What order to fill up retirement accounts?

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TarHeel2002
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What order to fill up retirement accounts?

Post by TarHeel2002 » Wed Mar 13, 2019 8:25 pm

Okay new situation for us. Our small business is moving from a SIMPLE 401(k) to a Safe Harbor 401(k). This will open up another 12k of 401(k) space for me and my wife. 13k x 2 = 26k vs 19k x 2 = 38k. We have been maxing out the SIMPLE 401(k) x 2, Backdoor Roth IRA x 2, and HSA for retirement savings. We would like to continue to max out all retirement accounts going forward - but - if we can't for some reason I just wanted to double check on what the correct order is of filling up the retirement account buckets. I assume it goes like this..

HSA
401(k) x 2
Backdoor Roth IRA x 2
Taxable

Thank you! :sharebeer

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grabiner
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Re: What order to fill up retirement accounts?

Post by grabiner » Wed Mar 13, 2019 9:21 pm

Your order is generally correct, with one minor exception; contribute enough to the 401(k) to get the full match, even in preference to the HSA if the match is 50%.

Two possible exceptions for 401(k) versus Roth:

The 401(k) has expensive options, so that the potential tax benefit (from retiring in a lower tax bracket) is outweighed by the cost.

You need the Roth IRA for the option of tax-free withdrawals before retirement (for example, a potential home down payment).
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sailaway
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Re: What order to fill up retirement accounts?

Post by sailaway » Wed Mar 13, 2019 9:23 pm

When you say "our small business" is this just the two of you? Can you make employer contributions, as well?

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TarHeel2002
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Re: What order to fill up retirement accounts?

Post by TarHeel2002 » Tue Mar 19, 2019 1:35 pm

Can someone please give me the bullet points of why I should fill up the HSA bucket (7k) before I fill up the backdoor Roth IRA bucket (12k). Thank you!

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teen persuasion
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Re: What order to fill up retirement accounts?

Post by teen persuasion » Tue Mar 19, 2019 1:45 pm

TarHeel2002 wrote:
Tue Mar 19, 2019 1:35 pm
Can someone please give me the bullet points of why I should fill up the HSA bucket (7k) before I fill up the backdoor Roth IRA bucket (12k). Thank you!
HSA is tax free going in and coming out. Roth IRA is post tax money going in, tax free coming out.

PeterParker
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Re: What order to fill up retirement accounts?

Post by PeterParker » Tue Mar 19, 2019 2:57 pm

HSA is completely tax free (in, growth, and out) but only for medical, vision, and dental costs (excluding premiums and vanity stuff). It's not hard to blow $400 a year just on vision (exams, glasses, contacts) and dental (2 cleanings).

Some people treat the HSA as COMPLETELY a retirement account (either save receipts or just wait til old age to withdrawal later) -- but I think this is a bit of folly. My Dad is retired age 62, and he has some Obamacare silver deal where he pays $10 a month after subsidies and has like a $2,000 max out of pocket. If you have $80k saved in the HSA, good luck "burning" through that. What do you do then, "Hope" you get cancer or something? Yeah ... no.

Now ... the HSA at age 65 can be dispersed like a tIRA. So it's simply "better" than a tIRA BECAUSE of potential medical spending advantage. But believe me, you want every DROP of medical you ever spend in your dear life pulled from it. Because why not. You can be in a situation where there's too much to burn through. I mean --- okay it's not likely given the terrible state of healthcare in our country but you never know. Tax laws might even change in the future, abuse while you can.

So yeah the HSA is 3500 a year currently max limit. Depending on your annual medical costs, it can be anything from a 20 (right now) / 80% retirement account, or a 50-50 now/ retirement account.

The Roth IRA? The principal can be pulled out at any time without penalty (not the earnings). The earnings can be used for a first-time home purchase, with some rules (5 years old account or something?). So it's more of a "flex" account where you can use the majority "right now" or save it for retirement.

A tIRA/ 401k is a 100% retirement account.

I'm just saying this because --- you need to ask yourself how much savings you want to be able to "flex" for "right now" expenses or opportunities. Like a house, college, European vacation, business opportunity, etc.

Because that will influence your strategy. But generally, you want "match" first (free money), and it's good practice to max the HSA and Roth IRA both (definitely do the ROTH before any taxable since it effectively can be one). After that, more into the 401k depending on retirement allocation, and more in the taxable depending on "right now flex savings" allocation.

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TarHeel2002
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Re: What order to fill up retirement accounts?

Post by TarHeel2002 » Tue Mar 19, 2019 3:30 pm

Yeah - I feel like that was what I was getting at with that question. The Roth IRA just seems more flexible in terms of usage vs the HSA. I have a decent little chunk saved in my HSA right now (17k) invested into a Vanguard fund (VASGX). My plan was to max out everything but then we upgraded our small business 401(k) creating more tax advantaged space to save. I'm just trying to figure out the optimal way to invest these dollars. I could probably max out everything (HSA, 401(k), Roth) but it's a little tighter (50.5k vs 62.5k). I'm also trying to pay for all medical costs out of pocket rather then dip into the HSA so it can be invested and grow long term.

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Re: What order to fill up retirement accounts?

Post by yogesh » Tue Mar 19, 2019 3:47 pm

Emergency: FDIC | Taxable: VTMFX | Retirement: TR2040

nolesrule
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Re: What order to fill up retirement accounts?

Post by nolesrule » Tue Mar 19, 2019 4:01 pm

TarHeel2002 wrote:
Tue Mar 19, 2019 3:30 pm
Yeah - I feel like that was what I was getting at with that question. The Roth IRA just seems more flexible in terms of usage vs the HSA. I have a decent little chunk saved in my HSA right now (17k) invested into a Vanguard fund (VASGX). My plan was to max out everything but then we upgraded our small business 401(k) creating more tax advantaged space to save. I'm just trying to figure out the optimal way to invest these dollars. I could probably max out everything (HSA, 401(k), Roth) but it's a little tighter (50.5k vs 62.5k). I'm also trying to pay for all medical costs out of pocket rather then dip into the HSA so it can be invested and grow long term.
If it's too tight to max everything and pay for your medical costs out of pocket, you might as well take some reimbursements from the HSA if it will allow you to max the HSA.

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grabiner
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Re: What order to fill up retirement accounts?

Post by grabiner » Tue Mar 19, 2019 8:03 pm

TarHeel2002 wrote:
Tue Mar 19, 2019 3:30 pm
Yeah - I feel like that was what I was getting at with that question. The Roth IRA just seems more flexible in terms of usage vs the HSA.

I'm also trying to pay for all medical costs out of pocket rather then dip into the HSA so it can be invested and grow long term.
In that case, the HSA is also flexible. If you have already had $10K in medical expenses, you can reimburse yourself for that $10K from the HSA at any time, and should do this if you need the money to fund your Roth IRA. (Once the money is in the Roth IRA, you can withdraw that amount tax-free at any time; only gains have to wait until you are 59-1/2.)
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