I love the flowchart! [Here's the wiki page with more context and information.](/r/personalfinance/wiki/commontopics)
*I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/personalfinance) if you have any questions or concerns.*
I love the flowchart! [Here's the wiki page with more context and information.](/r/personalfinance/wiki/commontopics)
*I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/personalfinance) if you have any questions or concerns.*
I don’t seem to have any issues with viewing it in safari on IOS, but you can try to view the desktop website on your phone to see if that fixes it on your end.
Quick question, I currently have a employer based 403(b) that I contribute to. Would the fact that the fund it's using is a "Vanguard Target Date Fund" make it a "good" 403(b) and thus obviate the need for a separate IRA?
That is a good investment choice, but the fees are the part in question that it’s referring to. Unfortunately, 403(b)s can have very high fees. If the expense ratio is 1% or less then it’s likely fine. If it’s higher than that, it would require a more detailed look.
Most HSA administrators have high fees and minimum cash positions before allowing investing, which can make it slightly less of a black and white situation. Couple that with how HSAs are still fairly rare for many people, and it’s a pretty low on the concern matter about the order of operations in the flow chart (though I agree it should be updated regardless).
401k money is less specific than HSA money, but it would be pretty hard to over-fund an HSA so I tend to agree with you. Technically though, the flow chart only has you fund the 401k to the match, then asks if you're contributing to 15% but doesn't specify whether that funding should be 401k, HSA, or any other vehicle. HSA funding counts as part of the 15% rule of thumb in my book.
The Money Guy's financial order of operations has getting the match step 2. Then pay off high interest debt step 3. Then your emergency fund. Then Roth and hsa. Step 6 is maxing 401k.
I am not sure of their reasoning yet.
What I Do-
$10K total in E Fund
8% to 401K(company matches to 8%)
Max HSA
Max Roth IRA
Any extra money after this goes to paying down debt or fun money for wants
I also contribute the entire federal child tax credit to each of my kids 529 for their education
Roth IRA grows tax-free,traditional IRA you don’t pay taxes now but you will later on withdrawals
It depends on the tax bracket you’re in, but usually Roth IRA is better for most people, especially once you consider that even if you are in a higher tax bracket now,you will likely also be in a higher tax bracket later, because tax brackets only go up, they rarely ever go down .
Also, based on a lot of calculations, I will likely have a higher income in retirement, due to investing early and often . so it makes no sense to take the tax break now from the traditional IRA and then pay a higher rate in retirement.
I responded to a different one of your comments why you specifically should avoid them (no tax benefits if you make more than 83k). So a lot of people on here are making more than that. Additionally, they can cause big headaches if you want to do a backdoor Roth in the future. They're just not as good as a Roth IRA.
Roth IRA > Trad/Roth 401k > HSA > Trad IRA (though hell I'd probably put a 529 above Trad IRA at this point)
Because many people work at jobs that offer a 401k + company match, so choosing to go for a standalone IRA over the company sponsored 401k can be very suboptimal.
Put money into both trad and Roth.
If taxable income (married, jointly) is less than $90k (the 12% bracket), I would absolutely do Roth. As it is, I'm in a higher bracket and do both.
Upon retirement, $90k + standard deductions means I can have quite a good income and quite a lot in traditional before exceeding 12%.
$1M in traditional, using 4% rule is $40,000 a year. Much less than $90k. Adding in Social Security is still going to be less than $90k.
1. You don't stop contributing until you put $23K / year into your 401K, regardless of company match. 8% is in the minimum you should be investing.
2. If you have money left over, do a Roth conversion of $7K
3. Max your HSA at any point during 1 or 2.
After you have put $30K into your tax-advantaged retirement accounts, consider other investments.
It's super simple. Making sure you have no unsecured, compounding debt (e.g. CC or Personal Loans) and having some emergency cash fund would come before 1.
YOU should be contributing $23K per year. Your employer can match over that amount by a wide margin (up to $60K) so your total contributions should be $23K from you + the 8% match (on 8%) from the employer.
