401K Allocation Help!

[yayme1227]

Okay, I am actually researching for my husband. I am familiar with no load mutual funds (my Roth IRA and my childrens' college funds are with Fidelity and T. Rowe Price in no load funds) but I have no clue when it comes to these Advisor type funds or how to pick funds with all these fees etc. Anyway, my husband is 35 and here are his choices of funds to choose from. I told him to see if he could get help with an advisor through his company but it turns out the company that is in charge is OneAmerica and I looked up the 2 funds they offer in his plan and they are awful. So anyway, I would just like some advice on what you think please. We would want something that we would not have to manage too much and would not be some extreme risk either--maybe moderate risk at most. Some of these funds look good on Morningstar but I am not sure what percentages we should do in each etc.

Also, his company does not currently match. They give him the choice of a traditional 401K or a Roth 401k.
He will contribute 10% of his income ($8,500yr) to retirement. Should he go with the Roth?

AUL Fixed account
Alger SmallCap Growth Institutional
American Century Ginnie Mae
American Century Small Cap Value
American Funds Capital World Growth and Income
Fidelity Advisor Mid Cap
Fifth Third All Cap Value
Franklin Strategic Income
OneAmerica Asset Director
OneAmerica Value
Oppenheimer Main Street Opportunity
Russell 2020 Strategy Fund
Russell 2030 Strategy Fund
Russell 2040 Strategy Fund
SSgA Russell 2000 Index Strategy
SSgA S&P 500 Index Strategy
SSgA S&P MidCap 400 Index Strategy
T. Rowe Price Growth Stock
Thornburg International Value

Thanks for your help!

[jIM_Ohio]

I would post income (current), retirement assets (current) and ages for retirement before choosing traditional vs Roth.

The T Rowe, Fidelity fund and Alger are funds I have heard of, I think I have heard of Thornberg too.

[yayme1227]

Thanks I just entered his info in a calculator online I found to determine the diff. between the 2. It looks like the Roth would be the better way to go.
He is 35 and estimate retirement 65. Currently $85,000 per year salary and I am not sure what he has in his retirement from his last job. Not a lot, under $10K I think. He was only saving 2% I found out so he started this new job and I told him he must save at least 10% and once our debt it paid off he needs to save even more! So I am sort of in charge here to make sure we choose good funds and the 10% is invested. He has no interest in this stuff. I do so I gotta figure it out for him.

[jIM_Ohio]

85k, married filing jointly, puts you in 25% tax bracket. 75% of Americans earn less than you (75% of population is in 15% tax bracket). I would recomend using the regular 401k in an effort to decrease taxes now, as it's probable in retirement you will be in 15% bracket then, so don't pay 25% now, pay 15% later and you just earned 10%.

I would then consider putting 10% of income to regular 401k. I would divide this up between

T Rowe Growth stock
Fidelity Mid Cap
Alger Small Growth
and
Thornberg International

Maybe a 45-15-15-25 split.

I would then look to open a Roth IRA in each of your names and max that (if possible). 5k to each. I would look to add a large cap value fund and maybe an international small cap fund in the Roths.

Most people are best served trying to reduce taxable income now if in 25% bracket. If you do this right, the 401k will lower you into 15% tax bracket NOW, so the Roth deposits are being taxed at 15% (and not 25%).

[yayme1227]

Sorry, I forgot to add I make $55K a year. I work for the State of Texas so it is a teachers' retirement program that I have to save through. They automatically take out 5% and they match it (but they also manage the plan..there are no options on my part..when I retire they give me a percentage of my salary for the rest of my life based on my age at the time and years worked there.
I also have an additional Roth 403B through Fidelity that I do on my own.
I am currently putting $100 a month in the Roth. I am paying down my credit cards currently too.

So our combined income is $140K and we would be in the 28% tax bracket.
Would you still recommend what you said?

Also, at what combined salary am I no longer able to qualify for the Roth?

[jIM_Ohio]

Sorry, I forgot to add I make $55K a year. I work for the State of Texas so it is a teachers' retirement program that I have to save through. They automatically take out 5% and they match it (but they also manage the plan..there are no options on my part..when I retire they give me a percentage of my salary for the rest of my life based on my age at the time and years worked there.
I also have an additional Roth 403B through Fidelity that I do on my own.
I am currently putting $100 a month in the Roth. I am paying down my credit cards currently too.

So our combined income is $140K and we would be in the 28% tax bracket.
Would you still recommend what you said?

Also, at what combined salary am I no longer able to qualify for the Roth?

Tax brackets are based on AGI and taxable income, not gross income.

What was your AGI on last tax return?

If in 28% tax bracket, I would strongly recomend investing with methods which reduce taxable income (401ks and deductable IRAs) until you are in 25% tax bracket. I would keep these investments as is until you see an oppotunity to convert to Roth at 15% bracket. My wife and I earn slightly less than you, and our taxable income is in 15% tax bracket with about 4k to spare.

