how to structure my 401k and IRA

[cdrwok]

Hello forum.
I will start work soon, and I have some questions about my 401k and IRA.
Here is my asset allocation
EARLY TO MID-CAREER
40% US blue chip
30% foreign blue chip
5% value
5% small cap
10% high quality bonds
5% TIPS
5% cash

LATE CAREER
30% US blue chip
25% foreign blue chip
2.5% value
2.5% small cap
20% high quality bonds
10% TIPS
10% cash

To create a tax efficient allocation, I read that it is best to put my bonds and TIPS into my 401k and IRA. As you can see, I can only contribute 5000 into IRA and 16500 into 401k this year. Eventually, late in my career, I will have to shift allocation, and have 30% of portfolio in bonds.
As the year goes by,I will contribute the max into 401k and IRA, and at the same time, buy increasingly more bonds in my 401k, and IRA

Example:
this year, i contribute 16500 to 401k, 5000 to IRA. 10% bond plus 5% TIPS equals to 15%. So 21500 x 15% = 3225. So I buy 3225 worth of bonds and TIPS and put them in 401k.
As the years go by, say to the year where my yearly contribution limit to 401k is 25000, my IRA contribution is 5000. Thus that year, I have 30000 to invest. At that year I rebalance to 30% bonds and TIPS. Thus I have to invest 30% x 30000 = 9000 into bonds and TIPS. To max tax efficiency, 5000 to IRA will be used to buy bonds, and the other 4000 to buy bonds in 401k.

So does that mean eventually, my yearly 401k and IRA contributions will devote more to bonds, kicking my yearly stocks contribution out into a regular investment account?

It is a lengthy post, hope someone can give me some advice. Thanks.

 

[jIMOh]

I have a different philosophy.

The Roth IRA represents the core of your portfolio. It will exist the longest of all investments, so each asset class in your allocation needs to exist inside the Roth. Only exception might be to own muni bonds in a taxable account before adding other bonds to Roth.

I am 36 and 17 years (I HOPE) to FIRE.

My Roth is allocated as follows:
75% domestic equity-25% foreign equity

45% domestic large cap (equity income)
15% domestic mid cap
15% domestic small cap
15% foreign large
10% foreign mid/small/emerging markets

My 401k and wife's 401k are the same 75-25 allocation with the following exceptions:
My 401k has no mid cap, so it is 30% small cap
Wife's 401k has no small cap, so it is 30% mid cap
My rollover IRA is the same allocation as my Roth
My wife's rollover IRA compliments her Roth with an additional sector fund

Wife's Roth is in sector funds which have the 75-25 allocation, but not the 45-15-15-15-10 allocation (it is close, within 10% on xray). She owns close to 9 funds I believe, each covering a different sector (energy, health care, real estate, tech, emerging markets, global tech, value, growth and financial). She overweights 2-3 sectors at a time, but keeps a position in each.

My 401k+Roth= close to 75% of the assets.

Each account is managed as its own. This is my 4th 401k in 12 years. This is wife's 4th 401k in 8 years. The 401k funds come and go (her 401k switches funds out every year). No reason to lock in "the large cap fund is in wife's 401k" because that decision might only last a year... we need a broader plan to cover 30 years of investing pre-retirement.

 

[travelover]

....................So does that mean eventually, my yearly 401k and IRA contributions will devote more to bonds, kicking my yearly stocks contribution out into a regular investment account? ........................

Maybe so, depending on how much the contribution limits are indexed to inflation or increased to encourage saving and how much you continue to save.

Having stocks in a taxable account is not all bad, especially if you use an index fund with inherently small capital gain and dividends. Stocks in a taxable account also provides an opportunity for tax loss harvesting.

 

[cdrwok]

Thanks for the replies gentlemen.

