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Learning, Sharing, and Teaching => Investor Alley => Topic started by: arebelspy on December 08, 2016, 12:53:59 AM

Title: Investment Order
Post by: arebelspy on December 08, 2016, 12:53:59 AM
This thread has the recommended order in which you should invest your money.

1. USA (http://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153)

2. Australia (http://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333550/#msg1333550)


Anyone from another country (Canada, UK, etc.), willing to step up and create one for your own country, please do so and PM me to get it added!
Title: Re: Investment Order
Post by: MDM on December 08, 2016, 10:51:59 AM
This ordering is appropriate for investors in the US.

In the lists below, thinking "first your governmental 457 (if you have one), then your 401k/403b/SIMPLE/etc." wherever "401k" appears is likely correct -            
   unless your governmental 457 fund options are significantly worse than those in the 401k/403b -         
   due to penalty-free access to governmental 457 funds at retirement, even if younger than 59 1/2.
   Non-governmental 457b plans have deficiencies, including the inability to roll the balance into an IRA.

"Max _____" means "contribute up to the maximum allowed for _____, subject to your ability to pay day-to-day expenses."            

Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).            
            
The 10-year Treasury note yield over the past year has been ~1.5%.  See http://quotes.wsj.com/bond/BX/TMUBMUSD10Y.
            
WHAT            
0. Establish an emergency fund (https://www.bogleheads.org/wiki/Emergency_fund) to your satisfaction            
1. Contribute to your 401k up to any company match            
2. Pay off any debts with interest rates ~5% or more above the current 10-year Treasury note yield.            
3. Max Health Savings Account (https://www.bogleheads.org/wiki/Health_savings_account) (HSA) if eligible.
4. Max Traditional IRA or Roth (or backdoor Roth (https://www.bogleheads.org/wiki/Backdoor_Roth_IRA)) based on income level            
5. Max 401k (if
    - 401k fees are lower than available in an IRA, or
    - you need the 401k deduction to be eligible for (and desire) a tIRA deduction, or
    - you earn too much for an IRA deduction and prefer traditional to Roth, then
    swap #4 and #5)            
6. Fund a mega backdoor Roth (https://www.bogleheads.org/wiki/After-tax_401(k)) if applicable.         
7. Pay off any debts with interest rates ~3% or more above the current 10-year Treasury note yield.            
8. Invest in a taxable account and/or fund a 529 with any extra.            
            
WHY            
0. Give yourself at least enough buffer to avoid worries about bouncing checks            
1. Company match rates are likely the highest percent return you can get on your money            
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs for that purpose.
    At worst, the HSA behaves much the same as a tIRA after age 65.
4. Rule of thumb: traditional if current federal marginal rate is 22% or higher; Roth if 10% or lower, or if MAGI is too high to deduct a traditional IRA; flip a coin otherwise. 

   For those willing to expend a little more energy than it takes to flip a coin, consider comparing current marginal tax saving rate vs. predicted marginal withdrawal tax rate.
      If current > predicted, use traditional.  Otherwise use Roth.
   See Credits can make Traditional better than Roth for lower incomes (http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-overwhelming-student-loan-debt-how-would-you-get-started/msg868845/#msg868845) and other posts in that thread about some exceptions to the rule.
   See Traditional versus Roth - Bogleheads (https://www.bogleheads.org/wiki/Traditional_versus_Roth) for even more details and exceptions.
   The 'Calculations' tab in the Case Study Spreadsheet (http://forum.mrmoneymustache.com/forum-information-faqs/case-study-spreadsheet-updates/) (CSS) can show marginal rates for savings or withdrawals*.
   Remember to include all income-dependent effects in your marginal tax rate (https://www.bogleheads.org/wiki/Marginal_tax_rate).
      The CSS does include most federal and state brackets, credits (Child Tax, Education, ACA, Earned Income, etc.), phase-ins, phase-outs, and IRMAA tiers. 
      It may not include some state tax details, FAFSA Expected Family Contribution, and other items irrelevant to most but important to some.

5. See #4 for choice of traditional or Roth for 401k.  In a 401k there are no income-based limits for deductions or contributions.      
6. Applicability depends on the rules for the specific 401k.  See Mega Backdoor Roth IRA (https://www.bogleheads.org/wiki/After-tax_401(k)).
7. Again, take the risk-free return if high enough.  Note that embedded in "high enough" is the assumption that your alternative is "all stocks" or a "fund of funds"
   (e.g., target retirement date) that provides a blend of stock and bond returns.  If you wish to consider separate bond funds, compare the yield on a fund
   with a duration similar to the time remaining on the loan, and put your money toward the one with the higher after-tax interest/yield.
8. Because taxable earnings will still help your FI journey.  If your own retirement is in good shape, and you choose to provide significant help for children's college costs,
   a 529 plan (https://www.bogleheads.org/wiki/529_plan) may be appropriate.  Similar to "put on your own oxygen mask before assisting others," do consider funding your own retirement before funding 529 plans for children's college costs.

Speaking of things to do first, see Getting started - Bogleheads (https://www.bogleheads.org/wiki/Getting_started) if this is all new.  Working through that post and the links therein is also a good refresher, even if personal finance isn't completely new to you.

The emergency fund is your "no risk" money.  You might consider one of these online banks: http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001, or possibly use a Roth IRA as an emergency fund (https://www.bogleheads.org/wiki/Roth_IRA_as_an_emergency_fund).

It is up to you whether to consider "saving for a house down payment" as a "day to day expense", vs. lumping the down payment savings in with "taxable investments" at the end.

If you are renting, you may not be throwing away as much on rent as you might think.  See http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/ for some thoughts.            
               
For those concerned about "locking up" money in retirement accounts until age 59.5, see How to withdraw funds from your IRA and 401k without penalty before age 59.5 (https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/).

If your 401k options are poor (i.e., high fund fees) you can check http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/ for some thoughts on "how high is too high?"

See MAGI - Bogleheads (https://www.bogleheads.org/wiki/MAGI) for the MAGI calculations applicable to Roth IRA contributions and traditional IRA deductions.
Then see IRA Contribution Limits (https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits) and IRA Deduction Limits (https://www.irs.gov/retirement-plans/ira-deduction-limits) for the IRS limits on those MAGI amounts.

If one can swing the cash flow, getting in and out of an ESPP is ~"free money".  But if one has to make a choice between deferring income in a 401k vs. taking the income and using it for an ESPP, it isn't the same.  The benefits of employee stock purchase plans (ESPPs) relative to other opportunities is highly dependent on tax rates, because ESPP benefits all occur in taxable accounts. 
 - For someone paying 12% tax on ordinary income, and 0% on dividends and capital gains, ESPPs can be very favorable, perhaps competing with high interest rate loans in step 2. 
 - For someone paying 22% tax on ordinary income, and 15% on dividends and capital gains, ESPPs are not as favorable, perhaps coming between steps 6 and 7.

Priorities above apply when income is primarily through W-2 earnings.  For those running their own businesses (e.g., rental property owner, small business owner, etc.),            
   putting money into that business might come somewhere before, in parallel with, or after step 5.         
            
Why it is likely better to invest instead of paying a low interest rate mortgage early, if you have a long time until the mortgage is due:            
   https://www.thebalance.com/rolling-index-returns-1973-mid-2009-4061795      
   http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html


*Estimating withdrawal tax rates is not an exact science, but here is one approach:
1) Estimate any guaranteed income.  E.g., pension you can't defer in return for higher payments when you do start, rentals, etc.
2) Take current traditional balance and predict value at retirement (e.g., with Excel's FV function) using a conservative real return, maybe 3% or so.  Take 4% of that value as an annual withdrawal.
3) Take current taxable balance and predict value at retirement (e.g., with Excel's FV function) using a conservative real return, maybe 3% or so.  Take 2% of that value as qualified dividends.
4a) Decide whether SS income should be considered, or whether you will be able to do enough traditional->Roth conversions before taking SS.
4b) Include SS income projections (using today's dollars) if needed from step 4a.
5) Calculate marginal rate on withdrawals from traditional accounts using today's tax law on the numbers from step 1-4.
6) Make your traditional vs. Roth decision for this year's contribution
7) Repeat steps 1-6 every year until retirement

The steps above may look complicated at first, but you don't need great precision.  The answer will either be "obvious" or "difficult to choose".  If the latter, it likely won't make much difference which you pick anyway.

Note the possibility of self-defeating predictions:
a) predict high taxable retirement income > contribute to Roth > get low taxable retirement income
b) predict low taxable retirement income > contribute to traditional > get high taxable retirement income

Also, if you pick traditional and that ends up being wrong it will be because you have "too much money" - not the worst problem.
If you pick Roth and that ends up being wrong it will be because you have "too little money" - that would be a problem.
Thus using traditional is a "safer" choice.
Title: Re: Investment Order
Post by: deborah on December 08, 2016, 03:37:19 PM
AUSTRALIA

WHAT           
0. Pay the minimum required on all debts.
1. Establish an emergency fund to your satisfaction.  See https://www.bogleheads.org/wiki/Emergency_fund.  Use your mortgage offset account OR use springy debt http://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/  .       
2. Pay off any debts with interest rates above your mortgage rate (if you have one)
3. Put money into your PPOR mortgage offset account (if you have one).           
4. If your taxable income is less than $53,564 (before salary sacrifice) consider contributing $1000 per year to superannuation to get the Government co-contribution.
5. Pay off any debts above the return you can get on your investments.
6. If you taxable income is more than $37,000 optimise Salary Sacrifice into Superannuation - you need to work this out individually, because how much depends on at what age you will ER, how much is already inside/outside superannuation, and your marginal tax rate.
7. Invest any extra into low cost index funds (long term investments - 10 years) or high interest accounts (short term - 2 or 3 years).           
           
WHY           
0. Don't get yourself into trouble.           
1. Give yourself at least enough buffer to avoid worries about paying bills.
2.& 3. Because it's untaxed, the effective return on a mortgage offset account is likely to be the highest percent return you can get on your money           
4. When the government is giving you money - take it.
5. It's better to pay off expensive debt than to invest.
6. Salary sacrifice is taxed at 15% as it goes into superannuation and people on low incomes have a lower tax rate. You will need other money to last you between when you retire and when you are eligible for superannuation. However superannuation tax rates are low.           
7. Because earnings, even if taxed, are beneficial. If you are saving for the short term (eg. a house deposit whether PPOR or IP), you want to be absolutely sure that you will get back what you saved, but longer term savings are better off in an index fund.

Note: This assumes that you are employed. If you are a business, make sure that you put the 9.5% superannuation guarantee for yourself because if the business fails, you will at least have that money in old age.
Title: Re: Investment Order
Post by: erp on December 24, 2016, 07:45:19 AM
CANADA

What:
0: Pay off any high interest debts and establish emergency fund based on your risk tolerance
1: Max out your contributions to your TFSA
2: Contribute to your RRSP (remember that $25,000 can be used for a down payment through the first time home buyer's plan if you have not owned a house in the last 4 or 5 years)
3: Pay off your mortgage and low interest debt
4: Invest in non-registered funds

Why:
0: High interest debt is a huge drag on your money, and you'll be much happier without it. An emergency fund is a fairly personal decision, if you are risk averse or work in a boom/bust industry then a substantial emergency fund can help you sleep at night. If you have a very stable career and are comfortable with 'springy debt' as described in the Australia section you probably don't need much.
1: The TFSA is a pretty amazing investment vehicle, particularly if you're young. You contribute after tax dollars and never pay tax again on the money, regardless of how much it grows. You have the option of withdrawing money and preserving the contribution room in the following year, but withdrawals should be avoided unless there's a really good reason for it (people often invest their mortgage downpayment in their TFSA, which may be appropriate if you're planning on buying 'in a few years').
2: RRSP are a reasonable tax deferred investment vehicle, you don't pay tax (or are refunded taxes if you contribute after tax dollars) on the contributions, but do pay tax when the money is withdrawn. You will pay taxes on the withdrawn money as income, rather than potentially more favourable capital gains and dividend tax rates. In general, the fact that your RRSP can grow for years tax free should balance the potential tax consequences. If you are discovering MMM after working for a few years, you will probably find that you have fairly vast contribution room in your RRSP (it grows at 18% of your salary/yr).
3: Low interest in this context means 'close to or less than the expected return on your investments'. Less debt is pretty great. You may decide to invest in non-registered (taxable) accounts rather than paying off your mortgage at this phase, either way is fine and it will depend primarily on your risk tolerance and what your best guesses are on what your interest rate will be.
4: Shovel money into your taxable accounts. Remember that eligible Canadian dividends are taxed at a preferential rate (as are dividends from VCN or similar index funds), but that this is not true of international dividends.

