Filling Tax-Advantaged Accounts in the Right Order

The single largest tax break most working people can use is not a deduction they hunt for at filing time; it is the retirement and health accounts their paycheck can already reach. Yet many people fill them in whatever order is convenient, leave room unused, or pick traditional or Roth without thinking about their bracket. This chapter shows what each account's tax break is worth in dollars, an order for filling them that suits most households, and the advanced moves, the backdoor Roth, after-tax 401(k) money and Roth conversions, that matter once the basics are full. Volumes 1 and 2 of the Retirement shelf cover the accounts' rules in more depth; this chapter is about the tax.

What a pre-tax contribution is really worth

A traditional 401(k) or deductible IRA contribution removes income from the top of your tax return, so it saves tax at your marginal rate, not your average rate.

With no pre-tax saving, this filer owes $12,070 of federal income tax. Contributing the full 2026 employee limit of $24,500 to a traditional 401(k) brings the wages reported on the return down to $70,500 and the tax to $6,680. Nearly every dollar contributed came out of the 22.0% bracket, so the tax saved is close to 22 cents per dollar. Most states add their own saving on top.

That saving is a deferral, not a gift: the money and its growth are taxed as income when withdrawn. Whether deferral beats paying tax now depends on whether your rate in retirement will be lower or higher than today's, which is the Roth versus traditional question below.

The health savings account: the only triple tax break

A health savings account, available only to people covered by a qualifying high-deductible health plan, is the one account where money can go in untaxed, grow untaxed and come out untaxed. Contributions are deductible (and, through payroll, also escape Social Security and Medicare tax); growth is not taxed; withdrawals for qualified medical costs are tax-free at any age. For 2026 the limit is $4,400 for self-only coverage and $8,750 for family coverage, counting any employer money.

The strategy that turns an HSA into a retirement account is to pay current medical bills from your regular cash, keep the receipts, and leave the HSA invested. There is no deadline for reimbursing yourself for a qualified expense incurred after the account was opened, so years later the receipts can be cashed in tax-free.

Saving $350 a month for 25 years puts in $105,000; at 6.0% a year the account would reach about $236,701, of which $131,701 is growth that need never be taxed if it pays for medical care. After 65, money taken out for anything else is taxed as income, like a traditional IRA, with no penalty; before 65 a non-medical withdrawal also carries a 20% penalty. A few states, including California and New Jersey, do not follow the federal treatment and tax HSA contributions and growth. The HSA retirement calculator projects your own numbers.

An order for filling accounts

No single order is right for everyone, but this one reflects the size of each account's advantage for a typical employee.

1. The employer match. Contribute at least enough to your 401(k) to receive the full match. An immediate match is a return no investment reliably offers. The 401(k) match calculator shows what you would leave behind.
2. The HSA, if you are eligible. The triple tax break makes it the next most valuable dollar, especially if you can leave it invested.
3. An IRA. The 2026 limit is $7,500. IRAs usually have cheaper and broader fund choices than a workplace plan. Whether it should be traditional or Roth depends on your bracket and on income limits.
4. The rest of the 401(k) limit. Back to the workplace plan, up to $24,500.
5. After-tax and taxable money. Once the above are full, the options below, then an ordinary brokerage account invested tax-efficiently.

People who are self-employed have a different set of accounts; the solo 401(k) calculator covers them.

Traditional or Roth: matching the account to your bracket

A Roth contribution pays the tax now and takes out qualified withdrawals tax-free; a traditional contribution defers the tax. If your rate is the same at both ends, the two leave you with the same money. The choice therefore comes down to comparing today's marginal rate with the rate you expect on withdrawals.

The first couple's next dollar is taxed at 12.0%. Paying tax at that rate now, through Roth contributions, is attractive, because few retirees with meaningful savings expect a lower rate later. The second couple's next dollar is taxed at 24.0%; for them a traditional contribution saves tax at a rate they may well avoid in retirement. Many households split contributions so that some money sits in each kind of account, which gives them a choice of what to draw from each year in retirement.

Advanced moves once the basics are full

The backdoor Roth IRA. Direct Roth IRA contributions shrink and then disappear as income rises; the phase-out begins at $153,000 of modified adjusted gross income for a single filer and $242,000 for a joint return. Anyone with earned income can still make a non-deductible traditional IRA contribution and then convert it to a Roth. The trap is the pro rata rule: if you hold any pre-tax money in traditional, SEP or SIMPLE IRAs at the end of the year of the conversion, part of the conversion is taxable in proportion to those balances. Rolling old pre-tax IRA money into a current 401(k), if the plan accepts it, often clears the way. The backdoor Roth calculator shows how much of a conversion would be taxed.

After-tax 401(k) contributions. Some plans let you contribute after-tax money above the employee limit, up to the plan's overall cap, and convert it to Roth inside the plan or roll it to a Roth IRA. This is often called the mega backdoor Roth. Whether you can do it depends entirely on your plan's rules; the mega backdoor Roth calculator shows the room available.

Roth conversions in low-income years. Moving money from a traditional account to a Roth is taxed as ordinary income in the year you do it, so the best years are the low ones: a sabbatical, a gap between jobs, or the years between retiring and starting Social Security. Conversions cannot be undone, and money converted before 59½ must stay in the Roth for five years to avoid a penalty on withdrawal. The Roth conversion calculator shows the tax on a given amount.