Start with the free money: the employer match

Most employers let you contribute part of your pay to a 401(k) (or a 403(b) at a school, hospital, or government job — they work almost identically). Many also match a portion of what you put in. If your employer matches 50% of your contributions, every dollar you add becomes $1.50 instantly. That is an immediate, guaranteed return you cannot get anywhere else, so contributing at least enough to capture the full match is almost always the first move.

A traditional 401(k) also defers tax: your contributions come out of pre-tax pay, and the investments grow without being taxed each year. You pay tax only when you withdraw in retirement — often at a lower rate, since most people earn less once they stop working.

The HSA: the most tax-friendly account there is

If your health plan is a qualifying high-deductible plan, you may have access to a Health Savings Account (HSA), which has a rare triple tax advantage:

• Contributions go in pre-tax (and, when made through payroll, they also skip Social Security and Medicare/FICA tax).
• The money grows tax-free — and most HSAs let you invest it in index funds, not just hold cash.
• Withdrawals for qualified medical expenses are tax-free.

There is even a long-game trick: you can pay a medical bill out of pocket today, save the receipt, leave the HSA invested for years, and reimburse yourself later — all tax-free. After age 65, you can also withdraw HSA money for any reason and just pay ordinary income tax, exactly like a traditional 401(k). Because it is so powerful, the IRS caps it tightly: for 2026 the limits are $4,400 for an individual and $8,750 for a family (always confirm the current figure with the IRS).

IRAs and the power of Roth

Anyone with earned income can open an IRA, and there are two main kinds. A traditional IRA can give you a deduction now and is taxed at withdrawal. A Roth IRA is the opposite and often the better deal: you contribute after-tax money, and then it grows and comes out completely tax-free forever. Splitting money between traditional and Roth also gives you valuable flexibility over your tax rate in retirement.

The catch is that Roth IRA contributions phase out above certain incomes. High earners get around this with the Backdoor Roth IRA: contribute to a traditional IRA, then convert it to a Roth. One important warning — if you already hold pre-tax money in any IRA, the pro-rata rule means part of the conversion will be taxable, so the backdoor works cleanest when you have no existing pre-tax IRA balance. A backdoor conversion is also reported on IRS Form 8606.

The Mega Backdoor Roth

Some 401(k) plans allow after-tax contributions on top of the normal pre-tax limit, plus an in-plan conversion or in-service rollover to a Roth. If yours does, the Mega Backdoor Roth lets you move a large additional amount into Roth space each year, up to the IRS total 401(k) limit minus what you and your employer already contributed. For high earners with the right plan, it is one of the most powerful ways to build tax-free savings. Not every plan offers it, so check your plan documents or ask HR.

The order to fill your accounts

Put the steps together and most US families do best in roughly this order:

1. Contribute to the 401(k) up to the full employer match.
2. Fund an HSA if you are eligible.
3. Fund an IRA (Roth if you qualify, or a Backdoor Roth if you do not).
4. Max out the 401(k).
5. Use the Mega Backdoor Roth if your plan supports it.
6. Invest anything left in a taxable brokerage account, using low-cost, tax-efficient index funds.

The annual contribution limits for these accounts change every year, so check the current figures on the IRS website before you plan. The order matters more than the exact numbers: you are always moving money into the most tax-sheltered place available before reaching for the next one.

Making the taxable account efficient too

Once you are investing in a regular brokerage account, two habits keep the tax bill down. First, hold tax-efficient funds — broad index funds and ETFs throw off fewer taxable distributions than actively traded funds. Second, use tax-loss harvesting: if an investment is down, you can sell it to realize the loss, which offsets capital gains and up to $3,000 of ordinary income per year, with the rest carried forward.

One rule you must respect here is the wash-sale rule: if you buy the same or a “substantially identical” investment within 30 days before or after the sale, the loss is disallowed. The usual fix is to replace the holding with a similar but not identical fund — and to keep the replacement close in risk so your overall portfolio does not change much. Education savers can also look at a 529 plan, where money grows and comes out tax-free when used for qualified education expenses.

Do not forget state taxes

Federal accounts get the headlines, but state income tax matters too. A traditional 401(k) or IRA usually defers your state income tax along with the federal tax, and the bill later depends on where you live in retirement. Some people move to a state with no income tax — such as Florida, Texas, or Nevada — to lower the tax they pay when they finally draw the money out. Many states also offer their own deduction or credit for 529 college-savings contributions, which adds to the federal-level benefit. Because state rules vary so much, it is worth checking how your own state treats retirement accounts and 529 plans as part of your plan.

Why this matters so much over time

Sheltering your investments from tax is not a small edge. Every dollar of tax you avoid stays invested and keeps compounding, so the benefit grows the longer your time horizon. A family that fills its tax-advantaged accounts year after year can end up with a meaningfully larger nest egg than an identical family that invests the same amounts in a fully taxable account. To see how decades of sheltered, compounding contributions can grow, try our FIRE calculator, read our guide to compound interest, or explore our other free financial calculators.

Frequently asked questions

Last updated: June 2026 · US tax rules and IRS limits change yearly. Confirm current figures with the IRS.