Reasonable Prioritizations Of Accounts

Scope And Purpose Of This Post

This post talks about reasonable prioritizations for putting your money into various accounts (401k, IRA, HSA, tax-normal brokerage, etc).  I will try to add on to what the Bogleheads wiki and /r/PersonalFinance wiki have already said on the matter.

Sections:

• A Baseline Ordering
• A Possible Ordering When Saving For A House
• Explanation Of Terms/Accounts
• Overall Reasoning Of Baseline Ordering
• How Does Employee Stock Purchase Plan (ESPP) Fit In?
• Why Traditional Over Roth?
• What About Saving For A House Or Something Else Before Retirement?
• Can I Eliminate My Emergency Fund?

A Baseline Ordering

Vanilla: exotic spice but default flavor.

To give you something notable right away, here is a reasonable ordering for putting money into various accounts if you are mostly looking to save for retirement or other long-term goals:

• Pay down high-interest debt.
• Build up an emergency fund (savings/checking account, able to cover 3-6 months of expenses).
• Max out ESPP contributions and sell shares immediately.
• Contribute to your Traditional 401k enough to get the full match from your employer.
• Max out HSA contributions.
• Max out Traditional 401k contributions.
• Max out Roth IRA contributions (and Mega Backdoor Roth contributions to your 401k if your 401k supports it).
  
• Contribute to a taxable (normal) account.

Note: this ordering also assumes that your 401k doesn't have ridiculously high fees and that you have too much income to be eligible for making tax-deductible contributions to a Traditional IRA.  Even if your income is too high to be eligible for contributing to a Roth IRA, you can make non-tax-deductible contributions to a Traditional IRA and then Roth-convert that money so that you end up with Roth IRA money.

I will explain the terms/accounts and reasoning in the sections below.

A Possible Ordering When Saving For A House

Here's another sneak peek.  For the logic of the changes from the baseline, see the section "What About Saving For A House Or Something Else Before Retirement?".

• Pay down high-interest debt.
• Build up an emergency fund (savings/checking account, able to cover 3-6 months of expenses).
• Max out ESPP contributions and sell shares immediately.
• Contribute to your Traditional 401k enough to get the full match from your employer.
• Max out HSA contributions.
• Max out Roth IRA contributions with plan to later withdraw these contributions to help pay for the house.
• Contribute to a taxable (normal) account to help pay for the house.
• Max out Traditional 401k contributions.
• Contribute to a taxable (normal) account for reasons other than house.

Explanation Of Terms/Accounts

• ESPP: Employee Stock Purchase plan, where payroll deductions let you buy your employer's stock at a discount. Some companies use the term "DSPP" instead ("D" for "discount"). I'm going to refrain talking more about this account until the section "How Does Employee Stock Purchase Plan (ESPP) Fit In?".  Investopedia.
• HSA: Health Savings Account, a very tax-advantaged account meant for qualified medical expenses.  Wikipedia.
• 401k: A tax-advantaged account set up through your employer.  Usually you choose how much to contribute from your paycheck, and then you choose from the funds your plan offers.
• Wikipedia, Bogleheads, /r/PersonalFinance.
• Some 401k plans allow you to do Mega Backdoor Roth stuff where you make "after-tax" or "non-Roth non-deductible" contributions, and then Roth-convert them.
  
• IRA: Individual Retirement Account.  A tax-advantaged account you have a lot of control over.  You can set up an IRA with an institution of your choosing; timing and amounts of contributions (within legal limits) are up to you.
• Wikipedia: IRA, Traditional IRA, Roth IRA.
• Bogleheads: Traditional IRA, Roth IRA. 
• /r/PersonalFinance: IRAs.
• IRS: IRA, Traditional IRA,  Roth IRA.