Possible Variations:
- If your income in retirement is likely to be higher than your working income, you should avoid investing in your RRSP. This is possible if you have a lot of money in your RRSP, a relatively low income and are approaching 71, when you you will be required to start withdrawing a percentage of your RRSP. You can probably avoid this by retiring earlier and drawing down your RRSP in a controlled manner prior to control your taxes.
- If your income is very high, and you expect it to be lower in retirement (eg. you started saving late in life but have a high salary) then it might be optimal to be contributing to your RRSP before your TFSA.
- RRSP income is considered as 'income' for tax purposes, as is your Canadian Pension Plan (CPP).  In a perfect world you'll be able to keep your income below ~ $71,000/yr after you reach 65 years so that you can receive the Old Age Supplement. It's hard to know whether this program will change if you're currently relatively young, but if you're in your 50s then it's worth looking at your taxes pretty carefully to try and make sure you're not inadvertently limiting your wealth by having a suboptimal withdrawal strategy.
- Mortgage choices are pretty personal, and depend a great deal on where you live. Between the TFSA and First Time Home Buyer Plan you should be well on your way to a downpayment if you don't own a house. If a purchase is imminent (6 months or a year?) then you should be invested in something very safe (eg. GICs) or in cash.
Title: Re: Investment Order
Post by: joonifloofeefloo on January 03, 2017, 04:29:06 PM
re: Canada, and probably other regions, too, I would make the following Step 2.

Find out which accounts offer matching grants from your employer or government, and optimize those. e.g., If you are eligible for the RDisabilitySP, shovel money in there to get $10,500/yr in cash gifts. If you or a child might ever do any version of formal learning after high-school, shovel $5k/yr in there to get $1k (or more) free. Etc.
Title: Re: Investment Order
Post by: Eucalyptus on January 28, 2017, 06:44:44 AM
re: Canada, and probably other regions, too, I would make the following Step 2.

Find out which accounts offer matching grants from your employer or government, and optimize those.

Agree, this should be clear for most countries.

For Australia, Deborah's list is awesome. Perhaps one thing to highlight along these lines is what to do about any HECS-HELP debt if you have one. Lots of people are often unclear on this. As of 2017, there are no longer bonus % contributions from the federal government for upfront payments. Its also still only indexed to inflation. Also, depending on when you completed your degree, and which field, if you are then employed in that field, for several years you may be eligible for extra free repayments from the gov...you just have to fill out a form each year. Its not insignificant, I think for me in Science I worked out it will save me a few years of repayments. Rates vary depending on field (includes education and nursing also I think). Because of this, it would work out a super dumb move if you are in a qualifying degree+ field to make upfront payments on your HECS-HELP debt....effectively the debt is far below inflation, probably even "backwards" depending on your debt level.

EDIT: It now seems that the HECS-HELP Benefit disappears after this current financial year! Sad :-(

Excellent idea for a thread, by the way!
Title: Re: Investment Order
Post by: Prairie Stash on March 03, 2017, 01:02:50 PM
Canada - invest in non registered accounts under certain circumstances first. The correct order depends on income, its not universal.

For example if you earn under $42,000/year in Ontario dividends are taxed at -6.83% (that's a negative tax rate). In Alberta its -0.03%, basically zero. That's a case where non-registered come first (low income spouse scenario).

Low income earners should tackle TFSA/nonregistered while high income earners benefit from RRSP. Eligible dividends are held outside and non-eligible held inside TFSA. That's the basic rule.

Hooray for tax laws ;) Not every Canadian should be following the same order, don't forget to tailor to your own province. It gets more complicated when you add in the clawbacks for children (depends on number and age of kids). there's a $65,000 tax bracket, because of the clawback percentage change, that most people are unaware of. I've used RRSP contributions to increase benefits, in later years I won't get benefits (as kids age), then the allocation shifts again to be optimal.
Title: Re: Investment Order
Post by: Well Respected Man on March 16, 2017, 09:54:07 AM
This ordering is appropriate for investors in the US.

<snip/>

- For someone paying 25% tax on ordinary income, and 15% on dividends and capital gains, ESPPs are not as favorable, perhaps coming between steps 6 and 7.
         
Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).            
            
Current 10-year Treasury note yield is ~2%.  See            
   http://quotes.wsj.com/bond/BX/TMUBMUSD10Y         
            
WHAT            
0. Establish an emergency fund to your satisfaction            
1. Contribute to your 401k up to any company match            
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.            
3. Max HSA             
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)            
6. Fund mega backdoor Roth if applicable            
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.            
8. Invest in a taxable account with any extra.            
            
<snip/>

I believe the ESPP belongs between 1 and 2, whatever your tax rate. For a typical plan, there is a 15% discount on the purchase price, which over a 6-month offering period with equal contributions each month, is equivalent to 6% per month, or 100% annualized return. That assumes no increase in the stock price. With a look-back period and/or a stock price increase, it can be even more profitable. Even with a decline in stock price, there is usually a 15% discount off the lower price, with some limits on how much you can buy. So, take the free taxable money, sell the stock immediately, and consider it as a pay raise. Then use that money to pay down the debt, max HSA, etc.

Buying and holding ESPP stock for 2+ years is OK, with a lot of downside risk (bad quarter = 25% drop + lose job), and so probably belongs where you suggested, between 6 and 7, or maybe even between 7 and 8.
Title: Re: Investment Order
Post by: MDM on March 16, 2017, 12:32:56 PM
I believe the ESPP belongs between 1 and 2, whatever your tax rate.
You are correct that if one can swing the cash flow, getting in and out of an ESPP is ~"free money".  But if one has to make a choice between deferring income in a 401k vs. taking the income and using it for an ESPP, it isn't the same.

Assumptions:
- 30% current tax (e.g., 25% federal, 5% state)
- 20% 401k withdrawal tax (e.g., 15% federal, 5% state)
- 5% taxable withdrawal tax (e.g., 0% federal, 5% state)
- 20% tax on dividends in taxable (e.g., 15% federal, 5% state); all dividends reinvested
- total return  of 7%, 5% from growth and 2% from dividends
- 15% "bonus" from ESPP
- 20 years growth

Starting with a $5000 initial pre-tax amount available, one gets the results below, indicating the tax-advantaged account would be better.
ESPP401k
Initial cash50005000
Tax bite-15000
Start35005000
Bonus5250
Bonus tax-157.50
Investment3867.55000
After 20 yrs1388619348
Withdrawal tax3803870
Net spendable1350615479

Growth in the taxable account:
cgt = capital gain tax rate, %5.0%
d = annual dividend rate, %2.0%
g = annual growth excluding dividends, %5.0%
n = years invested, yr20
P = principal invested, $$3,868
t = tax rate on dividends, %20.0%
e = tax-adjusted annual growth, %6.60%
ecgt = tax-adjusted cap. gain tax rate, %3.788%
F = Future, after tax, value $13,506

One could even make the case that if the ESPP can be paid in a single lump sum, and the paperwork takes a few weeks to process, using emergency funds to get a guaranteed 15% for the cost of having a lower e-fund for those few weeks is worthwhile.  But if it's a choice between tax-advantaged vs. ESPP, see the tables above.
Title: Re: Investment Order
Post by: Well Respected Man on March 17, 2017, 04:07:17 PM
Yes, I guess the ESPP should be considered a cash management tactic to make more money become available for investing, and not an investment strategy in itself.
Title: Re: Investment Order
Post by: Heckler on March 19, 2017, 11:01:28 AM
Wow, this thread will get confusing with multiple countries posting in random order. 

Arebelspy, can I recommend your first post gets locked and stickied with links to a new thread for each country who is interested before it gets out of hand?  The thread for each country don't need a sticky, as they'd be referred to here with a link.



Title: Re: Investment Order
Post by: MustacheAndaHalf on March 22, 2017, 05:49:16 AM
I believe the ESPP belongs between 1 and 2, whatever your tax rate. For a typical plan, there is a 15% discount on the purchase price, which over a 6-month offering period with equal contributions each month, is equivalent to 6% per month, or 100% annualized return.
You don't double your money from a 15% discount on ESPP stock purchases.  You save 15%, and your $85 purchase of $100 worth of stock is like a +17.6% gain.  You do not roll over this purchase or multiply it: you have a limit on how much you can buy, and you can't buy more.  Each ESPP purchase is a separate decision, not something that multiplies each month.
Title: Re: Investment Order
Post by: BiotechGuy on April 02, 2017, 10:01:41 AM
Need some help here, guys and gals. My income is too high for a deductible IRA. I'm maxing out my pre-tax 401k and using the mega backdoor on after tax 401k contributions up to the 54k limit. Then I've been moving to a taxable account. I haven't put anything into a non-deductible IRA, ever, but reading this through I'm thinking I should be doing that too and using a backdoor roth conversion to get that into my Roth IRA too. Thoughts? Isn't the backdoor and mega back door basically doing the same thing for me in my case? Are there any limits or things I need to consider if using both those options in the same year?

I'm shooting for 75k/yr after tax income in retirement, so I'm not expecting super low or nonexistent federal taxes. Maybe that extra 5k is better off going into a taxable account because 1) both are after tax investments, 2) long term cap gains rate and my fire rate seem like they might be roughly similar, and 3) normal taxable account has no restrictions around withdrawals. That 3rd point, my taxable account, was my plan for covering a good part of my expenses for the years between 'retiring' and reaching 59.5 yrs old. Help!
Title: Re: Investment Order
Post by: BiotechGuy on April 02, 2017, 10:11:57 AM
Need some help here, guys and gals. My income is too high for a deductible IRA. I'm maxing out my pre-tax 401k and using the mega backdoor on after tax 401k contributions up to the 54k limit. Then I've been moving to a taxable account. I haven't put anything into a non-deductible IRA, ever, but reading this through I'm thinking I should be doing that too and using a backdoor roth conversion to get that into my Roth IRA too. Thoughts? Isn't the backdoor and mega back door basically doing the same thing for me in my case? Are there any limits or things I need to consider if using both those options in the same year?

I'm shooting for 75k/yr after tax income in retirement, so I'm not expecting super low or nonexistent federal taxes. Maybe that extra 5k is better off going into a taxable account because 1) both are after tax investments, 2) long term cap gains rate and my fire rate seem like they might be roughly similar, and 3) normal taxable account has no restrictions around withdrawals. That 3rd point, my taxable account, was my plan for covering a good part of my expenses for the years between 'retiring' and reaching 59.5 yrs old. Help!

Just re-read my post and to clarify my first question--does that 54k limit for 2017 include the IRA? If that's the case I'm guessing I was right to move to taxable, if not, I'm not so sure...
Title: Re: Investment Order
Post by: MDM on April 02, 2017, 10:24:18 AM
Just re-read my post and to clarify my first question--does that 54k limit for 2017 include the IRA? If that's the case I'm guessing I was right to move to taxable, if not, I'm not so sure...
No, it doesn't.  401k limits and IRA limits are separate.

