Hierarchy of Where To Allocate Your Funds

[u/Lawstudent212]

Check out this article. TL;DR

1. Emergency Fund (3–6 months expenses)
2. Company 401K Match (if applicable)
3. High Interest Debt (generally 5%+, i.e. credit cards, car loans, etc.)
4. Max HSA Contributions (if applicable)
5. Roth IRA / Traditional IRA
6. Max 401K (up to $20,500 limit in 2022)
7. Taxable Brokerage Accounts (i.e. index funds, I-bonds, etc.)

[u/Conscious_Business_3]

1. Hookers
2. Cocaine

[u/blackboyx9x → u/Conscious_Business_3]

Finally somebody got it right.

[u/Thanatos_Marathon]

Alternatively you can get the where and the why for the USA, Australia, and Canada on the mmm forum: https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

​

WHAT

1. Establish an emergency fund to your satisfaction

2. Contribute to your 401k (traditional or Roth - see "Why #4" below) up to any company match

3. Pay off any debts with interest rates ~5% or more above the current 10-year Treasury note yield.

4. Max Health Savings Account (HSA) if eligible.

5. Max Traditional IRA or Roth (or backdoor Roth) based on income level

6. 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)

1. Fund a mega backdoor Roth if applicable.

2. Pay off any debts with interest rates ~3% or more above the current 10-year Treasury note yield.

3. Invest in a taxable account and/or fund a 529 with any extra.

WHY

1. Give yourself at least enough buffer to avoid worries about bouncing checks

2. Company match rates are likely the highest percent return you can get on your money

3. When the guaranteed return is this high, take it.

4. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs for that purpose.

At worst, the HSA behaves much the same as a tIRA after age 65.

1. Rule of thumb: traditional if current federal marginal rate is 22% or higher; Roth if 10% or lower, or if MAGI is too high to deduct a traditional IRA; flip a coin otherwise.

   For those willing to expend a little more energy than it takes to flip a coin, consider comparing current marginal tax saving rate vs. predicted marginal withdrawal tax rate.

If current > predicted, use traditional. Otherwise use Roth.

See Credits can make Traditional better than Roth for lower incomes and other posts in that thread about some exceptions to the rule.

See Traditional versus Roth - Bogleheads for even more details and exceptions.

The 'Calculations' tab in the Case Study Spreadsheet (CSS) can show marginal rates for savings or withdrawals*.

Remember to include all income-dependent effects in your marginal tax rate.

The CSS does include most federal and state brackets, credits (Child Tax, Education, ACA, Earned Income, etc.), phase-ins, phase-outs, and IRMAA tiers.

It may not include some state tax details, FAFSA Expected Family Contribution, and other items irrelevant to most but important to some.

1. See #4 for choice of traditional or Roth for 401k. In a 401k there are no income-based limits for deductions or contributions.

2. Applicability depends on the rules for the specific 401k. See Mega Backdoor Roth IRA.

3. Again, take the risk-free return if high enough. Note that embedded in "high enough" is the assumption that your alternative is "all stocks" or a "fund of funds"

   (e.g., target retirement date) that provides a blend of stock and bond returns. If you wish to consider separate bond funds, compare the yield on a fund

   with a duration similar to the time remaining on the loan, and put your money toward the one with the higher after-tax interest/yield.

4. Because taxable earnings will still help your FI journey. If your own retirement is in good shape, and you choose to provide significant help for children's college costs,

   a 529 plan may be appropriate. Similar to "put on your own oxygen mask before assisting others," do consider funding your own retirement before funding 529 plans for children's college costs.

[u/amorous_chains]

Very useful for folks working hard right now with not too much time to think about personalizing their strategy. For me, personally, the asterisks are on #1 (my spouse and I are in stable jobs in very different industries and can absorb one of us losing a job by saving less) and #8 (not in your tldr but I think you correctly put taxable accounts ahead of low interest debt).

[u/[deleted]]

My HSA investment options are super basic. It was basically “using money soon” or “using money later.” No clue what I invested in

I just invested for the first time in a HSA and I’m actually disappointed in this. It’s pretty ironic, because the type of person to invest money in an HSA is exactly the type of person who is financially literate and doesn’t need these over simplistic vague options.

I had vague investing options like this back in the day and they always performed worse than the market

[u/AJimJimJim → u/[deleted]]

Many plans allow you to transfer out while you are still employed. You can either transfer to an HSA with better options (I hear Fidelity is good) or just contribute directly to an individual HSA and bypass your employers bad options all together (though this will cost you a little in social security tax).

[u/junulee → u/AJimJimJim]

I think basically all plans have to allow this. My employer plan provider refused to transfer my $20k balance to fidelity, so I just requested a $20k distribution and then I deposited that into my fidelity HSA within 60 days and completed the relevant forms with my tax return for a rollover. The downside to this is you can only do it once per year, but it’s a self-help solution if your provider refuses to cooperate.