Help me figure this out, please

[HadEnuff]

Here's the situation:

I have enough in various IRAs the I expect to be able to maintain current lifestyle with a 3% WD rate from them. IRAs are invested 60-40, stock-equities in Vang. Index Funds, very closely modeled after a typical Bernstein tax deferred allocation strategy.. pretty simple there .

it's the After-Tax money strategy I'm scratching my head over...

I have 250K in After-Tax money, and I'd like to leave 50K in a money market as my 1 year emergency fund, which will be more than enough when combined with my SS. I could do CD ladders with that, but the rate of return is not worth the hassle IMO. but I'm open to suggestions there..

that leaves me with the 200K that I'd like to make something on, 2-3% would be nice. I've got about 150K of it in MMs, (local bank, and Vang.), and have bought
about 50K in VANG. STAR FUND, on little bitty market dips.

What are your thoughts on STAR FUND, (which more-or-less allocates bonds-equities wishing the fund) vs. other vehicles for investing this money?

Marginal Tax Rate will be managed at 15% Fed, and 6.5% NY State, BTW.

Thank you in advance.

 

[LOL!]

My opinion: STAR fund is not tax-efficient. If you are in the 15% tax bracket, then you would pay no federal income taxes on qualified dividends and on long-term capital gains.

You did not state what your desired risk level is.

I am also in the 15% marginal income tax bracket and pay no state income taxes. I use a 100% equity (stock) fund in my taxable account because I have plenty of fixed income (bond) funds in my tax-advantaged accounts.

I convert some of my IRAs each year to Roth IRAs. The lower I can keep my taxable income from my investments, the more I can convert without paying much in the way of taxes. The more I convert, the higher will be my future tax-free income. That will be very important to me in order to avoid the taxes on Required Minimum Distributions (RMDs) in future years.

So, I am using Vanguard Large-cap Index fund because it has 100% qualified dividends. It is risky in that it is a stock fund and fluctuates in value. But I don't pay any taxes on the income it produces for me.

 

[HadEnuff]

I would describe my risk tolerance as "moderate" I guess. At least that's the way I think of it, based upon my willingness to be at least 50% exposed to equities.

Very interesting point you make about Roth Conversions...have not really researched that at all. In fact, I don't know anything about how that is done. Do you have a link where I can get some info on that? Do you convert regular IRA funds to Roth IRA funds by paying income tax on that amount, at the 15% rate now, so you won't pay a bigger rate later when you have to make larger RMDs?

Please further forgive my ignorance, but what is meant by "qualified" dividends?

 

[LOL!]

Here is post about Roth conversions with links to articles about Roth conversions:
https://www.bogleheads.org/forum/viewtopic.php?t=162635

As for qualified dividends, take a look at your last year's 1099-DIV from Vanguard and the STAR fund. See where it says "qualified dividends"? Is that less than the total in Box 1? How about your Form 1040 Lines 9a and 9b?

 

[Gotadimple]

it's the After-Tax money strategy I'm scratching my head over...

I have 250K in After-Tax money, and I'd like to leave 50K in a money market as my 1 year emergency fund, which will be more than enough when combined with my SS.

Think about putting your emergency fund in a high yield savings account, especially one at an internet bank. Pays more than money market yields, and provides you with an easy way to move money back into your checking account.

- Rita

 

[HadEnuff]

Think about putting your emergency fund in a high yield savings account, especially one at an internet bank. Pays more than money market yields, and provides you with an easy way to move money back into your checking account.

- Rita

Got any recommendations for internet banks?

 

[LOL!]

Why do you even have an emergency fund? Are you expecting to lose your job?

 

[HadEnuff]

Why do you even have an emergency fund? Are you expecting to lose your job?

now I see how you got your screen name....

good question though... I'm new at the retirement game, and old habits die hard.

My thinking is that if we have a meltdown, like in 2008, I'd like to have a full year to not sell anything.

 

[LOL!]

In 2008 Vanguard Interm-term treasury bond fund VFIUX was up 13.5%. I like that kind of meltdown. In 2007 it was up more than 10%.

 

[RAE]

Got any recommendations for internet banks?

I use Ally Bank. They pay around 1% for savings accounts. I've been satisfied with them, no problems.

 

[HadEnuff]

In 2008 Vanguard Interm-term treasury bond fund VFIUX was up 13.5%. I like that kind of meltdown. In 2007 it was up more than 10%.

there are enough funds invested in enough different things, that in any particular circumstance, some will do well.

You kind of lost me here with this observation. What is your point? That I shouldn't have an emergency fund, or that if I'm worried about a crash, I should have my emergency fund in VFIUX?

 

[LOL!]

My point is that your portfolio should have an asset allocation and include equities (stocks) and fixed income (bonds, CDs, cash, if you like). The fixed income assets are for a meltdown in equities, but Treasury bonds do better than cash almost all the time. In my opinion, one doesn't need cash if they have an asset allocation between stocks and bonds. In a meltdown like 2008, cash did not do as well as bonds. In a market like last year, cash did not do as well as bonds. In future markes, cash will not do as well as bonds.

I am sure you will have bonds in your portfolio. After all, the STAR fund you initially mentioned is something like 37% in bond funds. You probably have bond funds in somewhere else in your portfolio, too. Those bond funds are for when stocks "melt down." You do not need cash because you have those bond funds.

I would not have bond funds in my taxable account. I have bond funds in my tax-deferred accounts. I think your Bernstein mention suggests you have read some of his books. What do they have to say?

 

[growerVon]

Hi HadEnuff, this page on the Bogleheads wiki site gives a good overview of what types on investments are good fits for your tax-advantaged vs taxable accounts:
https://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement

Lots of good info in that wiki. In terms of your IRA vs after-tax account, ideally you use both accounts to get to your overall desired asset allocation. You'd keep bonds and other less-tax-efficient holdings in the IRA, and tax-efficient holdings in the taxable account. Vanguard's Total Stock Market Admiral class would be a good fit instead of the STAR account. You could then beef up your bond fund holdings in the IRA to get your target AA.

 

[pb4uski]

It is better to look at your AA across your taxable and tax-deferred accounts on a combined basis rather than just for your tax-deferred accounts.

I would put the $50k in an online savings account (I use Discover Bank...0.95%) and consider that part of my fixed income allocation and put the rest in Vanguard Total Stock Index and Vanguard Total International Stock Index funds (or the Vanguard World ETF). The dividends and LTCG from the Vanguard funds would be mostly tax-free if you remain in the 15% tax bracket and you would get the foreign tax credit. Then make adjustments in your tax-deferred funds to bring you back to 60/40 overall.

Then explore Roth conversions to the top of the 15% tax bracket.