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #24 on: August 29, 2014, 08:14:09 AM »
@ milesdividendmd, thanks, I'll check those out.

@ Sdsailing, thanks for the advice. I've read a bit at bogleheads, but not much. You and Miles both recommend small cap value so I will certainly analyze this weekend against the other choices. Asset allocation considered past returns, cap size, expense ratio (although they were all near 0.10%) and holdings. I will also now be looking more into value potential and maybe lean for value over blend. I realize past returns isn't everything, but a 15 year history of great returns (particularly given 2 big dips in that time) is too impressive to ignore.

Thanks guys, I will do some more research on the recommendations.

Cheddar Stacker

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #25 on: August 29, 2014, 08:16:52 AM »
@ BlueHouse, I don't know these laws 100%, but I am confident this is possible. It depends on how your plan is written. You need to access the plan documents. HR department should be able to provide. See attachment for one page from our plan documents where this is addressed which should give you a guideline for where to look in your documents.

In our plan, you must EITHER be 59 1/2, or have been in the plan for 5 years.

ioseftavi

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #26 on: August 29, 2014, 09:29:34 AM »

A couple months ago I discovered my 401K plan allows for "in-service distributions" and I plan to create a new Vanguard Traditional IRA next month by transferring my entire 401K balance into it. I think I will continue to do in-service distributions into this account each year once all the EE and ER contributions reach my account, and 2014 will be fully funded next week.

Very exciting news for me as I've been looking for a way to do this. A little research later and I see a restriction saying you MUST be 59.5 to do this. How will you get around this seemingly unbend able rule?

You don't.  It doesn't have to do with any kind of laws - it's a feature that some workplace retirement accounts offer.  If your plan provider offers it, your company either ticked the box that said "we want this as a feature" or they left that box unchecked, so to speak.  Call up your workplace retirement account provider (Schwab or whoever) and ask them if your particular plan allows for in-service rollovers to a rollover IRA, and they'll let you know if you can rollover money while still working.  Probably not - only about 10-20% of employers choose to do this, I think.

I'm not an expert, so please help me understand why every source I read says something to this effect:
Quote
So you first have to understand what the law allows and what the law prohibits. If the law doesn’t allow it, don’t waste time asking your plan administrator. If the law allows it, do ask. Maybe your plan allows it; maybe it doesn’t.

When it comes to rolling over money from a 401k plan while still working for the employer, the law allows rolling over:

Employer contributions: match, profit sharing
Employee after-tax (not Roth) contributions
Employee pre-tax and Roth contributions only if the employee reaches age 59-1/2

Hrmmmm.  BlueHouse, honestly I'm not sure.  I've been out of the retail side of the business for four years now, so my memory may be foggy.  I could've sworn this was something that I had done with folks who were NOT 59.5 years old, but I may be mistaken.  It is a very uncommon option for plans to have, as I mentioned, and often not needed. 

The only no-brainer reason to do them is if a plan participant both had the option to do it, and their set of  401(k) investment choices were garbage (expensive, constricting, not diversified enough).  In that case, doing an in-service rollover to an IRA made sense for the lower fees and greater investment flexibility.  Otherwise, it's not necessary.

However I probably only did a handful of these, and it's been years.  If current literature is saying that you've got to be 59.5 no matter what, then I either mis-remembered or it's been changed since I did one.  It seems odd that you'd have to be 59.5 just for an in-service rollover, though - you're not taking a taxable distribution, and you're not taking direct custody of your assets.  Money goes from one qualified account to another, and typically that's all the IRS needs to see to be happy.

EDIT:  Just read Cheddar's upload.  That document looks like a common set of provisions - I now remember that most of the plan participants that I worked with had that "you must have participated in this plan for 5 years" proviso.  The phrasing on the plan documents also - as per cheddar's helpful highlights - makes me think that this appears to be something you can do at some companies if you're not 59.5.  As always folks, check with your plan administrator or accountant.
« Last Edit: August 29, 2014, 09:34:34 AM by ioseftavi »

BlueHouse

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #27 on: August 29, 2014, 11:14:02 AM »
thanks for the info iosatavi and Cheddar.  I choose my own plan (solo) and I've been considering dropping the plan altogether and moving the entire 401K directly to Vanguard, which would allow me to rollover.  I'd be very happy to learn that I could do an in-service rollover and keep both plans.  (I prefer to keep the existing for some ease of reporting and consolidation effects of keeping the account under one roof with payroll & tax provider). 
Good info and I'll dig a little deeper.  I'm the boss so I can change the rules when I want to.  Just didn't know I had the option without losing the benefit of keeping the payroll and 401k .  So thanks for the info! 

wtjbatman

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #28 on: August 29, 2014, 04:00:26 PM »
Do not base asset allocation only on past returns.

You're right, better to base them on future returns.

... what are those going to be again?

