Question regarding investment order

[DirtDiva]

Copied investment order

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)
5. Max 401k   
6. Fund a 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 and/or fund a 529 with any extra.

Q:  We are older (56/57) and in the 22% tax bracket. Does it not make sense to max the 401k before investing in Roth’s? I am certain we will be in a lower tax bracket when we cease to earn income.

Q: Why it make sense to find a backdoor Roth instead of maxing 401k space  while your income tax rate is high?

Probably dumb questions but I want to be certain I understand the mechanics.

[cool7hand]

I'm confused by your first question. Are you asking about IRAs v. 401ks or Roth v. Traditional? You should invest in a 401k with matching first. If there is no matching, you probably have fewer options in the 401k than an IRA. As for Roth v. Traditional, which exist for both IRAs and 401ks, I agree that in your situation that traditional makes more sense.

I'm afraid I don't understand your second question. Could you rephrase?

[wageslave23]

OP, #4 is an either/or.  Fund either an IRA or Roth IRA or Backdoor Roth.  In your case the best option is regular IRA.  If you can contribute to your regular IRA, then do that before maxing your 401k.  Ignore the other two options because they don't apply to you.  For you, Roth IRA and Backdoor Roth fall lower in the list after 401k. 

An IRA is the same as a 401k except that you have more investment options. 

[Rhinodad]

OP, #4 is an either/or.  Fund either an IRA or Roth IRA or Backdoor Roth.  In your case the best option is regular IRA.  If you can contribute to your regular IRA, then do that before maxing your 401k.  Ignore the other two options because they don't apply to you.  For you, Roth IRA and Backdoor Roth fall lower in the list after 401k. 

An IRA is the same as a 401k except that you have more investment options.

I'd agree with almost all of that, but depending on your income, you may not be able to deduct the IRA contribution, but you can certainly put money into the 401k pretax up to $26k per year as you are over 50.

[DirtDiva]

Our income is too high to qualify for a pre-tax IRA. 

So I think we max out the 401k, the regular Roth’s if we end up below the income cutoff.  Thanks for confirming my understanding.

[nereo]

correct.  There is a wealth of informaiton about the "why's" included in the investment Order thread. 

[dandarc]

Quoting investment order more fully https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153:

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 current 10-year Treasury note yield.           
3. Max Health Savings Account (HSA) if eligible.
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
    - 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 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.   

Note the 3rd bullet under item 5.

[wageslave23]

OP, #4 is an either/or.  Fund either an IRA or Roth IRA or Backdoor Roth.  In your case the best option is regular IRA.  If you can contribute to your regular IRA, then do that before maxing your 401k.  Ignore the other two options because they don't apply to you.  For you, Roth IRA and Backdoor Roth fall lower in the list after 401k. 

An IRA is the same as a 401k except that you have more investment options.

I'd agree with almost all of that, but depending on your income, you may not be able to deduct the IRA contribution, but you can certainly put money into the 401k pretax up to $26k per year as you are over 50.

Correct, I should have specified if your income is low enough that you qualify for deductible contribution.  I never make non-deductible IRA contributions, but that's another topic.

[wageslave23]

Our income is too high to qualify for a pre-tax IRA. 

So I think we max out the 401k, the regular Roth’s if we end up below the income cutoff.  Thanks for confirming my understanding.

Yes, you are on the right track!  You can't go wrong maxing your 401k!

[terran]

It addition to swapping the IRA > 401(k) order to 401(k) > IRA if your 401(k) investment fees are low(er) compared to your IRA, in the last few years before retirement I could see there being an argument for swapping 401(k) > Roth IRA (assuming income is too high for traditional IRA) even if the 401(k) fees are high because you'll be able to roll over from 401(k) to IRA once you retire and get out of the high fees, so the tax deferral will be more than worth it to pay high investment fees for a few years.

Of course, if you're over the traditional traditional IRA income limit, and even more so if you're over the direct Roth IRA limit (requiring backdoor Roth as mentioned in your post) then I'd wonder why this is even a question and why you're not just maxing everything out anyway?

[DirtDiva]

Quoting investment order more fully https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153:

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 current 10-year Treasury note yield.           
3. Max Health Savings Account (HSA) if eligible.
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
    - 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 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.   

Note the 3rd bullet under item 5.

Thank you for posting the thread link! I couldn’t find it.

I had around 700k in cancer related expenses in 2019-2020, didn’t work a lot in those years, and hubs (who is self employed) worked less than usual.  Fortunately he got a nice windfall at the end of this year, causing a last-minute scramble to allocate intelligently.  I usually have things under better control but I was otherwise occupied this last couple of years.

Thank you all again for pitching in to help educate me.

[nereo]

There’s a lot to learn here.  I certainly have :-)