Probably better to start a new thread, maybe in "Investor Alley" (or "Case Studies" if you want a full look), if you want to discuss specifics about your individual situation.
Title: Re: Investment Order
Post by: BiotechGuy on April 02, 2017, 10:39:19 AM
Just re-read my post and to clarify my first question--does that 54k limit for 2017 include the IRA? If that's the case I'm guessing I was right to move to taxable, if not, I'm not so sure...
No, it doesn't.  401k limits and IRA limits are separate.

Probably better to start a new thread, maybe in "Investor Alley" (or "Case Studies" if you want a full look), if you want to discuss specifics about your individual situation.

Thanks! Just put up a new post on investor alley. Some sites make it seem it's a combined contribution limit for both, but it's not clear.
Title: Re: Investment Order
Post by: southpaw328 on April 14, 2017, 12:38:53 PM

The benefits of employee stock purchase plans (ESPPs) relative to other opportunities is highly dependent on tax rates, because ESPP benefits all occur in taxable accounts. 
 - For someone paying 15% tax on ordinary income, and 0% on dividends and capital gains, ESPPs can be very favorable, perhaps competing with high interest rate loans in step 2. 
 - For someone paying 25% tax on ordinary income, and 15% on dividends and capital gains, ESPPs are not as favorable, perhaps coming between steps 6 and 7.
         


In the 15% tax bracket, the ESPP is favorable to take part of simply to get the discounted stocks, but I should probably be selling and re-investing the money into a Traditional IRA or another taxable account such as my Vanguard indexes or even into my HSA account?

I put 10% of my paycheck toward ESPP and the company makes purchases of stock twice/year. But I have never sold any of the stock, just have it in E-Trade account they setup for me.
Title: Re: Investment Order
Post by: MDM on April 14, 2017, 12:53:26 PM
In the 15% [any] tax bracket, the ESPP is favorable to take part of simply to get the discounted stocks, but I should probably be selling and re-investing the money into a Traditional IRA or another taxable account such as my Vanguard indexes or even into my HSA account?
As edited, yes.
Title: Re: Investment Order
Post by: Jamese20 on April 18, 2017, 11:36:56 AM
i would love someone from the UK to do this for us UKer's - i am too noobie at the moment for this myself!
Title: Re: Investment Order
Post by: hunt2eat on April 20, 2017, 01:27:59 PM
This ordering is appropriate for investors in the US.

It is up to you whether to consider "saving for a house down payment" as a "day to day expense", vs. lumping the down payment savings in with "taxable investments" at the end.

If you are renting, you may not be throwing away as much on rent as you might think.  See            
   http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/         
for some thoughts.            
            
In the lists below, thinking "first your 457 (if you have one), then your 401k and/or 403b" wherever "401k" appears is likely correct -            
   unless your 457 fund options are significantly worse than those in the 401k/403b -         
   due to penalty-free access to 457 funds at retirement, even if younger than 59 1/2.
   "Max _____" means "contribute up to the maximum allowed for _____, subject to your ability to pay day-to-day expenses."            

The benefits of employee stock purchase plans (ESPPs) relative to other opportunities is highly dependent on tax rates, because ESPP benefits all occur in taxable accounts. 
 - For someone paying 15% tax on ordinary income, and 0% on dividends and capital gains, ESPPs can be very favorable, perhaps competing with high interest rate loans in step 2. 
 - For someone paying 25% tax on ordinary income, and 15% on dividends and capital gains, ESPPs are not as favorable, perhaps coming between steps 6 and 7.
         
Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).            
            
Current 10-year Treasury note yield is ~2%.  See            
   http://quotes.wsj.com/bond/BX/TMUBMUSD10Y         
            
WHAT            
0. Establish an emergency fund to your satisfaction            
1. Contribute to your 401k up to any company match            
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.            
3. Max HSA             
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)            
6. Fund mega backdoor Roth if applicable            
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.            
8. Invest in a taxable account with any extra.            
            
WHY            
0. Give yourself at least enough buffer to avoid worries about bouncing checks            
1. Company match rates are likely the highest percent return you can get on your money            
2. When the guaranteed return is this high, take it.*
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.            
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between.
   See Credits can make Traditional better than Roth for lower incomes (http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-overwhelming-student-loan-debt-how-would-you-get-started/msg868845/#msg868845) and other posts in that thread about some exceptions to the rule.
   See Traditional versus Roth - Bogleheads (https://www.bogleheads.org/wiki/Traditional_versus_Roth) for even more details and exceptions.
   The 'Calculations' tab in the Case Study Spreadsheet (http://forum.mrmoneymustache.com/forum-information-faqs/case-study-spreadsheet-updates/) can show marginal rates for savings or withdrawals.
5. See #4 for choice of traditional or Roth for 401k            
6. Applicability depends on the rules for the specific 401k            
7. Again, take the risk-free return if high enough            
8. Because earnings, even if taxed, are beneficial            

Similar to "put on your own oxygen mask before assisting others," you should fund your own retirement before funding 529 or similar plans for children's college costs.

The emergency fund is your "no risk" money.  You might consider one of these online banks:            
   http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001         
               
If your 401k options are poor (i.e., high fund fees) you can check            
   http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/         
for some thoughts on "how high is too high?"            
            
Priorities above apply when income is primarily through W-2 earnings.  For those running their own businesses (e.g., rental property owner, small business owner, etc.),            
   putting money into that business might come somewhere before, in parallel with, or after step 5.         
            
Why it is likely better not to pay a low interest rate mortgage early:            
   http://allfinancialmatters.com/wp-content/uploads/2013/08/SandP500_5-Year_Rolling_Returns_with-CPI_calendar_year.pdf         
            
See http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html for some data on historical returns.

If you're going to retire early and do a Roth conversion I would think maxing out 401K and Trad IRA would be the way to go.  Assuming your income lets you.
Title: Re: Investment Order
Post by: MDM on April 20, 2017, 02:00:15 PM
If you're going to retire early and do a Roth conversion I would think maxing out 401K and Trad IRA would be the way to go.  Assuming your income lets you.
Probably is.  That's what the guidelines suggest, is it not?
Title: Re: Investment Order
Post by: Kooljohn on April 26, 2017, 07:50:24 AM
Great idea!

Could someone do this for Ireland please????

Title: Re: Investment Order
Post by: southpaw328 on April 29, 2017, 10:17:38 PM
In the 15% [any] tax bracket, the ESPP is favorable to take part of simply to get the discounted stocks, but I should probably be selling and re-investing the money into a Traditional IRA or another taxable account such as my Vanguard indexes or even into my HSA account?
As edited, yes.

Would you elaborate please?

I have heard many different answers. A popular one I don't totally understand is I should hold the stocks for 12 months in order to avoid capital gains taxes (or something?). The other is that I should look at my entire portfolio of net worth and whenever my ESPP/RSU shares exceed 5% of our total stock investments i.e. ~5% of 80% and sell off down to 5%/reinvest into indexes or w/e. The other is to sell them immediately. I don't feel confident in making a decision on it besides continuing to purchase at 10% rate.
Title: Re: Investment Order
Post by: MDM on April 29, 2017, 11:19:28 PM
In the 15% [any] tax bracket, the ESPP is favorable to take part of simply to get the discounted stocks, but I should probably be selling and re-investing the money into a Traditional IRA or another taxable account such as my Vanguard indexes or even into my HSA account?
As edited, yes.
Would you elaborate please?
I have heard many different answers. A popular one I don't totally understand is I should hold the stocks for 12 months in order to avoid capital gains taxes (or something?). The other is that I should look at my entire portfolio of net worth and whenever my ESPP/RSU shares exceed 5% of our total stock investments i.e. ~5% of 80% and sell off down to 5%/reinvest into indexes or w/e. The other is to sell them immediately. I don't feel confident in making a decision on it besides continuing to purchase at 10% rate.
Here's the short version: provided the employer imposes no restriction on the sale of the stock, you have a guaranteed return on your money so you should participate.

The long version includes whether you should keep or sell the shares, and if selling, when that should happen.  Because there are many variations possible (e.g., for some ESPPs the IRS imposes some consequences for selling quickly), see Employer stock options (https://forum.mrmoneymustache.com/investor-alley/employer-stock-options/).  See also espp site:bogleheads.org - Google Search (https://www.google.com/search?sitesearch=bogleheads.org&q=espp#q=espp+site:bogleheads.org).
If those don't answer your questions (and there is a good chance they will not), please either resurrect the MMM thread for more discussion or start a new thread. 

It's a good question and this was a good place to ask.  To keep the size of this thread manageable, though, it would be good to spin off detailed discussions about specific investment order nuances to other threads - thanks.
Title: Re: Investment Order
Post by: Izybat on May 05, 2017, 05:55:02 PM
So question on this. In the original list (for the US), it has #4 as an IRA (either traditional or Roth), and #5 as maxing out your 401k. My husband and I make too much money for the traditional IRA to be deductible. I have been working towards maxing out my 401K (not there yet, but getting there), but haven't looked into a Roth IRA. What is the benefit of doing a Roth IRA ahead of maxing out your 401K?
Title: Re: Investment Order
Post by: MDM on May 05, 2017, 09:15:24 PM
So question on this. In the original list (for the US), it has #4 as an IRA (either traditional or Roth), and #5 as maxing out your 401k. My husband and I make too much money for the traditional IRA to be deductible. I have been working towards maxing out my 401K (not there yet, but getting there), but haven't looked into a Roth IRA. What is the benefit of doing a Roth IRA ahead of maxing out your 401K?
Good question.

For a couple making ~$50K/yr total, the amount available for savings may be limited.  If so, the choice between IRA and 401k (after the match) should be based on which has the better (e.g., lower fee) investment options.  That couple would also be in the 15% bracket, where the choice between traditional and Roth can be a very close call, in which case it could be better to do a Roth IRA instead of a 401k.

Based on "...too much money for the traditional IRA to be deductible" your AGI is at least $99K and both of you have contributions going into a retirement plan at work.  That implies your gross income is at least $99K plus the amount you are already contributing to 401k plans, pre-tax insurance, and any other pre-tax deduction.  You may indeed have some unusual circumstances, but for many that would be enough to maximize both 401ks and IRAs.
Title: Re: Investment Order
Post by: runewell on May 21, 2017, 05:15:56 PM
I believe the ESPP belongs between 1 and 2, whatever your tax rate.
You are correct that if one can swing the cash flow, getting in and out of an ESPP is ~"free money".  But if one has to make a choice between deferring income in a 401k vs. taking the income and using it for an ESPP, it isn't the same.

Assumptions:
- 30% current tax (e.g., 25% federal, 5% state)
- 20% 401k withdrawal tax (e.g., 15% federal, 5% state)
- 5% taxable withdrawal tax (e.g., 0% federal, 5% state)
- 20% tax on dividends in taxable (e.g., 15% federal, 5% state); all dividends reinvested
- total return  of 7%, 5% from growth and 2% from dividends
- 15% "bonus" from ESPP
- 20 years growth

Starting with a $5000 initial pre-tax amount available, one gets the results below, indicating the tax-advantaged account would be better.

While that scenario is certainly feasible, could you repost using identical 15+5=20% tax rates.  It is clear that you want to reduce your taxable income when in a higher bracket, but I wonder how miniscule the benefit will be when we hold the tax rates equal.  Could do it myself but too lazy.
Title: Re: Investment Order
Post by: runewell on May 21, 2017, 05:25:46 PM
An ESPP is a pretty good investment.  I get a 15% return on my money, assume I sell the stock immediately and pay 20% tax, so I net 12% after taxes.  But I achieved this in six months and as the money is taken out each paycheck, on average the money is only held for three months.  A 12% gain in three months annualizes to a gain of about 50%/yr.  Who wouldn't want that. 

As a side benefit this money ends up in my investment account and pays for our Roth IRA contributions so between the ESPP and my 401k deductions my major retirement contributions come out of my paychecks regularly.
Title: Re: Investment Order
Post by: southpaw328 on June 06, 2017, 10:25:17 AM
For California residents where HSAs are not recognized by the state and therefore are treated as taxable accounts on a state level, should HSAs still be maxed so highly on the investment order list?

