The right account type determines whether you pay taxes now, later, or never on your investment growth. Choosing correctly can add $50,000–$200,000 in lifetime wealth on the same underlying investments.
The account menu
| Account | Tax on contributions | Tax on growth | Tax on withdrawal | Annual limit |
|---|---|---|---|---|
| Taxable brokerage | After-tax | Dividends/gains taxed annually | Capital gains at withdrawal | None |
| Traditional 401(k) | Pre-tax | Tax-deferred | Ordinary income | $23,500 |
| Roth 401(k) | After-tax | Tax-free | Tax-free (qualified) | $23,500 |
| Traditional IRA | May be pre-tax | Tax-deferred | Ordinary income | $7,000 |
| Roth IRA | After-tax | Tax-free | Tax-free (qualified) | $7,000 |
| HSA | Pre-tax | Tax-free | Tax-free (medical) | $4,300 |
| 529 Plan | After-tax (state deduction) | Tax-free | Tax-free (education) | $18,000/yr |
The order of operations
- HSA: triple tax advantage, contribute max first if eligible
- 401(k) to employer match: guaranteed return
- Roth IRA: tax-free growth, flexible access to contributions
- 401(k) to maximum: high limit, strong tax deferral
- Taxable brokerage: no limit, most flexible, least tax-efficient
Asset location: which investments go where
Tax-inefficient assets (bonds, REITs, dividend stocks): hold in 401(k) or IRA to defer taxes on ordinary income distributions. Tax-efficient assets (growth stocks, index funds with low turnover): hold in taxable brokerage — qualify for lower long-term capital gains rates. This asset location adds 0.2–0.6% annually in after-tax returns on the same portfolio.
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