Author Topic: Investment Order Question  (Read 180 times)

diesel

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Investment Order Question
« on: February 05, 2021, 07:04:14 AM »
Hi All.  I come seeking advice.  First a little background.

Age: 31
Status: Engaged
Home: Rental
Salary: ~105k
Debt: 0 (as of 12/2020..yay)
HSA: maxed

My question is regarding steps 4 and 5 in the investment order (401k and IRA).
Let's say for round numbers I have 20k to invest.  I am trying to decide what would be best.

Scenario 1: Max out 401k (invest extra 500 in Roth)
Scenario 2: Max out Roth IRA and invest the remaining 14k in 401k.

Both accounts are through vanguard.  The biggest difference is in the 401k I don't have access to VTSAX but I have created about the same diversification through the funds that are there. (Ratio of large cap, mid cap, small cap, international)

The reason I only mentioned Roth 401k is due to the fact that as far as I know my salary is too high to deduct traditional.

Has anyone ever been in a similar scenario or have advice?  Thanks in advance!

**Disclaimer.  I know a better option would be just to max out both.  I'm working on that but in the meantime I'm looking for my best immediate course of action.**

EvenSteven

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Re: Investment Order Question
« Reply #1 on: February 05, 2021, 07:47:16 AM »
If the IRA and 401k are pretty similar in terms of fees and investment options, the question becomes would you rather make Roth or traditional contributions. You should look at your marginal tax rate now, and compare it to what you estimate your marginal tax rate will be when your are retired and start withdrawing those funds. Lower tax rate in retirement would favor traditional contributions today.

There is some uncertainty in trying to estimate what your tax rate will be in the future, so there is some benefit in having some tax diversification, with funds in both tax deferred and tax free accounts. If you think you will have a similar tax rate now and in retirement, I would probably opt for maxing out the Roth IRA, but don't stress too much about the choice, they are both good options.

Traditional IRA deductibility income limits are based on your MAGI, somewhere around $103,000 for MFJ filers in 2021. You can deduct your traditional 401k contributions and your HSA contributions from your gross to see if you can deduct (probably not if your soon to be spouse also works, probably yes if they do not.)