It is insightful to read those posts. Would it make sense to instruct the administrator of the 401k to adhere to my asset allocation (they dont offer target date fund) with auto-rebalance quarterly or yearly, then have them deduct directly from my paycheck- like dollar cost averaging?
So the IRA can become my core with all the assets classes in them, I am thinking about opening it at Vanguard and purchase a target date fund (with auto-rebalance built-in), again with dollar cost averaging. Would this make sense?
I am now living in NC, is it a good idea to have NC munis in my taxable investment account?
Again, thanks all for reading and responding. I just started out, and have been trying to read as much as I can, but it is certainly enriching to have discussion with others

 

[JOHNNIE36]

Not sure this is the right thread but I have a querstion on selling brokerage CD and reinvesting in another IRA CD. I have a $183K IRA CD in Fidelity (a brokerage CD). These are new to me. Fidelity tells me I can sell this CD for $192K because its a 5% for 5 years and people would love to have this. I've put it out for bids today. If I can get the $192k offer, I'll sell it and roll it over into another IRA CD at 4.75% for 5 years and be money ahead ($9000 gain). It's moving to another institution but the rate is guaranteed through 4-15-09. What can be wrong with this move? I'm losing .025% per year but gaining $9000 right now.

 

[jIMOh]

It is insightful to read those posts. Would it make sense to instruct the administrator of the 401k to adhere to my asset allocation (they dont offer target date fund) with auto-rebalance quarterly or yearly, then have them deduct directly from my paycheck- like dollar cost averaging?
So the IRA can become my core with all the assets classes in them, I am thinking about opening it at Vanguard and purchase a target date fund (with auto-rebalance built-in), again with dollar cost averaging. Would this make sense?
I am now living in NC, is it a good idea to have NC munis in my taxable investment account?
Again, thanks all for reading and responding. I just started out, and have been trying to read as much as I can, but it is certainly enriching to have discussion with others

How long do you plan to live in NC? That may answer the muni bond question...

Understand that in some cases, size matters.
Understand that in other cases size does not matter. Really.

For example its possible your 401k will have more money it while you are this employer. No guarantee you will work at this employer for 30 years... right? So make sure the allocation is correct (whatever it happens to be for your risk tolerance). Even if one of the funds is less than great, if it fits the allocation, use it.

In the IRA use stricter criteria. The size of the IRA will be smaller (right now), but make sure you pick the funds you want to own your whole life.

As for bonds, no need to think you need them now. Maybe you do (what is your risk tolerance?). When you do need bonds, adding them to 401k might be enough (it is for me). When you need bonds to reduce the risk of the Roth, that is when you add munis, IMO.

There is more than one correct way to do it.
In some ways you might combine philosophies of many posters. Maybe a few tell you my philosphy makes no sense or maybe I tell you that poster is full of $h!....

 

[cdrwok]

Look like I plan to stay in NC 3 year plus. Got a job offer at Walgreen that pays 116000, signing bonus 15000 for total of 3 year contract, and 1250 moving cost.
If i contribute the max, which is 16500 into my 401k, and 5000 into a flex account, my pay will be 94500-not counting 15000 signing bonus and 1250 moving cost.
Do i still qualify for the Roth IRA or I have to go with a traditional IRA?
thanks.

 

[DblDoc]

I would post also your questions over at Bogleheads Bogleheads :: View Forum - Investing - Help with Personal Investments. There are a group of posters over there that give excellent advice.

Read this first: Bogleheads :: View topic - Asking Portfolio Questions to see how to organize your post

Also do you have an emergency fund of 6+ months of expenses?. Any high interest credit card debt? You might want to find the E fund first and pay of debt before maxing out retirement accounts.

Kudos for starting to plan so early in your career.

DD

 

[cdrwok]

I would post also your questions over at Bogleheads Bogleheads :: View Forum - Investing - Help with Personal Investments. There are a group of posters over there that give excellent advice.

Read this first: Bogleheads :: View topic - Asking Portfolio Questions to see how to organize your post

Also do you have an emergency fund of 6+ months of expenses?. Any high interest credit card debt? You might want to find the E fund first and pay of debt before maxing out retirement accounts.

Kudos for starting to plan so early in your career.

DD

Good idea about the 6 month living expenses. I dont have any credit card debt, paying balance in full so far. So I probably pay some of my student loans first, some carry 6.5%, but some is 2.85. I at least should contribute to get the matching funds. I should focus paying off the 6.5% loan first, considering returns in any investment this year goona be lower than 6.5%.
Thanks.