Prioritizing investments

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Revision as of 17:16, 6 August 2012 by Hoppy08520 (talk | contribs) (rather than just "Roth IRA" in "investing priority", change to Roth IRA or deductible traditional IRA)
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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 or deductible Traditional IRA up to maximum contribution limit, depending on personal circumstances and eligibility.
  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 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).

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