Are You Saving in the Right Retirement Accounts?

Life is full of tough decisions. Picking the right retirement accounts shouldn’t be one of them.


Are you unsure if you’re using the right retirement accounts? In my last post, A Mega Backdoor Roth for Mega Long-Term Wealth, I described a complex saving strategy that’s extremely effective for younger high-earners who are looking for a tax-efficient way to save and invest after having maxed out eligible contributions to their 401k/403b, IRA, and HSA (if available) accounts. This post is for those savers who aren’t yet maxing out all of those aforementioned accounts and who need help figuring out how to most effectively split their savings among their available retirement accounts. If this describes your situation, read on.

Step one is to determine how much you can put towards retirement over the year. Once you’ve got your retirement savings budget, step two will be figuring out which accounts you have available and which you should save your retirement dollars in. Do you just put it all in your employer 401k or 403b? What about your HSA or a Roth IRA? Have you considered just splitting evenly between all three? Here, I lay out what I believe is the right approach for the majority of savers who find themselves in this situation. As with all financial planning decisions, the devil is in the details. The following won’t apply in every circumstance or for all savers. As always, you should consult with your fee-only planner before making any changes to your current plan.


The first question you need to ask is: Do I have an employer matching contribution in my 401k or 403b? This is when your employer makes a contribution to your account as long as you make a contribution as well. A common approach for many employers is matching 50 cents on the dollar on up to the first 6% of your income that you contribute. Some offer a full dollar for dollar match on the first 3% and 50 cents on the dollar for the next 2%. These matching formulas can take many different forms, but in all of them your employer is essentially giving you free money with the slight inconvenience of requiring that it go directly towards your retirement savings. If your employer does offer some sort of match, your first priority for your retirement savings should be to ensure that you receive the full amount. If you get 100% match on your first 3% and 50% match on the next 2%, you should definitely contribute 5%. Even if you just get a 50% match – think about what that means. The money you contribute is essentially getting an immediate 50% return! Not a 50% annualized return (over a year), this 50% return happens the moment your investment is made! That instant “free money” then teams up with your contribution to amplify the already powerful effect of compound interest on your long-term growth. All of this is to say that when trying to pick the right retirement accounts, your first priority should be to contribute enough to your 401k or 403b to get the full employer match.  Note, the choice between Traditional vs. Roth contributions will depend on your personal and tax circumstances and is beyond the scope of this post.


You’ve contributed enough to get your full company match and have money remaining that you want to save. What next? Most companies now offer High-Deductible Health Plans (HDHP) as an insurance option and these come equipped with an incredibly powerful wealth building tool called a Health Savings Account (HSA). Boring name, exciting tax treatment! Multiple blog posts could be dedicated entirely to HSAs. Because HSA’s are tied to a type of health insurance plan, a lot needs to go into determining whether or not that insurance plan is the correct option for you. For now, I’m going to assume that you have a HDHP and an HSA account available to contribute to. HSAs are unique in that if you contribute to them via a salary reduction agreement through your paycheck, you get an unmatched opportunity for a quadruple tax-shelter.

1. You can deduct your HSA contribution (max of $3,600/Single and $7,200/Family in 2021) from your federally taxable income (and state income in most states) for the up-front tax break.

2. Your contribution also avoids the 7.65% payroll tax, also known as the FICA tax IF you contribute via a Section 125 Salary Reduction Agreement.

3. You can invest the money in your HSA (much like you would in an IRA) for tax-free long-term growth.

4. You can withdrawal money from your HSA tax-free as long as you use it for a qualified medical expense – at any time – though given the tax benefits, it’s best to let it grow for the long-run. Why? According to a recent Fidelity study, healthcare expenses in retirement are expected to average $295,000 per couple in today’s dollars!

In terms of wealth building, this is truly an unrivaled account! If used correctly, the IRS could very conceivably never be able to tax a pretty decent portion of your income and you could use those never-taxed dollars to pre-fund a known, and substantial, cost in your retirement. As such, your next priority should be to max out your eligible HSA contributions (using a Salary Reduction Agreement if possible).


I’ve dedicated many hours and multiple posts extolling the benefits of Roth retirement accounts. With Roth accounts you pay income tax up-front in exchange for tax-free growth and tax-free withdrawals for any purposes once you hit 59.5 years old. Roth accounts are particularly attractive these days (even for high-earners) because of the very low tax environment that we’re currently in. Once you’ve contributed enough to your 401k/403b to get 100% of your employer’s match, and you’ve maxed out your eligible HSA contributions, your next priority should be to max out your eligible Roth IRA contributions – $6,000 if under 50. There are income restrictions on who can contribute to a Roth IRA. If you earn too much to contribute to a Roth IRA, you have two options:

1. If available, you could use the Roth option in your 401k/403b for your remaining retirement contributions.

2. If this isn’t an option and you don’t have any Traditional IRA accounts funded, you could consider a “Backdoor Roth IRA”. Note that performing a “Backdoor Roth IRA” is a little complex. It’s best achieved with guidance from a professional if you’re not 100% confident that you know what you’re doing.


What if you can’t make Roth IRA contributions directly because your income is too high, you don’t have a Roth option in your 401k/403b, and you can’t properly execute a “Backdoor Roth IRA” because you have a Traditional IRA(s)? OR, what if you’ve determined that Traditional contributions are better for your circumstances than Roth contributions? In either of these cases, your next priority should be to put all of your remaining retirement savings to the Traditional account in your 401k/403b.


If you have retirement savings left after getting the full employer match in your 401k/403b, maxing out your HSA, and maxing out your Roth IRA, you’re likely best off putting your remaining savings back into your 401k/403b. The automated nature of saving and investing every paycheck without having to do anything, coupled with the low cost associated with most employer plans makes this an appealing final option. Again, the choice of Traditional vs. Roth contributions will depend on your personal circumstances.


Every person’s situation and circumstances are unique. Accordingly, this advice certainly doesn’t apply to all retirement savers however, most people would be well-served to save for retirement in the following manner:

First – Contribute enough to your 401k/403b to get 100% of your Employer Match “free money”.

Second – Max out eligible contributions to your HSA.

Third – Max out eligible contributions to your Roth IRA.

Fourth – Contribute any remaining savings to your 401k.

Now that you’ve got your retirement budget set and you know you’re saving in the right retirement accounts, your last step is to pick the right investments for your long-term growth in those accounts. If you’re looking for help with that, check out my post on the importance of having an Investment Philosophy here.

If you’d like to schedule a time to chat about your financial situation, you can do so here.

Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Robert Stromberg, and all rights are reserved. Read the full Disclaimer