Author Topic: Investment Order  (Read 68716 times)

bender

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Re: Investment Order
« Reply #50 on: February 11, 2018, 02:49:05 PM »
I propose adding a step for USA investment order.  The last step before funding a taxable account should be to fund a 529 plan, if applicable. 

I've been researching this since the new tax law went into effect, and it seems to be the right move in my situation and likely for many others as well.  If you plan to help your children pay for college (or private K-12 with new law), stashing money in a 529 plan is better than a taxable account. 

I understand this isn't for everyone, but I think people can benefit from this investment advice.  I think some of the other buckets like mega backdoor and HSA are fantastic, but probably applicable to fewer people than 529s.

Of course there are some risks associated with 529s that could trigger tax penalties if the money isn't used for education.  Even with that risk, most parents who plan to help their children pay for education should consider funding a 529 after other tax advantaged accounts are funded.

I understand the rationale for funding your own retirement first, and generally agree with that sentiment.  For those planning to help children with educational costs during early retirement, the 529 is a valuable tool that will reduce your overall tax burden.  When you get to the bottom of the list and are funding the taxable account, you're doing pretty well anyways.  I'm thinking most parents who are well off enough to retire before their kids finish high school will want to help their kids pay for education.  There's no reason why you can't save for both goals.

« Last Edit: February 11, 2018, 03:00:38 PM by bender »

Radioherd88

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Re: Investment Order
« Reply #51 on: February 12, 2018, 04:16:43 PM »
Ok so this thread is super - and as a result i got the following plan in action for 2017:

1. 401k maxed out for wife's employer
2. Traditional IRA's maxed out for both of us
3. ESPP maxed out for wife's employer plan
4. HSA maxed out for wife's employer plan
5. FSA maxed out for my employer plan

I just came to do my taxes and realize that the Traditional IRA is not deductible (seemingly due to our maxing out of the 401k), so the plan is to convert these to Roth. This has also led me back to re-evaluating the rest of the retirement plan and looking for advice:

I have the option to contribute to a 403b or 457 through my employer, and hadn't considered this until i read the other post that talks about the IRA conversion pipeline that allows you to withdraw this penalty free - so my question is, should i also aim to max this out instead of what i have currently been doing (which is adding approx 18k per year to my principal mortgage*)?

* I must confess, that we are paying PMI of approx 2k per year on the mortgage as i was given some bad advice at the time of taking out our loan (my bad), so once i realized this, i became hell bent on removing it. In hindsight, this 18k per year could grow to cover the pmi and interest savings over the next 15 years (planned retirement date), so should i start putting this aside to get the tax savings (especially now that the ira conversion is possible with these two options)?

Thanks as always Mustacheville!

MDM

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Re: Investment Order
« Reply #52 on: February 12, 2018, 05:00:49 PM »
What's the thinking for choosing Roth over tIRA under the new tax brackets? Choose Roth at 12 percent and under, and tIRA for 22 percent and up, all else being equal?
Unfortunately all else can be difficult to define and rarely equal.

Good point on the new brackets, though.  Updated the rule of thumb accordingly.

It would be good for people to compare current marginal tax saving rate vs. predicted marginal withdrawal tax rate instead of relying on a rule of thumb that has so many exceptions.  But people want rules of thumb....

MDM

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Re: Investment Order
« Reply #53 on: February 12, 2018, 05:10:47 PM »
I propose adding a step for USA investment order.  The last step before funding a taxable account should be to fund a 529 plan, if applicable. 

I've been researching this since the new tax law went into effect, and it seems to be the right move in my situation and likely for many others as well.  If you plan to help your children pay for college (or private K-12 with new law), stashing money in a 529 plan is better than a taxable account. 

I understand this isn't for everyone, but I think people can benefit from this investment advice.  I think some of the other buckets like mega backdoor and HSA are fantastic, but probably applicable to fewer people than 529s.

Of course there are some risks associated with 529s that could trigger tax penalties if the money isn't used for education.  Even with that risk, most parents who plan to help their children pay for education should consider funding a 529 after other tax advantaged accounts are funded.

I understand the rationale for funding your own retirement first, and generally agree with that sentiment.  For those planning to help children with educational costs during early retirement, the 529 is a valuable tool that will reduce your overall tax burden.  When you get to the bottom of the list and are funding the taxable account, you're doing pretty well anyways.  I'm thinking most parents who are well off enough to retire before their kids finish high school will want to help their kids pay for education.  There's no reason why you can't save for both goals.
See updated version.  Does that capture it well enough?

bender

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Re: Investment Order
« Reply #54 on: February 12, 2018, 07:54:43 PM »
Looks good - thanks MDM!

