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Investment order priority

Posted: Thu Aug 27, 2020 10:45 am
by Scuttlebutt
From the Wiki:
1.Establish an Emergency fund to your satisfaction.
2.Contribute to the work-based plan (401(k), 403b,) enough to get the full employer match (the match is like free money, your best possible investment),
3.Pay off high interest debt (a guaranteed high return, the next best thing to free money),
4.Contribute to a Health Savings Account (HSA) if available (unlike many other tax deductions, there are no income restrictions to contribute to an HSA),[1][note 1]
5.Contribute the maximum to an IRA, traditional or Roth (or backdoor Roth technique[note 2]), depending on eligibility and personal circumstances,
6.Contribute the remainder of the maximum employee contribution to the work-based plan, including an After-tax 401(k) (Mega Back Door) if available,
1.Check. happy with emergency fund
2.Currently contributing 6%; however employer cut match. Happy with low cost investment choices in plan.
3.Only debt is mortgage @ 5.125%
4.Having $1200 pulled from paycheck over the course of a year to cover the majority of deductible. Not happy with HSA people. Lots of fees and stuff.
5. Maxed out IRA first week of January
6.Plan has decent choices like Fidelity 500 Index Fund (FXAIX)

Question is: Because my employer cut the match on our 401k; should I stop contributing?

I can allocate the money to pay down mortgage, but there's a good chance I'm moving soon and getting married (which is why I haven't tried to do a refi)
I can start a new HSA account at Fidelity with the money and just use my work plan to pay for prescriptions. (semi healthy with no major needs on the horizon.
Cant put anymore in an IRA.
Last idea is to skip all those inbetween steps and continue contributing as I have been because I'm happy with my fund choices.

The best options I see are either to stop my 401k contribution and fund an HSA instead, outside of my paycheck which means I would pay SS taxes on that amount; or Stay the course and be happy.

Anyone?

Re: Investment order priority

Posted: Thu Aug 27, 2020 10:51 am
by livesoft
I'll just say that I didn't have to make all those choices when I was working because there were no HSAs, no Roths, no Roth 401(k), and when Roths came on the scene no Roth conversions allowed due to income limits. It was max 401(k) all the way and all the time whether there was a match or not. And guess what? It worked out tremendously fine.

So for me, order would be:
1. Max 401(k) / 403(b) no matter what the match or cost of the plan is.
2. Max HSA
3. Max Roth
4. Max taxable
5. Got college coming up for dependents? Max 529 plans.

Saving on taxes was a big deal. Going from 33% marginal rate to 12% is a big deal and more importantly effective rate of about 2% or less.

Re: Investment order priority

Posted: Thu Aug 27, 2020 10:59 am
by retiredjg
Scuttlebutt wrote: Thu Aug 27, 2020 10:45 am Question is: Because my employer cut the match on our 401k; should I stop contributing?
No. Tax-deferral is useful even if there is no employer match.

The "order" only really matters if you cannot fill everything and have to decide which is least important in your circumstance. And the order is not written in stone either - what you have found is the Wiki is just one of several good suggestions. It may or may not be the very best order for every situation.

It appears you might have to decide between completely filling the 401k and completely filling the HSA - I doubt it matters much. The HSA, if not used for medical costs, will eventually end up just acting like an IRA...just like the 401k. Just suit yourself on this decision.

Re: Investment order priority

Posted: Thu Aug 27, 2020 11:14 am
by MrBobcat
livesoft wrote: Thu Aug 27, 2020 10:51 am
So for me, order would be:
1. Max 401(k) / 403(b) no matter what the match or cost of the plan is.
2. Max HSA
3. Max Roth
4. Max taxable
5. Got college coming up for dependents? Max 529 plans.

Saving on taxes was a big deal. Going from 33% marginal rate to 12% is a big deal and more importantly effective rate of about 2% or less.
How bad would the 403(b) have to be before you wouldn't max it? Best option out of a lot of bad ones available to my wife is a 5.5% front end load with an ER of .8% (oh and no match). Once we understood this we diverted all her contributions to a taxable account. I wish we could roll over the money she has in the plan, but no, have to wait till she retires.

