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What Order Should You Invest Your Money?

Amanda only recently started thinking about saving and investing. Her coworker Elaine has been saving money for years and is close to retirement.

Both, however, are struggling with the same issue: “I hear experts talk about the importance of having an emergency savings account and funding my 401(k). Others tell me I should first get out of debt and contribute the maximum to a Roth IRA. I’m confused. What should my money priorities be?”

These two women are asking great questions. Maybe you wonder the same thing: Is there a recommended “order” to invest my money? 

I believe there is. As I help federal employees (and others) prepare for a successful retirement, I generally recommend the following:

1. Build up an emergency fund. 

This is top priority. Most financial planners recommend an amount of 3-6x your monthly expenses. Create this emergency fund before you start saving for retirement or investing. This can be a separate checking or savings account. 

I find that not having such an emergency fund is why so many people use credit cards when they face unexpected bills. The car breaks down and the mechanic tells you it will cost $2,000 to fix it. Without an emergency fund, you may see your only recourse as going into credit card debt. 

This is undesirable and avoidable. With cash always available, you’ll be ready for those times when life throws you a curveball.

2. Contribute to your TSP or 401(k) to the extent that you get your match. 

The match you are receiving is 100% gain. Contribute 5% to your TSP, and you will get a 5% match. You can put your 5% in the traditional side of the TSP or you can put it in the Roth side of the TSP. Either way, you’ll get your 5% match–but it will go to the traditional side. Getting that free match is a must. 

3. Get rid of high-interest debt.

Next on the list, you want to get rid of high-interest debt. This goes for anything–credit cards, student loans, personal loans–with an interest rate of 5% or higher. 

If you’re carrying a monthly balance on a credit card, set up a plan to get this paid off. Once paid off, you’ll be amazed at the extra income you’ll have to invest. 

4. Contribute to a Roth IRA. 

In 2024, you can contribute $7,000 to a Roth IRA if you’re under the age of 50. You can contribute $8,000 if you’re over the age of 50. 

What’s great about the Roth IRA is that it gives you access to the basis. Let me explain. “Basis” is a fancy accounting word that means you can access the money you’ve contributed. 

Let’s say you contribute $7,000 for two years. That’s $14,000 dollars. Let’s say the account has grown to $16,000. You can touch that $14,000 any time you want and have no taxes and no penalties. 

You can’t touch the $2,000 gain, however, until you hit 59 and a half and have had the Roth IRA for at least five years. 

What’s great about the Roth IRA is that you’re putting the money in after taxes. All your growth will be tax-free, as long as you play by the rules. 

Remember, IRA stands for Individual Retirement Account. That means you have more control and flexibility than you have inside an employer plan like a TSP. With Roth IRAs, there are lots more investment options than you’ll have available inside your employer plan. This increased flexibility and control can make the Roth IRA a really attractive option. 

The reason we didn’t put “Contribute to a Roth IRA” sooner on this list is that you need to take advantage of your employer’s 5% match of your TSP contribution. That’s like free money! So, we list it as a higher priority here than the Roth IRA. 

Now, there are some income phase-outs, meaning if you make too much income, the IRS won’t let you contribute directly to a Roth. 

If you’re a single tax filer and your income hits $138,000 a year, you’ll start to phase out and not be eligible to contribute to a Roth IRA. 

If you’re married filing jointly, you’ll start to phase out at $218,000 of income. 

If your income is above those limits, there is one more way to contribute money indirectly to a Roth IRA, and that’s using a backdoor Roth strategy. The rules of doing this are a little more complicated, but it is something that you can look into. 

5. Max out your TSP. 

You can either do this through using the traditional TSP or the Roth. Contribution limits for TSP have been increased for 2024 to $23,000 per year for those 50 and below. 

If you’re over the age of 50, you can tack on an additional $7,500 of “catch up contributions.” To do this, you have to select the pay period, contribute to the regular TSP and then also contribute to the “catch up.” You’ll want to make sure you divide this by 26 pay periods so that you are contributing equally to the TSP. The reason? You don’t want to max out your TSP before the year is out. Let’s say you hit your limit in November. That would mean you couldn’t make any contributions in December, which means you wouldn’t be getting a match in December. So you want to make sure you’re contributing equally and have it maxed out by the end of the year.

You do have the option of doing traditional or Roth. Now there are benefits to doing each. An advisor can help you decide which option is best for you.

Suppose, after all this, you have more money you can put somewhere. What then?  

6. Pay off other debt. 

If you can be debt-free by the time you retire, that means you can live on a lot less during retirement. That means you don’t have to have quite as big a nest egg to fund your lifestyle. I’ve yet to meet the retiree (or soon-to-be-retiree) who’s debt-free and who says, “That was a bad decision.” 

If you get to the point where…

  • You’ve got an emergency fund.
  • You’re getting your maximum TSP match.
  • You’ve paid off all credit cards, student loans, etc.
  • You’re fully funding a Roth IRA (for both you and your spouse).
  • You’ve maxed out your TSP and–if your spouse is working, maxed out their 401(k) as well. 
  • You’re debt-free…

…and you still have money, there are two further steps you can take.

7. Put money in non-qualified accounts.

You do have to pay taxes on the growth. The money is completely liquid and there are no age limits, meaning you can touch the money at any time. 

The drawback of this is that any gains are taxable. 

8. Overfunding a life insurance contract.

Here you are over-funding the policy to build up cash value. 

Life insurance is life insurance, so there does need to be a need for a death benefit. With federal employees, you have the survivor benefit election (if you’re married). This type of insurance can cover that need. But most married federal employees do need life insurance. 

Instead of shopping for life insurance with the attitude I want the cheapest payment I can make, and I want to get the largest possible death benefit, try to get the death benefit you need, and then actually over-fund the policy. That’s right, put extra money in there. Depending on the policy, these funds could grow inside that account tax deferred. Later, if you remove the money appropriately, in accordance with IRS regulations, you can withdraw the money tax-free. 

Now, is this the same as a Roth IRA? No, not exactly. Inside any life insurance contract, you’ll pay some costs for that death benefit. But if you need that death benefit, those costs are acceptable.

What we’re saying here is, if you fully funded all the other steps and still have some leftover money, this is a way to get tax-advantaged growth inside of a life insurance policy. It gives you a death benefit that a lot of people need. It can give you long-term care coverage, which a lot of people will need as well. 

So, if you’ve fully funded all these other items, this can be a great last step.

I hope this quick review has been insightful and helpful. If you have at least $400,000 in your TSP and need assistance planning for your retirement, I’d encourage you to visit our website, There–in the top right corner of the page–you’ll see a green TALK WITH AN ADVISOR button. Click it. Leave us a short message. We’ll be in touch right away. Our mission is to help you prepare for the best retirement possible.

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