Prioritizing investments

Investors who are able to place their investments in several different kinds of accounts (such as taxable accounts, 401k, or an IRA) need to decide which ones to prioritize. In order to maximize the tax efficiency of a portfolio, here is a general account funding priority that often works well for many people (all points will not apply to everyone):


 * 1) 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),
 * 2) Pay off high interest debt (a guaranteed high return, the next best thing to free money),
 * 3) Contribute to a Health Savings Account (HSA) if available (unlike many other tax deductions, there are no income restrictions to contribute to an HSA),
 * 4) Contribute the maximum to an IRA, traditional or Roth, depending on eligibility and personal circumstances,
 * 5) Contribute the remainder of the maximum employee contribution to the work-based plan,
 * 6) Contribute via the  backdoor Roth technique,
 * 7) Contribute to taxable  investing,
 * 8) Non-deductible IRAs or annuities.

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

An investor's tax bracket may influence the decision as well: those in higher tax brackets should consider higher contributions to a tax-deferred plan (e.g. traditional 401k or IRA) rather than a post-tax plan (e.g. Roth 401k or IRA); see Traditional versus Roth for more guidance.

Many company plans contain high-cost funds which make them unattractive. If you have such a plan, look for one or two index funds or a bond fund that can be used. If your company offers matching funds up to a certain contribution level, it's always wise to use the company plan. If there is no match, the power of tax-deferred compounding and automatic contributions still favors using the plan with limited contributions.

Also, if you leave your current employer you will most likely be able to rollover the assets in your poor-quality company plan to either a better company plan, or to an IRA.