Cheddar Stacker

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #29 on: September 25, 2014, 03:05:40 PM »
thanks for the info iosatavi and Cheddar.  I choose my own plan (solo) and I've been considering dropping the plan altogether and moving the entire 401K directly to Vanguard, which would allow me to rollover.  I'd be very happy to learn that I could do an in-service rollover and keep both plans.  (I prefer to keep the existing for some ease of reporting and consolidation effects of keeping the account under one roof with payroll & tax provider). 
Good info and I'll dig a little deeper.  I'm the boss so I can change the rules when I want to.  Just didn't know I had the option without losing the benefit of keeping the payroll and 401k .  So thanks for the info!

OP here.

@BlueHouse, turns out you're right. Sad news friends, it turns out 401k money generally may not be distributed prior to age 59 1/2. I just now got around to initiating this in-service distribution and was informed of this by our plan administrator. Upon further research, I came across many items like what BlueHouse noted above. I've read numerous times on this forum about in-service distributions so I'm wondering how others may have gotten around the rules for their 401K??

Silver lining for me though: roughly 1/6th of my 401k funds were rolled in from a previous profit sharing plan and these funds allow for in-service distributions. So, I will be doing this anyway, just with a much smaller balance than I thought. However, the advice on this thread, as well as the news I received today prompted me to take a much closer look at my 401k options as well. I've moved 100% of my 401K into the 4 best options we have IMO, which are VFIAX (20%), VIMAX (35%), VSMAX (25%), and VBTLX (20%). I've decided 20% bonds will keep me sane. Thanks again everyone.

ioseftavi

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #30 on: September 25, 2014, 03:09:28 PM »
Thanks for the update cheddar!  Sorry to hear the in-service rollover couldn't quite happen.  And 20% bonds sounds very reasonable; if you want to get more aggressive, you can always revisit!

whitedragon

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #31 on: September 25, 2014, 05:10:29 PM »
thanks for the info iosatavi and Cheddar.  I choose my own plan (solo) and I've been considering dropping the plan altogether and moving the entire 401K directly to Vanguard, which would allow me to rollover.  I'd be very happy to learn that I could do an in-service rollover and keep both plans.  (I prefer to keep the existing for some ease of reporting and consolidation effects of keeping the account under one roof with payroll & tax provider). 
Good info and I'll dig a little deeper.  I'm the boss so I can change the rules when I want to.  Just didn't know I had the option without losing the benefit of keeping the payroll and 401k .  So thanks for the info!

OP here.

@BlueHouse, turns out you're right. Sad news friends, it turns out 401k money generally may not be distributed prior to age 59 1/2. I just now got around to initiating this in-service distribution and was informed of this by our plan administrator. Upon further research, I came across many items like what BlueHouse noted above. I've read numerous times on this forum about in-service distributions so I'm wondering how others may have gotten around the rules for their 401K??

Silver lining for me though: roughly 1/6th of my 401k funds were rolled in from a previous profit sharing plan and these funds allow for in-service distributions. So, I will be doing this anyway, just with a much smaller balance than I thought. However, the advice on this thread, as well as the news I received today prompted me to take a much closer look at my 401k options as well. I've moved 100% of my 401K into the 4 best options we have IMO, which are VFIAX (20%), VIMAX (35%), VSMAX (25%), and VBTLX (20%). I've decided 20% bonds will keep me sane. Thanks again everyone.

Cheddar, what rules/provisions/whatever governed the 1/6th amount that you were allowed to make an in-service distribution from? 

I still can't quite wrap my head around everything here.  Are we saying that you can't do an in-service distribution period until you're 59.5, or you can if your plan allows it?  I have a friend that recently just did this himself, due to the advice of his financial advisor.  (Multiple E.Honda Facepunches for a gajillion reasons) However, it seemed to me that he was able to do the distribution like that, but is he really just going to get a penalty this year as well for that?

That makes it doubly bad.

And unfortunate for your situation as well.

Cheddar Stacker

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #32 on: September 25, 2014, 05:30:42 PM »
Based on my reading and what I've been told, anything 401k its not allowed. My 401k includes my contributions, my employer safe harbor contribution, and a transfer of funds from my employers' old profit sharing plan. The psp is the only thing that allows an in service distribution unless you are 60+.

If you are talking about a withdraw from the plan that's different. You can take this money out, you just need to give the govt a hefty sum as well. I'm talking about a rollover into another qualified plan like an IRA. In that instance, I don't think its possible to use 401k designated funds from your current employer. But, I hope someone speaks up and proves me wrong so I can.

EscapeVelocity2020

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #33 on: September 25, 2014, 07:25:28 PM »
Sorry to say I'm not speaking up to the in-service rollover, but maybe after today you are a little relieved not to have amped up risk?  Hopefully you have spent a little time on Bogleheads or plan to, sound advice given quite a few times earlier in this thread.  When I was a more active Boglehead, a very smart Econ grad student named Market Timer showed up with a fancy theory that people shouldn't have to wait until earning money to get equity exposure.  A more 'rational' way to maintain exposure over a career would be to borrow against future earnings and simply pay down this debt with the income while maintaining a constant equity exposure.  Over a 20 year horizon, you'd get compounding on the future earnings instead of having all the exposure bunching up at the end.  For an exciting introduction to Bogleheads, start with his post Monday, January 21st 2008 (http://www.bogleheads.org/forum/viewtopic.php?t=11742).  A ripping tale of financial woe if ever there was one, but it seems to be ending OK if you follow the links later in the thread...

