My retirement accounts update

I don’t write much about my retirement accounts since there’s really nothing much to write about and I try to keep it that way. However after completing the transfer of The Pension That Time Forgot into my Traditional IRA, I also converted my former 401(k) plan and picked a new asset allocation which affected both my Roth and Traditional IRA and also my current 401(k). So I had something to write about after all!

I maintain my dividend portfolio in taxable accounts for the purpose of Financial Independence. However I also have tax-advantaged “Retirement” accounts which I tend to call Retirement accounts since the access to them is restricted until I retire.

This is also the reason that I don’t consider capital gains and dividends from my tax-advantaged accounts as “income” since I can’t access / spend the money, so for the purpose of Financial Independence, my tax-advantaged accounts don’t exist; nor are the accounts included in my “wet-worth” calculations. These accounts will be a nice bonus when I do decide to retire.

First here’s a quick summary of the three types of tax-advantaged retirement accounts that I hold.

401(k) Plan

This is my employer sponsored plan; contributions are paid before tax and reduce my income for the purposes of tax calculations. Dividends and capital gains inside this account are not taxed. However when you retire and start to withdraw money from a 401(k), you pay taxes on your distribution at normal income tax rates. And once you reach 70 years old, you’re forced to take a certain percentage withdrawal (called a Required Minimum Distribution) each year. The larger your 401(k) the higher your potential tax bracket might be.

The single biggest benefit for most employees is that your employer will typically match your contributions up to a certain percentage. So for example if you pay 3% of your gross salary then your employer will pay 3% as well. This is free money and you should always take advantage of this if it’s offered. In my previous job my employer contributed half of what I did up to 3%, so I had to pay 6% of my salary to get a 3% match.

Traditional IRA

The Traditional IRA is an individual account – you can have as many as you like in as many financial companies but they all count as one for tax and contribution limits. You can pay either pre-tax or post-tax money into these accounts but there is a yearly limit and it’s additionally limited by your income. Be sure to understand these limits as there are penalties for over-payment.

In most respects a typical T-IRA holding pre-tax money is similar to a 401(k) plan – the main difference is that you’re free to shop around and find a company such as Fidelity or Vanguard with a wider range of investment options than may be available in a 401(k). Taxes are not paid on investment income until you start withdrawing money upon reaching retirement and the same RMD rules apply.

Roth IRA

The Roth IRA is a newer product (and Roth-401(k) plans are available for some employees too). With a Roth IRA, all money paid in is post-tax, but all dividends and capital gains are tax-free and you pay no taxes ever even when withdrawing the money in retirement. There are also no required minimum distributions, however contribution limits are much lower and also income restricted.

Even though a Roth IRA is paid for with post-tax money, if you’re early in your career they are well-worth considering since your tax bracket is typically lower than it’ll be at the middle or end of your career. The main criteria here is the expected change between your tax bracket now and what you think it’ll be in retirement.

An aside

I should really be writing about my asset allocation but there’s one more factor I wanted to mention, and that’s “space”. Because a Roth IRA is a “use it or lose it” opportunity, if you don’t make a contribution to one in a given year, you can’t go back and add a contribution later.

In retirement I plan to hold high taxable assets such as REITs and high-yield bonds in my Roth account since the ordinary dividends they pay won’t be taxed. However the available “space” in my Roth is limited as I’ve only paid into it for about 4 years, so for now I’m holding higher total return investments than bonds to increase its value.

Asset Allocation

Asset Allocation is simply how much money you choose to allocate to different classes of investments. For example one person might be 100% in stocks, another person might have 100% in bonds and a third person might have 50% in stocks, 25% in bonds and 25% in cash. Asset allocation is a personal decision based on your tolerance for risk although a general rule is that you should gradually reduce risk and move out of stocks into more stable investments as you get nearer to retirement. Holding your age in bonds is a fairly common guideline that’s often repeated.

A single view

As far as asset allocation is concerned, all retirement accounts should be viewed as one (hopefully large) account. If you plan for 50% stocks and 50% bonds, it doesn’t matter too much if the bonds are in a Roth IRA and the stocks are in your 401(k) or vice-versa. The more limiting factors are the available investments in your accounts and how much “space” you have in them. If your 401(k) is $50,000 but your Roth IRA is $5,000, you’ll never be able to hold 50% of your assets in your Roth IRA so you’d have to have a mix of stocks and bonds if your 401(k) for example.

If you include some taxable accounts in your retirement portfolio because of limited access to those investments in IRA or 401(k) accounts, there’s an excellent article on tax efficient placement by the Bogleheads.

My allocation

My target allocation is shown below and I plan to re-balance this once at the end of each year if the values get too far out of alignment.

