Tax-Advantaged Accounts: 401k, IRA, and HSA

Why Tax-Advantaged Accounts Are Non-Negotiable

The government gives you legal ways to shelter your investments from taxes. Using them is one of the highest-leverage moves in personal finance. Skipping them is leaving free money on the table.

The order of operations for FI investors:

1. 401k up to employer match — this is a 50-100% instant return
2. Max your HSA (if eligible)
3. Max your Roth or Traditional IRA
4. Max remaining 401k contribution
5. Taxable brokerage account for anything beyond

The 401k

A workplace retirement account funded with pre-tax dollars (Traditional) or post-tax dollars (Roth).

• 2024 contribution limit: $23,000 ($30,500 if 50+)
• Employer match: Free money — always contribute at least enough to get the full match
• Traditional 401k: Reduces taxable income now, pay taxes on withdrawal
• Roth 401k: Pay taxes now, withdrawals in retirement are tax-free

FI tip: If you plan to retire early, a Roth ladder strategy lets you access 401k funds before 59½ without penalties.

The IRA (Individual Retirement Account)

• 2024 contribution limit: $7,000 ($8,000 if 50+)
• Roth IRA: Pay taxes now, tax-free growth and withdrawals. Ideal if you expect to be in a higher tax bracket later. Income limits apply.
• Traditional IRA: Tax-deductible contributions, taxed on withdrawal.

For early retirees: Roth IRA contributions (not earnings) can be withdrawn anytime penalty-free. This is a key FI flexibility tool.

Not sure which IRA to pick? Enter your tax bracket today, the bracket you expect in retirement, and how much you plan to contribute, and see which one leaves you with more after tax.

The HSA — The Triple Tax Advantage

The Health Savings Account is the only account with a triple tax benefit:

1. Contributions are tax-deductible
2. Growth is tax-free
3. Withdrawals for qualified medical expenses are tax-free

• 2024 limit: $4,150 individual / $8,300 family
• Requires a High Deductible Health Plan (HDHP)
• After 65, can be used for any expense (like a Traditional IRA)

FI strategy: Pay medical expenses out-of-pocket now, invest the HSA, withdraw tax-free in retirement against saved receipts.