Author Topic: Intra-year investing order  (Read 1220 times)

moof

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Intra-year investing order
« on: December 13, 2017, 11:30:56 PM »
Iíve been pondering investment order vs. front loading optimization.

Letís say you have steady 4000 a month you can spare to save for MFJ, single earner household.  While it is important to fill up tax deferred accounts by the end of the year, it would seem to me you should fill up the lowest withdrawal rate accounts first to maxize growth.  So intra-year it would seem the correct order would be:
1.  Minimum 401k to get the match each month.
2.  Roth, since the tax rate on withdrawal is 0%.
3.  Taxable up to the amount amount planned for the year.
4.  401k/spousal IRAís at the end of the year.

Shouldnít the goal to maximize the growth and time in market for the lowest exit taxes, as there are no tax benefits for early/late year contributions?

Aunt Petunia

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Re: Intra-year investing order
« Reply #1 on: December 14, 2017, 09:09:42 AM »
By putting off the 401k contributions, you are essentially front loading your tax withholding, which earns you nothing. Also why are you putting your spouse IRA after taxable? Do you have Roth for yourself and traditional for your spouse? Why?

My way is probably not perfect, but I spread out my traditional 403b throughout the year. Any extra goes to my Roth IRA until full, then my spouse's Roth IRA, then taxable. My income and expenses tend to be lumpy so this gives me flexibility about how much to invest each month while still filling the tax advantaged buckets.

ixtap

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Re: Intra-year investing order
« Reply #2 on: December 14, 2017, 09:18:26 AM »
It depends.

Many people have mentioned that they only get a full match if they contribute per paycheck. If that is the case, you should not frontload.

Why wouldn't the spousal (presumably Roth) IRA be concurrent with your own?

Where would you put the HSA, when available? Mega backdoor Roth?

Babybalrog

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Re: Intra-year investing order
« Reply #3 on: December 14, 2017, 12:50:46 PM »
I agree with MrsWolfeRN. You want to front load your tax deductions in order to start compounding the tax savings too. But you need to micro the match so be careful. I've always found going into my brokerage and transferring 5500 to my IRA a nice January / Post Holiday treat to myself.

Proud Foot

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Re: Intra-year investing order
« Reply #4 on: December 14, 2017, 02:35:56 PM »
I believe you are overthinking this and making it more complicated than necessary. The differences will be negligible and in the aggregate your pretax returns would be the same no matter which strategy you use. It also would highly depend upon what your plans are. If you are going to work to a "normal" retirement age of 65 then this might make sense.

moof

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Re: Intra-year investing order
« Reply #5 on: December 14, 2017, 09:45:43 PM »
By putting off the 401k contributions, you are essentially front loading your tax withholding, which earns you nothing. Also why are you putting your spouse IRA after taxable? Do you have Roth for yourself and traditional for your spouse? Why?

My way is probably not perfect, but I spread out my traditional 403b throughout the year. Any extra goes to my Roth IRA until full, then my spouse's Roth IRA, then taxable. My income and expenses tend to be lumpy so this gives me flexibility about how much to invest each month while still filling the tax advantaged buckets.
If you put your W4 with-holdings on auto-pilot, sure.  If you have your expected tax liabilities figured out and set your with-holdings to be a fixed dollar amount the picture changes a little.  Ideally you can estimate via spreedsheet far better than using the government form.  I have never been a fan of getting a surprise at tax time myself.

Roth stuff gets taxed at 0% at some future date of withdrawal.  Long term capital gains taxes on taxable accounts will also likely be very low if retiring modestly.  401k/IRA savings will have a higher marginal rate on withdrawal, say 10 or 15% (much higher if you account for ACA subsidy reductions as an effective tax).

So if you are putting equal total contributions into front loaded Roth and taxable into the first half the year, and 401k/IRA into the second half the year and average 7% returns, you will get crudely 3.5% more on average into the more exit-tax advantageous accounts than doing equal contributions to all accounts every month.  It nets about 0.3-0.5% net after tax money in a horse race with no more taxes in the current years.  Small, but not trivial.  Likewise front-loading 401k/IRA, as was advocated a couple time, ends up 0.3-0.5% worse yet than equal split contributions, which is what got me thinking.