401(k), IRA, or HSA? Here’s a hierarchy for retirement savings

When allocating funds for retirement savings, a helpful strategy is to follow a ranked hierarchy of account types. Prioritize contributions to a company retirement plan, such as a 401(k), to capture any matching contributions. These contributions provide free money that cannot be matched elsewhere. If your employer does not offer matching contributions, move on to step two.

Next, focus on opening an Individual Retirement Account (IRA). IRAs offer low costs, flexibility, and the option to contribute to a Roth account. Choose an IRA over a 401(k) if your 401(k) plan offers robust features, such as low costs, a Roth option, and excellent investment choices. If your employer's plan is subpar or lacking in these areas, funding an IRA becomes the primary focus.

For married couples where one spouse earns income, consider funding a Spousal IRA if the other spouse's 401(k) plan is of high quality. This allows the non-earning spouse to accumulate retirement savings independently. If your earning spouse has a solid 401(k), funding both their and your Spousal IRA can follow.

After optimizing contributions to employer-sponsored retirement accounts, consider a company 401(k). Max out contributions to take advantage of tax-free contributions, tax-deferred growth (traditional), or tax-free withdrawals (Roth). While a poor 401(k) may not warrant prioritization over a taxable account, a subpar 401(k) generally offers more benefits than a nonretirement account.

Health Savings Accounts (HSAs) are next on the list. These accounts allow for pre-tax contributions, tax-free growth, and tax-free withdrawals for qualified healthcare expenses. If you qualify for an HSA through a high-deductible health plan, contribute to it to maximize your tax benefits.

For those with 401(k) plans that allow after-tax contributions, consider making additional after-tax contributions up to the limit. This strategy allows for greater Roth asset allocation within the 401(k), providing tax-free growth and withdrawals in retirement. However, if your 401(k) is particularly poor or outstanding, prioritize contributions to a taxable account instead.

Finally, invest in a taxable account as a means of diversifying your retirement portfolio and achieving tax diversification. This account is ideal for investing in assets that are not eligible for tax-deferred treatment, such as certain bonds or stocks. It also provides flexibility for withdrawals before retirement, especially if you anticipate needing funds during lower tax brackets.