A quick, conceptual way to think of the taxation of the accounts:

• HSA: If eventually used for qualified medical expenses, taxes never touch it, not even FICA taxes.
• Traditional 401k, Traditional IRA: delays ordinary income taxation until withdrawal.
• Roth 401k, Roth IRA: pay income taxes before you contribute, then no more taxation (includes Mega Backdoor Roth money once it has been Roth-converted).
  
• Taxable (normal): pay income taxes before you contribute, then pay ongoing tax drag on any interest, dividends, or realized capital gains.  For withdrawals, realized capital gains are taxed.

Table of how various accounts are taxed:

Account Type	Contributions	Growth (Interest, Dividends, and Realized Capital Gains)	Withdrawals
HSA	Pre-tax (aka tax-deductible, decreases your taxes at time of contribution). Avoids FICA taxes.	No tax.	No tax, as long as it's for qualified medical expenses.
Traditional 401k, Traditional IRA	Pre-tax as far as ordinary income tax in concerned. Post-tax for FICA taxes.	No tax.	Taxed as ordinary income.
Roth 401k, Roth IRA	Post-tax (you already paid taxes on your income that went to these contributions).	No tax.	No tax.
Taxable (normal)	Post-tax (you already paid taxes on the money you contributed).	Some taxed at ordinary income rates, others at capital gain rates.	No tax on the withdrawal itself. If you had to realize a capital gain to make the withdrawal, the gain is taxed.

Overall Reasoning Of Baseline Ordering

Here is the baseline ordering again:

• Pay down high-interest debt.
• Build up an emergency fund (savings/checking account, able to cover 3-6 months of expenses).
• Max out ESPP contributions and sell shares immediately.
• Contribute to your Traditional 401k enough to get the maximum match from your employer.
• Max out HSA contributions.
• Max out Traditional 401k contributions.
• Max out Roth IRA contributions (and Mega Backdoor Roth contributions to your 401k if you 401k allows it).
  
• Contribute to a taxable (normal) account.

The ordering is mostly due to two factors: efficiency and flexibility.

Efficiency: Making Your Contributed Dollars Grow As Big As Possible

The biggest factor at play is per-dollar efficiency.   For instance, the first dollar contributed to a Traditional 401k will reduce your income taxes, get an instant +100% return (the employer match is usually 1-to-1), and then grow without tax drag.  Compare that to the first dollar contributed to a taxable account, which does not reduce your taxes, has no instant return, and suffers ongoing tax drag (on interest, dividends, and realized capital gains).  Under some reasonable assumptions for a 30-year old, the first Trad401k dollar will give you ~2.5 times as much money as the first taxable account dollar when you retire at age 65.

Paying down high-interest debt (such as credit card debt) can be like getting an annual return of 15% or even 30%.  This extremely high rate of return can potentially be more efficient than getting 401k employer match if your debt is going to take ~3+ years to pay off.

Other than paying down high-interest debt and building an emergency fund, the rest of the ordering can be decided by a combination of tax efficiency (for typical people) and the employer match:

• Traditional 401k with employer match: Instant 100% gain and Tier2 tax efficiency.
• HSA: Tier1 tax efficiency.
• Traditional 401k without employer match: Tier2 tax efficiency.
• Roth IRA: Tier3 tax efficiency.
• Taxable (normal) account: Tier4 tax efficiency.

It's uncontroversial that the HSA is more tax efficient than a Traditional 401k, but it is somewhat controversial that a Traditional 401k/IRA is more tax efficient for most people than a Roth 401k/IRA.

Flexibility: Accessible Money Is Better Than Locked-Up Money

The second factor is flexibility; money is only useful if you can actually use it.  If you need $10K right now to replace your car right now, your 401k money won't help you.  I don't think the car replacement would qualify for a hardship withdrawal, and not all 401k plans allow for hardship withdrawals.  Even if can do a hardship withdrawal, you'd have to pay taxes AND penalties.

Flexibility is why having an emergency fund in a checking/savings account is earlier in the baseline ordering than other accounts that are more tax-efficient.  You probably need some financial flexibility to handle your car suddenly needing replacing or getting laid off.  Once you have enough flexibility, we resort back to efficiency.