I just opened an HSA via my employer with Optum Bank. They made their contribution and I made my first. But now that I have learned that CA doesn't recognize it, should I actually go with a Traditional 401k @ Vanguard first?

Title: Re: Investment Order
Post by: MDM on June 06, 2017, 10:54:44 AM
For California residents where HSAs are not recognized by the state and therefore are treated as taxable accounts on a state level, should HSAs still be maxed so highly on the investment order list?

I just opened an HSA via my employer with Optum Bank. They made their contribution and I made my first. But now that I have learned that CA doesn't recognize it, should I actually go with a Traditional 401k @ Vanguard first?
It's less advantageous than it would be if it were deductible at the state level, but you do avoid all federal tax - both at contribution and at withdrawal - assuming the money can be attributed to medical expenses.   Because federal taxes are usually more onerous than state taxes, the HSA probably remains a better deal.

You could check: what is the after-tax spendable amount for a $1000 contribution if it goes into, grows, and is then withdrawn from
1) an HSA
2) a 401k?
Title: Re: Investment Order
Post by: DrF on June 09, 2017, 08:17:49 AM
For California residents where HSAs are not recognized by the state and therefore are treated as taxable accounts on a state level, should HSAs still be maxed so highly on the investment order list?

I just opened an HSA via my employer with Optum Bank. They made their contribution and I made my first. But now that I have learned that CA doesn't recognize it, should I actually go with a Traditional 401k @ Vanguard first?

I think you mean traditional IRA?
Title: Re: Investment Order
Post by: southpaw328 on June 29, 2017, 12:47:12 PM
For California residents where HSAs are not recognized by the state and therefore are treated as taxable accounts on a state level, should HSAs still be maxed so highly on the investment order list?

I just opened an HSA via my employer with Optum Bank. They made their contribution and I made my first. But now that I have learned that CA doesn't recognize it, should I actually go with a Traditional 401k @ Vanguard first?

I think you mean traditional IRA?

Yes, I meant Traditional IRA. Thanks.
Title: Re: Investment Order
Post by: Kwill on September 09, 2017, 05:25:23 PM
i would love someone from the UK to do this for us UKer's - i am too noobie at the moment for this myself!

There's a thread on that now: https://forum.mrmoneymustache.com/uk-tax-discussion/basic-investment-advice-for-uk-beginners/
Title: Re: Investment Order
Post by: lax4life93 on September 19, 2017, 03:59:13 PM
Canada - invest in non registered accounts under certain circumstances first. The correct order depends on income, its not universal.

For example if you earn under $42,000/year in Ontario dividends are taxed at -6.83% (that's a negative tax rate). In Alberta its -0.03%, basically zero. That's a case where non-registered come first (low income spouse scenario).

Low income earners should tackle TFSA/nonregistered while high income earners benefit from RRSP. Eligible dividends are held outside and non-eligible held inside TFSA. That's the basic rule.

Hooray for tax laws ;) Not every Canadian should be following the same order, don't forget to tailor to your own province. It gets more complicated when you add in the clawbacks for children (depends on number and age of kids). there's a $65,000 tax bracket, because of the clawback percentage change, that most people are unaware of. I've used RRSP contributions to increase benefits, in later years I won't get benefits (as kids age), then the allocation shifts again to be optimal.

Prairiestache, do you happen to have a calculator or something you use for this?  We are transitioning from DINK to SI1K and I could really use a tool to play through some scenarios
Title: Re: Investment Order
Post by: LadyDividend on October 31, 2017, 12:29:42 PM
Canada - invest in non registered accounts under certain circumstances first. The correct order depends on income, its not universal.

For example if you earn under $42,000/year in Ontario dividends are taxed at -6.83% (that's a negative tax rate). In Alberta its -0.03%, basically zero. That's a case where non-registered come first (low income spouse scenario).

Low income earners should tackle TFSA/nonregistered while high income earners benefit from RRSP. Eligible dividends are held outside and non-eligible held inside TFSA. That's the basic rule.

Hooray for tax laws ;) Not every Canadian should be following the same order, don't forget to tailor to your own province. It gets more complicated when you add in the clawbacks for children (depends on number and age of kids). there's a $65,000 tax bracket, because of the clawback percentage change, that most people are unaware of. I've used RRSP contributions to increase benefits, in later years I won't get benefits (as kids age), then the allocation shifts again to be optimal.

I have another point to mention. Almost every year, due to rental income, I owe taxes. So every year I am forced to put a large amount of savings into an RRSP so I can drop my taxable income.... I feels better, for example, to invest $4000 than to pay $1000 in taxes.
Title: Re: Investment Order
Post by: Aga_RockStar on October 31, 2017, 03:43:14 PM
CANADA

What:
0: Pay off any high interest debts and establish emergency fund based on your risk tolerance
1: Max out your contributions to your TFSA
2: Contribute to your RRSP (remember that $25,000 can be used for a down payment through the first time home buyer's plan if you have not owned a house in the last 4 or 5 years)
3: Pay off your mortgage and low interest debt
4: Invest in non-registered funds

Why:
0: High interest debt is a huge drag on your money, and you'll be much happier without it. An emergency fund is a fairly personal decision, if you are risk averse or work in a boom/bust industry then a substantial emergency fund can help you sleep at night. If you have a very stable career and are comfortable with 'springy debt' as described in the Australia section you probably don't need much.
1: The TFSA is a pretty amazing investment vehicle, particularly if you're young. You contribute after tax dollars and never pay tax again on the money, regardless of how much it grows. You have the option of withdrawing money and preserving the contribution room in the following year, but withdrawals should be avoided unless there's a really good reason for it (people often invest their mortgage downpayment in their TFSA, which may be appropriate if you're planning on buying 'in a few years').
2: RRSP are a reasonable tax deferred investment vehicle, you don't pay tax (or are refunded taxes if you contribute after tax dollars) on the contributions, but do pay tax when the money is withdrawn. You will pay taxes on the withdrawn money as income, rather than potentially more favourable capital gains and dividend tax rates. In general, the fact that your RRSP can grow for years tax free should balance the potential tax consequences. If you are discovering MMM after working for a few years, you will probably find that you have fairly vast contribution room in your RRSP (it grows at 18% of your salary/yr).
3: Low interest in this context means 'close to or less than the expected return on your investments'. Less debt is pretty great. You may decide to invest in non-registered (taxable) accounts rather than paying off your mortgage at this phase, either way is fine and it will depend primarily on your risk tolerance and what your best guesses are on what your interest rate will be.
4: Shovel money into your taxable accounts. Remember that eligible Canadian dividends are taxed at a preferential rate (as are dividends from VCN or similar index funds), but that this is not true of international dividends.

Possible Variations:
- If your income in retirement is likely to be higher than your working income, you should avoid investing in your RRSP. This is possible if you have a lot of money in your RRSP, a relatively low income and are approaching 71, when you you will be required to start withdrawing a percentage of your RRSP. You can probably avoid this by retiring earlier and drawing down your RRSP in a controlled manner prior to control your taxes.
- If your income is very high, and you expect it to be lower in retirement (eg. you started saving late in life but have a high salary) then it might be optimal to be contributing to your RRSP before your TFSA.
- RRSP income is considered as 'income' for tax purposes, as is your Canadian Pension Plan (CPP).  In a perfect world you'll be able to keep your income below ~ $71,000/yr after you reach 65 years so that you can receive the Old Age Supplement. It's hard to know whether this program will change if you're currently relatively young, but if you're in your 50s then it's worth looking at your taxes pretty carefully to try and make sure you're not inadvertently limiting your wealth by having a suboptimal withdrawal strategy.
- Mortgage choices are pretty personal and depend on a great deal on where you live. Between the TFSA and First Time Home Buyer Plan you should be well on your way to a downpayment if you don't own a house. If a purchase is imminent (6 months or a year?) then you should be invested in something very safe (eg. GICs) or in cash.


Thank you very much for this information. Could you please advise in regards to investing. Currently, as a family, we are investing in TFSAs only, but this is done through a financial advisor. I realized after reading some of the posts and other blogs that our advisor and investments are very badly managed. I need to find a better service, with lower fees and better management. I am in desperate need of some help and advice on where to go. I don't know much about investing and that is why we had someone to help (we live in Alberta, Canada). Any support would be greatly appreciated. I have lost my job this summer and this prompted me to look at the investment since we could not afford the contributions for now. When I looked, it was such a disappointment and embarrassment on my part, that it is hard for me to deal with. Thank you in advance for any information and guidance.

Title: Re: Investment Order
Post by: joonifloofeefloo on November 01, 2017, 12:13:16 AM
Aga_Rockstar, many of us follow the simple stuff nicely laid out here:
http://canadiancouchpotato.com/model-portfolios-2/

Personally, I do Option 3. You can select these at TD Direct Investing, RBC Direct Investing, etc.
Title: Re: Investment Order
Post by: boarder42 on November 01, 2017, 04:23:32 AM
For California residents where HSAs are not recognized by the state and therefore are treated as taxable accounts on a state level, should HSAs still be maxed so highly on the investment order list?

I just opened an HSA via my employer with Optum Bank. They made their contribution and I made my first. But now that I have learned that CA doesn't recognize it, should I actually go with a Traditional 401k @ Vanguard first?

I think you mean traditional IRA?

Yes, I meant Traditional IRA. Thanks.

It's unlikely that even without the state tax deduction that the IRA will be better. You have payroll deduction it appears so this will bypass FICA saving you 7.5%. Plus remember all the gains aren't taxed at a federal level when used for healthcare.
Title: Re: Investment Order
Post by: Aga_RockStar on November 01, 2017, 09:41:36 AM
Aga_Rockstar, many of us follow the simple stuff nicely laid out here:
http://canadiancouchpotato.com/model-portfolios-2/

Personally, I do Option 3. You can select these at TD Direct Investing, RBC Direct Investing, etc.

Thank you very much!! This a great site! The issue I have, is that I don't know how to decide what is the best for my situation, and my lack of knowledge is embarrassing, to say the least. Even on this site, it does not say what are "small contributions", does this mean $100/month, $1000/month??? Little things like that I have to find out... thank you again, I will start reading the posts to get more clarity and understanding.
Title: Re: Investment Order
Post by: joonifloofeefloo on November 01, 2017, 10:10:14 AM
Yeah, Aga_Rockstar, there's a bit of a learning curve still, even though it's really nicely laid out. Definitely poke through the site some. Also, I highly recommend the book Millionaire Teacher by Andrew Hallam. He released a new edition January 2017. This really breaks things down nicely.

I would (in this order):
1. Read MT, newest edition
2. Poke through the CCP site for more CCP understanding
3. Ask here if any further questions (you might start a new thread re: 'CCP preparation')
4. Choose one of the three model portfolios
Title: Re: Investment Order
Post by: Aga_RockStar on November 01, 2017, 10:33:52 AM
Great advice, jooniFLORisploo!! Much appreciated! I am getting this book right now. I am reading Tony Robbins' "Unshakeable", but lots of information is US based. I tried to use the links and they do not have equivalent once for Canada, BUT this book made me review the current investment. As suggested, I might start a new thread... I need to get my questions organized (too many) :). Thank you again.
Title: Re: Investment Order
Post by: joonifloofeefloo on November 01, 2017, 10:37:57 AM
You're welcome!

When I did my thread to sort out the details, I asked one question at a time. i.e., Posted one question, got it answered thoroughly, posted the next in the same thread, got it answered...  There were maybe 20 distinct questions, starting with things like "is stocks and equity the same thing?", so you can sense my starting point, lol. The community was AWESOME, and this approach really did the trick for me.