Investment %
US Stocks 45
International Stocks 10
Emerging Market Stocks 5
US Bonds 30
REIT 10

This is a fairly conservative allocation but I think having a bond component helps overall growth over the long term. Typically bonds go down as stocks go up and vice-versa, so any rebalancing at the end of the year helps you to sell high and buy low.

Investments

The investments I’ve chosen for my retirement accounts are listed below. They’re they lowest expense funds I have access to. I don’t invest in individual stocks in these accounts, I leave that to my taxable portfolio instead.

Investment Class Expense Ratio Account
Vanguard VTSAX US Stocks 0.05 % IRA
Vanguard VTMGX International Stocks 0.09 % IRA
Vanguard VEMAX Emerging Market Stocks 0.15 % IRA
Vanguard VBTLX Bonds 0.08 % IRA
Vangard VGSLX REIT 0.10 % IRA
SSGA Large Cap US Stocks 0.01% 401(k)
SSGA Mid-Size US Stocks 0.04% 401(k)
SSGA International International Stocks 0.08% 401(k)
SSGA Emerging Markets Emerging Market Stocks 0.12% 401(k)
Pimco Core Plus Bond Fund Bonds 0.37% 401(k)
SSGA REIT REIT 0.08% 401(k)

I’m aiming for the same asset allocation in my 401(k) account as my IRA accounts so I’m mirroring the investment classes. This will make rebalancing a bit simpler since the accounts are at different institutions.

My 401(k) is at Fidelity and my IRA accounts are at Vanguard. The total value of my retirement accounts is about $285,000.

 

Quote of the day

The trouble with retirement is that you never get a day off.

0 thoughts on “My retirement accounts update”

    1. Hi DFG,

      It certainly makes sense to take advantage of tax-advantaged accounts. If you don’t qualify for pretax contributions on your Traditional IRA, then I think a post-tax Roth IRA is better than a post-tax T-IRA. After 5 years you can take original contributions out without penalty in an emergency with a Roth (although you can’t replace the money), and the post-tax Roth IRA income will be tax-free.

      There are income limits on Roth IRA contributions (not on the T-IRA) so you could be unable to contribute the full amount to a Roth. Although a conversion method known as the ‘backdoor Roth’ effectively allows contributions to a Roth regardless of income level but you have to be very careful with that if you have pre-tax money in a T-IRA.

      Best wishes,
      -DL

  1. DL. That’s great information. I invest in taxable accounts and IRA. But in my blog to calculate the overall portfolio value etc, I do include both my taxable accounts and IRA. Like I mentioned in my blog, my primary focus of dividend investing is not Financial Independence since I am single earner in my family of 4. My primary aim is to provide additional income during retirement years and hence that’s why I include my IRA numbers as well. I do contribute to a 401k which I don’t include in my calculation and that’s my bonus like you mentioned. I did debate between Roth and Traditional IRA, but figured that my tax rate at retirement will be smaller than right now and hence decided to take advantage of the tax savings in Traditional IRA right now. But I do revisit this every year during tax time anyway. So it might change.

    1. Hi DGJ,

      Since you’re looking at your investments for retirement income then it makes perfect sense to me to combine the income across both accounts – viewing your portfolio across all accounts will help you spot any over-allocation to a sector etc.

      I went through the Roth vs. Traditional choice in my 401(k) plan as my current employer offers both options, and I reached the same conclusion as you did – I stayed with the standard 401(k) plan. However for IRA contributions outside my 401(k) I had exceeded the tax-deductible income limit for my T-IRA so I could only make post-tax contributions. At which point the Roth IRA was a better choice.

      I’m not adding more money to my Roth IRA now because I’m somewhere above the income limit where Roth IRA contributions are restricted and I have pre-tax money in my T-IRA which makes a roll-over expensive. So any spare money goes towards ‘Financial Independence’ instead.

      Thanks for stopping by and sharing your thoughts; it’s great to get other perspectives on retirement!

      Best wishes,
      -DL

    1. Hi Alex,

      I’m doing it very simply in Excel at the moment – I use the asset class from the table above in the post (e.g. VTMGX = International) and use this to determine the percentage of that asset class against the entire portfolio.
      E.g. International % = Market Cap of (VTMGX + SSGA) / Total Market Cap Value of all funds.

      I do use Quicken 2015 to consolidate my accounts and it comes with access to Morningstar’s Portfolio X-Ray feature. I looked at the funds using that feature which provided a more detailed view – e.g. the total stock market funds include REIT stocks which are duplicated in the REIT index. It wasn’t enough to make me change anything at this point so I’ll most likely use the simple method when I do need to rebalance.

      Thanks for stopping by!
      Best wishes,
      -DL

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