Investing Priority

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ole luna patoona
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Investing Priority

Post by ole luna patoona »

I read on the very first post on this forum the following:

Investing Priority
The general rule of thumb for investing priority is:
1. 401k/403b up to the company match
2. Max out Roth
3. Max out 401k/403b
4. Taxable Investing

Could someone please explain the math behind the idea of why we would just meet the company match (1) and not max it out prior to maxing out a Roth (2)?
PFInterest
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Re: Investing Priority

Post by PFInterest »

usually because of tax rates and also fund options.
ray333
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Re: Investing Priority

Post by ray333 »

roth growth tax free, funds in 401k may suck - still worth it up to the match since it's essentially free money / no brainer
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whaleknives
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Re: Investing Priority

Post by whaleknives »

The Bogleheads Wiki section Prioritizing investments provides more detail, but it is a question of comparing the costs of your company funds to others available in an individual IRA. Also, the choice between Traditional versus Roth IRAs is not obvious for everyone.
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retiredjg
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Re: Investing Priority

Post by retiredjg »

ole luna patoona wrote:Could someone please explain the math behind the idea of why we would just meet the company match (1) and not max it out prior to maxing out a Roth (2)?
That is a very general suggestion. It was made during a time when people's 401ks usually contained poorer choices than what could be found in an IRA. This approach also offers some tax-diversification which is likely to be a good thing.

Obviously, you want to get the entire match even in a poor 401k. What you do after that depends on the quality of your 401k (low cost funds offered), your own personal preferences, and how much money you can save.
livesoft
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Re: Investing Priority

Post by livesoft »

A significant number of investors don't agree with the stated "general rule of thumb."
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triceratop
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Re: Investing Priority

Post by triceratop »

The general rule of thumb also doesn't work so great when you're ineligible for a Roth or when it's just smarter to use a deductible IRA. I'd focus on specifics of your situation because rules of thumb are quite limited in optimality.
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Dandy
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Re: Investing Priority

Post by Dandy »

They didn't have Roths or Roth options in my 401k so my 401k which turned into a TIRA was basically it. It was nice having those tax deductions during the accumulation stage. The funds included were not the best as far as expense ratios and performance. I am lucky that I have a pension and have accumulated a large nest egg in my TIRA.

The issue I now face is the RMDs will put us in a higher tax bracket for the rest of our life. That will be even more of a problem for the longest living since the Single tax brackets are less favorable and the ability to itemize will likely not be an option. When you think about it you or your spouse can likely spend almost as much time in retirement as you did working if you retire at say, age 60.

What I wish is that I had put maybe 2/3 of my investments in my regular 401k and 1/3 in a Roth. A trade off between paying a bit more tax during the accumulation years and a bit less in retirement. I'm not complaining things worked out well. But it would be nice to have a larger pool of Roth assets not only for me but for my heirs.
Fishing50
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Re: Investing Priority

Post by Fishing50 »

Dandy wrote:They didn't have Roths or Roth options in my 401k so my 401k which turned into a TIRA was basically it. It was nice having those tax deductions during the accumulation stage. The funds included were not the best as far as expense ratios and performance. I am lucky that I have a pension and have accumulated a large nest egg in my TIRA.

The issue I now face is the RMDs will put us in a higher tax bracket for the rest of our life. That will be even more of a problem for the longest living since the Single tax brackets are less favorable and the ability to itemize will likely not be an option. When you think about it you or your spouse can likely spend almost as much time in retirement as you did working if you retire at say, age 60.

What I wish is that I had put maybe 2/3 of my investments in my regular 401k and 1/3 in a Roth. A trade off between paying a bit more tax during the accumulation years and a bit less in retirement. I'm not complaining things worked out well. But it would be nice to have a larger pool of Roth assets not only for me but for my heirs.
The rule of thumb mitigates RMD issues by prioritizing Roth IRA ahead of max tax deferred 401K contributions. In the 15% tax bracket, Roth 401K is usually the best option.
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runner3081
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Re: Investing Priority

Post by runner3081 »

Another one to add on there is the HSA.
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flamesabers
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Re: Investing Priority

Post by flamesabers »

ole luna patoona wrote:I read on the very first post on this forum the following:

Investing Priority
The general rule of thumb for investing priority is:
1. 401k/403b up to the company match
2. Max out Roth
3. Max out 401k/403b
4. Taxable Investing

Could someone please explain the math behind the idea of why we would just meet the company match (1) and not max it out prior to maxing out a Roth (2)?
You typically have a much better selection of funds with an IRA then a 401k. Also, with an IRA you don't have to pay admin fees and such to the plan administrator.
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ruralavalon
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Re: Investing Priority

Post by ruralavalon »

ole luna patoona wrote:I read on the very first post on this forum the following:

Investing Priority
The general rule of thumb for investing priority is:
1. 401k/403b up to the company match
2. Max out Roth IRA, Roth or traditional, depending on eligibility and personal circumstances
3. Max out 401k/403b
4. Taxable Investing

Could someone please explain the math behind the idea of why we would just meet the company match (1) and not max it out prior to maxing out a Roth (2)?
# 2 is an IRA, not necessarily a Roth IRA. Sometimes a traditional IRA instead.

1) The match is like free money, getting free money should always come first.
2) An IRA at a low cost provider like Vanguard or Fidelity is usually second, because very often the 401k/403b has limited and poor fund choices with high expense ratios, so you get better and less expensive choices in an IRA.

The wiki article "prioritizing investments" states all this more precisely, and also covers high interest debt and Health Savings Accounts
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