The system might look like this:

Max out 401k and 403b accounts. Contribute as much to deductable IRA as possible (you cannot max the deductable IRA, more than likely, but get whatever deduction you can). If you have a mortgage, itemize your returns (which should also lower effective tax rate). Invest any extra monies in taxable accounts. If you have enough to max Roths too, do it, but make sure you have some monies in taxable accounts which will compound and provide 10 years worth of income in retirement.

When withdrawing, use the taxable accounts first. Do this because capital gains do NOT raise your taxable income. You have a 10 year window between ages 59.5 and 70.5 to position assets where you want them. At age 70.5 the government will require 401ks and traditional IRAs have withdraws.

Then convert the 401k/IRA to a Roth up to cap of current 15% tax bracket (meaning you could convert around 66k per year today). You live off the taxable account, converting the 401ks/IRAs to a Roth.

Create a spreadsheet and look at the following

age, conversion amount, amount in IRA/401k, amount in Roth, amount in taxable account

and then make sure you run this for each year between 59.5 and 70.5 (to see when all of 401k can be converted to Roth). You may want two spreadsheets, one which converts in 15% bracket and one which converts in 25% bracket. Experience tell me the break even point suggests only convert to 15% bracket cap (because the extra 10% in taxes will require around 12 years of compounding in the Roth to catch up).

Your pension will throw a wrench into this, depending on the age you start withdrawing the pension (that is additional income and would prevent moving full 15% bracket amount to the Roth for a given year).

The goal is to pay as little taxes as possible (15%) over your whole life.

[yayme1227]

Wow! Thanks for all the great info!

I just checked and our agi last year was $116K. My husband was making less though at a different job. I think we will still be under $130K agi this year for sure. So with this info. how is it possible to get to 15%? Or should our goal at this point be just to keep from reaching the 28% bracket?

Also, one other question. On the breakdown of the funds you recommend are all of these higher risk? Would we need a bond fund in his 401K?

Thanks again for all of your advice. You are very knowledgable obviously and I apprecitate your help!

[jIM_Ohio]

If 100% equities is too risky, add a bond fund to taste. Being age 35, with more than 15 years to needing the money, T Rowe Price recomends no bonds (until you need the money within 15 years).

The time you have the money invested will reduce the risk of 100% equities. Time in and of itself reduces most risks of equity investing.

At 116k, you would need 50k of deductions to find 15% tax bracket. I had 40k of deductions (30k was mortgage interest). Each situation is different, without posting more, I could not set a realistic expectation.

[yayme1227]

Okay, thanks.
My only concern with the 100% is what if he changes jobs again in a few years (which he probably will). If these funds are not doing well at that point for some reason and he has to roll them over into other funds or whatever will he lose more money since they will be in the funds short term?

I am still a newbie at all this and not really sure. The money he had is his 401K at his last job he rolled it into an IRA at Fidelity to one of their Freedom Funds so we would not have to worry about it. I am just worried when he leaves this job we will not know what to do with his current funds other than roll them over into the IRA. Thoughts on this?

If I were to add a bond fund the only choice I see is AUL Fixed account whatever that is????

Thanks again for your help!

[noppenbd]

If you have to roll over to an IRA you would likely be able to do an "in-kind" rollover where the shares would actually transfer over (leaving the funds and amts unchanged) or you could liquidate and rebuy similar funds. In the former case you would not be locking in any losses because the funds would not be altered, just their location. In the latter case, by buying new funds with similar allocations, the change in value would be minimal at the point of transfer. You would just want to stick with a similar or identical asset allocation (i.e. 45-15-15-25).

[jIM_Ohio]

Okay, thanks.
My only concern with the 100% is what if he changes jobs again in a few years (which he probably will). If these funds are not doing well at that point for some reason and he has to roll them over into other funds or whatever will he lose more money since they will be in the funds short term?

I am still a newbie at all this and not really sure. The money he had is his 401K at his last job he rolled it into an IRA at Fidelity to one of their Freedom Funds so we would not have to worry about it. I am just worried when he leaves this job we will not know what to do with his current funds other than roll them over into the IRA. Thoughts on this?

If I were to add a bond fund the only choice I see is AUL Fixed account whatever that is????

Thanks again for your help!

If we allowed short term events to dictate long term choices, we might never get to the level of risk we truly need for something which we don't know may or may not happen.

Do not let the current market drive the asset allocation choice (mix of stocks and bonds)
Do not let a change of job change the asset allocation choice either.

Both are short term issues which should not impact long term planning.

[yayme1227]

Okay, thanks. I took your advice and went with the funds you recommended. They all looked really good on Morningstar. I put them in the porfolio x-ray and from what I could understand it looked good to me.
I also went with 100%. Personally, for me I would want a little bit of bonds but I asked my husband and he said he would want to do no bonds right now since he is not retiring for 25-30 years so we went with that.

Thanks!