It was partway through that thread that I read MT, and that would have saved us all some effort, lol.
Title: Re: Investment Order
Post by: Aga_RockStar on November 16, 2017, 01:56:14 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!
Title: Re: Investment Order
Post by: boarder42 on November 16, 2017, 02:29:29 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.
Title: Re: Investment Order
Post by: Aga_RockStar on November 16, 2017, 03:31:06 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.
Title: Re: Investment Order
Post by: boarder42 on November 16, 2017, 05:02:09 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.
Title: Re: Investment Order
Post by: joonifloofeefloo on November 16, 2017, 07:38:08 PM
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.

+1. If you want to move it ASAP, skip the first few steps presented above, divvy it up per Canadian Couch Potato ETF model, continue learning, adjust if you wish after that. The first few steps are really just so we feel confident in our CCP step! (We should never do anything we are not comfortable and confident doing. But that caution should apply to the costlier roboadvisers just as much as the cheaper CCP option.)
Title: Re: Investment Order
Post by: harvestbook on January 19, 2018, 03:00:31 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?
Title: Re: Investment Order
Post by: FI40 on February 09, 2018, 09:12:57 AM
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.

The new VBAL or VGRO from Vanguard fill this role quite well.
Title: Re: Investment Order
Post by: FI40 on February 09, 2018, 09:29:43 AM
CANADA

What:
0: Pay off any high interest debts and establish emergency fund based on your risk tolerance
1: Max out your contributions to your TFSA
2: Contribute to your RRSP (remember that $25,000 can be used for a down payment through the first time home buyer's plan if you have not owned a house in the last 4 or 5 years)
3: Pay off your mortgage and low interest debt
4: Invest in non-registered funds

Why:
0: High interest debt is a huge drag on your money, and you'll be much happier without it. An emergency fund is a fairly personal decision, if you are risk averse or work in a boom/bust industry then a substantial emergency fund can help you sleep at night. If you have a very stable career and are comfortable with 'springy debt' as described in the Australia section you probably don't need much.
1: The TFSA is a pretty amazing investment vehicle, particularly if you're young. You contribute after tax dollars and never pay tax again on the money, regardless of how much it grows. You have the option of withdrawing money and preserving the contribution room in the following year, but withdrawals should be avoided unless there's a really good reason for it (people often invest their mortgage downpayment in their TFSA, which may be appropriate if you're planning on buying 'in a few years').
2: RRSP are a reasonable tax deferred investment vehicle, you don't pay tax (or are refunded taxes if you contribute after tax dollars) on the contributions, but do pay tax when the money is withdrawn. You will pay taxes on the withdrawn money as income, rather than potentially more favourable capital gains and dividend tax rates. In general, the fact that your RRSP can grow for years tax free should balance the potential tax consequences. If you are discovering MMM after working for a few years, you will probably find that you have fairly vast contribution room in your RRSP (it grows at 18% of your salary/yr).
3: Low interest in this context means 'close to or less than the expected return on your investments'. Less debt is pretty great. You may decide to invest in non-registered (taxable) accounts rather than paying off your mortgage at this phase, either way is fine and it will depend primarily on your risk tolerance and what your best guesses are on what your interest rate will be.
4: Shovel money into your taxable accounts. Remember that eligible Canadian dividends are taxed at a preferential rate (as are dividends from VCN or similar index funds), but that this is not true of international dividends.

Possible Variations:
- If your income in retirement is likely to be higher than your working income, you should avoid investing in your RRSP. This is possible if you have a lot of money in your RRSP, a relatively low income and are approaching 71, when you you will be required to start withdrawing a percentage of your RRSP. You can probably avoid this by retiring earlier and drawing down your RRSP in a controlled manner prior to control your taxes.
- If your income is very high, and you expect it to be lower in retirement (eg. you started saving late in life but have a high salary) then it might be optimal to be contributing to your RRSP before your TFSA.
- RRSP income is considered as 'income' for tax purposes, as is your Canadian Pension Plan (CPP).  In a perfect world you'll be able to keep your income below ~ $71,000/yr after you reach 65 years so that you can receive the Old Age Supplement. It's hard to know whether this program will change if you're currently relatively young, but if you're in your 50s then it's worth looking at your taxes pretty carefully to try and make sure you're not inadvertently limiting your wealth by having a suboptimal withdrawal strategy.
- Mortgage choices are pretty personal, and depend a great deal on where you live. Between the TFSA and First Time Home Buyer Plan you should be well on your way to a downpayment if you don't own a house. If a purchase is imminent (6 months or a year?) then you should be invested in something very safe (eg. GICs) or in cash.

Great job, just one comment: if you have kids, and you plan to help with their education costs, the RESP is the best bang for your buck because of the government grants. Better than the TFSA or RRSP. And if you are not inclined to help them out TOO much, or if they don't need that much money for whatever reason, keep in mind your contributions are still yours. The grant and any investment gains are taxed in your child's hands, and once withdrawn by your child you can pull out the contributions for yourself. It's basically loaning your kid some money and letting them get some amazing returns from it (mostly from the grant) in a tax deferred account, then getting your principal back on "maturity". Not a huge loss for you, massive gain for them. Doing the math on it, as I said, it works out better than anything else in pretty much all cases, so this would be my Step 0.5 I guess.
Title: Re: Investment Order
Post by: bender 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.

Title: Re: Investment Order
Post by: Radioherd88 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!
Title: Re: Investment Order
Post by: MDM 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....
Title: Re: Investment Order
Post by: MDM 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?
Title: Re: Investment Order
Post by: bender on February 12, 2018, 07:54:43 PM
Looks good - thanks MDM!
Title: Re: Investment Order
Post by: MustacheAndaHalf 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
Title: Re: Investment Order
Post by: MDM 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. 
Title: Re: Investment Order
Post by: Radioherd88 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!
Title: Re: Investment Order
Post by: MDM 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.
Title: Re: Investment Order
Post by: Radioherd88 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....
Title: Re: Investment Order
Post by: MDM 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? (https://forum.mrmoneymustache.com/ask-a-mustachian/pmi-payoff-roi/) and Getting rid of PMI? What % "return" would I get for paying down my mortgage? (https://forum.mrmoneymustache.com/ask-a-mustachian/getting-rid-of-pmi-what-'return'-would-i-get-for-paying-down-my-mortgage/) for some thoughts.
Title: Re: Investment Order
Post by: MustacheAndaHalf 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).
Title: Re: Investment Order
Post by: Radioherd88 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? (https://forum.mrmoneymustache.com/ask-a-mustachian/pmi-payoff-roi/) and Getting rid of PMI? What % "return" would I get for paying down my mortgage? (https://forum.mrmoneymustache.com/ask-a-mustachian/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...
Title: Re: Investment Order
Post by: rudged 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 (https://www.bogleheads.org/wiki/Backdoor_Roth_IRA)) 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?
Title: Re: Investment Order
Post by: MDM 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 (https://www.bogleheads.org/wiki/Backdoor_Roth_IRA)) 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).
Title: Re: Investment Order
Post by: tomdrake 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/
Title: Re: Investment Order
Post by: lilactree on February 16, 2019, 11:47:39 AM
USA-specific question:

Would the investment order be different for a family that is trying to use Public Service Loan Forgiveness (PSLF)? e.g. would maxing out a 401K then move up in priority since adjusted gross income and thus income-based payments be lower?

 
Title: Re: Investment Order
Post by: MDM on February 16, 2019, 12:18:58 PM
Would the investment order be different for a family that is trying to use Public Service Loan Forgiveness (PSLF)? e.g. would maxing out a 401K then move up in priority since adjusted gross income and thus income-based payments be lower?
At a quick glance I'd say "no" because
- paying off very high interest debt provides a guaranteed high return.
- HSAs and traditional IRAs also reduce adjusted gross income.

But if you have done a deeper drill and have a worked example showing why a different order is better...?
Title: Re: Investment Order
Post by: lilactree on February 16, 2019, 01:03:32 PM
Thank you, MDM. I have not done a deeper drill; I'm pretty much a novice. If I somehow ever do, I'll share my findings.
Title: Re: Investment Order
Post by: robartsd on February 19, 2019, 08:54:52 AM
USA-specific question:

Would the investment order be different for a family that is trying to use Public Service Loan Forgiveness (PSLF)? e.g. would maxing out a 401K then move up in priority since adjusted gross income and thus income-based payments be lower?
I would think that student loans that might qualify for PSLF wouldn't have interest rates high enough to place paying them off above tax advantaged savings. While it is true that you could slightly reduce the payments to the loans by lowering AGI, I don't think it would be worth the cost of the extra interest on the high interest loans (hair on fire debt that should have been avoided) especially after considering the tax impact of the increased balance of the loans at forgiveness. At most adjusting for a PSLF strategy would increase the threshold interest rate for the first loan payoff line a little bit.
Title: Re: Investment Order
Post by: andrew08 on March 07, 2019, 09:01:55 AM
You should assign an investment order account to an AuC if the maintenance work is to continue across a period limit (for example, end of the year) or if the asset is to be activated as a line item (https://www.robotance.com/robotic-food-processor/processor-reviews/)
Title: Re: Investment Order
Post by: MizB on April 01, 2019, 09:08:11 PM
This ordering is appropriate for investors in the US.

In the lists below, thinking "first your governmental 457 (if you have one), then your 401k/403b/SIMPLE/etc." wherever "401k" appears is likely correct -            
   unless your governmental 457 fund options are significantly worse than those in the 401k/403b -         
   due to penalty-free access to governmental 457 funds at retirement, even if younger than 59 1/2.
   Non-governmental 457b plans have deficiencies, including the inability to roll the balance into an IRA.

"Max _____" means "contribute up to the maximum allowed for _____, subject to your ability to pay day-to-day expenses."            

Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).            
            
Current 10-year Treasury note yield is ~3%.  See            
   http://quotes.wsj.com/bond/BX/TMUBMUSD10Y         
            
WHAT            
0. Establish an emergency fund (https://www.bogleheads.org/wiki/Emergency_fund) to your satisfaction            
1. Contribute to your 401k up to any company match            
2. Pay off any debts with interest rates ~5% or more above the current 10-year Treasury note yield.            
3. Max Health Savings Account (https://www.bogleheads.org/wiki/Health_savings_account) (HSA) if eligible.
4. Max Traditional IRA or Roth (or backdoor Roth (https://www.bogleheads.org/wiki/Backdoor_Roth_IRA)) based on income level            
5. Max 401k (if
    - 401k fees are lower than available in an IRA, or
    - you need the 401k deduction to be eligible for (and desire) a tIRA deduction, or
    - your earn too much for an IRA deduction and prefer traditional to Roth, then
    swap #4 and #5)            
6. Fund a mega backdoor Roth (https://www.bogleheads.org/wiki/After-tax_401(k)) if applicable.         
7. Pay off any debts with interest rates ~3% or more above the current 10-year Treasury note yield.            
8. Invest in a taxable account and/or fund a 529 with any extra.            
            