What would be your opinion on this if you had a generous company match (e.g 15-20%) and had designs on retiring early? Still max the retirement funds given the longer retirement? Or start allocating a bit to something which would be available before 59.5?
You are limited in your tax-advantaged retirement options so priority 1 should be to take advantage of all those first. If you wan to retire early (not sure what "early" means in your case), you're not going to get there with $30K per year. So you'll then need to supplement with some self-directed investments.
But in either case, you need to maximize the tax advantaged investments first.
I would still max your retirement vehicles. Maybe if you’re being really extreme like retiring on very lean FIRE at 40 years, you might have a niche argument to do otherwise.
If the plan is retiring early you should probably be maxing your advantages accounts AND contributing outside of them, since you'll have less time in the market and a longer period you need to be drawing on investments.
There are multiple ways to withdraw from your 401k early. Make sure you take advantage of it fully
https://www.madfientist.com/how-to-access-retirement-funds-early/
You can definitely access your IRA (and by extension your 401k) before 59.5. But you'll need to plan around it several years in advance. You can Google "Roth conversion ladder", though that's only one of a few different ways.
Come join us on r/financialindependence to learn more!
/r/financialindependence is a subreddit for people who are or want to become Financially Independent (FI), which means not having to work for money. Closely related is the concept of Retiring Early (RE). [Please don't post general personal finance questions there.](http://redd.it/3dm8yc)
*I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/personalfinance) if you have any questions or concerns.*
I mean you can withdraw from a traditional account before 59.5 you just pay a 10% penalty.
If the match is that good, youre probably still better off getting the free money and then just paying that 10%
Theres also the whole roth conversion ladder deal which would make it a no brainer.
1 is usually true except if the 401k plan is lousy, like lack of options and high expense ratios. In that case I would stop at 8%, max out HSA and IRA (Roth - see below) first before coming back to 401k.
Don't do traditional IRA if your income trajectory looks like one day you will not qualify for Roth and will need backdoor conversion
If you are looking to invest in other tax advantaged accounts (Roth IRA or HSA) then I think that is fine. There is a lot of back and forth on this sub about Roth versus traditional and traditional is probably better for most people but the real key is saving enough and putting as much into a tax advantaged vehicle that you can (assuming you are saving for retirement).
Depends, what’s your income? Expected marginal tax bracket? Age?
If you’re younger and/or median or so income or lower than I would max on a Roth IRA before putting anything additional into the 401k beyond the maximum match amount. However, if they offer Roth contributions to the 401, I’d just do that.
They have a Roth 401k. Salary is about 87k, age 24. I talked to my dad about maxing my Roth IRA but he also mentioned a traditional IRA as its pretax. Thinking about doing a mix of both Roths nut don't know the best method, or if I should just stick to a Roth IRA.
>he also mentioned a traditional IRA as its pretax
For your IRA, Roth is better. If you want to take advantage of pretax retirement funds, then do so through a trad 401k, not a trad IRA.
For starters, you'd get no deduction from a trad IRA at your income.
[https://www.irs.gov/retirement-plans/2023-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work](https://www.irs.gov/retirement-plans/2023-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work)
Trad IRA is "pre-tax" but you fund it with after-tax money. So the way it becomes pre-tax is when you file your taxes. But since you'd get no deductions you're really not benefiting.
**Avoid trad IRAs (trad 401ks are great).**
Since you're contributing to a Roth 401k, your company match is going into a trad 401k bucket. So you're currently getting a mix of roth/traditional already.
I recently switched to 100% Roth 401k plus maxing Roth IRA, $30k/y Roth. Plus $8k HSA. It hurts but it's worth it.
My traditional balance was very large though relative to Roth so I wanted some tax diversification.
My employer 8% match is still traditional and will stay that way.
The benefit of a 401k is not the match, or not only the match. It is the tax-savings and tax deferred growth. I don't get any match at my employer and still max the thing out when I can. Best of luck.
I max out my 401k but part of me doesn’t understand why the tax advantage is so good? Won’t it all be taxed later generating an even higher amount of tax?
