Master Your U.S. Retirement Accounts

The U.S. tax code quietly pays you to save for retirement, and most people leave a large part of that money unclaimed. This chapter explains the accounts, the traditional-versus-Roth choice, and the funding order that squeezes the most out of every dollar.

The accounts

401(k) and 403(b): the workplace workhorses

Employer-sponsored plans funded straight from payroll. Contributions are either pre-tax (traditional) or after-tax (Roth), growth is untaxed while invested, and the IRS adjusts the generous annual limits each year. Two details matter enormously:

• The match. Many employers match some of what you contribute, commonly 50–100% of the first 3–6% of salary. That is an instant, guaranteed return no market can offer. Contributing below the match is declining part of your paycheck.
• Vesting. Your own contributions are always yours; employer money may vest over a few years. Know your schedule before job-hopping.

IRA: the account you own yourself

An Individual Retirement Account lives at a brokerage you choose, with far more investment options than most workplace plans. Traditional IRA contributions may be tax-deductible depending on income and workplace coverage; Roth IRA eligibility phases out at higher incomes. Limits are much lower than 401(k) limits, but the flexibility makes it the classic second stop.

HSA: the best tax deal in America

Available only with a high-deductible health plan (HDHP), the Health Savings Account is triple tax-advantaged: deductible going in, untaxed growth, and tax-free withdrawals for qualified medical expenses at any age. Many HSAs let you invest the balance. After 65, non-medical withdrawals are simply taxed like a traditional IRA, so the worst case is still good. If you have HDHP access and can pay routine medical costs from cash flow, the HSA is arguably the single best account in the system.

Traditional or Roth?

The question is just: pay tax now, or later?

• Traditional (pre-tax): deduct now, pay income tax on withdrawals. Wins when your tax bracket today is higher than it will be in retirement: typical for peak earners.
• Roth (after-tax): no deduction now, but qualified withdrawals are completely tax-free. Wins when your bracket is low today: early career, gap years, residency.

Rule of thumb: early career, favor Roth; peak earnings, favor traditional; genuinely unsure, split. Diversifying tax treatment is itself a strategy, and Roth accounts have a bonus: no required minimum distributions during your lifetime.

The funding order

This waterfall maximizes guaranteed returns and tax advantage. Fund each level fully before the next:

1. 401(k) up to the full employer match. Free money first, always (yes, even during debt payoff).
2. Kill high-interest debt (anything near or above ~8% APR).
3. HSA to its limit, if you have HDHP coverage and can invest the balance.
4. IRA (usually Roth) to its limit.
5. Back to the 401(k) toward its annual max.
6. Taxable brokerage for everything beyond, covered in Step 7.

To feel why this matters, put your own numbers in the compound interest calculator: decades of tax-free compounding on maxed accounts routinely add up to six figures versus the same savings in a taxable account.

Rules worth knowing (not fearing)

• Early withdrawals before 59½ generally cost a 10% penalty plus taxes, with exceptions (including Roth IRA contributions, which you can always withdraw). Treat retirement money as untouchable and let the emergency fund absorb surprises.
• Job changes: roll the old 401(k) into an IRA or the new plan via a direct rollover. Never take it as a check; cashing out triggers taxes, penalties, and the silent loss of decades of growth.
• RMDs: traditional accounts require minimum withdrawals starting in your mid-70s (currently 73, moving to 75 for younger cohorts). A far-future detail, but it is one reason Roth money is precious.

Action items

• Find your employer match formula and vesting schedule, and set your contribution to at least the full match.
• Check whether your health plan qualifies you for an HSA.
• Open an IRA if you do not have one and automate a monthly deposit.
• Move to Step 7: Start investing.