When saving for retirement, understanding the various account types and their funding priorities is crucial for maximizing your savings and minimizing taxes. Below, I break down the key account types and outline a suggested order of funding for optimal retirement planning.
The ideal order to fund retirement accounts focuses on minimizing tax liability, reducing the risk of outliving your money, and maximizing your lifestyle in retirement. For context, I retired early in 2012 at age 34 and have not returned to traditional work since. However, I’ve stayed busy writing on Financial Samurai, the personal finance site I founded in 2009, which is now the top independently-owned site in its category worldwide.
Personally, I have a rollover IRA, Roth IRA, Solo 401(k), SEP IRA, and taxable brokerage accounts. As a pioneer of the modern FIRE movement, I’m always exploring ways to optimize tax-free income and withdrawals in retirement. Let’s dive in!
Types of Retirement Accounts
- Workplace Retirement Accounts
- 401(k), 403(b), TSP, 457 plans (contribute with pre-tax dollars)
- Individual Retirement Accounts (IRA)
- Traditional IRA (contribute with pre-tax dollars)
- Roth IRA (contribute with post-tax dollars)
- Health Savings Accounts (HSA) (contribute with pre-tax dollars)
- Taxable Accounts (contribute with post-tax dollars)
With all these different types of retirement accounts, does the order of funding these accounts matter? The answer is yes. There is a best order in funding retirement accounts.
Below, I outline a step-by-step approach to prioritize your contributions and explore scenarios where this order may vary based on individual circumstances.
Annual Contribution Limits (2024-2025) For Retirement Accounts
| Account Type | 2024 Limit | 2025 Limit |
|---|---|---|
| 401(k), 403(b), TSP | $23,000 | $23,500 |
| Catch-Up (Age 50+) | $7,500 | $7,500 |
| Catch-Up (Age 60-63) | $7,500 | $11,250 |
| IRA (Traditional & Roth) | $7,000 | $7,000 |
| IRA Catch-Up (Age 50+) | $1,000 | $1,000 |
| HSA (Individual) | $4,150 | $4,300 |
| HSA (Family) | $8,300 | $8,550 |
| HSA Catch-Up (Age 55+) | $1,000 | $1,000 |
Step 1: Contribute to Your 401(k) to Max Out Employer Match
If your employer offers a matching contribution, prioritize this step. Employer matches are essentially free money and do not count toward your annual contribution limit.
Example:
- A $80,000 salary with a 10% contribution ($8,000 annually) and a 5% employer match adds an extra $4,000 annually.
- Over 30 years, assuming a 8% return, your savings grow from $1,059,000 (no match) to $1,548,000 with the match.
Key takeaway: Never leave free money on the table. Always at least contribute to the employer match in your 401(k).
Step 2: Max Out Your Health Savings Account (HSA)
For those with a High Deductible Health Plan (HDHP), HSAs offer unmatched tax advantages:
- Contributions are tax-deductible.
- Growth is tax-free.
- Withdrawals for qualified medical expenses are tax-free.
In other words, there is a triple tax benefit to contributing to an HSA.
Additional Perks To An HSA:
- Save medical receipts and withdraw funds tax-free at any time.
- At age 65, withdraw for any purpose penalty-free (taxes apply for non-medical expenses).
Although the HSA is an attractive retirement savings vehicle, not everybody is comfortable with a high deductible health plan. With a HDHP, ensure you have the liquidity to meet surprise medical expenses. Evaluate your HSA’s terms, fees, and investment options. In some cases, prioritizing an IRA may be better.
Step 3: Contribute to an IRA (Roth or Traditional)
If you’re eligible, contribute the maximum to an IRA. There are income limits that prohibit workers from contributing the maximum. A Roth IRA is generally ideal for those in lower tax brackets, while a Traditional IRA may benefit high-income earners in states with high income taxes.
What's great about a Roth IRA is that it has no Required Minimum Distributions (RMDs), allowing your investments to grow tax-free indefinitely. When you withdraw funds from your Roth IRA, there are no taxes because you already paid them up front. Hence, a Roth IRA is a great way to diversify your retirement income.
Explore brokers offering IRA contribution matches, such as Robinhood (up to 3% match with Gold membership) or SoFi (1% match).
Step 4: Max Out Your 401(k)
Once your HSA and IRA are fully funded, return to your workplace retirement account to contribute up to the annual maximum. You can contribute to both a 401(k) and an IRA in the same year to maximize savings.
