Tax-advantaged accounts let your savings grow with a tax break, either when you put money in, while it grows, or when you take it out. Using the right ones can make the same savings go further.
Pre-tax vs. Roth
- Pre-tax (traditional): contributions reduce your taxable income now; withdrawals in retirement are taxed as income.
- Roth: you contribute money that's already been taxed; qualified withdrawals later are tax-free.
A rough rule: pre-tax tends to help more if you expect a lower tax rate in retirement, Roth if you expect a similar or higher one. Many people split between both.
401(k) and 403(b) workplace plans
Offered through employers, often with a match. Contributions come straight from your paycheck. If there's a match, contributing at least enough to get all of it is usually the first step, because it's extra money you'd otherwise leave behind.
IRAs
Individual retirement accounts you open yourself, traditional or Roth. They have lower annual limits than workplace plans. Roth IRA contributions phase out above certain income levels, and traditional IRA deductions can be limited if you have a workplace plan.
HSAs
Health savings accounts are available if you have a qualifying high-deductible health plan. Contributions can be deductible, growth isn't taxed, and withdrawals for qualified medical expenses are tax-free. Some people treat an HSA as an extra long-term savings account.
529 plans
Education savings plans run by states. Growth isn't federally taxed when used for qualified education expenses, and some states offer a deduction for contributions.
A common order to consider
- Build a starter emergency fund.
- Contribute enough to get any employer match.
- Pay down high-interest debt.
- Fund an HSA (if eligible) and/or an IRA.
- Increase workplace plan contributions.
- Save for other goals, such as education, in the matching account.
Contribution limits, income limits and penalties for early withdrawal change and have exceptions, so check the current year's rules before you contribute.
Educational information only, not tax advice. Tax rules, brackets and contribution limits change every year, so confirm current figures at IRS.gov or with a qualified tax professional.