Where you invest matters as much as what you invest in. The right account structure can save (or cost) you thousands in taxes.
The Three Account Types
| Account Type | Tax Treatment | Best For |
|---|---|---|
| Tax-deferred (Traditional 401k, IRA) | Pay later | High earners, retirement |
| Tax-free (Roth 401k, , ) | Pay now, grow free | Young workers, tax |
| Taxable (Brokerage) | Pay yearly + at sale | After maxing tax-advantaged |
When to Use Each
Traditional 401k / IRA
- You're in a high now
- You expect to be in a lower bracket in retirement
- You need the today
- Your employer offers a match (always take it!)
Roth 401k / Roth IRA
- You're in a low now
- You expect higher income later
- You want tax-free growth forever
- You value flexibility (Roth contributions can be withdrawn anytime)
Taxable Brokerage
- You've maxed all tax-advantaged accounts
- You need money before age 59½
- You want no contribution limits
- You're saving for goals 5-15 years out
The Flow of Priority
Do This
Investment priority order:
- 401k up to match — Free money
- HSA — Triple tax advantage (if eligible)
- Roth IRA — Tax-free growth
- 401k to max — More tax-advantaged space
- Taxable brokerage — Extra investing
What Goes Where?
Once you have multiple accounts, it matters what you put in each:
Tax-Deferred (Traditional)
Best for: Bonds, REITs, high- stocks
- These generate taxable income annually
- In a tax-deferred account, that doesn't matter until withdrawal
Tax-Free (Roth)
Best for: High-growth stocks
- If something might grow 10x, you want that growth tax-free
- No taxes on any gains, ever
Taxable
Best for: , ETFs, stocks you'll hold forever
- These are tax-efficient anyway (low turnover)
- You can tax-loss harvest here
- Long-term gains get favorable rates
Pro Tip
This is called "asset location"—as important as . Our Wealth tier lesson on tax-efficient investing goes deeper on this strategy.
Access to Your Money
| Account | When Can You Access? |
|---|---|
| Taxable | Anytime |
| Roth IRA contributions | Anytime (penalty-free) |
| Roth IRA earnings | After 59½ |
| /401k | After 59½ (or penalty) |
| HSA (for health) | Anytime |
| HSA (for anything) | After 65 |
Watch Out
Early withdrawal from traditional accounts triggers a 10% penalty PLUS income taxes. Avoid unless absolutely necessary.
Building Your Account Stack
Starting out (income < $50k):
- 401k to match only
- Roth IRA if you can
- Emergency fund in HYSA
Growing income ($50-100k):
- 401k to match
- Max Roth IRA
- HSA if available
- More 401k
- Start taxable investing
Higher income ($100k+):
- Max 401k
- Max HSA
- Backdoor Roth IRA
- Taxable brokerage
- Mega backdoor Roth (if available)
Common Mistakes
Avoid This
- Choosing Roth vs. Traditional based on feelings, not math
- Ignoring the HSA
- Putting bonds in Roth (wasting the tax-free growth)
- Not investing taxable accounts because you "already invested in 401k"
- Leaving money in cash inside the account instead of investing it
The Long Game
Quick Win
Review your current accounts. Are you:
- Getting your full 401k match?
- Contributing to an HSA if eligible?
- Using a Roth or Traditional IRA?
- Investing (not just saving) in each account?
If you answered "no" to any of these, that's your next step.