Flexibility analysis on the various accounts, most flexible first...

• taxable brokerage account and checking/savings account: very flexible, usually no restrictions on getting money out.
• HSA: can be used for qualified medical expenses at any time; other expenses incur taxes and penalties.
• ESPP: money is tied up until the purchase period ends (usually six months), but once the purchase goes through, you can sell at any time.
• Roth IRA: you are able to withdraw your Roth contributions at any time; it's the growth that's locked up until age 59.5.  Also, if you Roth convert some money (from a Traditional IRA), then that money is able to be withdrawn without penalty after five years.
• Roth 401k: same deal as Roth IRA, but your plan probably has additional restrictions on withdrawals.
• Traditional IRA: fairly locked up until age 59.5; you can do a Roth conversion and wait 5 years, or you can do SEPP (wiki, IRS).  SEPP does give you some flexibility in getting Traditional IRA/401k money out early, but it is very inflexible itself:
• "SEPP payments must continue for the longer of five years or until the account owner reaches 59.5"
• "The payments cannot be changed beyond a one-time allowed change from one of the latter two calculation methods to the first or all of the payments received will be retroactively taxable and penalized."
• Traditional 401k: same deal as Traditional IRA, but your plan probably has additional restrictions on withdrawals.

PersonalFinance subreddit has a post that talks about getting money out of tax-advantaged accounts before retirement age.  Also note that you can borrow some of your 401k money to buy a home (be aware there are many restrictions and potential drawbacks to doing this {one, two}).

How Does Employee Stock Purchase Plan (ESPP) Fit In?

An Employee Stock Purchase Plan (ESPP, sometimes called DSPP) is an employer-run program where you contribute via payroll deductions for a while (purchase period) and at the end of the purchase period, your contributions buy your employer's stock at a discount.  Often there is a "look back" feature where your purchase price is the lower of the beginning price and ending price of the purchase period, and the discount is applied on top of that.  So, if the stock starts at $100, ends at $120, and you have an ESPP with look back and 15% discount, your purchase price will be $85 even though the market price is $120.

You might have wondered why the ESPP is so high in the baseline ordering and why you would sell your shares immediately.  I think the best use of an ESPP is as a money multiplier to help you get more money into the other accounts.  So, you should very much prioritize participating in the ESPP (it could even rival paying down credit card debt, especially because it could help you pay off credit card debt faster), but the reasons for keeping your ESPP shares are far weaker.

Imagine your employer has an ESPP with a 6-month purchase period and 7.5% discount, and imagine you face a 24% marginal tax rate.  If you sell the stock immediately after purchase, your ESPP contributions got you an after-tax annualized return of 26.73% (36.06% before tax; also note that I'm neglecting transaction fees, which are usually small).  Usually the discount is on the lower of the beginning and ending stock price in the purchase period, so a 7.5% discount could easily become a 15% discount on the ending stock price, which would result in an after-tax annualized return of 63.77% (88.40% before tax).  See the EsppReturn tab of the Money Formula Demo google sheet if you want to see more numbers.

These returns are amazing, thus the ESPP can be viewed as a strong money multiplier, and thus the case for participating in your ESPP is very strong.  The tough decision is when to sell your ESPP shares.  There are three main reasons to sell your ESPP shares sooner (immediately even) rather than later...

