Where to Put Your Money

The Account Hierarchy

Not all retirement savings are equal. Where you put your money matters almost as much as how much you put in, because different accounts have different tax treatments — and tax savings compound just like investment returns.

This chapter explains the major retirement account types, their advantages, and the order in which you should prioritize them. The focus is on US accounts, but the principles of tax-advantaged saving apply globally.

The Priority Order

If you're wondering where your next dollar should go, follow this hierarchy:

Step 1: Employer match in your 401(k) — this is free money, always take it.

Step 2: Max out your HSA (if eligible) — triple tax advantage.

Step 3: Max out your Roth IRA (if eligible) — tax-free growth forever.

Step 4: Max out your 401(k) beyond the match — tax-deferred growth.

Step 5: Taxable brokerage account — no tax advantages, but no restrictions either.

Not everyone can do all five. That's fine. The point is knowing the priority so each dollar goes to the most tax-efficient place.

401(k) and 403(b) Plans

What They Are

Employer-sponsored retirement accounts that let you contribute pre-tax dollars (traditional) or post-tax dollars (Roth variant). Your employer may match a portion of your contribution — typically 3–6% of your salary.

Contribution Limits (2026)

Under 50: $23,500 per year (this adjusts annually for inflation). Age 50+: Additional $7,500 catch-up contribution.

Traditional vs. Roth 401(k)

Traditional 401(k): Contributions reduce your taxable income now. You pay taxes when you withdraw in retirement. Best if you expect to be in a lower tax bracket in retirement.

Roth 401(k): Contributions are made with after-tax dollars. Withdrawals in retirement are tax-free. Best if you expect to be in a higher tax bracket in retirement — or if you want tax diversification.

Many people benefit from splitting contributions between traditional and Roth, giving them flexibility to manage taxes in retirement.

The Employer Match

If your employer matches 50% of contributions up to 6% of salary, and you earn $80,000, contributing 6% ($4,800) gets you $2,400 in free money. Not contributing enough to get the full match is literally leaving compensation on the table.

The match almost always goes into the traditional (pre-tax) bucket, regardless of whether you choose traditional or Roth for your own contributions.

Common 401(k) Mistakes

Not enrolling. Many employers auto-enroll at 3%. That's a start, but usually insufficient. Manually increase it.

Ignoring the match. The match is an immediate 50–100% return on your money. No investment beats that.

Leaving money in the default fund. Many plans default to a money market or stable value fund. These barely beat inflation. Switch to an appropriate target-date fund or index fund.

Cashing out when changing jobs. Withdrawing before 59½ triggers income taxes plus a 10% penalty. Roll it over to an IRA or your new employer's plan instead.

Individual Retirement Accounts (IRAs)

Traditional IRA

Contributions may be tax-deductible depending on your income and whether you have a workplace retirement plan. Growth is tax-deferred. Withdrawals are taxed as income.

Roth IRA

Contributions are made with after-tax dollars. Growth and qualified withdrawals are completely tax-free. No required minimum distributions (RMDs) during your lifetime.

The Roth IRA is one of the most powerful retirement tools available. Tax-free growth for decades, no forced withdrawals, and the ability to withdraw contributions (not earnings) at any time without penalty.

Contribution Limits (2026)

Under 50: $7,000 per year. Age 50+: $8,000 per year.

Income Limits for Roth IRA

If your modified adjusted gross income (MAGI) exceeds certain thresholds, you can't contribute directly to a Roth IRA. For 2026, these are approximately $161,000 (single) and $240,000 (married filing jointly).

The Backdoor Roth IRA

If you earn too much for a direct Roth contribution, you can use the backdoor strategy: contribute to a traditional IRA (non-deductible), then convert to a Roth. This is legal, widely used, and may remain available under current law — though it's been a target for legislative changes.

If you have existing traditional IRA balances, the pro-rata rule complicates backdoor conversions. Consult a tax professional.

AI Prompt: Traditional vs. Roth Decision

Help me decide between traditional and Roth retirement contributions.

My situation:
- Age: [X]
- Current annual income: [amount]
- Current federal tax bracket: [percentage]
- State income tax rate: [percentage]
- Expected income in retirement: [higher / lower / similar / unsure]
- Current retirement savings: [traditional amount] and [Roth amount]
- Years to retirement: [X]
- Other income sources in retirement: [Social Security, pension, rental, etc.]