When in doubt, always contribute as much as you can to your 401(k). After 10 years of doing so, you will be surprised by how much you will have. It may hurt in the beginning, but you will get used to living on less very quickly. Over time, your 401(k) contributions will accelerate your portfolio balance.
Here's a guide for how much you should have in your 401(k) by age if you want to achieve financial freedom and retire comfortably.
Step 5: Fund a Mega Backdoor Roth
If your employer offers a Mega Backdoor Roth option, you can contribute after-tax dollars to your 401(k) and convert them to Roth funds. This can significantly boost your retirement savings.
If you are a high-income earner, you can consider doing a Mega Backdoor Roth IRA. This involves maxing out your 401(k), then contributing up to the maximum per year in your 401(k), and converting the after-tax funds into a Roth IRA. Doing so will really supercharge your retirement contributions because for 2025, you can contribute up to $70,000.
Not every employer offers a Mega Backdoor Roth IRA option, so check.
Step 6: Invest Aggressively in a Taxable Account
Once all tax-advantaged accounts are maxed out, focus on building wealth in a taxable brokerage account. Taxable brokerage accounts have no RMDs or no contribution limits.
If you want to retire before the traditional retirement age of 60-65, you must aggressively build your taxable brokerage account. It is your taxable accounts that will generate the passive income that will fund your retirement without an early withdrawal penalty.
My recommendation is to try and build a taxable account that is three times larger than all tax-advantaged accounts by the time you want to retire. If you do, you will have enough passive income to retire earlier if you so choose. At the very least, you will have even more wealth for retirement to draw from.
Below is a base case taxable investment portfolio amount by age to shoot for. Notice the 3X multiple. If you plan to buy a house, a car, or retire early, having a large taxable retirement account is important.
Fun fact: Low- to moderate-income taxpayers may qualify for the Saver's Credit, reducing tax liability by up to 50% of the first $2,000 contributed to a retirement account.
Additional Considerations For Funding Retirement Accounts
- Fees: Watch out for administrative fees and expense ratios, especially with 401(k)s and HSAs. Your goal should be to invest in index funds and ETFs with the lowest fees possible. Think Vanguard and iShares.
- Investment Options: IRA and taxable accounts generally offer more flexibility compared to workplace plans. However, if you are an emotional investor who likes to trade, more options can be dangerous. Stick to index funds and limit active investments to no more than 20% of total. Most active fund managers cannot outperform their respective indices.
- Simplification: Consolidate accounts where possible to make managing your investments easier. As your net worth grows, it can get very complicated with multiple brokerage firms and types of accounts to manage. The more you consolidate, the better the service and terms you usually get.
Fund Your Retirement Accounts Aggressively
The optimal best of funding retirement accounts depends on individual circumstances, such as income, employer benefits, and investment options. Use this guide as a starting point and adjust based on your unique financial situation.
At the end of the day, there is no best order to fund retirement accounts, but an optimal order based on your current situation at hand. When in doubt, the more you can fund your retirement accounts the better.
Use The Best Retirement Planner: Boldin
If you’re serious about building wealth and retiring comfortably, sign up for Boldin’s powerful retirement planning tools. They offer a free version and a PlannerPlus version for just $120/year—far more affordable than hiring a financial advisor.
Boldin was designed specifically for retirement planning, offering a holistic approach to financial management. Beyond just focusing on your stock and bond portfolio, Boldin integrates real estate investments, guides you through Roth conversions for tax minimization, and addresses many other real-life financial scenarios we all face.
There's no more powerful retirement planning tool to help you finish rich than Boldin today. Below is an example of Boldin's powerful Roth Conversion tool to help you save on taxes and decide how much to convert. Funding retirement accounts is much easier with Boldin's powerful financial tools.
Diversify Your Retirement Investments Into Real Estate
Investing in stocks and bonds in your 401(k) or IRA are classic staples for retirement investing. However, I also suggest diversifying into real estate—an investment that combines the income stability of bonds with greater upside potential.
Consider Fundrise, a platform that allows you to 100% passively invest in residential and industrial real estate. With over $3 billion in private real estate assets under management, Fundrise focuses on properties in the Sunbelt region, where valuations are lower, and yields tend to be higher.
There is a multi-decade demographic shift towards lower-cost areas of the country thanks to remote work. Technology has enabled more people to work from home or anywhere in the world. Post-pandemic, this trend has only accelerated.
I’ve personally invested over $300,000 with Fundrise, and they’ve been a trusted partner and long-time sponsor of Financial Samurai. With a $10 investment minimum, diversifying your portfolio has never been easier.
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