1. If you haven't maxed out your tax-advantaged accounts (HSA, 401k, IRA), then selling your ESPP shares in order to afford higher HSA/401k/IRA contributions can be thought of as transforming tax-inefficient assets into tax-efficient assets.  Yes, you pay tax on the realized gain now, but, for example, the increased Traditional 401k contribution reduces your current tax bill, and avoids ongoing tax drag.  For selling ESPP shares to contribute more to tax-advantaged accounts, the tax-rewards can outweigh the tax-punishments.
• Numerical example 1: You participate in your ESPP and sell immediately for a gain of $1000.  Your marginal tax bracket is 24% (and the "bargain element" of ESPP shares is taxed as ordinary income), so this sale increases your tax bill by $240.  The sale also allows you to contribute an extra ~$1000 to your HSA.  (The extra $1000 contribution is approximate because you have to subtract the gains you would have experienced on the money if it had not gone into the ESPP.)  This extra HSA contribution has a lot of tax benefits...
• Reduces the current year's ordinary income tax by ~$240.
• Reduces the current year's FICA taxes (7.65%) by ~$76.50.
• No ongoing tax drag on interest, dividends, and realized gains.  Using current US stock market dividend yield (~1.8%), taxes on dividends could eat up 8% of your money by the end of 30 years.  Think of this as saving you ~$80 in the current year.
• Reduces your tax bill in the future whenever you pay a qualified medical expense and you didn't have to pay taxes on realized gains.
• Numerical example 2:  same as before, but your ~$1000 goes to your Traditional 401k, reducing your current tax bill by ~$240.
• If you haven't maxed out your employer's 401k match, you get an additional tax-deferred ~$1000 from your employer.
• Reduces the current year's ordinary income tax by ~$240.
• No ongoing tax drag on interest, dividends, and realized gains. (~$80)
• In retirement, when you finally exhaust your Traditional 401k, your tax bill will be a bit higher than if you had kept the ESPP shares.
2. You wouldn't want 80% of your portfolio tied to your employer.  If you think of your paycheck/employment as a bond-like asset, you might already be over 80% invested in your employer.  Also, if things aren't going well for your employer, and they lay you off, their stock price has probably also taken a big hit, meaning your portfolio has taken a big hit...at exactly the worst time.  Keeping ESPP shares is like putting additional eggs into a full basket; it's keeping a lot of your financial risk concentrated rather than diversified.
3. Your ESPP shares have the risks of a single stock, which are high.  Selling your ESPP shares and then buying a total US stock market fund (examples here) or bonds can be thought of as converting a high-risk asset into a lower-risk asset.

There are two mains reasons to delay selling your ESPP shares...

1. If you're going to have a lower marginal ordinary income tax rate soon, and you're okay with holding your ESPP shares until that time, then it is reasonable to wait for selling at that lower rate.
2. If the main reasons listed above to immediately sell the ESPP shares don't apply to you (or apply weakly), and you really want to delay those ESPP sale taxes, then it is reasonable to hold on to the ESPP shares for a while.

So, for most people, reasonable advice would be, "sell your ESPP shares immediately unless you have clear, strong arguments for keeping them".

If you have old ESPP shares and are thinking about selling them, be aware of wash sale rules (Wiki, Fairmark, tax code).  If you sell old ESPP shares at a loss and there is an ESPP purchase 30 days before or after that sale, you can't claim the loss until you sell the newly purchased ESPP shares.

Why Traditional Over Roth?

From a Michael Kitces article.

One-line summary: for most people, going Traditional will decrease your lifetime losses to taxes compared to going Roth.

The following logic applies for 401k and IRA, but lots of people can't make tax-deductible contributions to a Traditional IRA, therefore a lot of people only have a noteworthy Traditional-vs-Roth decision to make for their 401k.

A Traditional 401K saves you taxes at your current marginal tax rate and later costs you taxes at close to your average tax rate. A Roth 401K costs you taxes at your current marginal tax rate and later saves you taxes at your average tax rate. Your average tax rate in retirement will probably be less than your marginal tax rate while working, so Traditional 401K can be the best choice even if you will have a higher marginal tax rate in retirement than when working. Important caveats apply, so be careful.

Example Walkthroughs (Using 2018 Tax Brackets)

Imagine a single person that makes $113K per year while working. Their marginal income tax rate is 24%. Every dollar contributed to their Traditional 401k instead of a Roth 401k saves them taxes at the 24% tax rate.  Let's say they max out their 401k contributions ($18.5K for 2018), so they have $94.5K of income remaining to live life.