Re: Investment order priority

Posted: Thu Aug 27, 2020 11:15 am
by McDougal
Scuttlebutt wrote: Thu Aug 27, 2020 10:45 am 3.Only debt is mortgage @ 5.125%
Slightly off topic, but have you looked into refinancing the mortgage?

Re: Investment order priority

Posted: Thu Aug 27, 2020 11:20 am
by AlabamaPaul
McDougal wrote: Thu Aug 27, 2020 11:15 am
Scuttlebutt wrote: Thu Aug 27, 2020 10:45 am 3.Only debt is mortgage @ 5.125%
Slightly off topic, but have you looked into refinancing the mortgage?
From the OP - "...but there's a good chance I'm moving soon and getting married (which is why I haven't tried to do a refi)"

Re: Investment order priority

Posted: Thu Aug 27, 2020 11:26 am
by McDougal
AlabamaPaul wrote: Thu Aug 27, 2020 11:20 am
McDougal wrote: Thu Aug 27, 2020 11:15 am
Scuttlebutt wrote: Thu Aug 27, 2020 10:45 am 3.Only debt is mortgage @ 5.125%
Slightly off topic, but have you looked into refinancing the mortgage?
From the OP - "...but there's a good chance I'm moving soon and getting married (which is why I haven't tried to do a refi)"
Oops, not enough coffee today! Carry on without me 8-)

Re: Investment order priority

Posted: Thu Aug 27, 2020 11:32 am
by livesoft
MrBobcat wrote: Thu Aug 27, 2020 11:14 amHow bad would the 403(b) have to be before you wouldn't max it? Best option out of a lot of bad ones available to my wife is a 5.5% front end load with an ER of .8% (oh and no match). Once we understood this we diverted all her contributions to a taxable account. I wish we could roll over the money she has in the plan, but no, have to wait till she retires.
My spouse had such a 401(k) for many years. She always maxed it. Eventually, through moving to different employer(s) either through buyouts or changing jobs, her plan is now superb. The tax savings were a big deal and overcame the fees.

And one more trick: If the plan allows for loans, then do what my spouse did: Borrow the maximum and invest the money elsewhere. In our case, the borrowed money was put into 529 plans, so she stiffed the 401(k) of the fees and still got the tax savings.

Also to keep fees low, her 401(k) was invested into fixed income, so that the growth was stunted compared to equity funds and kept the absolute dollar amount of the fees lower. We had equities in other accounts to meet our asset allocation.

Re: Investment order priority

Posted: Thu Aug 27, 2020 11:38 am
by FiveK
MrBobcat wrote: Thu Aug 27, 2020 11:14 am How bad would the 403(b) have to be before you wouldn't max it? Best option out of a lot of bad ones available to my wife is a 5.5% front end load with an ER of .8% (oh and no match). Once we understood this we diverted all her contributions to a taxable account. I wish we could roll over the money she has in the plan, but no, have to wait till she retires.
Is she eligible for Relief for taxpayers affected by COVID-19 who take distributions or loans from retirement plans | Internal Revenue Service?

If so she may be able to take up to $100K from the 403b and recontribute immediately to a traditional IRA.

Re: Investment order priority

Posted: Thu Aug 27, 2020 11:39 am
by ruralavalon
Happy with low cost investment choices in plan.
. . . . .
Plan has decent choices like Fidelity 500 Index Fund (FXAIX).
Don't stop contributions just because there is no employer match.

"If the company plan offers good, low-cost funds, it may be preferable to contribute to the company plan before contributing to an IRA." Wiki article, "Prioritizing Investments" .

Re: Investment order priority

Posted: Thu Aug 27, 2020 11:43 am
by FiveK
Scuttlebutt wrote: Thu Aug 27, 2020 10:45 am From the Wiki:
2.Contribute to the work-based plan (401(k), 403b,) enough to get the full employer match (the match is like free money, your best possible investment),
6.Contribute the remainder of the maximum employee contribution to the work-based plan, including an After-tax 401(k) (Mega Back Door) if available,
Question is: Because my employer cut the match on our 401k; should I stop contributing?
Lack of a match just moves it from #2 to #6 in the list.
I can start a new HSA account at Fidelity with the money and just use my work plan to pay for prescriptions. (semi healthy with no major needs on the horizon.
The best options I see are either to stop my 401k contribution and fund an HSA instead, outside of my paycheck which means I would pay SS taxes on that amount; or Stay the course and be happy.
If you don't want to pay the FICA tax, you could contribute to the HSA through your employer and then roll those funds over to your Fidelity HSA.

