# Should I put money in my 401(k) or a Roth IRA first?

By James Ustby, CFP®, APMA®. Canonical URL: https://jamesustby.com/w2-401k-or-roth-ira-first

> In this order: the 401(k) up to the full employer match, then a health savings account if your plan allows one, then a Roth IRA up to the limit, then back to the 401(k) until it is maxed, then a regular brokerage account. The match is free money, the HSA is the only account that is never taxed in or out when used for medical costs, and the Roth gives you a tax-free bucket you will be grateful for at 65.

## Why the match comes first, always

An employer match of 50 cents on the dollar is an immediate 50 percent return on that money. Nothing else in investing does that. Contribute at least enough to collect every dollar of it before any other account sees a cent.

## Why the HSA is second and almost nobody treats it that way

Contributions go in before tax, grow untaxed, and come out untaxed for medical expenses, which every retiree has. If you can pay today's medical bills from cash and let the HSA grow, it becomes a retirement account with better tax treatment than either a 401(k) or a Roth. You need a high-deductible health plan to contribute.

## Why the Roth before the rest of the 401(k)

Your 401(k) is taxed when you take it out. A Roth is taxed now and never again. Having both gives you a choice every year in retirement about which bucket to draw from, and that choice is worth real money. If your income is too high for a direct Roth contribution, the backdoor method still works for most people; ask before assuming you are shut out.

## Then finish the 401(k), then taxable

Once the Roth is full, go back and fill the 401(k) to the annual limit. After that, a taxable brokerage account is where the rest goes. It has no limits, no penalties, and gets favorable capital gains treatment. People who reach this step in their thirties are the ones who retire early.

## A worked example at a $120,000 salary

| Item | Amount |
|---|---|
| Employer matches 100 percent of the first 4 percent | Contribute 4 percent, $4,800, and collect $4,800 free |
| HSA, family coverage | Fill it to the annual limit |
| Roth IRA | Fill it to the annual limit |
| Back to the 401(k) | Raise the deferral until you hit the annual limit or run out of cash flow |
| Anything left | Taxable brokerage, invested the same way |

The exact limits change each year and are on the IRS page below. The order does not change.

## Questions people ask next

### Roth 401(k) or traditional 401(k)?

If your plan offers a Roth option and you are in a low or moderate bracket now, Roth deferrals are usually the better bet. In a high bracket, traditional deferrals and a separate Roth IRA give you both treatments.

### What if I have debt?

Collect the full match no matter what. Then pay down any debt above roughly 7 to 8 percent before moving to the next account. Low-rate debt can wait while you fill the tax-advantaged accounts.

### Where does an emergency fund fit?

Before all of it. Three to six months of expenses in cash, so a surprise never forces you to raid a retirement account and pay the penalty.

## Sources

- [IRS: 401(k) contribution limits](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits)
- [IRS: Roth IRA contribution limits and income ranges](https://www.irs.gov/retirement-plans/roth-iras)
- [IRS: Publication 969, Health Savings Accounts](https://www.irs.gov/publications/p969)

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Author: James Ustby, CFP®, APMA®, Wealth Advisor, LPL Financial, Durham and Chapel Hill, North Carolina. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. Examples are hypothetical and for illustration only. Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA / SIPC. Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP® and CERTIFIED FINANCIAL PLANNER® in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.