WHY            
0. Give yourself at least enough buffer to avoid worries about bouncing checks            
1. Company match rates are likely the highest percent return you can get on your money            
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs for that purpose.
    At worst, the HSA behaves much the same as a tIRA after age 65.
4. Rule of thumb: traditional if current federal marginal rate is 22% or higher; Roth if 10% or lower, or if MAGI is too high to deduct a traditional IRA; flip a coin otherwise. 
   For those willing to expend a little more energy than it takes to flip a coin, consider comparing current marginal tax saving rate vs. predicted marginal withdrawal tax rate.
      If current > predicted, use traditional.  Otherwise use Roth.
   See Credits can make Traditional better than Roth for lower incomes (http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-overwhelming-student-loan-debt-how-would-you-get-started/msg868845/#msg868845) and other posts in that thread about some exceptions to the rule.
   See Traditional versus Roth - Bogleheads (https://www.bogleheads.org/wiki/Traditional_versus_Roth) for even more details and exceptions.  State tax (or lack thereof) should also be considered.
   The 'Calculations' tab in the Case Study Spreadsheet (http://forum.mrmoneymustache.com/forum-information-faqs/case-study-spreadsheet-updates/) can show marginal rates for savings or withdrawals*.
5. See #4 for choice of traditional or Roth for 401k.  In a 401k there are no income-based limits for deductions or contributions.      
6. Applicability depends on the rules for the specific 401k.  See Mega Backdoor Roth IRA (https://www.bogleheads.org/wiki/After-tax_401(k)).
7. Again, take the risk-free return if high enough.  Note that embedded in "high enough" is the assumption that your alternative is "all stocks" or a "fund of funds"
   (e.g., target retirement date) that provides a blend of stock and bond returns.  If you wish to consider separate bond funds, compare the yield on a fund
   with a duration similar to the time remaining on the loan, and put your money toward the one with the higher after-tax interest/yield.
8. Because taxable earnings will still help your FI journey.  If your own retirement is in good shape, and you choose to provide significant help for children's college costs,
   a 529 plan (https://www.bogleheads.org/wiki/529_plan) may be appropriate.  Similar to "put on your own oxygen mask before assisting others," do consider funding your own retirement before funding 529 plans for children's college costs.

Speaking of things to do first, see Getting started - Bogleheads (https://www.bogleheads.org/wiki/Getting_started) if this is all new.  Working through that post and the links therein is also a good refresher, even if personal finance isn't completely new to you.

The emergency fund is your "no risk" money.  You might consider one of these online banks:            
   http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001      

It is up to you whether to consider "saving for a house down payment" as a "day to day expense", vs. lumping the down payment savings in with "taxable investments" at the end.

If you are renting, you may not be throwing away as much on rent as you might think.  See            
   http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/         
for some thoughts.            
               
For those concerned about "locking up" money in retirement accounts until age 59.5, see How to withdraw funds from your IRA and 401k without penalty before age 59.5 (https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/).

If one can swing the cash flow, getting in and out of an ESPP is ~"free money".  But if one has to make a choice between deferring income in a 401k vs. taking the income and using it for an ESPP, it isn't the same.  The benefits of employee stock purchase plans (ESPPs) relative to other opportunities is highly dependent on tax rates, because ESPP benefits all occur in taxable accounts. 
 - For someone paying 12% tax on ordinary income, and 0% on dividends and capital gains, ESPPs can be very favorable, perhaps competing with high interest rate loans in step 2. 
 - For someone paying 22% tax on ordinary income, and 15% on dividends and capital gains, ESPPs are not as favorable, perhaps coming between steps 6 and 7.

If your 401k options are poor (i.e., high fund fees) you can check
   http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/         
for some thoughts on "how high is too high?"

The MAGI calculation for Roth IRA purposes is https://www.irs.gov/publications/p590a#en_US_2017_publink1000230985
Then see Retirement Topics IRA Contribution Limits | Internal Revenue Service (https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits).
The MAGI calculation for traditional IRA purposes is https://www.irs.gov/publications/p590a#en_US_2017_publink1000230489.
Then see IRA Deduction Limits | Internal Revenue Service (https://www.irs.gov/retirement-plans/ira-deduction-limits)

Priorities above apply when income is primarily through W-2 earnings.  For those running their own businesses (e.g., rental property owner, small business owner, etc.),            
   putting money into that business might come somewhere before, in parallel with, or after step 5.         
            
Why it is likely better to invest instead of paying a low interest rate mortgage early, if you have a long time until the mortgage is due:            
   https://www.thebalance.com/rolling-index-returns-1973-mid-2009-4061795      
   http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html


*Estimating withdrawal tax rates is not an exact science, but here is one approach:
1) Estimate any guaranteed income.  E.g., pension you can't defer in return for higher payments when you do start, rentals, etc.
2) Take current traditional balance and predict value at retirement (e.g., with Excel's FV function) using a conservative real return, maybe 3% or so.  Take 4% of that value as an annual withdrawal.
3) Take current taxable balance and predict value at retirement (e.g., with Excel's FV function) using a conservative real return, maybe 3% or so.  Take 2% of that value as qualified dividends.
4a) Decide whether SS income should be considered, or whether you will be able to do enough traditional->Roth conversions before taking SS.
4b) Include SS income projections (using today's dollars) if needed from step 4a.
5) Calculate marginal rate on withdrawals from traditional accounts using today's tax law on the numbers from step 1-4.
6) Make your traditional vs. Roth decision for this year's contribution
7) Repeat steps 1-6 every year until retirement

The steps above may look complicated at first, but you don't need great precision.  The answer will either be "obvious" or "difficult to choose".  If the latter, it likely won't make much difference which you pick anyway.

Note the possibility of self-defeating predictions:
a) predict high taxable retirement income > contribute to Roth > get low taxable retirement income
b) predict low taxable retirement income > contribute to traditional > get high taxable retirement income

Also, if you pick traditional and that ends up being wrong it will be because you have "too much money" - not the worst problem.
If you pick Roth and that ends up being wrong it will be because you have "too little money" - that can be a real problem.
Thus using traditional is a "safer" choice.

Hello, I am hoping to get advice on where to invest next:

I have already saved an Emergency Fund, paid off all debt, have about $60K in index funds, and maxed out my TSP (401K). I work for the Federal Government and don't have the ability to contribute to an HSA or do a mega back door roth. I make $160K and therefore can't contribute to a Roth and won't get a deduction for a traditional IRA. Is it still worth contributing to a traditional IRA or should I stick with taxable accounts? I have $100K in savings and can't decide whether to buy a place or invest. I would really appreciate any advice you fellow mustachians have!

Title: Re: Investment Order
Post by: MDM on April 01, 2019, 10:12:25 PM
Hello, I am hoping to get advice on where to invest next:

I have already saved an Emergency Fund, paid off all debt, have about $60K in index funds, and maxed out my TSP (401K). I work for the Federal Government and don't have the ability to contribute to an HSA or do a mega back door roth. I make $160K and therefore can't contribute to a Roth and won't get a deduction for a traditional IRA. Is it still worth contributing to a traditional IRA or should I stick with taxable accounts? I have $100K in savings and can't decide whether to buy a place or invest. I would really appreciate any advice you fellow mustachians have!
It would be better to ask this in the Case Studies (https://forum.mrmoneymustache.com/case-studies/) board.

See How To: Write a Case Study Topic (https://forum.mrmoneymustache.com/case-studies/how-to-write-a-'case-study'-topic/).  Good luck!
Title: Re: Investment Order
Post by: MizB on April 01, 2019, 10:19:43 PM
Hello, I am hoping to get advice on where to invest next:

I have already saved an Emergency Fund, paid off all debt, have about $60K in index funds, and maxed out my TSP (401K). I work for the Federal Government and don't have the ability to contribute to an HSA or do a mega back door roth. I make $160K and therefore can't contribute to a Roth and won't get a deduction for a traditional IRA. Is it still worth contributing to a traditional IRA or should I stick with taxable accounts? I have $100K in savings and can't decide whether to buy a place or invest. I would really appreciate any advice you fellow mustachians have!
It would be better to ask this in the Case Studies (https://forum.mrmoneymustache.com/case-studies/) board.

See How To: Write a Case Study Topic (https://forum.mrmoneymustache.com/case-studies/how-to-write-a-'case-study'-topic/).  Good luck!

Oh! New poster....thanks for the tip. I will try that!
Title: Re: Investment Order
Post by: MrThatsDifferent on April 24, 2019, 02:16:59 AM
I’ve got a mate from the UK that would be interested in an investment order for that. Anyone got one?
Title: Re: Investment Order
Post by: robartsd on April 24, 2019, 10:15:17 AM
I’ve got a mate from the UK that would be interested in an investment order for that. Anyone got one?
You can check out the UK Tax discussion (https://forum.mrmoneymustache.com/uk-tax-discussion/) board. Unfortunately the dominance of North Americans in the general areas has our UK mustachians using it as a pretty general place for UK discussion (their only sticky is a directory to UK based journals).

So far I know that the UK has the following types of tax advantaged accounts:
[li]LISA (Lifetime ISA - government adds 25% to your contributions - can withdraw for: first home purchase, old age, terminal illness)
[/li][/list]
I believe the biggest problem for our UK friends is that only the ISA provides access to funds in early retirement. Pensions and SIPPs are typically available at age 55, LISA is available at age 60, State Pension (similar to Social Security) kicks in at 65 or later. I don't know of any early withdraw schemes similar to the options we have in the US (Roth conversion ladder, SEPP, low 10% penalty).
Title: Re: Investment Order
Post by: letsdoit on May 13, 2019, 07:27:10 AM
This ordering is appropriate for investors in the US.

In the lists below, thinking "first your governmental 457 (if you have one), then your 401k/403b/SIMPLE/etc." wherever "401k" appears is likely correct -            
   unless your governmental 457 fund options are significantly worse than those in the 401k/403b -         
   due to penalty-free access to governmental 457 funds at retirement, even if younger than 59 1/2.
   Non-governmental 457b plans have deficiencies, including the inability to roll the balance into an IRA.

"Max _____" means "contribute up to the maximum allowed for _____, subject to your ability to pay day-to-day expenses."            

Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).            
            
Current 10-year Treasury note yield is ~3%.  See            
   http://quotes.wsj.com/bond/BX/TMUBMUSD10Y         
            
WHAT            
0. Establish an emergency fund (https://www.bogleheads.org/wiki/Emergency_fund) to your satisfaction            
1. Contribute to your 401k up to any company match            
2. Pay off any debts with interest rates ~5% or more above the current 10-year Treasury note yield.            
3. Max Health Savings Account (https://www.bogleheads.org/wiki/Health_savings_account) (HSA) if eligible.
4. Max Traditional IRA or Roth (or backdoor Roth (https://www.bogleheads.org/wiki/Backdoor_Roth_IRA)) based on income level            
5. Max 401k (if
    - 401k fees are lower than available in an IRA, or
    - you need the 401k deduction to be eligible for (and desire) a tIRA deduction, or
    - your earn too much for an IRA deduction and prefer traditional to Roth, then
    swap #4 and #5)            
6. Fund a mega backdoor Roth (https://www.bogleheads.org/wiki/After-tax_401(k)) if applicable.         
7. Pay off any debts with interest rates ~3% or more above the current 10-year Treasury note yield.            
8. Invest in a taxable account and/or fund a 529 with any extra.            
            
WHY            
0. Give yourself at least enough buffer to avoid worries about bouncing checks            
1. Company match rates are likely the highest percent return you can get on your money            
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs for that purpose.
    At worst, the HSA behaves much the same as a tIRA after age 65.
4. Rule of thumb: traditional if current federal marginal rate is 22% or higher; Roth if 10% or lower, or if MAGI is too high to deduct a traditional IRA; flip a coin otherwise. 
   For those willing to expend a little more energy than it takes to flip a coin, consider comparing current marginal tax saving rate vs. predicted marginal withdrawal tax rate.
      If current > predicted, use traditional.  Otherwise use Roth.
   See Credits can make Traditional better than Roth for lower incomes (http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-overwhelming-student-loan-debt-how-would-you-get-started/msg868845/#msg868845) and other posts in that thread about some exceptions to the rule.
   See Traditional versus Roth - Bogleheads (https://www.bogleheads.org/wiki/Traditional_versus_Roth) for even more details and exceptions.  State tax (or lack thereof) should also be considered.
   The 'Calculations' tab in the Case Study Spreadsheet (http://forum.mrmoneymustache.com/forum-information-faqs/case-study-spreadsheet-updates/) can show marginal rates for savings or withdrawals*.
5. See #4 for choice of traditional or Roth for 401k.  In a 401k there are no income-based limits for deductions or contributions.      
6. Applicability depends on the rules for the specific 401k.  See Mega Backdoor Roth IRA (https://www.bogleheads.org/wiki/After-tax_401(k)).
7. Again, take the risk-free return if high enough.  Note that embedded in "high enough" is the assumption that your alternative is "all stocks" or a "fund of funds"
   (e.g., target retirement date) that provides a blend of stock and bond returns.  If you wish to consider separate bond funds, compare the yield on a fund
   with a duration similar to the time remaining on the loan, and put your money toward the one with the higher after-tax interest/yield.
8. Because taxable earnings will still help your FI journey.  If your own retirement is in good shape, and you choose to provide significant help for children's college costs,
   a 529 plan (https://www.bogleheads.org/wiki/529_plan) may be appropriate.  Similar to "put on your own oxygen mask before assisting others," do consider funding your own retirement before funding 529 plans for children's college costs.