Then, imagine in retirement they continue their lifestyle, so they withdraw $94.5K from their Traditional 401k. Their top marginal tax rate bracket will be 22%, but they have no paycheck filling up tax brackets, so the dollars taken from the Traditional 401k will be taxed at 14.9% on average. The Traditional 401k avoided 24% tax on dollars going in and caused 14.9% tax on dollars going out.

[Side note: If we want to take into account that a retiree is no longer paying FICA taxes (7.65% of $113K = $8.6K), then the retiree could withdraw $85.9K, which would be taxed at 14.2% on average.]

Now, let's imagine someone else with a $113K salary that contributes to a Roth 401k. Every dollar they contribute to the Roth 401k instead of a Traditional 401k increases their tax bill by $0.24, so all contributed dollars are taxed at a 24% rate. Later, when retired, they pay 0% tax on dollars going out. The Roth 401k caused 24% tax on dollars going in and avoided 14.9% tax on dollars going out.

If you made $113K per year while working, you'd have to annually withdraw more than $260K from your 401k to make the Roth 401k be more tax-attractive than the Traditional 401k.

There are caveats below, but these example calculations still shows it's improper to simply compare your current average tax rate to your predicted average tax rate while retired.

Important Caveats

These arguments and examples assume the tax code stays the same. Also, you might have ordinary income in retirement other than Traditional 401K withdrawals that increase your average tax rate. Take extra care about interaction with taxes on Social Security benefits, qualified dividends, and long term capital gains. Do your own projections and math.

Here's a fancy paper that looks at retirement account withdrawal strategies and talks a lot about Social Security benefits: https://www.onefpa.org/journal/Pages/FEB18-The-Effects-of-Social-Security-Benefits-and-RMDs-on-Tax-Efficient-Withdrawal-Strategies.aspx

Michael Kitces has an article on why retirees might not fear tax rate increases of the future:

• "A closer look at paths to tax reform that can address Federal deficits though, reveal that while tax burdens in the aggregate may be higher in the future, marginal tax rates will not necessarily be higher. In fact, most tax reform proposals, from the bipartisan Simpson-Bowles to the recent proposals from Representative Camp, actually pair together a widening of the tax base and an elimination of many deductions with a lowering of the tax brackets!"
• "proposals to shore up Social Security and Medicare often involve simply raising the associated payroll taxes that currently fund them… tax increases that would result in a higher tax burden on workers, but no increase in the taxation of future IRA withdrawals."
• "the US remains one of the only countries that does not have a Value-Added Tax (VAT), which could also increase the national tax burden without raising marginal tax rates."

Some Tools/Articles For Your Possible Tax Situations

• Taxes

• SmartAsset: simple, easily lets you play around with income levels, shows marginal and effective tax rates.
•  H&R Block: lots of questions in case you are wondering about deductions and exemptions.
• Money Formula Demo google sheet: Taxes2018 tab shows you tax brackets and tables of marginal and effective tax rates for various amounts of ordinary income.
• Social Security
• Social Security Benefits Online Calculator, where if you put birthdate 1986-01-01, retirement age 67, and $100K for years 2009 and later, you get an annual benefit of $33K in today's dollars.
• Social Security Benefits Quick Calculator, where you can put in your birth year, current annual earnings (previous earnings can be tinkered with), and then see what your annual benefit will be for the three important ages of starting to take Social Security benefits.  For $100K and "today's dollars", the annual benefits are $23K at 62, $32K at 67, $40K at 70.
• You can also create a SSA online account, check your contribution history, and have them do some calculations based on that.