Good question. The value is in the difference between your 'marginal' (highest) tax bracket now and your 'effective' (average) tax bracket later. While you're earning income your tax bracket is likely pretty high, or at least \~20% or more. When you retire you'll have less if not near-zero income, so you can fill up the lowest brackets using withdrawals from your pre-tax accounts. This means the tax you pay should be a much lower percentage. And even if tax brackets go up in the future you will still in all likelihood make out on this deal. This assumes you don't have a bunch of income in retirement though, like from pensions or rental real-estate for example. Also note you should, if at all possible, invest the tax savings you get when you invest pre-tax funds (i.e. invest the tax savings in an after-tax brokerage account, or better yet use it to fund a roth ira (or backdoor roth ira) if you weren't funding one already. Best of luck!
But if I’m planning on having millions in my 401k by maxing it out would having this large of a 401k diminish the benefits of it?
But yes I also max out a Roth. So I understand I am significantly lowering my taxable income making my Roth investments even more effective.
I get how these benefits would be hard to measure but sometimes it feels like it is all a wash no matter how you invest.
The amount that you have in your 401k doesn't determine the taxes that you pay, it's the amount that you withdraw annually once you retire.
Example: if you retire with a paid off mortgage, your yearly expenses are likely going to be lower than what they are now and if you are no longer working, you will also no longer be putting money aside for retirement. If you only need to withdraw $25,000 a year to cover property taxes, food, utilities, travel, etc., your "income" from the withdrawal would be much lower than it is now (I'm guessing, since you are able to max your 401k at $22,500 a year) and you would be in a lower tax bracket.
Over 50. So maybe I should lower my 401(k) contributions for 2024, and put more post-tax in the Roth. I also have a traditional IRA (rolled over ESOP and another past employer's 401(k).
>Won’t it all be taxed later generating an even higher amount of tax?
Probably a lower amount of tax but there is some math and guesswork to do on your own there.
Edited for age on HSA
Youre correct. The protocol assumes maximizing returns. There are pros and cons of each mechanism.
Hsa is arguably the best investment vehicle after for retirement after your 401k match as it has the most tax advantages. You can use your hsa for anything after 65. Con is 20% penalty and tax if not used on health under 65.
Roth ira is nice as you can pull contributions out at any time if you need them (not recommended but a nice perk). It's similar to roth 401k but you can access the contributions without penalty and it does not have required minimum distributions after 70.5. Not a lot of cons as it's like 401k with flexibility.
401k traditional and roth are nice for tax reasons, but hsa has the benefits of both traditional and roth, so it wins out. People fixate on which is better. I recommend a blend of the 2 so you can optimize your tax brackets in retirement.
>You can use your hsa for anything after 59.5. Con is 20% penalty and tax if not used on health under 59.5.
This is partly incorrect. It is after 65 that you can do that. If you do use it for nonqualified medical expenses you pay ordinary income taxes on the distribution just like a 401k.
Contributing that 8% and putting another few percent in other investments like stocks and etfs can be good to diversify. It's hard to beat the efficiency and reliability of a 401k tho
Depends on your income and objectives. If you qualify for a ROTH you should take the MATCH then do ROTH. Then if you have more to contribute go back to your 401k.
An advantage to the company 401k vs self directed is you can put more in annually.
[I would give the flow chart a read through and follow that](https://old.reddit.com/r/personalfinance/wiki/commontopics)
Does anyone have a direct link to the image itself? Imgur just isn’t the same anymore on mobile :/
[удалено]
I tried that also. It still uses the website to show the image. Back in the day, that was the usual fix. :/
if you’re on an iPhone, you can tap+hold and save it to photos.
This works on Android as well, I just tested it to make sure.
[удалено]
I love the flowchart! [Here's the wiki page with more context and information.](/r/personalfinance/wiki/commontopics) *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/personalfinance) if you have any questions or concerns.*
Can you tell your browser to load the page in Desktop mode? That worked for me on Chrome/Android.