Speaking of things to do first, see Getting started - Bogleheads (https://www.bogleheads.org/wiki/Getting_started) if this is all new.  Working through that post and the links therein is also a good refresher, even if personal finance isn't completely new to you.

The emergency fund is your "no risk" money.  You might consider one of these online banks:            
   http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001      

It is up to you whether to consider "saving for a house down payment" as a "day to day expense", vs. lumping the down payment savings in with "taxable investments" at the end.

If you are renting, you may not be throwing away as much on rent as you might think.  See            
   http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/         
for some thoughts.            
               
For those concerned about "locking up" money in retirement accounts until age 59.5, see How to withdraw funds from your IRA and 401k without penalty before age 59.5 (https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/).

If your 401k options are poor (i.e., high fund fees) you can check
   http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/         
for some thoughts on "how high is too high?"

The MAGI calculation for Roth IRA purposes is https://www.irs.gov/publications/p590a#en_US_2018_publink1000230985
Then see Retirement Topics IRA Contribution Limits | Internal Revenue Service (https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits).
The MAGI calculation for traditional IRA purposes is https://www.irs.gov/publications/p590a#en_US_2018_publink1000230489.
Then see IRA Deduction Limits | Internal Revenue Service (https://www.irs.gov/retirement-plans/ira-deduction-limits)

If one can swing the cash flow, getting in and out of an ESPP is ~"free money".  But if one has to make a choice between deferring income in a 401k vs. taking the income and using it for an ESPP, it isn't the same.  The benefits of employee stock purchase plans (ESPPs) relative to other opportunities is highly dependent on tax rates, because ESPP benefits all occur in taxable accounts. 
 - For someone paying 12% tax on ordinary income, and 0% on dividends and capital gains, ESPPs can be very favorable, perhaps competing with high interest rate loans in step 2. 
 - For someone paying 22% tax on ordinary income, and 15% on dividends and capital gains, ESPPs are not as favorable, perhaps coming between steps 6 and 7.

Priorities above apply when income is primarily through W-2 earnings.  For those running their own businesses (e.g., rental property owner, small business owner, etc.),            
   putting money into that business might come somewhere before, in parallel with, or after step 5.         
            
Why it is likely better to invest instead of paying a low interest rate mortgage early, if you have a long time until the mortgage is due:            
   https://www.thebalance.com/rolling-index-returns-1973-mid-2009-4061795      
   http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html


*Estimating withdrawal tax rates is not an exact science, but here is one approach:
1) Estimate any guaranteed income.  E.g., pension you can't defer in return for higher payments when you do start, rentals, etc.
2) Take current traditional balance and predict value at retirement (e.g., with Excel's FV function) using a conservative real return, maybe 3% or so.  Take 4% of that value as an annual withdrawal.
3) Take current taxable balance and predict value at retirement (e.g., with Excel's FV function) using a conservative real return, maybe 3% or so.  Take 2% of that value as qualified dividends.
4a) Decide whether SS income should be considered, or whether you will be able to do enough traditional->Roth conversions before taking SS.
4b) Include SS income projections (using today's dollars) if needed from step 4a.
5) Calculate marginal rate on withdrawals from traditional accounts using today's tax law on the numbers from step 1-4.
6) Make your traditional vs. Roth decision for this year's contribution
7) Repeat steps 1-6 every year until retirement

The steps above may look complicated at first, but you don't need great precision.  The answer will either be "obvious" or "difficult to choose".  If the latter, it likely won't make much difference which you pick anyway.

Note the possibility of self-defeating predictions:
a) predict high taxable retirement income > contribute to Roth > get low taxable retirement income
b) predict low taxable retirement income > contribute to traditional > get high taxable retirement income

Also, if you pick traditional and that ends up being wrong it will be because you have "too much money" - not the worst problem.
If you pick Roth and that ends up being wrong it will be because you have "too little money" - that can be a real problem.
Thus using traditional is a "safer" choice.


457 b governemtnal vs: non governmental.
some ppl say that if yours has a Roth option, then it is definitely governemtal (altho some gov't 457s do not have ROth).  is there another way to tell?  and , why does it matter?
Title: Re: Investment Order
Post by: MDM on May 13, 2019, 10:01:44 AM
457 b governemtnal vs: non governmental.
some ppl say that if yours has a Roth option, then it is definitely governemtal (altho some gov't 457s do not have ROth).  is there another way to tell?  and , why does it matter?
If the employer is a private company, it's not governmental.  If the employer is government run (e.g., a school district) it is governmental.

See 457 plan - Wikipedia (https://en.wikipedia.org/wiki/457_plan#Governmental_and_non-governmental_plans) and Non Governmental 457b Deferred Compensation Plans | Internal Revenue Service (https://www.irs.gov/retirement-plans/non-governmental-457b-deferred-compensation-plans) for details on differences.
Title: Re: Investment Order
Post by: mtnrider on May 13, 2019, 10:33:31 AM
This ordering is appropriate for investors in the US.

0. Establish an emergency fund (https://www.bogleheads.org/wiki/Emergency_fund) to your satisfaction            

8. Invest in a taxable account and/or fund a 529 with any extra.            


I'd like to suggest that Series I Bonds from Treasury Direct are appropriate for US investors as an emergency fund.  Depending on your age and risk tolerance, they may also be appropriate for taxable accounts.  I Bonds are US government issued bonds that are indexed to inflation.  They often return around the same amount as a high yield savings account or CDs, but are tax deferred.

I Bonds are tax free if for used education, depending on your income.  If you're bumping up against the gift tax in a 529, consider I Bonds. 

They are not without some complication.  There is a purchase limit of $10,000 per year.  They must be held for a year before you can redeem them, and if redeemed within five years, there is a 3 month interest penalty.

https://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm
Title: Re: Investment Order
Post by: Minion on June 05, 2019, 12:52:30 AM
Would be awesome if someone could update this for Germany - not sure if there are many other DE mustachians  around?
Title: Re: Investment Order
Post by: Gatzbie on June 27, 2019, 05:26:54 PM
Newby questions here

I’m trying to do calculations to estimate my withdrawal tax rates:

Step #2: Does take “current traditional balance” mean just your pre-tax 401k & traditional IRA balance? Or is Roth IRA/Roth 401k included here too?
Step #3: Does take “current taxable balance” mean just your brokerage account money?

Step #5:Does "traditional accounts"  mean just your pre-tax 401k & traditional IRA balance? (Same as Step#2)





Title: Re: Investment Order
Post by: MDM on June 27, 2019, 05:58:12 PM
Newby questions here

I’m trying to do calculations to estimate my withdrawal tax rates:

Step #2: Does take “current traditional balance” mean just your pre-tax 401k & traditional IRA balance?
Step #3: Does take “current taxable balance” mean just your brokerage account money?

Step #5:Does "traditional accounts"  mean just your pre-tax 401k & traditional IRA balance? (Same as Step#2)
Yes to all the above.

Traditional is not Roth.
Title: Re: Investment Order
Post by: secondcor521 on August 03, 2019, 10:13:29 AM
@MDM, in the WHY section, step 4, you may consider adding a note that effects on ACA subsidies and FAFSA EFC function as separate parallel taxation systems and thus can add to the overall marginal tax rates, which affect the current vs. future marginal rate evaluation.

Although that adds to the complication of an already fairly complicated rule of thumb post, so I will respectfully leave it up to you to decide if the addition is worth the increase in complexity.

Last year with my personal tax situation the combined effect of ACA+FAFSA seemed to be about 12 percentage points of marginal rate, so it can be a fairly significant factor.  But I am FIREd with kids in college, which may be a small target audience.
Title: Re: Investment Order
Post by: MDM on August 03, 2019, 10:24:19 AM
@MDM, in the WHY section, step 4, you may consider adding a note that effects on ACA subsidies and FAFSA EFC function as separate parallel taxation systems and thus can add to the overall marginal tax rates, which affect the current vs. future marginal rate evaluation.

Although that adds to the complication of an already fairly complicated rule of thumb post, so I will respectfully leave it up to you to decide if the addition is worth the increase in complexity.

Last year with my personal tax situation the combined effect of ACA+FAFSA seemed to be about 12 percentage points of marginal rate, so it can be a fairly significant factor.  But I am FIREd with kids in college, which may be a small target audience.
Good point.

Currently, the ACA effect is included in marginal rate calculations done by the case study spreadsheet (http://forum.mrmoneymustache.com/forum-information-faqs/case-study-spreadsheet-updates/) (CSS) - provided one enters the inputs needed - but the FAFSA EFC is not.

Is the FAFSA EFC calculable from entries already needed, and calculations already made, by the CSS?  Or does it require significantly more inputs?
Title: Re: Investment Order
Post by: MDM on August 03, 2019, 10:37:15 AM
Is the FAFSA EFC calculable from entries already needed, and calculations already made, by the CSS?  Or does it require significantly more inputs?
Based on https://ifap.ed.gov/efcformulaguide/attachments/1920EFCFormulaGuide.pdf, it appears to require
- much more input from the spreadsheet user, and
- much more work from the spreadsheet developer
than currently needed.

Unless there is a way around the above (e.g., someone already has a CSS-compatible spreadsheet and is willing to share), I don't see the EFC being included in the CSS marginal rate calculation.  But a note about that effect in the IO post seems doable.
Title: Re: Investment Order
Post by: secondcor521 on August 03, 2019, 10:59:12 AM
Unless there is a way around the above (e.g., someone already has a CSS-compatible spreadsheet and is willing to share), I don't see the EFC being included in the CSS marginal rate calculation.  But a note about that effect in the IO post seems doable.

Agreed.  Thanks.
Title: Re: Investment Order
Post by: MDM on August 03, 2019, 11:42:02 AM
Unless there is a way around the above (e.g., someone already has a CSS-compatible spreadsheet and is willing to share), I don't see the EFC being included in the CSS marginal rate calculation.  But a note about that effect in the IO post seems doable.

Agreed.  Thanks.
Modified version below.  Further suggestions welcome.

4. Rule of thumb: traditional if current federal marginal rate is 22% or higher; Roth if 10% or lower, or if MAGI is too high to deduct a traditional IRA; flip a coin otherwise.

   For those willing to expend a little more energy than it takes to flip a coin, consider comparing current marginal tax saving rate vs. predicted marginal withdrawal tax rate.
      If current > predicted, use traditional.  Otherwise use Roth.
   See Credits can make Traditional better than Roth for lower incomes and other posts in that thread about some exceptions to the rule.
   See Traditional versus Roth - Bogleheads for even more details and exceptions.
   The 'Calculations' tab in the Case Study Spreadsheet (CSS) can show marginal rates for savings or withdrawals*.
   Remember to include all income-dependent effects in your marginal tax rate.
      The CSS does include most federal and state brackets, credits (Child Tax, Education, ACA, Earned Income, etc.), phase-ins, phase-outs, and IRMAA tiers.
      It may not include some state tax details, FAFSA Expected Family Contribution, and other items irrelevant to most but important to some.
Title: Re: Investment Order
Post by: secondcor521 on August 03, 2019, 06:15:24 PM
^ Looks good to me.  Thanks!
Title: Re: Investment Order
Post by: EscapedApe on October 30, 2019, 12:22:31 PM
Thanks to everyone who contributed to these lists.