Michael Kitces has a great article on tax-efficient withdrawal strategies in retirement. The article is not about how much to withdraw, but from which accounts.  The best strategy is to live off of your normal taxable assets while doing pre-emptive Roth conversions on your Traditional 401k/IRA assets so as to make your tax brackets as even as possible across years (which minimizes your tax bills due to progressive tax brackets).

Other People's Direct Commentary On Traditional vs Roth

• Bogleheads
• /r/PersonalFinance
• Go Curry Cracker 
• notably, the "Pensions and Social Security" section hints that the author has taken Social Security into account, and his conclusion section says, "We also saw that the impact of Social Security, Pensions, and RMDs also favor the Traditional solutions over the Roth".
• Mad Fientist 
• Early Retirement Now
• Michael Kitces has an article on why retirees might not fear tax rate increases of the future:
• "A closer look at paths to tax reform that can address Federal deficits though, reveal that while tax burdens in the aggregate may be higher in the future, marginal tax rates will not necessarily be higher. In fact, most tax reform proposals, from the bipartisan Simpson-Bowles to the recent proposals from Representative Camp, actually pair together a widening of the tax base and an elimination of many deductions with a lowering of the tax brackets!"
• "proposals to shore up Social Security and Medicare often involve simply raising the associated payroll taxes that currently fund them… tax increases that would result in a higher tax burden on workers, but no increase in the taxation of future IRA withdrawals."
• "the US remains one of the only countries that does not have a Value-Added Tax (VAT), which could also increase the national tax burden without raising marginal tax rates."
• The Finance Buff

What About Saving For A House Or Something Else Before Retirement?

Perhaps you have something big you're saving up for something that you'd like to enjoy far before retirement, like a house.  If your annual savings are far more than the maximum annual contributions to your tax-advantaged accounts, then maybe you can just use your tax-normal savings for the house.  Decisions get tougher if you can't max out all of your tax-advantage accounts AND make satisfactory progress on saving for a house.

Let's say Larry has no debt, his emergency fund is adequate, and wants to save for a house (an is inelegible to make tax-deductible contributions to a Traditional IRA).  I think it is reasonable for Larry to at least try to get his full employer match and max out his HSA contributions before setting aside money for that house (and he should use his ESPP to help him do this).  Why?  Well, the efficiency is just so high on the 401k match and HSA that it'd be a shame to miss out.  It really is quite something to miss out on that instant 100% gain on your matched 401k contributions.

Beyond matched 401k contributions and HSA contributions, I think we get into a very reasonable trade-off between long-term and short-term goals, and the efficiency differences aren't as big.  It'll be a very personal decision for Larry to make about how much money goes to the house, and how much goes to unmatched 401k contributions.

However, there is less tension between tax-advantaged account contributions and saving for a house than previously implied.  For instance, Larry could contribute to a Roth IRA and then later withdraw all of his Roth IRA contributions to help pay for the house (remember you can withdraw Roth IRA contributions at any time; it's the earnings that have restrictions).  Also, it is possible to borrow from your 401k for a home, be beware the restrictions and possible drawbacks.

So, maybe Larry might come up with this prioritization of where to put his money (differences from original baseline ordering in bold):

• Pay down high-interest debt.
• Build up an emergency fund (savings/checking account, able to cover 3-6 months of expenses).
• Max out ESPP contributions and sell shares immediately.
• Contribute to your Traditional 401k enough to get the full match from your employer.
• Max out HSA contributions.
• Max out Roth IRA contributions with plan to later withdraw these contributions to help pay for the house.
• Contribute to a taxable (normal) account to help pay for the house.
• Max out Traditional 401k contributions.
• Contribute to a taxable (normal) account for reasons other than house.

Basically, Larry upped the prioritization of Roth IRA and taxable (normal) account contributions because he needed the flexibility to spend the saved money well before retirement.

Can I Eliminate My Emergency Fund?

Once you start having investments in flexible places (Roth IRA contributions, taxable accounts), it is reasonable to start reducing your emergency fund that is in something safe like a FDIC-insured savings account.  I will explain why.

