User:Hoppy08520/Prioritizing investments

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Note by wiki author: Once reviewed and confirmed, I would like to move these images and explanations to the Prioritizing investments page. Please feel free to comment in forum thread or edit the page directly. Any comments on the flowchart images themselves, please let me know so I can revise them in Visio (flowchart-generating software). --Hoppy08520 13:41, 8 September 2012 (CDT)

Investing priority flowcharts

In this section are three flowcharts that help an investor choose their investing priority. The general goal of these priorities is to maximize contributions in tax-advantaged accounts in a way that also minimizes the investor's tax burden.

Based on your own personal profile, choose one of the following three flowcharts:

  • If you are not covered by a retirement plan by an employer, then go to #No plan at employment.
  • If you are covered by a retirement plan at work, and your preference is to invest in tax-deferred (i.e. traditional) accounts before tax-exempt (Roth) accounts, then choose #Traditional preference.
  • If you are covered by a retirement plan at work, and your preference is to invest in tax-exempt (Roth) accounts before tax-deferred (i.e. traditional) accounts, then choose #Roth preference.

If you are not sure of your preference for Roth or Traditional, see types of IRAs for guidance.

For each flowchart, start in the diamond-shaped box on the upper left. The diamond-shaped boxes contain a yes or no decision to make. Based on your answer, follow the corresponding arrow to the next box. The flat boxes indicate the investing choice to make based on the prior decision. Work your way through downward through the flowchart until you have directed all of your investment dollars you have available to allocate.

No plan at employment

Investing priority for investors with no retirement plan at employer.

Traditional preference

Investing priority for traditional (tax-deferred) preference.

Roth preference

Investing priority for Roth (tax-exempt) preference.

*Choose whether your retirement plan offers a traditional or Roth 401(k). In some cases, you might prefer to invest in a Roth IRA but a traditional 401(k); in this case, choose the traditional 401(k) branch.

Exceptions

As with many investing decisions, the three approaches listed above can have exceptions, including:

  • If you decide that you will use traditional contributions in one tax bracket (say, 25%) but then switch to Roth for any earnings in the 15% tax bracket, then you’ll need to follow a hybrid version of these flowcharts.
  • Per Investing FAQ, individuals covered by a retirement plan with expensive or poor choices might prioritize an IRA before 401(k) contributions even if it might be more advantageous to contribute to the 401(k) for tax reasons. In some extreme cases, it might even be eligible to skip a 401(k) in favor of taxable investments.
  • If asset protection is a concern, then 401(k) contributions might be prioritized over IRA contributions.
  • A number of decisions in these charts suggest contributing to a Backdoor Roth IRA. That decision assumes you are a good candidate for the Backdoor Roth IRA. If this is not the case, then you may need to make alternate choices.
  • Depending on your personal situation and goals, you might elevate one type of tax-advantaged plan over another. These flowcharts assume a general priority of 401(k) over Health savings accounts, 457(b), 529 plans, or other tax-advantaged plans.


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