Re-balancing my investments: 2013 Roth IRA contribution edition

My investments have been mostly plodding along this year. Occasionally, I have adjusted how much of my 401(k) contribution went to what (S&P 500 index, total international index, and stable value fund) and then left it alone again. For example, my September and October contributions went about 50/50 to the stable value fund and the total international index because the US stock markets had been doing so well.

But now that it is time to make my 2013 Roth IRA contribution, I am going to re-balance by exchanging some funds around. Back in May, I wrote a post on Tax-Efficient Investment Placement Over Time, which I have referenced so many times that I should really bookmark it.

First, what are the balances in my various accounts?

  • $23,600 Roth IRA (with $5,500 new contribution)
  • $8,200 Old tax-deferred CDs
  • $10,100 Series I Savings Bonds
  • $15,700 Taxable account
  • $74,500 401(k)
  • $132,000 Total investments

What is my asset allocation?

% Category Amount
26% Fixed income $34,320
37% International stocks $48,840
37% US stocks $48,840

If we follow my ordering from my post on tax-efficient investment placement, what does that ideal portfolio look like?

Steps

  1. My employer match to the company stock
  2. Series I Savings Bonds that already exist in taxable
  3. CDs that are already in my Roth IRA
  4. The remaining portion of my fixed income allocation to the stable value fund in my 401(k).
  5. (not necessary) As much of my remaining fixed income allocation to Total Bond Market in my Roth IRA as possible
  6. (not necessary) If my tax-advantaged balances weren’t enough for all the fixed income necessary, added $10,000 in Series I Savings Bonds (possibly early for future-proofing)
  7. (not necessary) Any other fixed income went to a tax-exempt bond fund in taxable.
  8. As much of my international allocation in taxable as it allowed (in the first few years, my entire taxable balance; in later years, the entire international allocation)
  9. Next, I added any of the remaining international allocation into my 401(k).
  10. The remaining 401(k) funds went to the S&P 500 index fund. Call this amount X.
  11. (X/0.8)-X is how much I put into the Extended Market index fund in my Roth IRA (minimum of $3,000).
  12. The remaining Roth IRA funds went to Total Stock Market.
  13. (not necessary) The remaining taxable funds went to Total Stock Market.

Ideal portfolio

Account Fund Current Ideal Difference
401(k) Stable value $14,300 $16,000 +$1,700
Taxable Total international stock index (admiral shares!) $15,700 $15,700 (same)
401(k) Total international stock index $22,100 $33,200 +$11,100
401(k) S&P 500 index + employer stock $38,000 $25,300 -$12,700
Roth IRA Extended Market index fund $8,400 $6,300 -$2,100
Roth IRA Total international stock index $9,700 $0 -$9,700
Roth IRA Total Stock Market index fund (admiral shares -soon!) $5,500 $17,300 +$11,800

Note that these numbers are all rounded, so they may be slightly off if you try to make calculations with them, but they should still illustrate my example sufficiently.

The main thing here is that I’m moving my Roth IRA from being mostly Total International Stock Market index (TISM) with a bit of Extended Market index to being mostly Total Stock Market Index (TSM) with a smaller amount of Extended Market. I’m also going to exchange all of my company stock into the S&P 500 index fund to diversify better. (So many people don’t know you can do this!)

I’ll perform a few transactions to accomplish this:

  1. Contribute $5,500 to the money market account in my Traditional IRA. – done!
  2. Convert the $5,500 from my Traditional IRA into the total stock market index fund in my Roth IRA once the funds settle. – done!
  3. In my 401(k), exchange all of the company stock money to the S&P 500 index fund.
  4. Next in my 401(k), exchange ($11,100 – company stock money = $12,700) from the S&P 500 index fund to $1,700 in the stable value fund and $11,000 in the total international stock index fund.
  5. In my Roth IRA, exchange $2,000 from the extended market index fund and the entirety of the total international stock index fund into the total stock market index fund.

And that’ll be the last re-balance I make by exchanging until early 2015 when I make my Roth IRA contribution for 2015 – all other rebalancing will be done by adjusting which funds in my 401(k) get how much of my contribution each month.

Happy Friday, all!

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15 thoughts on “Re-balancing my investments: 2013 Roth IRA contribution edition

  1. DH’s company just reinstated matching, so it looks like we’re not going to do the IRA option this year. Plus the only cheap options are an S&P500 index and a small-cap index. So no rebalancing there. Especially since the only cheap option in my 457 is another S&P500 index. Oh well, we’re still relatively young. We do have *some* variety, but haven’t rebalanced in a long time. But it is very likely we’re over-exposed to the S&P 500 at this point. I guess as things go it isn’t the worst thing to be over-exposed to.

