My oldest is two years out of college and just accepted a new job. His old job paid $60k. The new one pays $90k. So his gross for this year will be ~$80k. He has about $15k in a 401k. I think he should roll this into an IRA then convert that to a Roth IRA. Do you agree? Can you recommend a fund to set and forget for his Roth?
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From the context, I assume that the $15K in the 401k is from the old job and he can do an end of service rollover to an IRA elsewhere, then to a Roth. Yes, Iād do that. His taxes will never be lower than right now, and the benefit of post-tax dollars in the Roth are maximized as young as he is (assuming).
If you really mean set and forget (for a long time), then a Vanguard target date fund. But you also couldnāt go wrong with a total stock market ETF, if the goal is 10+ years out. He can tweak allocations in a few years as his assets grow.
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Yes. He has a ROTH, but this is from his old employerās 401k which has very limited options. He is 25. He has about $18k in his ROTH as well and that is invested in Vanguardās VIIX fund.
So, yeah, all his retirement money should be in a Roth at his age, in my opinion. I also think it rarely makes sense to leave money in an old employerās 401k plan. As you say, there are limited options there.
VIIX? Wow. Well, since I donāt know if he has other significant assets other than what we are discussing here, but if the $15K/$18K is his portfolio, he might should rethink having half his assets in a volatility fund. Iād be focusing on the basics.
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Only other assets are about $10k in epay (employee stock purchase plan), and about $20k in cash. My ears are wide open. If you can recommend a specific fund for the new money and suggest a move for the old, I will be eternally grateful. Thanks!
Honestly, the big target date plans (Vanguard, Fidelity, Schwab), are pretty decent. You can consider googling for Lazy Portfolios, too.
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Having anything more than a nominal amount of VIIX in a retirement account is insane. Itās a tool for fund managers to make certain hedges, not an investment. This should be remedied immediately, as if it were an emergency.
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thats probably a typo.
VIIX is not a Vanguard fund. VIIX is a short fund. VelocityShares Daily Long VIX Short-Term ETN. Thats not Vanguard and he said Vanguard. Vanguard is a lot more common in 401ks.
VFIIX is a Vanguard fund for government bonds which makes more sense to be in a 401k.
I bet its in VFIIX not VIIX.
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Whew! I think you are right that it is a typo. Perhaps VIIIX because that makes sense too.
So, perhaps I can instead pick on having almost 25% of portfolio in employer stock. Iād trim that back significantly if it was me.
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ahh, yeah thats probably it. For some reason I looked right past that one. But it is highly likely its VIIIX not VIIX
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Please disregard VIIX. The fund is an index fund. I probably misremembered the symbol. If people have suggestions for great set and forget funds for a 25yo, I would be forever indebted. Sorry for the misinformation.
No problem. As for a set and forget fund, you could either do a target date fund (e.g. Vanguard Target Retirement 2055 Fund, or the equivalent at Schwab or Fidelity). This would be what Iād recommend if he really wants something that he can go years or even decades without thinking about. Alternatively, a total stock index fund would be very similar in the short term, but he would have to start tweaking that as his assets grew and the years passed.
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Agree with roll over, disagree with Roth conversion. Heāll pay income taxes on the conversion at his marginal rate, which is most likely 22% federal plus some to the state. He doesnāt really make that much, so I donāt think itās justified.
beatme mentioned it hereās the link: Lazy portfolios - Bogleheads
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We are assuming he is single. If so, thatās correct. But if he is in a career that is promising, heāll never ever see 22% federal tax rates again, I donāt think. And heās got 40 years for it to compound ā¦ and it will all be tax-free when he withdraws it.
So between scripta and I you have two good opinions. What the future may hold for his income and for tax policy in this country is something we cannot predict with certainty.
Perhaps, but he would have to overcome the 22% (+state) EFFECTIVE, not MARGINAL, rate in retirement in order to benefit from this tax payment. Heāll have to draw a very nice taxable retirement income to have such a high effective rate.
AND heād have to work without ever being out of a job until retirement. If he takes a year or maybe even a few months off, or marries a stay-at-home wife some time in the future and has none or much lower tax liability, thatāll be the best year to do the conversion. So unless heās poised to make 7 digit income, I see no reason to do the conversion now.
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Two things:
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Make sure he rolls over the 401k into a new Roth. He may be able to commingle with the existing Roth. Donāt do that. The 401k funds converted into a Roth have special bankruptcy protections. Chances of your son using these special protections are slim to none, but why give up the 401k protections?
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For someone very young, Iāve always thought going with the near-zero fee ETF (like Schwabās broad market ETF) is the way to go. The trades are free if you open the account with Schwab. Vanguard is a nice option too, but some of the better ETFs have large minimum buys.
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Agreed. I used to think Roth was king, end of story. But the notion of āfilling inā lower tax brackets makes a lot of sense. Letās imagine your son is in retirement today with all of the tax laws as they are. The first 38.7k of income is at 12% (plus that $12,000 standard deduction). It makes sense to take a taxable distribution of 50k, pay $4,500 in income tax on that distribution, and then use a Roth distribution to cover the rest of living expenses.*
For me, personally, I have a good chunk of our retirement in Roth for all of the obvious reasons (tax free, blah blah). But I also keep a good bit in a Solo 401k. The Solo 401k is saving me 22%+ for every dollar I contribute. And in retirement Iāll fill in the lower tax brackets with distributions from that vehicle.
*Hereās some really rough back-of-the-napkin math:
If I have 15.59k invested at 6% interest for 20 years (annual compounding) I end up with 50k (in line with my example above). We concluded Iāll pay tax of $4,500 to get that money back out from a Traditional 401k. Total money in my pocket - $45,500.
Letās assume that I paid 22% in tax on the 15.59k. Now, instead Iāve invested $12,160 in a Roth. I end up with $39,000 tax free with 20 years of 6% interest.
$5,500 isnāt going to make a difference in retirement, but the Roth option is 85% as āefficientā as the Traditional.
Two more semi-obvious notes.
- The higher the rate of return the more efficient the Traditional becomes. (At 8% interest the Roth is 80% as efficient).
- The higher the tax rate one saves on their Traditional pre-tax contribution, the more efficient the Traditional becomes.
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A quick Google turned this up.
In my earlier post I said itās unlikely that someone would use this with a 10k Rollover IRA, but more I think about it, not sure thatās true. IRAās are bankruptcy protected up to something like 1.25m. If someone has a regular IRA with 1.5m, the Rollover IRA at 100k or so, I think the result of a bankruptcy would be keeping 1.25m in the IRA and all 100k of the Rollover. So the protection could be helpful even for smaller accounts.
In case it isnāt obvious, Iām not a bankruptcy lawyer. And, as Iāve said in a few places, this is definitely not legal advice 
Thank you. Following this thread. Appreciate all the input. Never really thought about bankruptcy protection. As a person working in Massachusetts and living in New Hampshire, though, I distribute the dividends of my 401k and replace with salary. I live in the 15% (now 12%) tax bracket and put everything beyond that into my 401k. The dividends forever avoid the Massachusetts tax collector.