Retirement Money 101: Where to put it and in what order

Retirement Money 101: Where to put it and in what order

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This will be short and sweet, just the way we like it here at Wealthy idiots. I’ve been asked by a few people to list my preferred order for retirement account contributions, so here they are. Note that these are assuming the investor doesn’t have any outstanding bad debt.

1. 401(k) up to the match.

If your employer gives a 5% match, you should be giving 5%, NO MATTER WHAT, to realize that 5% free money that they’ll give you. Don’t EVER turn down free money unless it’s offered to you by a Nigerian Prince via an email.

2. Roth IRA for a tax-free retirement.

After the 401(k) match, I would maximize your Roth IRA contribution annually. This is currently limited at $6k per year. My recommendation would be to use a firm such as VanguardFidelity, or Schwab. I really wish I had done this when I joined the Marine Corps in 2005. If I had, my account would be approximately $130k larger than it is today. Luckily, you can learn from my mistakes and send your account to the moon!

3. Maximize the 401(k) contribution.

The limit is currently $19,500 per year, but is expected to increase to $20,500 in 2022 due to rising inflation. If you can maximize this contribution, you will be way ahead of the game in terms of retirement savings. Don’t listen to your friends that tell you to only invest 10% of your salary, or that you should invest in crypto instead of the 401(k), etc. Make a plan, stick to it, and retire on a beach. Or don’t, and retire under a bridge with Hobo Bob. You pick.

4. Health Savings Account (HSA) for the win.

This is a triple-tax-advantaged account. HSA contributions are tax-deferred, the growth is tax-free, and the withdrawals are tax-free for qualified expenses. Can’t beat those tax savings. The current contribution limit on these is $3,600 for single individuals and $7,200 for those filing married-joint. Note that you’ll need a qualifying High Deductible Health Plan (HDHP) that is HSA-eligible in order to take advantage of this account. You’ll want to read the rules carefully on this one, as there are some unique circumstances which can occur.

5. Open a taxable brokerage account for additional savings and flexibility.

This can also be done at the firms I listed in number 2 above. These accounts have no annual contribution limit, and as long as you aren’t day trading, it’s pretty easy to minimize the annual tax burden. The advantage of these accounts is that they can be tapped in case of emergency, at any time, without penalty.

6. Buy rentals and watch your portfolio grow.

Honestly, this could be switched with number 5 above based on personal preference. While this isn’t a “retirement savings account” by IRS standards, it is certainly a viable means of passive cash flow that can further diversify your investments. Don’t ignore the huge advantages of real estate.

7. Give your children the start they deserve with a 529 Plan.

These plans typically earn you a state tax deduction. For my state, we can deduct up to $8k in expenses per year, per child. This sets our kids up for success and gives us an additional way to avoid paying taxes. Just remember, you shouldn’t contribute to a 529 if you can’t get your other savings in order. Your kids can borrow for college, but you can’t borrow for retirement. It does no one any good if Little Billy gets free college but you’re living in a refrigerator box.

8. Savings accounts, cryptocurrency, non-fungible tokens, misc investment opportunities, eBay flips, Craigslist treasures, your Etsy page, etc.

Toss all other investments into this category. It shouldn’t be a pillar of your retirement plan, but if you’ve still got some extra cash after steps 1-7, feel free to play around and not feel guilty about it. For me, my fun investment is to go on treasure hunts in the Atlantic Ocean… okay, so I don’t do that but it would be great if I could!

As with anything else, this isn’t definite. You can move these steps around as needed, however, they do give you a general idea of a good order of execution. Make a plan, stick to it, and become financially independent. Be a Wealthy Idiot.

Author

  • D.C. joined the Marine Corps right out of high school. When he left active duty after 5 years of service, he quickly earned a bachelors degree and an MBA. He got his first private sector job at a modest salary and quickly worked his way up through promotions. Once he started making decent money ($38k at the time), he quickly realized he needed to learn how to save for his future. After nearly ten years of research and application, he wants to share his knowledge and financial best practices so more people can become Wealthy Idiots!