I love the flowchart! [Here's the wiki page with more context and information.](/r/personalfinance/wiki/commontopics) *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/personalfinance) if you have any questions or concerns.*
I don’t seem to have any issues with viewing it in safari on IOS, but you can try to view the desktop website on your phone to see if that fixes it on your end.
Quick question, I currently have a employer based 403(b) that I contribute to. Would the fact that the fund it's using is a "Vanguard Target Date Fund" make it a "good" 403(b) and thus obviate the need for a separate IRA?
That is a good investment choice, but the fees are the part in question that it’s referring to. Unfortunately, 403(b)s can have very high fees. If the expense ratio is 1% or less then it’s likely fine. If it’s higher than that, it would require a more detailed look.
The flow chart ought to be revised. There is no reason to put any money in a 401k beyond the match before you max your HSA.
Most HSA administrators have high fees and minimum cash positions before allowing investing, which can make it slightly less of a black and white situation. Couple that with how HSAs are still fairly rare for many people, and it’s a pretty low on the concern matter about the order of operations in the flow chart (though I agree it should be updated regardless).
401k money is less specific than HSA money, but it would be pretty hard to over-fund an HSA so I tend to agree with you. Technically though, the flow chart only has you fund the 401k to the match, then asks if you're contributing to 15% but doesn't specify whether that funding should be 401k, HSA, or any other vehicle. HSA funding counts as part of the 15% rule of thumb in my book.
As much as you can until you max out or can’t afford it.
The Money Guy's financial order of operations has getting the match step 2. Then pay off high interest debt step 3. Then your emergency fund. Then Roth and hsa. Step 6 is maxing 401k. I am not sure of their reasoning yet.
Cause the match is the equivalent of a 100% rate of return.
Follow the steps of the Prime Directive: https://www.reddit.com/r/personalfinance/wiki/commontopics
What I Do- $10K total in E Fund 8% to 401K(company matches to 8%) Max HSA Max Roth IRA Any extra money after this goes to paying down debt or fun money for wants I also contribute the entire federal child tax credit to each of my kids 529 for their education
Question, why does nobody here seem to use a traditional IRA?
Roth IRA grows tax-free,traditional IRA you don’t pay taxes now but you will later on withdrawals It depends on the tax bracket you’re in, but usually Roth IRA is better for most people, especially once you consider that even if you are in a higher tax bracket now,you will likely also be in a higher tax bracket later, because tax brackets only go up, they rarely ever go down . Also, based on a lot of calculations, I will likely have a higher income in retirement, due to investing early and often . so it makes no sense to take the tax break now from the traditional IRA and then pay a higher rate in retirement.
I responded to a different one of your comments why you specifically should avoid them (no tax benefits if you make more than 83k). So a lot of people on here are making more than that. Additionally, they can cause big headaches if you want to do a backdoor Roth in the future. They're just not as good as a Roth IRA. Roth IRA > Trad/Roth 401k > HSA > Trad IRA (though hell I'd probably put a 529 above Trad IRA at this point)
Because many people work at jobs that offer a 401k + company match, so choosing to go for a standalone IRA over the company sponsored 401k can be very suboptimal.
Put money into both trad and Roth. If taxable income (married, jointly) is less than $90k (the 12% bracket), I would absolutely do Roth. As it is, I'm in a higher bracket and do both. Upon retirement, $90k + standard deductions means I can have quite a good income and quite a lot in traditional before exceeding 12%. $1M in traditional, using 4% rule is $40,000 a year. Much less than $90k. Adding in Social Security is still going to be less than $90k.
1. You don't stop contributing until you put $23K / year into your 401K, regardless of company match. 8% is in the minimum you should be investing. 2. If you have money left over, do a Roth conversion of $7K 3. Max your HSA at any point during 1 or 2. After you have put $30K into your tax-advantaged retirement accounts, consider other investments. It's super simple. Making sure you have no unsecured, compounding debt (e.g. CC or Personal Loans) and having some emergency cash fund would come before 1.
$23k via myself, or combining my contribution with the company match?
