Author Topic: Yet another savings allocation question  (Read 1796 times)

mxt0133

  • Handlebar Stache
  • *****
  • Posts: 1559
  • Location: San Francisco
Yet another savings allocation question
« on: October 23, 2014, 12:02:19 AM »
I keep thinking I know what i'm doing but that is not always the case, I keep learning something new every day.  So I'm here to ask my fellow mustachians to verify my where I should be putting my savings in order of priority to minimize my taxable income and defer taxable gains.

Specific situation is I work and my wife does not, I participate in a 401k plan at my job. We file married joint. So here is where i have been putting my savings in order of priority.

1. Max out 401k plan at my job
2. Max out HSA account my job
3. Contribute to traditional IRA for wife, i fall under the MAGI limit of 178k to qualify for full deduction*
4. Contribute to my Roth IRA, no deduction but grows tax free, I do not quality for deductions as our MAGI is above 115k limit*
5. Taxable accounts

I have kids but have decided to not to save up for their college for the time being.

Does the order seem right?  Is there anything else I should be putting my savings into to minimize my taxable income and defer investment gains?


* Ref http://www.irs.gov/publications/p590/ch01.html#en_US_2013_publink1000230467

MDM

  • Walrus Stache
  • *******
  • Posts: 9499
Re: Yet another savings allocation question
« Reply #1 on: April 04, 2015, 10:40:18 PM »
That's a very defensible ordering.  The "correct" order can depend on the funds available and fees charged in your 401k vs. what you can do in an IRA.  As your IRA options are essentially unlimited, there is a good chance you can do better in an IRA - but some 401ks have institutional fund options with fees even lower than available to an individual investor.

With the assumption that one can do better on funds/fees in an IRA, below is another defensible ordering.  It's not completely original but I don't recall where I first saw this (or similar) order.
1. Contribute to 401k up to any company match
2. Pay off any debts > 5% above current 10-year Treasury Note yield
3. Max HSA
4. Max Roth or Traditional IRA (based on income level)
5. Max out 401k
6. Pay off any debts > 3% above current 10-year Treasury Note yield
7. Invest in taxable account with any extra.

humblefi

  • Stubble
  • **
  • Posts: 107
    • Humble FI
Re: Yet another savings allocation question
« Reply #2 on: April 05, 2015, 01:50:23 AM »
Thanks for the wonderful thread! Your post and MDM's have pretty much covered all the bases.
I will add a teeny weeny point...your mileage with it may vary.

A college 529 plan is another vehicle which will not reduce your taxable income, but gains are tax free.
A minimum 10yr investment time frame is needed for the 529 plan to hit at least one bust+boom cycle and gain some headwind.
So, I would start a 529 fund (a 4.5 in your numbered list) and seed it with monthly contributions and let compounding start working for you.

The other suggestion would be to use CA muni funds ...fed+state tax free (ex VCAIX/VCADX) in your taxable account...since your profile says you live in SFO.
You can use the taxable equiv calculator (https://personal.vanguard.com/us/FundsTaxEquivForYield) to see if it makes sense for you.
« Last Edit: April 05, 2015, 01:55:56 AM by humblefi »