    • Ooooh that’s great that they reinstated matching! You could always put enough in to get the match and then contribute to an IRA, if you really want to do the IRA. The tax savings is probably worth using his 401(k) as much as you can though. S&P 500 index funds are sure popular in employer plans… Nope, S&P 500 index isn’t the worst to be exposed to. And at least you have one cheap fund to use.

      • No, we really can’t put in enough to get the match and then contribute to an IRA. Not with me already maxing out my 403(b) and the 457 (and contributing to the 529s, and daycare and private school and insurance and fancy cheese). It’s one or the other. (They’re both about the same amount– about $500 more to get the match vs. us both doing our IRAs.)

        His plan is actually kind of expensive, over 1% fees to use the Vanguard S&P. My Fidelity plan has the same Vanguard fund as its cheapest but it’s but a lot cheaper to use than in his employer’s plan. Still, a match makes it worth the higher fee.

        • Wow :( My S&P 500 index fund in my 401(k) is at 0.04%. That sounds like a terrible 401(k) plan – I hope he likes the job at least!

          You could contribute less than the max to an IRA. Like $500 or $1,000 each. You don’t have to just contribute the max.

        • His employer match limit is about $500 more than we’d set aside for the IRA. So we’re already doing $500 more than we had planned (which probably means $500 less in mortgage prepayment).

          Our retirement savings this year (including employer contributions):
          required: 14K
          403(b): 17.5
          457: 17.5
          401(k): 18K

          That, btw, is a lot more than 20% of our income.

          Our amount already saved is pretty large– we caught up with our recommended savings for our current income level about 2 years ago.

          I really don’t think we need to put away another 11K, or anywhere leading up to that amount.

        • Ahhhh! I get it now – 67k is a fair amount to save for retirement in one year :)

          The 401(k) max is only $17.5k unless your husband’s employer lets him make after-tax contributions. Where did you get your 18k number from?

        • That includes the employer match. Matches aren’t included, right? That’s what the worksheet I filled out seemed to imply, but I assume if that’s not true, they’d cut us off at 17.5.

  2. There is an interesting thread on bogleheads right now on tax efficient asset allocation and how traditional advice may be wrong depending on your holding period and the rates of return for different assets – I have not adjusted my allocation to reflect this (it is psychologically difficult and I am not sure how much of an advantage there would be) but am thinking about it.

    Separately, adjusting your contributions each month to keep yourself in balanace may not be optimal. I believe I read a study a while back (I think from vanguard) that rebalancing too frequently actually lowers your return vs rebalancing every 6 months or every year) – the logic of this I believe is you get some bonus from lettings things ride – which I think you could consider a momentum bonus from not rebalancing to frequently. I suspect doing it once a year for a sustained period to bring you back into balance on a less frequent basis may be a better approach while still avoiding the tax impacts rebalancing may cause you if you do it through an exchange.

    For new contributions, you could also set up automatic exchanges in your tax advantaged accounts so contributions in your taxable accounts were done so you were in effect adding money at your target allocation rate across accounts. For example, with two accounts not tax adjusting, if you wanted A25%,B25%,C25%,D25% where A and B were in taxable and B,C,D were in tax advantaged. For every deduction from your paycheck into the taxable you could have 25%A 75%B in your taxable and within your tax advantaged, an automatic exchange of 25% to C and D from B. Trick is you need 1 fund/asset class in common between two pairs of your 3 accounts to do this. Ideally, you should build a tax adjustment into your calculation and work with pretend balances since, for example money in a Roth is more valuable than money in taxable.

    • I saw that thread on bogleheads. It seems to me that sticking to an asset allocation/location over the long-term is probably almost more important than where exactly you put specific funds…

      I was under the impression that you should only sell to rebalance once a year at most, but that adjusting your contributions wasn’t bad. Since I only plan on making the Roth IRA and 401(k) contributions next year, I’ll probably just set it on auto-pilot for the year and try to leave it alone. I actually can’t do automatic exchanges in my 401(k).

      • Ah, I thought you meant adjust your contributions to bring yourself into balance each paycheck (so you remain close to perpetually in balance).

        • I may do that early in the year to re-balance from making the Roth IRA contribution. At my current allocation, $1,430 of the $5,500 should go to cash, not stocks. So I may put 100% of my 401(k) contribution in January there and then set and forget for the rest of the year. I’m trying to get better at not fiddling with things, so maybe keeping myself honest with this blog will lead me to just set it on auto pilot for the whole year…

          I tend to start fidgeting with things when I contribute unknown amounts. Until the mortgage is paid off, this should be simpler…

  3. Do you get incentives to purchase company stock? We get the transaction fee waived for any company stock we buy. I don’t know how that might impact it if you transfer it into an index fund

    • I don’t buy company stock. My matching funds in my 401(k) actually go to company stock. I usually exchange from that to the S&P 500 index fund every once in a while. My bonuses also come in the form of restricted stock units (RSUs) of my company’s stock, but I have those all set to sell immediately.

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