Author Topic: Newb question on investment order - 1st post  (Read 1511 times)

Absolute2021

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Newb question on investment order - 1st post
« on: May 02, 2017, 06:23:04 AM »
Hi there - I'm a high-earning, recently found MMM in March, trying-to-reform spendypants.

Since finding MMM, all my CC debt is wiped and I've maxed my 401k and HSA. Now what's left for debt (besides home/rental prop) is a 65k student loan that I just refinanced from a loooong graduated repayment plan to a 10-yr at 4.49% and I have a 0% car loan. I'm going to just make the minimums on the car payment until it's paid off in 1 year. And I'm making a little more than double payments on the student loan. With expected bonuses, I should be able to wipe it out within 1 year with a lump sum in early 2018. That said, I still have some room in the budget. I will not get a tax deduction contributing to an IRA and my employer does not allow a back-door ROTH. Should I pay the student loan down faster? Contribute non-tax deductible dollars to an IRA? Or should I open a taxable investment account?

Thank you for any help - this seems to be at the very end of the investment order and I'm not sure what to do and am new to all of this.


nereo

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Re: Newb question on investment order - 1st post
« Reply #1 on: May 02, 2017, 06:55:31 AM »
The following are very good places to start:
From member MDM
Quote
WHAT
0. Establish an emergency fund to your satisfaction
1. Contribute to 401k up to any company match
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield. (note: currently 1.69%, so 6.69% and above)
3. Max HSA
4. Max Roth or Traditional IRA based on income level
5. Max 401k (if 401k fees are lower than available in an IRA, 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. (note: currently 1.69%, so 4.69% and above)
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: trad if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between
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

A good background into investing and managing your own finances
http://jlcollinsnh.com/stock-series/

Absolute2021

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Re: Newb question on investment order - 1st post
« Reply #2 on: May 02, 2017, 07:19:40 AM »
Regarding step #4, would it be accurate to say this is step only belongs in this position with the assumption that the contributions are tax-deductible? If contributions to an IRA would not be deductible due to income, where would contributing to an IRA fall?

Nothlit

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Re: Newb question on investment order - 1st post
« Reply #3 on: May 02, 2017, 07:32:18 AM »
You may be confusing "backdoor Roth IRA" with "mega backdoor Roth IRA". The backdoor Roth does not involve your employer/401k at all (the mega backdoor does). But taking another step back, do you even need to use the backdoor at all? Can you just make direct Roth IRA contributions, or are your earnings too high for that as well? The ability to contribute directly to a Roth IRA starts to phase out with a MAGI of 118k single, 186k married. But keep in mind your 401k and HSA contributions (among other things) get subtracted from gross income when calculating MAGI so your gross income could be quite a bit higher and you could still contribute to the Roth without any backdoor maneuvering.

Heroes821

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Re: Newb question on investment order - 1st post
« Reply #4 on: May 02, 2017, 07:35:33 AM »
Read the parenthesis on number 5.  If you have Vanguard or something similar in your 401k with the standard low fees, it becomes #4 which would be pre-tax.  Even if you are contributing to a Roth IRA that is still better than the pre-tax 401k when you account for high fees in a bad 401k. If your income exceeds the phase out for Roth, meaning you can only contribute to a Traditional IRA (probably at Vanguard) and can't deduct it, the long term tax benefits of putting the post tax money in the T-IRA still exceed a taxable account.

I hope that makes sense.  Someone here has a good post about how you should also account for early withdrawl fees, or taxes that will get taken out when withdrawing from certain vehicles.

boarder42

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Re: Newb question on investment order - 1st post
« Reply #5 on: May 02, 2017, 07:40:18 AM »
Read the parenthesis on number 5.  If you have Vanguard or something similar in your 401k with the standard low fees, it becomes #4 which would be pre-tax.  Even if you are contributing to a Roth IRA that is still better than the pre-tax 401k when you account for high fees in a bad 401k. If your income exceeds the phase out for Roth, meaning you can only contribute to a Traditional IRA (probably at Vanguard) and can't deduct it, the long term tax benefits of putting the post tax money in the T-IRA still exceed a taxable account.

I hope that makes sense.  Someone here has a good post about how you should also account for early withdrawl fees, or taxes that will get taken out when withdrawing from certain vehicles.

this isnt correct.  you would back door roth if your income limits exceed that of a Roth IRA.  no reason to put it in a T IRA if your plan isnt to back door roth. 

Heroes821

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Re: Newb question on investment order - 1st post
« Reply #6 on: May 02, 2017, 07:42:15 AM »
Read the parenthesis on number 5.  If you have Vanguard or something similar in your 401k with the standard low fees, it becomes #4 which would be pre-tax.  Even if you are contributing to a Roth IRA that is still better than the pre-tax 401k when you account for high fees in a bad 401k. If your income exceeds the phase out for Roth, meaning you can only contribute to a Traditional IRA (probably at Vanguard) and can't deduct it, the long term tax benefits of putting the post tax money in the T-IRA still exceed a taxable account.

I hope that makes sense.  Someone here has a good post about how you should also account for early withdrawl fees, or taxes that will get taken out when withdrawing from certain vehicles.

this isnt correct.  you would back door roth if your income limits exceed that of a Roth IRA.  no reason to put it in a T IRA if your plan isnt to back door roth. 


Whoops, good Catch Boarder.  You are correct. If you have to  pay taxes on it might as well backdoor roll it into a Roth. I knew I was forgetting something in my post.

Absolute2021

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Re: Newb question on investment order - 1st post
« Reply #7 on: May 02, 2017, 07:46:43 AM »
Yes, I am confusing mega back door roth and backdoor Roth. Thank you for the clarification. My income does exceed the ability to fund a Roth. So it sounds like I need to look into the backdoor as a next step? Is that correct? Thank you!

boarder42

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Re: Newb question on investment order - 1st post
« Reply #8 on: May 02, 2017, 07:50:54 AM »
Yes, I am confusing mega back door roth and backdoor Roth. Thank you for the clarification. My income does exceed the ability to fund a Roth. So it sounds like I need to look into the backdoor as a next step? Is that correct? Thank you!

yes the order isnt as important either at this point.  Sounds like you will be maxing all tax advantaged accounts regardless of which is done first in a given year - thats really not relevant.  you should look into mega back door roth as an option after that... then move on to taxable.