If you're saving for retirement, the order in which you fund different accounts matters. A dollar in an HSA isn't the same as a dollar in a regular brokerage account. This calculator shows you the optimal contribution order to minimize taxes and maximize wealth building based on your specific situation.
The goal isn't just to save for retirement. It's to save in a way that pays the least taxes while maximizing the accounts that offer the best growth potential. A smart contribution order can save you thousands in taxes over decades. Most people fund accounts in the wrong order and miss out on significant tax savings.
How to Read Your Results
The optimizer shows you the priority order for funding different accounts. Start with step 1 and move down the list. Each step shows how much to contribute and why it matters. Pay special attention to accounts that offer employer matching or triple tax advantages. These are non-negotiable priorities that offer guaranteed returns.
The bottom of the results shows the total annual benefit from employer match and tax savings combined. This is free money and tax relief that you leave on the table if you fund accounts in the wrong order. The optimizer ensures you capture all of it.
Understanding Tax-Advantaged Accounts
- 401k with Match: Employer contribution is free money. Get the full match first. This is a guaranteed return with no investment risk.
- HSA: Health Savings Account with triple tax advantage. Deductible going in, tax-free growth, tax-free for medical expenses. Most tax-efficient account available.
- Roth IRA: Tax-free growth and tax-free withdrawals. You pay taxes going in but lock in low rate. Excellent for younger workers expecting higher income later.
- Traditional IRA: Tax deduction now, taxes on withdrawal in retirement. Lower priority than Roth for younger workers unless in high tax bracket.
- 401k (additional): Tax-deferred growth beyond match capture. High contribution limits but less flexible than Roth IRA.
- Taxable Brokerage: No tax advantages, but unlimited contribution and flexible withdrawal. Use after maxing tax-advantaged space.
Common Mistakes
Mistake 1: Maxing 401k before capturing employer match
This is catastrophic. If you contribute 23,000 dollars to 401k but don't capture your full employer match of 5,700 dollars, you've left free money on the table. Always contribute enough to 401k to get the full match first, then move to other accounts.
Mistake 2: Ignoring HSA as a retirement savings tool
HSA is often used just for current medical expenses, but it's actually the best retirement account available. You can let it grow for years and use it for medical expenses in retirement (and healthcare costs are huge in retirement). Max your HSA before maxing additional 401k.
Mistake 3: Choosing Traditional IRA over Roth when young
Many young workers choose Traditional IRA because they want tax deductions now. But if you're young with a 30-year horizon, your future tax rate will likely be higher than today. Roth locks in your current lower rate. You usually want Roth in your 20s and 30s, Traditional if you're in peak earning years.
Mistake 4: Not adjusting contributions when your situation changes
If your income rises, adjust contributions upward. If you get a bonus, adjust contributions up mid-year. If you leave your job, you can still fund Roth IRA independently. Your contribution strategy should evolve with your life. Review it annually.
Frequently Asked Questions
What's the difference between 401k and Roth 401k?
Traditional 401k contributions reduce your current taxable income, so you get a tax break today but pay taxes on withdrawals in retirement. Roth 401k contributions come from after-tax dollars, so you pay taxes now but withdrawals are tax-free in retirement. Some employers offer both. Choose Roth if you expect to be in a higher tax bracket in retirement. Choose Traditional if you're in your peak earning years now.
Can I contribute to both Roth and Traditional IRA in the same year?
You can contribute to both, but your combined contributions cannot exceed the annual limit (7,000 dollars for 2024). If you contribute 4,000 dollars to Roth, you can contribute maximum 3,000 dollars to Traditional. Your total is capped, not each account individually. Some high earners are phased out of Roth IRA and must use Traditional, so check income limits.
What if I have a Solo 401k because I'm self-employed?
Solo 401k allows much higher contributions than regular 401k because you're both employee and employer. You can contribute as both. Max contributions are over 60,000 dollars annually, much higher than IRA limits. This is excellent for self-employed founders. Contribution order becomes: (1) Max Solo 401k match to yourself, (2) Max HSA, (3) Max Roth IRA, (4) Max remaining Solo 401k space.
Should I withdraw from my 401k early to start my company?
No. Early 401k withdrawal before 59.5 triggers 10 percent penalty plus income taxes, meaning you lose 30 to 40 percent of what you withdraw. If you have 100,000 dollars saved, an early withdrawal nets only 60,000 to 70,000 dollars. Additionally, this money was supposed to fund retirement. Build your company with other savings. Keep retirement accounts intact.
Can I deduct IRA contributions if I have a 401k at work?
If you're covered by a 401k at work, your Traditional IRA deduction phases out at higher income levels. Check IRS income limits for your filing status. Roth IRA also has income limits. At very high incomes, you may not be able to contribute to Traditional or Roth IRA directly. This is where "backdoor Roth" strategies come in, which are more complex. Consult a tax professional if this applies to you.