Author Topic: Retirement Funding Order  (Read 1747 times)

The Butler

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Retirement Funding Order
« on: September 14, 2014, 09:29:28 PM »
I'm currently saving ~50% per year.  We currently are moving all our assets (taxable and Roth IRA) from an ETF held by a bank into VTSAX.  Converting from the ETF in the taxable account will take some time as I don't want to pay capital gains as I sell to move money into the lower expense Vanguard fund.

We have about 6 months of expenses in cash (~$16,000) as an emergency/buffer fund.  That's really more than we need, as I doubt the government could stop paying me in less than six months.  Short term interruptions like not passing a budget are small enough time periods not to worry about.

So here's my question:  What order should I invest my savings?

I know the easiest answer is to automate it so I dollar cost average to max out the Roth IRAs and TSP on my last paycheck of the year.  Is there a better way?  Intuitively, I suspect the answer is to max the TSP, then the IRAs, then the taxable account.  My reasoning is that starting with the TSP gives the tax-deferred money the longest time to earn during the tax year.  Reducing the TSP contribution would mean I pay more tax at the beginning of the year, and therefore lose the ability to put that money to work for several months.  As the tax bill is the same regardless of when during the year I earn the money, that seems like the best approach.

Is there anything I'm missing?  I think the order should be pre-tax, other tax-advantaged accounts, then taxable accounts last.  Given the way that military pay is treated (about 1/3 isn't taxed) and the generous pension, I think my after-retirement income will be about the same as my pre-retirement income.  In that case, does it matter whether I do Roth or traditional first?

Tick-Tock

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Re: Retirement Funding Order
« Reply #1 on: September 14, 2014, 09:56:34 PM »
As I understand it, if you're getting matching for your TSP contributions, you don't want to max out early because you'll miss the matching dollars once you max out and stop contributing.  So you can front-load to some extent, but at least average enough through the year to get the matching.

foobar

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Re: Retirement Funding Order
« Reply #2 on: September 14, 2014, 10:16:01 PM »
As I understand it, if you're getting matching for your TSP contributions, you don't want to max out early because you'll miss the matching dollars once you max out and stop contributing.  So you can front-load to some extent, but at least average enough through the year to get the matching.

I didn't think the military got matches but otherwise yeah that is something you need to consider. Personally I max out my ROTHs on Jan 1 and do the 401(k) on a slightly more conservative path. In reality, it probably doesn't matter much.

Military retirement is tough tax wise as you get those pensions that fill up your 0% and 10% space with a bunch of ordinary income which somewhat reduce the value of tax deferral.  On the other hand you are getting a pile of cash each money. If you have access to the ROTH TSP you might want to run you numbers and see what works out. I am pretty much always a traditional guy but the military is one case where it very close.