MustacheAndaHalf

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Re: Investment Order
« Reply #55 on: February 13, 2018, 06:41:53 AM »
I just came to do my taxes and realize that the Traditional IRA is not deductible (seemingly due to our maxing out of the 401k), so the plan is to convert these to Roth.
More likely it's because your income exceeds the IRS limits for IRA deduction.  Having access to a 401(k) through work alters the income limit, but it shouldn't matter if you contribute or not.
https://www.irs.gov/retirement-plans/2017-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work

MDM

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Re: Investment Order
« Reply #56 on: February 13, 2018, 07:15:02 AM »
I just came to do my taxes and realize that the Traditional IRA is not deductible (seemingly due to our maxing out of the 401k), so the plan is to convert these to Roth.
More likely it's because your income exceeds the IRS limits for IRA deduction.  Having access to a 401(k) through work alters the income limit, but it shouldn't matter if you contribute or not.
https://www.irs.gov/retirement-plans/2017-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work
Once one contributes $1 to a 401k, for that year contributing the maximum amount can only help make a tIRA deductible.

Not only must one be eligible, but money (from either the employee or employer) must go into a retirement plan for one to be "covered by" a retirement plan at work.

401k contributions do lower one's MAGI. 

Radioherd88

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Re: Investment Order
« Reply #57 on: February 13, 2018, 08:41:30 AM »
I just came to do my taxes and realize that the Traditional IRA is not deductible (seemingly due to our maxing out of the 401k), so the plan is to convert these to Roth.
More likely it's because your income exceeds the IRS limits for IRA deduction.  Having access to a 401(k) through work alters the income limit, but it shouldn't matter if you contribute or not.
https://www.irs.gov/retirement-plans/2017-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work

Ok right - it is our AGI then - even after 401k and a potential 403b/457 max, our AGI will still be above the max (lucky us) - so really the traditional IRA has no value in this case and we should resort to Roth right?

Should the roth IRA take priority over 403b/457 - i know the investment order post suggests so, and that's what we currently have as our priority.

How about maxing out 403b/457 vs paying off mortgage to remove PMI?

Thanks for the info!

MDM

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Re: Investment Order
« Reply #58 on: February 13, 2018, 09:36:19 AM »
...even after 401k and a potential 403b/457 max, our AGI will still be above the max (lucky us) - so really the traditional IRA has no value in this case and we should resort to Roth right?
Yes, if you are above the tIRA deductibility limit but below the Roth contribution limit.

Quote
Should the roth IRA take priority over 403b/457 - i know the investment order post suggests so, and that's what we currently have as our priority.
If you can max a 401k and 403b/457 and still be above the tIRA deductibility limit, you should probably be doing all the above.

Quote
How about maxing out 403b/457 vs paying off mortgage to remove PMI?
Depends on the PMI interest rate.

Radioherd88

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Re: Investment Order
« Reply #59 on: February 13, 2018, 03:30:36 PM »
Quote
How about maxing out 403b/457 vs paying off mortgage to remove PMI?
Depends on the PMI interest rate.
[/quote]

Well Interest rate on mortgage is 3.75%, but 6.4% of our payment each month is PMI until it drops off - approx 15k worth of payments into the future....*

*Side note i can't get my mortgage provider to tell me for sure that if i was to pay down enough to cover 20% of the loan sooner (e.g. tomorrow or in a few months) that the PMI would definitely come off automatically, but from what i've been told elsewhere, this is a legal requirement right? 

It would take around 60k to have paid down enough to remove PMI, but i'm struggling to get my head around the math of how much i would save in taxes and compound interest if this was all going in a 457b in VTSMX for the same period to determine if i should just let it run....

MDM

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Re: Investment Order
« Reply #60 on: February 13, 2018, 03:36:03 PM »
It would take around 60k to have paid down enough to remove PMI, but i'm struggling to get my head around the math of how much i would save in taxes and compound interest if this was all going in a 457b in VTSMX for the same period to determine if i should just let it run....
See PMI Payoff ROI? and Getting rid of PMI? What % "return" would I get for paying down my mortgage? for some thoughts.

MustacheAndaHalf

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Re: Investment Order
« Reply #61 on: February 13, 2018, 09:37:58 PM »
MDM - That's true, I stand corrected.  Contributions to a 401(k) cannot hurt your eligibility, and those just above the limit can use 401(k) contributions to lower their income and potentially allow IRA contributions to be deductible.

Radioherd88 - They might require an appraisal before they drop PMI.  I doubt they will accept your property tax bill's figure (with it's automatic appraisal), but it might be worth sending them a letter with a copy of that information and requesting they drop PMI since you have 20% equity.  A letter is a bit better from a legal point of view, and might get a better response.  You can call them, but it's in their best interest to stall (in terms of money, not in terms of customer service).