Re: Investment order priority

Posted: Thu Aug 27, 2020 11:47 am
by scophreak
AlabamaPaul wrote: Thu Aug 27, 2020 11:20 am
McDougal wrote: Thu Aug 27, 2020 11:15 am
Scuttlebutt wrote: Thu Aug 27, 2020 10:45 am 3.Only debt is mortgage @ 5.125%
Slightly off topic, but have you looked into refinancing the mortgage?
From the OP - "...but there's a good chance I'm moving soon and getting married (which is why I haven't tried to do a refi)"
Value of a refi would depend on the definition of "soon". As can be seen in a couple of very large ongoing threads, low rate no-cost refi options have been abundant and OP likely could have reduced the 5.125% rate by at least a couple of percentage points. With a no-cost refi, that would provide immediate savings (though, as I said, the definition of "soon" would help determine how valuable this might be overall). That said, the "no-cost" gravy train may at least be slowing/ending with the advent of the new 0.5% fee.

Re: Investment order priority

Posted: Thu Aug 27, 2020 11:48 am
by retiredjg
MrBobcat wrote: Thu Aug 27, 2020 11:14 am How bad would the 403(b) have to be before you wouldn't max it? Best option out of a lot of bad ones available to my wife is a 5.5% front end load with an ER of .8% (oh and no match).
Did you actually verify the 5.5% front end load? Loads are usually waived inside a 403b plan although this is not always clear in the plan documentation.

I would use a plan with ERs at .8%. I guess I'd have to think about the load though if it turns out it is actually charged in the plan.

Re: Investment order priority

Posted: Thu Aug 27, 2020 11:52 am
by MrBobcat
retiredjg wrote: Thu Aug 27, 2020 11:48 am
MrBobcat wrote: Thu Aug 27, 2020 11:14 am How bad would the 403(b) have to be before you wouldn't max it? Best option out of a lot of bad ones available to my wife is a 5.5% front end load with an ER of .8% (oh and no match).
Did you actually verify the 5.5% front end load? Loads are usually waived inside a 403b plan although this is not always clear in the plan documentation.

I would use a plan with ERs at .8%. I guess I'd have to think about the load though if it turns out it is actually charged in the plan.
Yeah I saw the front in loads taken right out of monthly investments. The plan also required you go through an "advisor" our only choices locally were EJ.

Re: Investment order priority

Posted: Thu Aug 27, 2020 11:53 am
by MrBobcat
FiveK wrote: Thu Aug 27, 2020 11:38 am
MrBobcat wrote: Thu Aug 27, 2020 11:14 am How bad would the 403(b) have to be before you wouldn't max it? Best option out of a lot of bad ones available to my wife is a 5.5% front end load with an ER of .8% (oh and no match). Once we understood this we diverted all her contributions to a taxable account. I wish we could roll over the money she has in the plan, but no, have to wait till she retires.
Is she eligible for Relief for taxpayers affected by COVID-19 who take distributions or loans from retirement plans | Internal Revenue Service?

If so she may be able to take up to $100K from the 403b and recontribute immediately to a traditional IRA.
No, I've looked at that as a possibility, but it would be a huge stretch to say we qualify.

Re: Investment order priority

Posted: Thu Aug 27, 2020 11:57 am
by MrBobcat
livesoft wrote: Thu Aug 27, 2020 11:32 am
MrBobcat wrote: Thu Aug 27, 2020 11:14 amHow bad would the 403(b) have to be before you wouldn't max it? Best option out of a lot of bad ones available to my wife is a 5.5% front end load with an ER of .8% (oh and no match). Once we understood this we diverted all her contributions to a taxable account. I wish we could roll over the money she has in the plan, but no, have to wait till she retires.
My spouse had such a 401(k) for many years. She always maxed it. Eventually, through moving to different employer(s) either through buyouts or changing jobs, her plan is now superb. The tax savings were a big deal and overcame the fees.