I came upon the FIRE community eager, but also really overwhelmed on how to approach the FIRE journey with the optimal first steps. This info really breaks things down nicely. I've learned a lot just by Googling the terms that appear in the lists.
Title: Re: Investment Order
Post by: Buffaloski Boris on February 20, 2020, 01:46:47 PM
This is a great list, and generally speaking I really like the order.  I do want to revisit the 529 issue, though, as several states actually offer STATE tax deductions or credits to contribute to a 529 plan.  Roughly 30 states do that. So not only are earnings used for higher education expenses free of tax, you also get a a deduction or credit up front.  That's a lot better than a Roth IRA. 

Example.  Let's say you have a kid and live in Virginia and plan on contributing to their college education.  So if you're single, that's up to $4000 you can deduct. If married, $8,000.  Multiply that by the marginal tax rate of 5.75% and you're talking a nice instant return for investing in a 529. 
Title: Re: Investment Order
Post by: Radioherd88 on May 03, 2020, 08:43:06 PM
Has anyone considered where or when an Indexed Universal Life LIRP (Life Insurance Retirement Plan) belongs in the order?

Taxable upfront, but there is no contribution limit, and it grows and can be withdrawn tax free;

You can buy the minimum life insurance benefit, and max the investment portion

It doesn't count towards provisional income
If the stock market crashes, you get a 0 for that year rather than a minus 20/30/40 for your portfolio (very attractive to me) - the downside is your gains would be capped in the good years, but over time, crashes are harder to recover from
You can get a long term care provision meaning if you need long term care it pays for that care from the death benefit
If you die, your investments and life insurance are passed on to spouse/children - so although you are paying for this premium, you are getting a service in return
The overall fees can be comparable to an IRA fund over the lifetime (not a really cheap IRA fund), but if you still with it your premium reduced with age

I recently stumbled across this because of the ability to have the protection against negative market years and feel it might be a valuable addition to a portfolio for that and the protection it has against long term care costs torpedoing retirement plans....

Anyone any experiences thoughts on where it should be in the list?
Title: Re: Investment Order
Post by: MDM on May 03, 2020, 09:05:03 PM
Has anyone considered where or when an Indexed Universal Life LIRP (Life Insurance Retirement Plan) belongs in the order?
It does not belong.  If you would like to discuss "Insurance Order" feel free to start such a thread.
Title: Re: Investment Order
Post by: Radioherd88 on May 05, 2020, 04:39:30 PM
Has anyone considered where or when an Indexed Universal Life LIRP (Life Insurance Retirement Plan) belongs in the order?
It does not belong.  If you would like to discuss "Insurance Order" feel free to start such a thread.

That sounds like a terrible thread, but I am actually surprised there isn't one already....

Yes, obviously it is insurance, but is no one considering long term care insurance to protect their portfolio from being pilfered in such a scenario? Or are we all happy to self insure by not paying an insurance premium and put more into taxable accounts to grow?

What interests me in the UIL LIRP and makes me think this becomes a conversation between the taxable brokerage account is the 0 loss aspect that can help protect against market crashes and bring your $ out ahead of a taxable brokerage - and you can touch it without counting as provisional income in RMD years - it has it's advantages if you stick with it long term?
Title: Re: Investment Order
Post by: mtnrider on May 13, 2020, 08:58:02 AM
Has anyone considered where or when an Indexed Universal Life LIRP (Life Insurance Retirement Plan) belongs in the order?
It does not belong.  If you would like to discuss "Insurance Order" feel free to start such a thread.

That sounds like a terrible thread, but I am actually surprised there isn't one already....

Yes, obviously it is insurance, but is no one considering long term care insurance to protect their portfolio from being pilfered in such a scenario? Or are we all happy to self insure by not paying an insurance premium and put more into taxable accounts to grow?

What interests me in the UIL LIRP and makes me think this becomes a conversation between the taxable brokerage account is the 0 loss aspect that can help protect against market crashes and bring your $ out ahead of a taxable brokerage - and you can touch it without counting as provisional income in RMD years - it has it's advantages if you stick with it long term?

Insurance products may be "meh" as in investment if you are in the highest tax bracket, and already using every single tax-deferment strategy, and you have a long time horizon, and you've talked to a fee-only financial advisor who suggests you look into one.  Otherwise they are usually bad.  You can google this, but it's generally true that the return on life insurance products is low, lower than you'd think.  You might as well be in US bonds.

The cliche is that life insurance products are usually sold, not bought.

You may wish to read this series: https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/
Title: Re: Investment Order
Post by: Radioherd88 on May 13, 2020, 09:22:02 PM
Has anyone considered where or when an Indexed Universal Life LIRP (Life Insurance Retirement Plan) belongs in the order?
It does not belong.  If you would like to discuss "Insurance Order" feel free to start such a thread.

That sounds like a terrible thread, but I am actually surprised there isn't one already....

Yes, obviously it is insurance, but is no one considering long term care insurance to protect their portfolio from being pilfered in such a scenario? Or are we all happy to self insure by not paying an insurance premium and put more into taxable accounts to grow?

What interests me in the UIL LIRP and makes me think this becomes a conversation between the taxable brokerage account is the 0 loss aspect that can help protect against market crashes and bring your $ out ahead of a taxable brokerage - and you can touch it without counting as provisional income in RMD years - it has it's advantages if you stick with it long term?

Insurance products may be "meh" as in investment if you are in the highest tax bracket, and already using every single tax-deferment strategy, and you have a long time horizon, and you've talked to a fee-only financial advisor who suggests you look into one.  Otherwise they are usually bad.  You can google this, but it's generally true that the return on life insurance products is low, lower than you'd think.  You might as well be in US bonds.

The cliche is that life insurance products are usually sold, not bought.

You may wish to read this series: https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/

I'm aware insurance is bad, mmmkay - i dislike insurance - i have highest deductibles where possible just to protect against catastrophe and reduce premiums.

What attracts me to the Indexed Universal Life LIRP is that it unlocks the potential to have a portion of your portfolio that is invincible to market crashes - meaning if that happens when you are about to FIRE, you can draw on that portion and wait for the market to recover before you touch the rest. There are plans that provide 0 loss indexes in down years (capped return at 12-14% on the plus years), and over the life of the insurance the premium cost is the equivalent of 1.5%. Yes 1.5% is still high compared to the index funds i currently invest in, but for a fee of 1.5% to unlock a 0 loss option, and provide long term care and death benefit, I figured there's be some that this appeals to..... apparently not!
Title: Re: Investment Order
Post by: mtnrider on June 08, 2020, 04:00:17 PM
Has anyone considered where or when an Indexed Universal Life LIRP (Life Insurance Retirement Plan) belongs in the order?
It does not belong.  If you would like to discuss "Insurance Order" feel free to start such a thread.

That sounds like a terrible thread, but I am actually surprised there isn't one already....

Yes, obviously it is insurance, but is no one considering long term care insurance to protect their portfolio from being pilfered in such a scenario? Or are we all happy to self insure by not paying an insurance premium and put more into taxable accounts to grow?

What interests me in the UIL LIRP and makes me think this becomes a conversation between the taxable brokerage account is the 0 loss aspect that can help protect against market crashes and bring your $ out ahead of a taxable brokerage - and you can touch it without counting as provisional income in RMD years - it has it's advantages if you stick with it long term?

Insurance products may be "meh" as in investment if you are in the highest tax bracket, and already using every single tax-deferment strategy, and you have a long time horizon, and you've talked to a fee-only financial advisor who suggests you look into one.  Otherwise they are usually bad.  You can google this, but it's generally true that the return on life insurance products is low, lower than you'd think.  You might as well be in US bonds.

The cliche is that life insurance products are usually sold, not bought.

You may wish to read this series: https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/

I'm aware insurance is bad, mmmkay - i dislike insurance - i have highest deductibles where possible just to protect against catastrophe and reduce premiums.

What attracts me to the Indexed Universal Life LIRP is that it unlocks the potential to have a portion of your portfolio that is invincible to market crashes - meaning if that happens when you are about to FIRE, you can draw on that portion and wait for the market to recover before you touch the rest. There are plans that provide 0 loss indexes in down years (capped return at 12-14% on the plus years), and over the life of the insurance the premium cost is the equivalent of 1.5%. Yes 1.5% is still high compared to the index funds i currently invest in, but for a fee of 1.5% to unlock a 0 loss option, and provide long term care and death benefit, I figured there's be some that this appeals to..... apparently not!

I'd suggest you read the series with the above link.  Especially https://www.whitecoatinvestor.com/rebutting-the-arguments-for-indexed-universal-life-insurance/

If you decide IUL right for you, I wouldn't try to dissuade you.  It's not the worst thing you can do.
Title: Re: Investment Order
Post by: londonstache on June 12, 2020, 04:47:28 AM
I thought I'd have a first attempt at explaining the UK investment order, at least as I see it. The UK tax system is complex and regularly gets tinkered with by the government but has some powerful saving vehicles available to the discerning Mustachian. The main ones are:
Of course these come with significant strings attached, the most important ones which are as follows:

PensionConfused yet?

ISA
Suggested Investment Order

0. Make sure that you are contributing under auto-enrollment to your company pension plan.
1. Establish a minimum-viability cash emergency fund to cover fairly predictable lumpy expenses and avoid more bad debt. I'd tentatively suggest this is £1-2,000.
2. Pay off high interest debt (>5%) as a priority.
3. Increase pension contributions to a higher level. Model for the lifetime allowance.
4. Start contributing to ISAs. If under 40, the Lifetime ISA is your first order of importance.
5. Beef up your emergency fund to your comfort level. For me this is 6 months of household expenditure. Some are comfortable with less as you can always access ISAs in extremis.
6. Max ISA contributions to the total allowed.
7. Look at taxable investment accounts and investing in these also.

Beyond this point a lot depends on your FIRE plan. The general approach of a lot of the UK FIRE community is as follows:

1. Financially Independent, Retire Early - using ISAs and taxable investment accounts to retire early.
2. Pension access age - crack open the big pot of cash in your pension(s).
3. State pension age - add this to your annual income. 

There are other ways to approach the same problem - the above assumes you want to do it through investments rather than real estate (to give an example). At a minimum you also want the money in investments you can access to at least bridge spending between Stage 1 & 2 in the FIRE plan above, even if you fully deplete your ISAs/investment accounts by the point you can crack open the pension pot.
At a certain level the lifetime allowance becomes a real pain and it's usual to see some of those closer to FIRE reducing pension contributions to avoid breaching the cap and diverting more into taxable investments instead. Equally, if you want to FIRE then you may choose not to contribute more to the pension due to the gap at which you can access it and contribute more to other investment accounts to speed up the time before you can pack it all in. After all, you can't retire early if all your money is in pension funds you can't access yet. There are other tax-advantaged investments you can make such as VCTs (Venture Capital Trusts) but honestly at this level I'd want to get professional financial advice.

I'm very open to be challenged on both the investment order and the specifics around pensions etc because I'm still learning myself, but this is based on my current knowledge. Final note to say that www.monevator.com is pretty much the go-to resource on FIRE in the UK and links to most of the other FIRE-minded blogs that cover UK investments and this is where I'd go first to learn more.
Title: Re: Investment Order
Post by: skyFIdive on September 14, 2020, 10:01:53 AM
I just wanted to share some gratitude for the work that went into creating the US investment order list (and probably the others too, although less relevant for me).  It’s the most value I feel like I’ve gotten from this community to date... this thread has practically become my investing bible. I love how simple and well-researched it is. It’s among the first posts I share with friends interested in improving their personal financial health, as it provides substantial relief to young people like me who can get stuck in the weeds of over optimization in the wrong areas. So yeah... thanks again @MDM and others. For someone who’s never taken a personal finance class, this thread was truly enlightening.