Also, have you ever fiddled around with www.i-orp.com (Optimized Retirement Planner)?  It's not everything for all circumstances, but quite fun to run multiple retirement dates and have a look at how it affects RMDs, taxes, theoretical spending and estate...  One thing it seems to optimize is a partial 401k rollover that can be 'pipelined' into Roth as well as a 72(t) on the remaining 401k until 59.5.  I'd be interested to hear your feedback on this strategy, if you can't get everything tax-free into the Roth and/or might face RMD's...

Cheddar Stacker

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #34 on: September 25, 2014, 08:51:57 PM »
Thanks for the links EV. I will check that out tomorrow.  I'm going to round out the retirement portfolio by putting the IRA funds in a vanguard REIT, vanguard int'l, and the vanguard total market index. It still feels aggresive with 60% in mid/small cap, but I like the 20% bonds after additional reading and discussion here and in the journal.

Starting to get the hang of it all I think??

TomTX

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #35 on: September 26, 2014, 05:42:45 AM »
Lets be clear - there is a big difference between an in-service distribution and an in-service rollover.

Distribution: I'm taking the money out of protected tax status, available to spend. (ie - 401(k) to my pocket)

Rollover: I'm moving the money directly* from one tax-protected account to another tax-protected account  (ie - 401(k) to a tIRA)

Even the Wall Street Journal seems a bit confused on this one:

http://online.wsj.com/news/articles/SB10001424127887323297504578579824114663206

*Yes, you can notionally take it from the 401(k) personally, then deposit it separately into a tIRA within 60 days - but I think that's much too risky. If "something happens" to the paperwork, you have to deal with the IRS. If you trigger something in the IRS computer, you have to deal with the IRS. If you somehow miss the 60 day window - taxes plus penalties. Just do the direct trustee-to-trustee rollover. ie - call Vanguard Concierge services with your 401(k) documents in hand.

Cheddar Stacker

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #36 on: September 26, 2014, 06:05:58 AM »
I'm going to use Vanguard so they will be my last attempt at getting the entire 401k out. If they say it's not possible I'll stop trying.

whitedragon

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #37 on: September 26, 2014, 11:14:01 AM »
Lets be clear - there is a big difference between an in-service distribution and an in-service rollover.

Distribution: I'm taking the money out of protected tax status, available to spend. (ie - 401(k) to my pocket)

Rollover: I'm moving the money directly* from one tax-protected account to another tax-protected account  (ie - 401(k) to a tIRA)

Even the Wall Street Journal seems a bit confused on this one:

http://online.wsj.com/news/articles/SB10001424127887323297504578579824114663206

*Yes, you can notionally take it from the 401(k) personally, then deposit it separately into a tIRA within 60 days - but I think that's much too risky. If "something happens" to the paperwork, you have to deal with the IRS. If you trigger something in the IRS computer, you have to deal with the IRS. If you somehow miss the 60 day window - taxes plus penalties. Just do the direct trustee-to-trustee rollover. ie - call Vanguard Concierge services with your 401(k) documents in hand.

Tom, thanks for the clarification.  I think we are all (even Cheddar) then talking about "Rollovers" from company 401k's to IRA's in other vehicles with better fund choices then. 

So then, it should be possible to "roll-over" any amount from your 401k to another vehicle at any time, subject to the terms and conditions of the 401k provider then correct?  For example, my 401k program stops the company match if you do a roll-over while still employed with the company.

This also matches what my friend was telling me he did, which I knew/suspected to be possible.

Good luck Cheddar and let us know how it works out.

milesdividendmd

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #38 on: September 26, 2014, 12:41:07 PM »
Cheddar,

If you want to be aggressive, the smart buy and hold way to do that is to tilt towards small/value, momentum, and quality.

The justification to tilt towards small value is threefold:

1. The value factor is strongest and most persistent in small Stocks.

2.  The small value sector beats all other boxes of the Morningstar matrix over a long time horizons.

3.  Small growth is such a nightmare with high risk/low returns/high volatility, long-term

My favorite easily accessible fund for small value is RZV which is available as a fee free ETF through Charles Schwab.

Cheap/easy ways to get access to the momentum factor and the quality factor are the iShares ETFs MTUM, and QUAL.

Good luck with your transition, which seems like a total no-brainer given the 0.5% management fee at your workplace 401(k)

CowboyAndIndian

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #39 on: September 26, 2014, 02:04:22 PM »
I would put in an emerging market fund also there.


milesdividendmd

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Re: New T.IRA from Rollover - Please review my agressive allocation plan
« Reply #40 on: September 26, 2014, 02:45:42 PM »

I would put in an emerging market fund also there.

100% agree. Good diversifier. About 10% of total equities, is my personal appetite.