And one more trick: If the plan allows for loans, then do what my spouse did: Borrow the maximum and invest the money elsewhere. In our case, the borrowed money was put into 529 plans, so she stiffed the 401(k) of the fees and still got the tax savings.

Also to keep fees low, her 401(k) was invested into fixed income, so that the growth was stunted compared to equity funds and kept the absolute dollar amount of the fees lower. We had equities in other accounts to meet our asset allocation.
No loans and zero likelihood of changing jobs. It's your typical mishmash of a 403(b) options with bad to very bad vendors offered as an afterthought at a school district. I've tried to get them to add a better option but they are already at their max 5 and really don't care to try and make the plan better.

Re: Investment order priority

Posted: Thu Aug 27, 2020 12:08 pm
by surfstar
scophreak wrote: Thu Aug 27, 2020 11:47 am
AlabamaPaul wrote: Thu Aug 27, 2020 11:20 am
McDougal wrote: Thu Aug 27, 2020 11:15 am
Scuttlebutt wrote: Thu Aug 27, 2020 10:45 am 3.Only debt is mortgage @ 5.125%
Slightly off topic, but have you looked into refinancing the mortgage?
From the OP - "...but there's a good chance I'm moving soon and getting married (which is why I haven't tried to do a refi)"
Value of a refi would depend on the definition of "soon". As can be seen in a couple of very large ongoing threads, low rate no-cost refi options have been abundant and OP likely could have reduced the 5.125% rate by at least a couple of percentage points. With a no-cost refi, that would provide immediate savings (though, as I said, the definition of "soon" would help determine how valuable this might be overall). That said, the "no-cost" gravy train may at least be slowing/ending with the advent of the new 0.5% fee.
Agreed - if 'soon' is a few months+ out, refi immediately. You should be able to get a no cost one for 3% +/- and reap savings immediately. Also if you kept the property and rented it out, you'd be better off to refi now as mortgage rates for rentals are higher.

Re: Investment order priority

Posted: Thu Aug 27, 2020 12:27 pm
by MrJedi
Lack of a match simply means you are saving less. If anything you need to INCREASE your contributions if you want the same number of dollars going toward investment.

Unless you were only contributing the minimum to get the match, I do not see the logic in lowering your contribution.

Re: Investment order priority

Posted: Thu Aug 27, 2020 2:13 pm
by Scuttlebutt
surfstar wrote: Thu Aug 27, 2020 12:08 pm
scophreak wrote: Thu Aug 27, 2020 11:47 am
AlabamaPaul wrote: Thu Aug 27, 2020 11:20 am
McDougal wrote: Thu Aug 27, 2020 11:15 am
Scuttlebutt wrote: Thu Aug 27, 2020 10:45 am 3.Only debt is mortgage @ 5.125%
Slightly off topic, but have you looked into refinancing the mortgage?
From the OP - "...but there's a good chance I'm moving soon and getting married (which is why I haven't tried to do a refi)"
Value of a refi would depend on the definition of "soon". As can be seen in a couple of very large ongoing threads, low rate no-cost refi options have been abundant and OP likely could have reduced the 5.125% rate by at least a couple of percentage points. With a no-cost refi, that would provide immediate savings (though, as I said, the definition of "soon" would help determine how valuable this might be overall). That said, the "no-cost" gravy train may at least be slowing/ending with the advent of the new 0.5% fee.
Agreed - if 'soon' is a few months+ out, refi immediately. You should be able to get a no cost one for 3% +/- and reap savings immediately. Also if you kept the property and rented it out, you'd be better off to refi now as mortgage rates for rentals are higher.
"Soon" would mean; prequalified for a new mortgage on a house that we've put a deposit down on, about to go to the underwriters as soon as we can get my fiancee's house under contract.

Re: Investment order priority

Posted: Thu Aug 27, 2020 2:24 pm
by Scuttlebutt
MrJedi wrote: Thu Aug 27, 2020 12:27 pm Lack of a match simply means you are saving less. If anything you need to INCREASE your contributions if you want the same number of dollars going toward investment.

