The Motley Fool Discussion Boards
Investing/Strategies / Retirement Investing
|Subject: Re: What comes first?||Date: 2/16/2001 7:13 PM|
|Author: JAFO31||Number: 27948 of 78166|
LooseChange: "My preference is to change the order from Ringfinger's ordering.
1. max 401(k) or 403(b)
2. traditional IRA (if AGI permits)
3. Roth IRA
4. Possibly other tax deferred accounts such as annuity accounts - this really depends upon your situation and should be considered closely before jumping in.
5. taxable account
I prefer to max out my 401(k) because it gives you a lot of bang for the short term buck even if you go beyond the matching percentage. Every dollar that goes into a 401(k) reduces your AGI (and taxable income) dollar for dollar. So you get to save immediate tax dollars that could then be used to fund a traditional or Roth IRA. Almost like a one-two punch. My general philosophy is to delay paying any tax as long as possible, so I strive to maximize vehicles which defer tax in the current tax year first. The other vehicles fall into place after that."
A clarification and a two quibbles.
"Every dollar that goes into a 401(k) reduces your AGI (and taxable income) dollar for dollar."
The original poster knows this I am sure, but your taxes are not reduced dollar for dollar as taxable income declines. The savings are only at your marginal tax rate times the reduction.
"So you get to save immediate tax dollars that could then be used to fund a traditional or Roth IRA."
These dollars may not be large enough to fully fund an IRA, depending upon the tax bracket you are in. For someone in the 15% bracket (even fully funding a 401-k at 10,500 [assuming that LBYM permits that much savings]) saves $1575 in taxes, some $425 dollars short of the current $2000 IRA cap.
Choosing a tax-deferred regular IRA (when AGI permits) versus a Roth IRA really requires assumptions about t