401(k), HSA or Roth IRA? The Order to Fund Them First

Michael Chen

Michael Chen writes about personal finance fundamentals. Bay Area-based · finance enthusiast for 15 years.

Visual representation of the voice · not a photographic portrait

Quick answer: For many people, a good order is: get the full 401(k) match, pay off high-interest debt, fund an HSA if you qualify, fund a Roth or traditional IRA, then go back and add more to your 401(k). Your income, taxes, and plan fees can change the best order for you.↗ Share on X

For many Americans, a good order for tax-advantaged investing is this: get your full 401(k) employer match, pay off high-interest debt, fund a Health Savings Account if you qualify, fund an IRA, then add more to your 401(k). "Tax-advantaged" just means the government gives you a tax break for saving in that account. The order above works for many people, but your income, tax bracket, and plan fees can change it. Use it as a starting point, and check your own numbers.

What are these accounts, in plain words?

READ ALSOIndex Funds vs. Mutual Funds: How a Beginner Can Choose →How to Calculate Your Personal Savings Rate for Retirement →Rebalance Index Funds Without a Surprise Tax Bill: 5 Ways →

The IRS changes these limits most years. Before you set your amounts, check the current numbers on IRS.gov. Roth IRA eligibility also shrinks and then ends at higher incomes, so check that table too.

The 6-step order, and why each step sits where it does

1. Build a small emergency fund. Aim for one month of bills first. Without it, a surprise bill can force you to pull money from an account, and that may bring taxes and a penalty.

2. Contribute enough to get the full 401(k) match. A match is money your employer adds when you save. If the company adds 50 cents for each dollar up to 6% of your pay, that is a 50% return on those dollars before any market change. Few other choices come close.

3. Pay off high-interest debt. Credit cards often charge more than 20% a year. Paying them off gives you a sure gain equal to that rate. Stock returns are not sure.

4. Fund your HSA, if you qualify. It is the only account here with a tax break at all three stages, as long as the money goes to qualified medical costs.

5. Fund an IRA. An IRA often gives you more investment choices and lower fees than a weak 401(k) plan.

6. Go back to the 401(k) until you hit the limit. After that, a regular brokerage account has no tax break but also has fewer rules.

How much do fees change this order?

READ ALSORetirement Savings Gap Before 40: The 4-Step Math to Check →First Brokerage Account: How to Open It and Skip Fees →Index Funds in a Roth IRA: How It Works and How to Start →

Check your 401(k) fund list. Look for a number called the "expense ratio." That is the yearly cost of the fund, shown as a percent.

Here is an example, for illustration only. Say $10,000 grows at 7% a year for 30 years.

That is a difference of about $18,000 on the same money. The 7% is only an example, not a forecast. If all of your 401(k) funds cost more than about 0.75% a year, it may make sense to stop at the match and fill an IRA first, then come back.

Where should $500 a month go?

Say you earn $60,000, your employer matches 50% of the first 6% you put in, you have no credit card debt, and you are on a regular health plan. That means no HSA. A month's emergency fund is already saved.

Now change one fact. If you carry $4,000 on a credit card at 25%, keep the $300 going for the match and send the other $200 to the card first. Once it is paid off, send that $200 to the Roth IRA.

What if you only have $50 a month? Follow the same order. Put the $50 toward the match if your job offers one. If it does not, open an IRA with a broker that has no minimum and set up an automatic transfer on payday. Small amounts still count, and the habit is easier to grow than to start.

How do you choose between Roth and traditional?

This is about when you want to pay the tax: now or later.

• Roth often fits if you are early in your career, in a lower tax bracket, or expect your income to rise.
• Traditional often fits if you are in your highest earning years and want to lower this year's tax bill.
• A mix is reasonable if you are not sure. No one knows what tax rates will look like decades from now.

If your plan offers a Roth 401(k), you can often split your contributions. The employer match may still go in as pre-tax money, depending on your plan. Ask your benefits office.

What should you buy inside the account?

Opening the account is only half the job. Many people put money in an IRA, and it sits in cash, earning very little. Check that your money is actually invested.

Two simple choices work for many beginners:

• A target-date fund. Pick the fund with the year closest to your retirement. It adjusts itself over time and holds both stocks and bonds.
• A broad index fund. An index fund holds small pieces of hundreds or thousands of companies. It usually has a very low yearly fee.

Stock funds go up and down, sometimes by a lot. The tax break does not protect you from a falling market. Money you will need in the next few years should not be in stocks.

Which mistakes cost the most?

• Skipping the match to pay off a low-rate car loan. Getting the match usually comes first.
• Withdrawing early. Taking money out of a retirement account before age 59½ usually means income tax and a 10% penalty, with some exceptions.
• Treating an HSA like a checking account. If you can afford it, pay small medical bills from your regular money and leave the HSA invested. Keep your receipts.
• Forgetting to raise your contribution. Each time you get a raise, add 1% to your savings rate.
• Going over the limit. If you have two jobs, your 401(k) limit is shared between them.

When should you talk to a professional?

Get help from a tax professional or a fee-only financial planner if you have self-employment income, a high income near the Roth limits, a large inheritance, a stock plan from your job, or a plan to retire soon. "Fee-only" means the person is paid by you, not by commissions on what they sell. Ask how they are paid before you sign anything.

*This article is for general information only. It does not replace advice from a licensed financial professional or tax advisor. All investing involves risk, including the loss of money you put in. Examples use made-up numbers and are not a forecast.*

Your next step this week

Log in to your 401(k) website or call your benefits office, and ask one question: "What percent do I need to contribute to get the full match?" Write the answer down and compare it to what you put in now. If you are below that number, raise it today. Then look up the expense ratio of your largest fund. That one number will tell you whether your next dollar should go to the 401(k) or an IRA.

FAQ

Should I choose a Roth or a traditional account?

Roth means you pay tax now and qualified withdrawals later are tax-free. Traditional usually means a tax break now and tax later. If you expect a higher tax rate later, Roth often makes more sense. If you are in a high bracket now, traditional may fit better.

What if my employer does not offer a 401(k)?

You can open an IRA at a brokerage on your own. If you are self-employed, ask a tax professional about a SEP IRA or solo 401(k). Those accounts follow different limits.

Can I lose money in these accounts?

Yes. The tax benefit does not protect you from market losses. Stock and bond funds can fall in value, especially over short periods. Money you need soon should stay in safer places.

Educational content, not personalized financial advice. Sources cited where applicable.