Steps 6 and 7 of my FIRE checklist are to invest in Roth IRA, HSA, and 401K. How do you prioritize which retirement accounts to invest in first?

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How to Prioritize Roth IRA/HSA/401K: Decide with 2 Simple Steps

Saving for the future is crucial to ensuring financial stability and security. retirement planning, in particular, plays a significant role in achieving long-term goals. However, with various retirement account options available, it can be challenging to determine the best approach. In this article, we will guide you through two simple steps to help prioritize your Roth IRA, HSA, and 401(k), allowing you to make informed decisions about your financial future.

Step 1: Understand the Basics

To begin, it is essential to have a clear understanding of the key features and advantages of each retirement account:

1. Roth IRA (Individual retirement account): A Roth IRA allows you to contribute after-tax income, meaning that the money grows tax-free over time. Moreover, qualified withdrawals made during retirement are also tax-free, providing an advantage over traditional IRAs or 401(k) accounts that are taxed upon withdrawal.

2. HSA (Health Savings Account): An HSA is a tax-advantaged savings account designed for individuals with high-deductible health insurance plans. Contributions to an HSA are tax-deductible, and any unused funds carry over from year to year. HSA withdrawals made for qualified medical expenses are tax-free, and if the funds are not needed for healthcare, they can be invested and grow tax-free, like a retirement account.

3. 401(k): A 401(k) is an employer-sponsored retirement savings plan that allows employees to contribute a portion of their salary on a pre-tax basis. Contributions are made before income taxes are deducted, reducing your taxable income for the year. The money invested in a 401(k) grows tax-deferred until retirement when withdrawals are taxed as regular income.

Step 2: Consider Your Financial Situation and Goals

Once you have a solid understanding of the three retirement account options, the next step is to evaluate your financial situation and goals. Here are two important factors to consider:

1. Employer Contribution Matching: If your employer offers a matching contribution for your 401(k), it is generally advisable to start by contributing enough to maximize this benefit. This is essentially free money that can significantly boost your retirement savings. If you don’t take advantage of this opportunity, you’re effectively leaving money on the table.

Additionally, some employers provide a separate employer-funded contribution, regardless of whether you contribute to your 401(k). Make sure you understand and take full advantage of any matching or employer contributions before considering other retirement options.

2. Financial Health and Objectives: Assess your current financial situation and goals to determine the order of priority for your Roth IRA and HSA. Consider factors such as your age, healthcare needs, and available discretionary income.

If you are relatively young and prioritize long-term retirement savings, it may be more beneficial to contribute to a Roth IRA. The tax-free growth potential of a Roth IRA over several decades can generate substantial returns. However, if you have high healthcare expenses or anticipate future medical needs, contributing to an HSA may be a wise choice. The HSA offers a triple tax benefit – tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.

In summary, prioritize the following retirement accounts based on these considerations:

1. Contribute to your 401(k) up to your employer’s maximum matching contribution to take advantage of free money.

2. If your employer does not offer a match or after maximizing the 401(k) match, consider your financial health and objectives:

a. If your focus is on long-term retirement savings, contribute to a Roth IRA.

b. If you have high healthcare expenses or anticipate future medical needs, prioritize contributing to an HSA.

Remember that retirement planning is a continuous process, and your priorities may evolve along the way. Regularly reviewing and reassessing your financial situation and goals will help ensure that you are continuously making the best choices for your retirement savings and long-term financial well-being.