When investing for retirement, there are several different account options to consider. Today I wanted to share my general savings hierarchy as to which accounts I typically go to first. See below:
Taking advantage of the 401k (or other employer plan) to max out the employer match. If your employer matches a certain percentage (say 100% on the first 3%), you are getting an immediate return on your contribution that is tough to beat. This assumes you stay long enough to meet the vesting requirements so you can keep the employer's contributions.
Health Savings Account or HSA. This assumes you are using the HSA as an investment account for the future. With the HSA account, you can get a tax deduction today and also have the possibility of tax-free growth in the future. I love HSA accounts as a retirement savings vehicle, so I am sure you will hear more about them in the future.
Roth IRA - Earnings in a Roth IRA are tax-free if you follow the appropriate guidelines. The added benefit of the Roth IRA is for direct Roth IRA contributions (not all money that goes into a Roth), you can generally withdraw up to your contribution amount (not earnings) at any time without tax or penalty. Generally speaking, I don't believe in investing if your time period for that money is short, as obviously, you won't be able to access the full amount of your contribution if the account balance has gone down. That said, having at least partial access to the funds is an added benefit.
Back to the 401k (Roth or Pre-tax depending on your tax picture) to max it out.
Other account types exist beyond what is listed here. Also, there are many exceptions to this hierarchy as each individual’s goals, tax situation, life stage, and options available vary. I only have a handful of clients that are following this hierarchy exactly because, in their situation, a different savings strategy is the most advantageous. You may not be able to make the contributions above if you don't fit the guidelines or the options simply aren't available. Have a wonderful weekend!
Interesting Article(s) or Video(s)
Frugal Professor - Hierarchy of Savings
This article is another perspective on the hierarchy of savings. I don't entirely agree with all of their points, but there is much that can be learned from the article.
Thank you for reading!