The purpose of an emergency fund is to protect you against scenarios like the following: there is a big recession, which causes the stock market to plummet, your employer to lay you off, and it is hard to find a job.  The emergency fund is supposed to help you survive for a while so you can do a decent job hunt and not have to do anything extremely painful (selling your grandmother's jewelry).

Stated another way, the purpose of an emergency fund is to have can-rely-on-it money.  $1 in a FDIC-insured savings account will probably be $1 you can use for surviving when bad stuff happens.  $1 invested in stocks could be only $0.50 when bad stuff happens.  You can choose your own numbers based on your own desired level of caution, but let's imagine treating $1 in a total US stock market ETF as $0.25 of can-rely-on-it money.  Also, let's imagine treating $1 in a total bond market ETF as $0.80 of can-rely-on-it money.

Imagine you have a $20K in a savings account as your emergency fund.  Imagine I have $12.5K in US Treasury bonds and $40K in a Total US Stock Market ETF in a taxable brokerage account. We both have $20K of can-rely-on-it money.  When the stock market plummets and we both get laid off, we'll probably both have at least $20K of money available to us to help survive our job hunts.  So, in a way, I also have a $20K emergency fund, and one that on average will give me greater returns than a savings account.

Also, it would make sense that as I increase my savings, a bigger and bigger proportion can be in the stock market while still providing me at least $20K of can-rely-on-it money.

If you dislike my suggestion because it might lead to selling of stocks when they are low, then the proper adjustment is to increase the safer portions (bonds) of my overall portfolio, not to lock up more money in a 0% interest checking account.

I think the EarlyRetirementNow blog has some good articles on why you don't have to always have an emergency fund composed of super-safe assets...

• Our Emergency Fund Is Exactly $0.00
• Lots of alleged "emergencies" can be handled by credit card (paid off before any interest), upcoming paychecks, and home equity line of credit.
• There is a large opportunity cost of keeping a large portion of your portfolio in very low-return assets. 
• Top 10 reasons for having an emergency fund – debunked (Part 1)
• Sure, have money accessible for emergencies, but it doesn't have to be in low-yielding cash (savings/checking accounts count as cash for this discussion).
• Delaying the power of compounding returns has big consequences.
• "The entire emergency fund rationale thus depends on the crazy assumption that the large cash stash sitting around would have been optimal under very specific and unlikely circumstances, namely your car breaking down or you losing your job exactly at the bottom of the stock market. To us, this is the textbook definition of Hindsight Bias. Keeping too much money in an emergency fund is an irrational behavioral bias."
• "Only 17% of unemployment claims occur during recession periods, 83% during expansions since the government started measuring those in 1967...you are still five times more likely to claim unemployment benefits during an expansion than during a recession. Unless you are an economics and finance wizard and you can time recessions vs. expansions, keeping that money sitting around in cash seems like a major waste of money."
• Top 10 reasons for having an emergency fund – debunked (Part 2)
• Nothing too dazzling here.
• Why an emergency fund is a bad idea in one single chart
• You should think of your assets/portfolio as a whole, and you should manage the risks of your portfolio as a whole.  If you have special rules for special buckets (emergency fund must be in cash), you could have achieved the same amount of risk with higher expected returns by optimizing your portfolio as a whole.  Instead of a dedicated cash bucket, ponder adding bonds to your portfolio.  This is a very important concept and applies to more than just emergency fund issues.
• Beat Behavioral Bias: Mental Accounting
• Builds on previous post, really tries to drive home points in previous post about how you'll do a better job if you optimize your portfolio as a whole and recognize that money is fungible.
• How crazy is it to invest an emergency fund in stocks?
• The author simulates different "emergency fund portfolios" (cash vs stocks and bonds) to see how they would do throughout history.
• Makes the point that our lives have multiple spending shocks, so it makes sense to have some priority for the average case rather than purely the worst case for our emergency funds.