Radioherd88

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Re: Investment Order
« Reply #62 on: February 14, 2018, 04:08:14 PM »
It would take around 60k to have paid down enough to remove PMI, but i'm struggling to get my head around the math of how much i would save in taxes and compound interest if this was all going in a 457b in VTSMX for the same period to determine if i should just let it run....
See PMI Payoff ROI? and Getting rid of PMI? What % "return" would I get for paying down my mortgage? for some thoughts.

Great, thanks MDM - some calculations for my wkd....

Radioherd88 - They might require an appraisal before they drop PMI.  I doubt they will accept your property tax bill's figure (with it's automatic appraisal), but it might be worth sending them a letter with a copy of that information and requesting they drop PMI since you have 20% equity.  A letter is a bit better from a legal point of view, and might get a better response.  You can call them, but it's in their best interest to stall (in terms of money, not in terms of customer service).

Indeed - i have already called them multiple times, and the most response i can get out of them is "well, we would do an appraisal and take it from there" - but i have to pay for the appraisal..... And the reason i am asking is i don't want to pay down the extra amount unless i  know for sure it will remove PMI, so it's a bit of a frustrating circle trying to get someone to confirm that when you reach the 78-80% of loan to value ratio that it 100% comes off...

rudged

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Re: Investment Order
« Reply #63 on: March 14, 2018, 07:13:39 PM »
This ordering is appropriate for investors in the US.

[stuff deleted]

4. Max Traditional IRA or Roth (or backdoor Roth) based on income level            
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)            


Please clarify why you advise maxing a traditional IRA before maxing your employer sponsored 401k (403(b) or 457). Is it simply a matter of you get to choose which company to invest in and therefore can choose more desirable investment options (e.g. my 403(b) doesn't have Vanguard associated investment options (VTSAX), but if I set up a traditional IRA through Vanguard, I'd have access to VTSAX)? Or is this simply an admonishment that when you have the option, you should avoid employer sponsored options?

MDM

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Re: Investment Order
« Reply #64 on: March 14, 2018, 07:30:52 PM »
This ordering is appropriate for investors in the US.

[stuff deleted]

4. Max Traditional IRA or Roth (or backdoor Roth) based on income level            
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)            


Please clarify why you advise maxing a traditional IRA before maxing your employer sponsored 401k (403(b) or 457). Is it simply a matter of you get to choose which company to invest in and therefore can choose more desirable investment options (e.g. my 403(b) doesn't have Vanguard associated investment options (VTSAX), but if I set up a traditional IRA through Vanguard, I'd have access to VTSAX)? Or is this simply an admonishment that when you have the option, you should avoid employer sponsored options?
It's that the "more desirable investment options" are usually associated with IRAs, not 401ks.

But note the parenthetical remark in #5: e.g., some 401k plans have institutional shares, which are even better than Admiral shares (or the equivalent Fidelity, etc., share classes).

tomdrake

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Re: Investment Order
« Reply #65 on: March 19, 2018, 10:55:07 PM »
Hello, here is another question for fellow Canadians (hopefully you are staying warm, it's snowing again here!!) What do you think about Robo-Advisors??? I just learned about this, still reading The Internet :)
here is the site that I have found to be quite useful: https://youngandthrifty.ca/complete-guide-to-canadas-robo-advisors/

Thank you!

i dont think its a country specific question - so i'll chime in... robo advisors are decent but will charge you a higher rate than any value they provide.  You're at this site and have passed the pack by getting here.  You should manage the money yourself and you'll save alot of fees over time.

Thank you!! I am still very very new at this :). I am trying to understand and learn on how to actually do it myself, don't feel confident enough yet. BUT i have to move my investments asap, since we are currently with someone that is charging a lot. So I was thinking to get a robo-advisor for now, and continue to gain knowledge until I can just do it myself.

Maybe someone from Canada will chime in with the equivalent of dump it into vtsax and forget about it but that's what I'd do while I was learning. Not pay higher fees in between.

I'll take you up on that. Here in Canada Vanguard just launched VGRO, which is 80% equities and 20% fixed income, with a 0.22% MER. You can buy this ETF through Questrade for no commision. I do like robo-advisors for the ease of getting people to invest, but this new ETF is almost as simple.

Further reading:
https://www.newswire.ca/news-releases/vanguard-introduces-three-new-asset-allocation-etfs-672114863.html
https://maplemoney.com/questrade-review-best-discount-broker/
https://maplemoney.com/best-robo-advisors-canada/
First read MMM in 2012, waited until 2018 to join the forum.  I'm a slow adopter.