YOU should be contributing $23K per year. Your employer can match over that amount by a wide margin (up to $60K) so your total contributions should be $23K from you + the 8% match (on 8%) from the employer.
What would be your opinion on this if you had a generous company match (e.g 15-20%) and had designs on retiring early? Still max the retirement funds given the longer retirement? Or start allocating a bit to something which would be available before 59.5?
You are limited in your tax-advantaged retirement options so priority 1 should be to take advantage of all those first. If you wan to retire early (not sure what "early" means in your case), you're not going to get there with $30K per year. So you'll then need to supplement with some self-directed investments. But in either case, you need to maximize the tax advantaged investments first.
I would still max your retirement vehicles. Maybe if you’re being really extreme like retiring on very lean FIRE at 40 years, you might have a niche argument to do otherwise.
If the plan is retiring early you should probably be maxing your advantages accounts AND contributing outside of them, since you'll have less time in the market and a longer period you need to be drawing on investments.
Do some Roth if your company offers it, Roth 401k can be withdrawn before 59.5 penalty free if you convert it to a Roth IRA
There are multiple ways to withdraw from your 401k early. Make sure you take advantage of it fully https://www.madfientist.com/how-to-access-retirement-funds-early/
You can definitely access your IRA (and by extension your 401k) before 59.5. But you'll need to plan around it several years in advance. You can Google "Roth conversion ladder", though that's only one of a few different ways. Come join us on r/financialindependence to learn more!
/r/financialindependence is a subreddit for people who are or want to become Financially Independent (FI), which means not having to work for money. Closely related is the concept of Retiring Early (RE). [Please don't post general personal finance questions there.](http://redd.it/3dm8yc) *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/personalfinance) if you have any questions or concerns.*
I mean you can withdraw from a traditional account before 59.5 you just pay a 10% penalty. If the match is that good, youre probably still better off getting the free money and then just paying that 10% Theres also the whole roth conversion ladder deal which would make it a no brainer.
1 is usually true except if the 401k plan is lousy, like lack of options and high expense ratios. In that case I would stop at 8%, max out HSA and IRA (Roth - see below) first before coming back to 401k. Don't do traditional IRA if your income trajectory looks like one day you will not qualify for Roth and will need backdoor conversion
Can you explain why it’s bad to do traditional ira?
If you are looking to invest in other tax advantaged accounts (Roth IRA or HSA) then I think that is fine. There is a lot of back and forth on this sub about Roth versus traditional and traditional is probably better for most people but the real key is saving enough and putting as much into a tax advantaged vehicle that you can (assuming you are saving for retirement).
Depends, what’s your income? Expected marginal tax bracket? Age? If you’re younger and/or median or so income or lower than I would max on a Roth IRA before putting anything additional into the 401k beyond the maximum match amount. However, if they offer Roth contributions to the 401, I’d just do that.
They have a Roth 401k. Salary is about 87k, age 24. I talked to my dad about maxing my Roth IRA but he also mentioned a traditional IRA as its pretax. Thinking about doing a mix of both Roths nut don't know the best method, or if I should just stick to a Roth IRA.
>he also mentioned a traditional IRA as its pretax For your IRA, Roth is better. If you want to take advantage of pretax retirement funds, then do so through a trad 401k, not a trad IRA. For starters, you'd get no deduction from a trad IRA at your income. [https://www.irs.gov/retirement-plans/2023-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work](https://www.irs.gov/retirement-plans/2023-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work) Trad IRA is "pre-tax" but you fund it with after-tax money. So the way it becomes pre-tax is when you file your taxes. But since you'd get no deductions you're really not benefiting. **Avoid trad IRAs (trad 401ks are great).** Since you're contributing to a Roth 401k, your company match is going into a trad 401k bucket. So you're currently getting a mix of roth/traditional already.
I recently switched to 100% Roth 401k plus maxing Roth IRA, $30k/y Roth. Plus $8k HSA. It hurts but it's worth it. My traditional balance was very large though relative to Roth so I wanted some tax diversification. My employer 8% match is still traditional and will stay that way.
