The Optimal Order of Funding Retirement Accounts

When it comes to saving for retirement, there are four account types to consider:

• Workplace Retirement Accounts
  • 401(k)
  • 403(b)
  • TSP
  • 457
• Individual Retirement Accounts (IRA)
• Health Savings Accounts (HSA)
• Taxable Accounts

The different account types raise an important question about saving for retirement–Does the order in which we fund these accounts matter?

In many cases, it does. In this article, we'll walk through an optimal order of funding retirement accounts. We'll also look at specific circumstances in which the optimal order below may not be optimal for you.

As we work through the optimal order, keep a few things in mind. First, different account types have different annual contribution limits:

Account Type	2024 Contribution Limit	2025 Contribution 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
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

Second, you may not have access to all of the account types or features, such as employer matching contributions. If that's the case, just skip to the next account in the list.

Finally, I assume the primary goal is to maximize your retirement savings. There are other considerations, however. These include poor investment options with some workplace retirement accounts and keeping your retirement savings simple with as few accounts as possible.

You can also check out my video on this topic:

Order of Retirement Account Funding

Step 1: Contribute to 401(k) Enough to Earn Any Employer Match

If you have a 401(k) or other workplace retirement account and your employer matches your contributions, this is the place to start. The employer match is too valuable to pass up. According to How American Saves 2024, the average employer match equaled 4.6% of an employee's pay.

Let's assume a salary of $70,000. We'll assume the employee saves 10%, or $7,000 a year. Without a match, and assuming a 9% return, after 30 years, our employee would have $1,075,000 according to this simple savings calculator.

Add in a $3,220 employer match (4.6% of $70,000), and this number jumps to $1,571,000. And keep in mind that employer contributions do not count toward your annual contribution limit.

All of which is to say that friends don't let friends ignore the match.

Step 2: Contribute the Maximum to an HSA

Health Savings Accounts are available to those with a high deductible healthcare plan. In 2025, the deductible on a healthcare plan for an individual must be at least $1,650 to qualify, and $3,300 for a family plan. (Source: IRS). Your health insurance options through work should tell you if it's HSA eligible.

I've chosen an HSA as the second account to fund for four reasons. First, it's the only account type that offers a triple tax advantage: (1) contributions are tax deductible; (2) they grow tax-free; and (3) they can be spent tax-free if used for eligible medical expenses.

Factoid: As long as you have a qualifying High Deductible Health Plan (HDHP), you can contribute to an HSA regardless of your employment status. This provides continued tax advantages even during periods of unemployment.

Second, while many employers contribute to HSAs without requiring employee contributions, some employers offer matching contributions. If they do, we want to take full advantage of the match.

Third, you can save your medical receipts and use them to withdraw money from an HSA tax-free at any time, even years after incurring the medical expense. This, for me, is the best feature of an HSA. My wife and I have been saving medical receipts for years.

Finally, if you do save more in an HSA than you'll need for healthcare costs, you can withdrawal money penalty-free once you reach the age of 65. You will pay taxes on the withdrawal, however, much like you would with a traditional retirement account. HSAs do not, however, have required minimum distributions.

Factoid: If you withdraw money from an HSA for non-medical reasons before age 65, you'll incur a 20% penalty in addition to paying income tax.

One caveat to consider with HSAs. Many employer-sponsored plans have fees. They also often require an employee to keep a certain amount in cash before they can invest the remainder. And the investment options are not always ideal. As such, it's important to evaluate the terms of the HSA. In some cases, it may be preferable to contribute to an IRA before maxing out an HSA.

Note that if you plan to use HSA funds each year to pay for medical expenses, I would not include them in your retirement plan. In fact, contributing to your HSA may take priority over any retirement contributions as they would be needed to pay necessary expenses each year.

Step 3: Contribute the Maximum to an IRA

The next step is to contribute the maximum to either a Roth or traditional IRA. For most people just starting out, I believe the Roth IRA is the better choice. A traditional IRA, however, could make sense for those in the top federal income tax brackets, particularly if you live in a state with high income tax brackets.

