Prioritizing Investments For FIRE

In this article, I will show you how prioritizing investments can help you reach financial independence and retire early (FIRE).  Following this investment order will also help you pay fewer taxes and get you to FIRE faster.

When I started learning about financial independence, I first learned about investment and account options. 

Once I understood how to invest by reading books like The Simple Path To Wealth, The Little Book Of Common Sense Investing, and The Bogleheads Guide, I shifted my focus to optimizing my investments to minimize tax.

There were no books on this topic, especially not for the FIRE community.

 

Prioritizing Investments

Prioritizing investments allows you to minimize taxes and maximize gains.  In addition, this boosts your progress toward financial independence!

In What Order Should I Fund My Retirement Accounts?

1. 401k Match
2. Traditional or Roth IRA
3. Health Savings Plan (HSA)
4. Max 401k/403b & 457 Plan
5. Taxable Account

I will now go further into why prioritizing investments in this order makes the most sense for us in the FIRE community.

I will also provide pro tips to take maximum advantage!

 

Priority #1: 401k Company Match

The best way to start is to fund your 401k up to the employer match.  For example, if your employer matches 5% of your contributions, then at least you should contribute 5% of your income.  

The company match is equivalent to a 100% return (Pro-Tip), and many people refer to it as free money.

However, I like to say it’s part of your compensation package, and you’ve earned that match.

If you don’t take advantage, it’s as if you are giving yourself a pay cut.

Contributing to your 401k is also tax-deductible, so you’ll be putting more money to work by giving less to Uncle Sam.

Even if you have limited investment options or higher fees, you should be taking advantage of the company match.

The 100% return of a company match will likely outweigh the poor investment options.

Pro-Tip: 

The company match is equivalent to a 100% return on your investment!

 

Priority #2: Traditional Or Roth IRA 

After contributing to your company 401k match, the next best investment is to max out your Traditional or Roth IRA.

This has all to do with the ability to choose where to invest instead of being limited by your company’s 401k options.

By selecting your investment options, you can diversify and choose options with really low fees.

This will keep more money in your account to compound even further.

Whether you use a Traditional or Roth IRA will depend on your income.

As of 2023, a Traditional IRA is no longer tax-deductible when your Adjusted Gross Income (AGI) exceeds $73,000 for single or head of household status.

The AGI limit for married filing jointly is $116,000.

For Example:

You are married, filing jointly, and estimate an adjusted gross income (AGI) between you and your spouse of $140,000 for the year.

Your most intelligent investment would be to fund a Roth IRA since a Traditional IRA will not give you an additional tax advantage.

At least the Roth IRA will grow tax-free and be tax-free once it’s time to withdraw funds.

Pro-Tip:

You can estimate your Adjusted Gross Income (AGI) at the beginning of the year OR wait until the end of the year and decide which account you want to fully fund based on your AGI.

 

Priority #3: Health Savings Plan (HSA)

If you are lucky enough to qualify for an HSA, you should take advantage of this government gift.  All you need to qualify for an HSA is to be enrolled in a high-deductible health plan.

A Health Savings Plan (HSA) gives you a triple tax benefit!

Your money goes in tax-free, grows tax-free, and you withdraw from it tax-free!  (if used on qualified medical expenses)

When you turn 65, the account turns into another Traditional IRA if you haven’t used all the funds in your HSA.

You can take the money out for any reason, and there is no penalty, but you will have to pay tax on these withdrawals.  Either way, you are winning.

An HSA plan is a massive benefit for us in the FIRE community.  Unfortunately, early retirement might leave us less health insurance coverage than desired.

See Why Barista FIRE Is Becoming So Popular

To maximize your HSA, you can pay for health expenses out of pocket (saving your digital receipts) and let your money grow in the account.

Then once you retire, you can withdraw all those expenses after you’ve benefited from the investment gains over the years.

In 2023, the contribution limits for an HSA are $3,850 for Single and $7,750 for Family plans.

If you don’t qualify for an HSA, you can skip this step of prioritizing investments.

However, the next step has an account that might be even better than the HSA.

Pro-Tip:

Set up payroll deduction contributions to your HSA.  This will save you an additional 7.65% on taxes since your contributions are taken out before the Federal Insurance Contributions Act (FICA) calculation.

 

Priority #4: Max 401k/403b & 457b Plan

The next step is to finish maxing out your 401k or 403b retirement account to the contribution limit of $22,500 for 2023.  You may also qualify for an additional retirement account called the 457b plan. 

See Using A 457b Plan: Advantages & Disadvantages

If you struggle to decide if you should max out your 401k/403b or 457b, don’t stress because you can max out both.

I recommend using this 457b plan with your 401k or 403b to defer up to $45,000 a year!  (That’s $22,500 for each account)

This step can make the most significant difference in shortening your FIRE journey.

Pro-Tip:

The 10% early withdrawal penalty does NOT apply to 457b plans.  This makes this account especially attractive to us in the FIRE community.

You can fund the account now and withdraw once you quit your job.

The only caveat is withdrawals are taxable.

 

Priority #5: Taxable Account

Any remaining funds can be invested into a taxable account.  This is the last priority because you do not get a tax advantage when using taxable accounts.

The tax drag from using a taxable account instead of tax-advantaged accounts like a 401k can be significant, especially over decades.  

This is due to the upfront tax break tax-advantaged accounts give you, meaning more money gets to work for you immediately.

However, investing in a taxable account is not a bad option because you’ve already taken advantage of the accounts above.

Benefits Of Taxable Account: 

• No Contribution Limit
• Access Money Penalty-Free At Any Time
• Tax Gain Harvesting
• More Investment Choices

Pro-Tip:

Use tax gain harvesting to retire early and pay NO tax on your capital gains.

 

Investing For Financial Independence 

Lastly, here is an excellent summary illustration to make it easy to remember and share:

By prioritizing your investments in this order, you can potentially defer $58,000!  (Not including company match or catch-up contributions)

That money gets to work immediately, allowing it to grow faster with compounding interest.

You will achieve FIRE years earlier than expected by following this investing order.

I’ve personally shortened my FIRE journey by prioritizing investments in this tax-efficient way.