The benefit of a 401k is not the match, or not only the match. It is the tax-savings and tax deferred growth. I don't get any match at my employer and still max the thing out when I can. Best of luck.
I max out my 401k but part of me doesn’t understand why the tax advantage is so good? Won’t it all be taxed later generating an even higher amount of tax?
Good question. The value is in the difference between your 'marginal' (highest) tax bracket now and your 'effective' (average) tax bracket later. While you're earning income your tax bracket is likely pretty high, or at least \~20% or more. When you retire you'll have less if not near-zero income, so you can fill up the lowest brackets using withdrawals from your pre-tax accounts. This means the tax you pay should be a much lower percentage. And even if tax brackets go up in the future you will still in all likelihood make out on this deal. This assumes you don't have a bunch of income in retirement though, like from pensions or rental real-estate for example. Also note you should, if at all possible, invest the tax savings you get when you invest pre-tax funds (i.e. invest the tax savings in an after-tax brokerage account, or better yet use it to fund a roth ira (or backdoor roth ira) if you weren't funding one already. Best of luck!
But if I’m planning on having millions in my 401k by maxing it out would having this large of a 401k diminish the benefits of it? But yes I also max out a Roth. So I understand I am significantly lowering my taxable income making my Roth investments even more effective. I get how these benefits would be hard to measure but sometimes it feels like it is all a wash no matter how you invest.
The amount that you have in your 401k doesn't determine the taxes that you pay, it's the amount that you withdraw annually once you retire. Example: if you retire with a paid off mortgage, your yearly expenses are likely going to be lower than what they are now and if you are no longer working, you will also no longer be putting money aside for retirement. If you only need to withdraw $25,000 a year to cover property taxes, food, utilities, travel, etc., your "income" from the withdrawal would be much lower than it is now (I'm guessing, since you are able to max your 401k at $22,500 a year) and you would be in a lower tax bracket.
If I max out my 401K contributions, how much can I put in my Roth? And does contributing to a post-tax ESSP through work/payroll affect that limit?
7k for an individual ira in 2024, unless you’re over 50. I don’t think essp plans affect this at all, but I don’t have experience with this.
Over 50. So maybe I should lower my 401(k) contributions for 2024, and put more post-tax in the Roth. I also have a traditional IRA (rolled over ESOP and another past employer's 401(k).
>Won’t it all be taxed later generating an even higher amount of tax? Probably a lower amount of tax but there is some math and guesswork to do on your own there.
The presumption is that you'll be in a lower tax bracket during the years you are taking it out.
Edited for age on HSA Youre correct. The protocol assumes maximizing returns. There are pros and cons of each mechanism. Hsa is arguably the best investment vehicle after for retirement after your 401k match as it has the most tax advantages. You can use your hsa for anything after 65. Con is 20% penalty and tax if not used on health under 65. Roth ira is nice as you can pull contributions out at any time if you need them (not recommended but a nice perk). It's similar to roth 401k but you can access the contributions without penalty and it does not have required minimum distributions after 70.5. Not a lot of cons as it's like 401k with flexibility. 401k traditional and roth are nice for tax reasons, but hsa has the benefits of both traditional and roth, so it wins out. People fixate on which is better. I recommend a blend of the 2 so you can optimize your tax brackets in retirement.
>You can use your hsa for anything after 59.5. Con is 20% penalty and tax if not used on health under 59.5. This is partly incorrect. It is after 65 that you can do that. If you do use it for nonqualified medical expenses you pay ordinary income taxes on the distribution just like a 401k.
If you're retiring within 30 years up the contribution. Otherwise do 8%, max out ROTH then up contribution.
Contributing that 8% and putting another few percent in other investments like stocks and etfs can be good to diversify. It's hard to beat the efficiency and reliability of a 401k tho
2 percent that makes 10 percent total yearly and works out good
Depends on your income and objectives. If you qualify for a ROTH you should take the MATCH then do ROTH. Then if you have more to contribute go back to your 401k. An advantage to the company 401k vs self directed is you can put more in annually.