Factoid: Unlike Traditional IRAs and 401(k)s, Roth IRAs do not have Required Minimum Distributions (RMDs) during the original owner's lifetime. This allows your investments to continue growing tax-free for as long as you like.

As to where to open an IRA, you might consider two options that offer matching contributions. These offers can change at any time, so please confirm the terms of the match directly with the broker.

1. Robinhood): The IRA match is an extra 3% match on annual contributions with Robinhood Gold ($50 a year) or 1% without.
2. SoFi: 1% match on IRA rollovers and contributions.

Keep in mind that you are required to keep your money in the IRA at these brokers for a period of time to retain the match.

Your income and other factors could prohibit you from either making Roth IRA contributions or deducting traditional IRA contributions. In that case, however, you could consider a Backdoor Roth IRA.

Factoid: High-income earners who exceed the Roth IRA income limits can still contribute to a Roth IRA using a strategy known as a “Backdoor Roth IRA.” This involves making a non-deductible contribution to a Traditional IRA and then converting it to a Roth IRA.

One advantage of an IRA over a 401(k) is that you have virtually unlimited investment options. With a 401(k), you generally are limited to the options available in your employer's plan. If those options include low-cost index funds, this may not be an issue. In some cases, however, plans have limited index fund options.

Step 4: Max Out Your 401(k)

Once the HSA and IRA are maxed out, return to your 401(k) or other workplace retirement account and contribute up to the maximum.

Factoid: Many people believe they must choose between contributing to a 401(k) or an IRA, but you can contribute to both. This allows you to maximize your retirement savings and take advantage of different tax benefits and investment options.

Step 5: Consider a Mega Backdoor Roth

Some employers offer a “Mega Backdoor Roth” option in their 401(k) plans. This allows employees to contribute after-tax dollars up to the total annual limit ($69,000 in 2024 and $70,000 in 2025, including employer contributions) and then convert those to Roth funds within the plan.

While I've never had access to such a plan, it can be a great way to save even more for retirement.

Step 6: Save in a Taxable Account

Finally, start saving for retirement in taxable accounts. Here, you'll want to focus on tax-efficient investments. For me, this means primarily low-cost, tax-efficient index funds.

Factoid: Low- to moderate-income taxpayers may be eligible for the Saver's Credit, a tax credit worth up to 50% of the first $2,000 contributed to a retirement account. This credit directly reduces the amount of tax you owe, providing an extra incentive to save.

Additional Considerations

It's important to keep in mind several things.

First, we need to keep an eye on fees, as they can vary based on account type. Common fees by account type include the following:

Account Type	Typical Fees
401(k)/403(b)/TSP	Administrative fees; fund expense ratios
Traditional IRA	Brokerage fees; fund expense ratios
Roth IRA	Same as Traditional IRA
HSA	Maintenance fees; investment fees (varies widely); minimum cash requirements
Taxable Account	Brokerage fees; fund expense ratios

These fees are in addition to any fees you pay an advisor to manage your investments.

Second, keep in mind that investment options can vary by account type:

Account Type	Investment Options
401(k)/403(b)/TSP	Limited to plan offerings, although some plans offer more options, such as Fidelity's BrokerageLink
Traditional IRA	Stocks, bonds, mutual funds, ETFs, CDs, etc.
Roth IRA	Same as the Traditional IRA
HSA	Varies by provider, but may be very limited.
Taxable Account	Same as Traditional IRA

Third, keep in mind that there are pros and cons with each account type:

Account Type	Pros	Cons
401(k)/403(b)/TSP	High contribution limits; employer match; tax benefits	Limited investments; potential high fees
Traditional IRA	Tax deduction; wide investment options	Lower contribution limits; income limits for deduction
Roth IRA	Tax-free withdrawals; wide investment options	Lower contribution limits; income limits for contribution
HSA	Triple tax advantage; portable	Must have HDHP; penalties for non-medical use before 65; may have limited investment options; may have to keep some in cash
Taxable Account	No limits; full investment flexibility	No tax advantages

Final Thoughts

When it comes to the optimal order of funding retirement accounts, there is no one-size-fits-all answer. The above, however, should offer a reasonable starting point for you to analyze the best options for your specific circumstances.