Please analyze:
1. Whether traditional or Roth is better for my situation right now
2. The tax impact over my lifetime for each option
3. Whether I should split between both for tax diversification
4. How my answer might change if tax rates increase in the future
5. Whether a Roth conversion strategy makes sense for me

Health Savings Account (HSA)

The HSA is the most tax-advantaged account in the US tax code — triple tax benefit:

Tax-deductible contributions. Like a traditional 401(k). Tax-free growth. Like a Roth IRA. Tax-free withdrawals for qualified medical expenses. Like neither.

Eligibility

You must be enrolled in a High Deductible Health Plan (HDHP). You can't be enrolled in Medicare. You can't be claimed as a dependent.

Contribution Limits (2026)

Self-only coverage: approximately $4,300. Family coverage: approximately $8,550. Age 55+: additional $1,000 catch-up.

The Retirement Strategy

Many financial planners recommend using HSAs as stealth retirement accounts: contribute the max, invest the funds (not just save them), pay current medical expenses out of pocket, and let the HSA grow tax-free for decades. In retirement, you can reimburse yourself for any medical expenses you've paid over the years — or, after 65, withdraw for any purpose (taxed as income, like a traditional IRA, but with no penalty).

Self-Employed Retirement Accounts

If you're self-employed or have freelance income, you have access to powerful retirement accounts:

SEP IRA

Contribution limit: 25% of net self-employment income, up to approximately $69,000. Easy to set up. Contributions are tax-deductible. Best for solo self-employed people with high income.

Solo 401(k)

Allows both employee contributions ($23,500) and employer contributions (25% of compensation), up to approximately $69,000 total. Also offers a Roth option. Best for self-employed people who want Roth access and high contribution limits.

SIMPLE IRA

For small businesses with employees. Lower limits ($16,000 + catch-up) but easier to administer.

AI Prompt: Self-Employed Retirement Strategy

I'm self-employed and need help maximizing my retirement savings.

My situation:
- Business structure: [sole proprietor / LLC / S-corp / partnership]
- Annual net self-employment income: [amount]
- W-2 income from other jobs: [if any]
- Current retirement accounts: [list]
- Number of employees: [if any]
- Tax bracket: [percentage]

Please recommend:
1. The best retirement account type for my situation
2. Maximum I can contribute this year
3. Whether I should consider changing business structure for tax advantages
4. A contribution strategy that maximizes tax deductions
5. How to set up the account (high-level steps)

International Retirement Accounts

If you're outside the US, your country likely has equivalent tax-advantaged retirement vehicles:

UK: Workplace pensions, SIPPs, ISAs (Lifetime ISA for retirement saving). Canada: RRSP (similar to traditional IRA), TFSA (similar to Roth). Australia: Superannuation (mandatory employer contributions + voluntary). EU countries: Varies significantly — occupational pensions, state pensions, and private pension products. Greece: Social insurance (EFKA), private pension plans, and investment accounts.

AI Prompt: International Retirement Planning

I live in [country] and want to understand my retirement savings options.

My situation:
- Country: [X]
- Age: [X]
- Employment type: [employed / self-employed / both]
- Annual income: [amount in local currency]
- Current retirement savings: [amount and account types]
- Employer pension: [details if applicable]
- Years to retirement: [X]

Please explain:
1. The main retirement account types available in my country
2. Tax advantages of each
3. Contribution limits for this year
4. Government pension benefits I can expect
5. The recommended priority order for funding accounts
6. How to think about retirement planning in my country's tax system

The Key Principle: Tax Diversification

Don't put all your retirement savings in one tax bucket. Having a mix of pre-tax (traditional), post-tax (Roth), and taxable accounts gives you flexibility in retirement to manage your tax bill.

In low-income years, withdraw from traditional accounts (filling lower tax brackets). In high-income years, use Roth accounts (no tax impact). Use taxable accounts for expenses that don't benefit from tax-bracket management.

This flexibility is worth more than perfect optimization of any single account.

Now that you know where to put your money, let's talk about how to invest it.