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401k vs Roth IRA vs Brokerage: Which to Max Out First

2024-03-10

Educational content only. Rules and tax laws change over time; verify official sources.

The order you fund your accounts could save you $100,000+ in taxes over your lifetime. Here's the optimal priority.

The Priority Order (For Most People)

  1. 401(k) up to employer match - This is 50-100% instant return. ALWAYS do this first.
  2. Max out Roth IRA ($7,000/year in 2024) - Tax-free growth forever.
  3. Max out rest of 401(k) ($23,000/year in 2024) - Tax-deferred growth.
  4. HSA if eligible ($4,150 individual in 2024) - Triple tax advantage.
  5. Taxable brokerage - No limits, but taxed annually.

Why This Order?

401(k) Match First

If your employer matches 50% up to 6%, you're getting a 50% return before any market gains. No investment beats that.

Roth IRA Second

You pay taxes now but NEVER again - not on growth, not on withdrawals. If your investments 10x, that's all tax-free.

Then Traditional 401(k)

Reduces taxable income now. You'll pay taxes on withdrawal, but probably in a lower bracket in retirement.

When to Break These Rules

  • Very high income? Traditional 401(k) might beat Roth due to current tax rates
  • Very low income now? Roth everything (you're already in a low bracket)
  • No employer match? Skip straight to Roth IRA first
  • Need money before 59.5? Prioritize taxable brokerage for flexibility

The Tax Math

$10,000 invested at 7% for 30 years:

  • Taxable account (20% cap gains): ~$60,000 after tax
  • Traditional 401k (22% bracket): ~$59,000 after tax
  • Roth IRA: $76,000 (all tax-free)

Model Your Tax Strategy

Use our calculator to see how different account types affect your retirement.

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Apply this framework to your own situation.

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