Retirement Account Funding: Prioritizing for Your Financial Future

It’s a fantastic position to be in when you’re thinking about funding multiple retirement accounts. However, the reality is that many people can’t maximize contributions to every single retirement account available to them. When you face this situation, the key is to strategically prioritize where you put your money to get the most benefit for your long-term financial security. There isn’t a single “right” answer for everyone, as the optimal strategy depends on your individual circumstances, but a clear framework can guide your decisions.

The most crucial first step is to understand the different types of retirement accounts and their unique advantages. We’re generally talking about employer-sponsored plans like 401(k)s (and sometimes 403(b)s or 457(b)s), and individual retirement accounts (IRAs), both Traditional and Roth. Health Savings Accounts (HSAs) can also play a significant role in retirement savings.

Your initial priority should almost always be your employer-sponsored retirement plan, especially if your employer offers a contribution match. Think of this employer match as “free money.” If your company matches dollar-for-dollar up to 5% of your salary, for example, contributing at least 5% ensures you’re capturing that full match. Failing to take advantage of this match is essentially leaving guaranteed returns on the table, which is rarely a wise financial move. Contribute at least enough to maximize the employer match before considering other options.

Once you’re maximizing your employer match, the next layer of prioritization involves considering the tax advantages of different account types. This is where the Roth versus Traditional debate comes into play. Traditional retirement accounts (like a Traditional 401(k) or Traditional IRA) offer tax-deferred growth. This means your contributions are made pre-tax, reducing your taxable income in the present, and your money grows tax-free until retirement. You’ll pay taxes on withdrawals in retirement, presumably when you are in a lower tax bracket (though this isn’t guaranteed).

Roth accounts (like a Roth 401(k) or Roth IRA), on the other hand, offer tax-free withdrawals in retirement. You contribute after-tax dollars, meaning you don’t get an immediate tax deduction, but all qualified withdrawals in retirement are tax-free. The choice between Roth and Traditional often hinges on your current versus expected future tax bracket. If you anticipate being in a higher tax bracket in retirement than you are now, Roth accounts can be particularly beneficial. Conversely, if you expect to be in a lower tax bracket in retirement, Traditional accounts may be more advantageous.

For many individuals in their early to mid-career, it’s often beneficial to prioritize Roth accounts after maximizing employer match. This is because they are likely in a lower tax bracket now and expect their income (and potentially tax bracket) to rise in the future. Locking in tax-free growth and withdrawals can be a powerful long-term strategy.

Another often overlooked, but incredibly valuable retirement savings vehicle, is the Health Savings Account (HSA), if you are eligible (typically through a high-deductible health insurance plan). HSAs offer a triple tax advantage: contributions are tax-deductible (or pre-tax if through an employer), growth is tax-free, and withdrawals for qualified medical expenses (at any age) are also tax-free. Furthermore, after age 65, you can withdraw funds for non-medical expenses, and while these withdrawals will be taxed as ordinary income (similar to a Traditional IRA/401(k)), the tax-free growth and potential for medical expense coverage make HSAs a highly efficient retirement savings tool, especially if you anticipate healthcare costs in retirement. Consider funding an HSA after maximizing your employer match and potentially alongside or before Roth IRA contributions, depending on your individual circumstances and healthcare needs.

After maximizing your employer match, considering Roth accounts (especially Roth IRA), and potentially contributing to an HSA, you can then revisit maximizing your employer-sponsored 401(k) or consider a Traditional IRA. Contributing beyond the employer match in a 401(k) is still beneficial, especially if your plan offers good investment options and low fees. Traditional IRAs can be attractive for their tax-deductibility, especially if you are eligible to deduct contributions (deductibility can be limited if you also have a retirement plan at work and your income is above certain thresholds).

Finally, if you’ve maxed out all the tax-advantaged retirement accounts available to you and still have funds to invest, then a taxable brokerage account is the next logical step. While these accounts don’t offer the same tax benefits as retirement accounts, they provide flexibility and access to your funds at any time.

In summary, a typical prioritization order might look like this:

1. Employer 401(k) up to the match: Capture that “free money.”
2. Health Savings Account (HSA) if eligible: Triple tax advantage and healthcare expense coverage.
3. Roth IRA: Tax-free growth and withdrawals, particularly beneficial for those expecting higher future tax rates.
4. Maximize Employer 401(k): Continue contributing to your 401(k) up to the annual limit.
5. Traditional IRA: Tax-deductible contributions, consider if you are eligible and if it aligns with your tax situation.
6. Taxable Brokerage Account: For any remaining investment funds after maximizing tax-advantaged accounts.

Remember, this is a general guideline. Your individual financial situation, risk tolerance, and long-term goals should always inform your specific retirement savings strategy. Consulting with a financial advisor can provide personalized guidance tailored to your unique needs.