Difference between revisions of "Prioritizing investments"

From Bogleheads
Jump to navigation Jump to search
(add template and clarify Roth=Roth IRA)
(clarify)
Line 1: Line 1:
 
{{Bogleheads_Investing_Start-Up_Kit}}
 
{{Bogleheads_Investing_Start-Up_Kit}}
The ''general'' rule for investing priority is:
+
Investors who are able to place their investments in several different kinds of accounts (such as taxable accounts, 401k, or [[IRA]]) need to decide which ones to prioritize.  In order to maximize the [[Principles_of_Tax-Efficient_Fund_Placement|tax efficiency]] of a portfolio, the ''general'' rule for investing priority is:
  
#Company plan ([[401k]]/[[403-b|403b]], etc.) up to the company match
+
#Company plan ([[401k]], [[403-b|403b]], etc.) up to the company match
#Max out [[Roth IRA]]
+
#[[Roth IRA]] up to maximum contribution limit
#Max out 401k/403b
+
#Company plan up to maximum contribution limit
 
#Taxable Investing  
 
#Taxable Investing  
  
One exception to this order might be to first add additional contributions to the company plan if it offers good, low-cost funds. An investor's tax bracket might influence the decision as well: Those in higher tax brackets should consider higher contributions to the tax-deferred plan. If the company plan offers a Roth option, then again, taxes will have an influence on which option is the most efficient.
+
If the company plan offers good, low-cost funds, it may be preferable to contribute to the company plan ''before'' contributing to the Roth IRA.
  
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 there is a match, it's always wise to use the plan. If there is no match, the power of tax-deferred compounding and automatic contributions still favors using the plan with limited contributions. Also, the possibility that you might leave the current employer means you most likely can roll the assets in the poor plan to either a better company plan or 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) rather than a post-tax plan (e.g. Roth 401k).
  
Another order discussed in the [[:Bogleheads' Guide to Retirement Planning]] considers [[debt]].
+
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.
 +
 
 +
== Paying off debts ==
 +
 
 +
Another order discussed in the [[:Bogleheads' Guide to Retirement Planning]] considers investors who have [[debt]]s that may need to be paid off.
  
 
#Invest up to the match
 
#Invest up to the match

Revision as of 14:25, 20 July 2011

Template:Bogleheads Investing Start-Up Kit Investors who are able to place their investments in several different kinds of accounts (such as taxable accounts, 401k, or IRA) need to decide which ones to prioritize. In order to maximize the tax efficiency of a portfolio, the general rule for investing priority is:

  1. Company plan (401k, 403b, etc.) up to the company match
  2. Roth IRA up to maximum contribution limit
  3. Company plan up to maximum contribution limit
  4. Taxable Investing

If the company plan offers good, low-cost funds, it may be preferable to contribute to the company plan before contributing to the Roth 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) rather than a post-tax plan (e.g. Roth 401k).

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.

Paying off debts

Another order discussed in the Bogleheads' Guide to Retirement Planning considers investors who have debts that may need to be paid off.

  1. Invest up to the match
  2. Pay Off high Interest Debt
  3. Tax-Deductible Retirement Accounts
  4. Roth IRA
  5. Taxable Accounts
  6. Nondeductible IRAs and Annuities

See also