Unless you were only contributing the minimum to get the match, I do not see the logic in lowering your contribution.
I wasn't thinking of saving less. I was looking at should I, moving down the priority investment list, reallocate the exact same amount into an HSA over at Fidelity that I would probably never use for current medical expenses but as an extra IRA; or should I not complicate things and just continue funding the current 401k that I'm happy with.
In either spot; I'd probably have pretty much the same funds. Simple 3 fund total everything as close as I can get to such a portfolio. One place would be inside an HSA, the other inside a 401k.

Re: Investment order priority

Posted: Thu Aug 27, 2020 2:34 pm
by MrJedi
Scuttlebutt wrote: Thu Aug 27, 2020 2:24 pm
MrJedi wrote: Thu Aug 27, 2020 12:27 pm Lack of a match simply means you are saving less. If anything you need to INCREASE your contributions if you want the same number of dollars going toward investment.

Unless you were only contributing the minimum to get the match, I do not see the logic in lowering your contribution.
I wasn't thinking of saving less. I was looking at should I, moving down the priority investment list, reallocate the exact same amount into an HSA over at Fidelity that I would probably never use for current medical expenses but as an extra IRA; or should I not complicate things and just continue funding the current 401k that I'm happy with.
In either spot; I'd probably have pretty much the same funds. Simple 3 fund total everything as close as I can get to such a portfolio. One place would be inside an HSA, the other inside a 401k.
Yes, if you are looking to save the same amount of your base pay, I would prioritize the HSA before spilling over into the 401k if there is no matching to consider. I think most people will have no problem draining down their HSA with qualified expenses in retirement. Worst case you use it like a tax deferred IRA/401k anyway after age 65. Best case it goes in and out tax free.

Re: Investment order priority

Posted: Thu Aug 27, 2020 2:43 pm
by Texanbybirth
MrJedi wrote: Thu Aug 27, 2020 2:34 pm
Scuttlebutt wrote: Thu Aug 27, 2020 2:24 pm
MrJedi wrote: Thu Aug 27, 2020 12:27 pm Lack of a match simply means you are saving less. If anything you need to INCREASE your contributions if you want the same number of dollars going toward investment.

Unless you were only contributing the minimum to get the match, I do not see the logic in lowering your contribution.
I wasn't thinking of saving less. I was looking at should I, moving down the priority investment list, reallocate the exact same amount into an HSA over at Fidelity that I would probably never use for current medical expenses but as an extra IRA; or should I not complicate things and just continue funding the current 401k that I'm happy with.
In either spot; I'd probably have pretty much the same funds. Simple 3 fund total everything as close as I can get to such a portfolio. One place would be inside an HSA, the other inside a 401k.
Yes, if you are looking to save the same amount of your base pay, I would prioritize the HSA before spilling over into the 401k if there is no matching to consider. I think most people will have no problem draining down their HSA with qualified expenses in retirement. Worst case you use it like a tax deferred IRA/401k anyway after age 65. Best case it goes in and out tax free.
Agree with MrJedi.

My family is in a similar position where we can't max out everything. We put a "little" into 401k, a "little" into Roth, a "little" into taxable, and max out the HSA.

Re: Investment order priority

Posted: Thu Aug 27, 2020 6:10 pm
by grabiner
MrBobcat wrote: Thu Aug 27, 2020 11:14 am How bad would the 403(b) have to be before you wouldn't max it? Best option out of a lot of bad ones available to my wife is a 5.5% front end load with an ER of .8% (oh and no match). Once we understood this we diverted all her contributions to a taxable account. I wish we could roll over the money she has in the plan, but no, have to wait till she retires.
My rule of thumb is that the extra expense, times the number of years you will be stuck with the plan, would need to exceed twice your tax rate on qualified dividends. For example, if you pay no state tax, and are paying an extra 1.5% on the 403(b), it is probably better to invest in the 403(b) if you will be there less than 20 years. If you pay 5% state tax, the 403(b) is better even for 26 years.

The reason is that you can invest in the 403(b), then roll it over to an IRA when you leave, keeping the tax deferral but getting rid of the high expenses.