The Right Contribution Order Between Your Investment Accounts

With so many tax-advantaged and taxable investment accounts, it may be hard to figure out the right contribution order between them for a healthier retirement. Between our family of four, we've somehow managed to open up 14 investment accounts over the years! Thankfully, technology has enabled us to keep track.

If you're on the path to financial freedom, it's not good enough to only contribute to a 401(k) and/or Roth IRA. You should also be contributing to a taxable brokerage account and other taxable investments.

After all, it is these taxable investments that will generate the passive income to enable you to leave work before the traditional retirement age.

Without having enough investment income to cover my basic living expenses, I probably would not have left work in 2012. Instead, I would have experienced the one more year syndrome for another five years or so.

The Right Investment Contribution Order To Maximize Wealth And Minimize Taxes

When people ask me what the right contribution order should be, initially, my default answer was to always max out all tax-advantaged retirement accounts first. With cash flow left over, then contribute as much as possible to your taxable investment accounts and other taxable investments.

However, I quickly realized the order of investment contribution is dependent on circumstance. Hence, let me highlight the various scenarios to determine a more nuanced answer.

1) The Default Assumption To Investment Allocation

When in doubt, always contribute up to the maximum contribution amount in your tax-advantaged retirement accounts. For 2024, this means $23,000 for your 401(k) and $7,000 for your traditional and Roth IRA. Expect the contribution amounts to go up $500 to $1,000 every two or three years to keep up with inflation.

If you are a sole proprietor or small business owner, contribute the maximum employee amount to your Solo 401(k) and then calculate the appropriate employer contribution amount based on your profits. If you are eligible to contribute to a traditional IRA or Roth IRA, please contribute the maximum as well.

The goal is to get in a habit of always contributing the maximum amount to your tax-advantaged accounts and being used to living on post-contribution cash flow. After your maximum contribution amount is complete, then proceed to contribute 20% or more of your after-tax, after-contribution amount cash flow to your taxable investments.

Taxable investments not only include online brokerage accounts, but also private funds, real estate syndication deals, and alternative assets like art, wine, and so forth.

2) The Bear Market Assumption To Investment Allocation

During corrections or bear markets, it's easier to sit on your cash and do nothing. However, the risk of doing nothing is that you eventually miss out on a recovery.

Therefore, it is recommended to always be contributing something, no matter the market conditions. As the saying goes, time in the market is better than timing the market. Dollar-cost averaging is a fine process, especially if you can keep contributing during downturns.

To make it easier for you to invest in a correction or bear market, contribute to your tax-advantaged accounts first. These include your 401(k), 403(b), traditional IRA, Roth IRA, SEP-IRA, Solo 401(k), and 529 plans. If funds are limited, all else being equal, contribute the most to the tax-advantaged account that is the farthest away from being tapped.

Example Of Investing In A Bear Market

For example, let's say you are 47 years old with 13 years left to be able to tap your 401(k) without penalty. You also have a one-year-old who is 17 years away from going to college. To overcome your fear of investing, perhaps the right investment contribution order is to contribute the maximum gift tax limit to your child's 529 plan first. With such a long runway, your chances of having a positive return increase.

Then work to contribute the maximum to your 401(k) throughout the rest of the year, especially if you are above the 24% marginal income tax bracket. It's easier to invest if you have a longer-term time horizon.

I was able to get over my fear of investing in 2012 by buying a S&P 500 structured note. It provided downside protection if I gave up some of the dividends.

My Example Of Investing In This Market

In 2020, I mustered up the courage to buy a house during the start of the pandemic because I thought about my children. In 20 years, I imagined having a conversation with them about investing in real estate. I imagined they would marvel at how cheap prices were back in 2020 or give me grief if I had not taken advantage during the pandemic.

Investing in a bear market usually turns out well over the long run. However, if you are worried about your job, the right contribution order is to invest in your taxable accounts first. This way, you can more easily draw from your funds if necessary.

There is a growing likelihood of a recession now that the Fed is aggressively hiking rates. Hence, I'm focused on building more cash and controlling my debt levels. Better opportunities are coming.

Here's how I'm investing $250,000 today. I'm taking advantage of higher interest rates by buying Treasury bonds and looking for real estate deals.

3) Different Portfolio Amounts

Of course, the order in which you contribute to your investment accounts is also dependent on the various portfolio amounts.

For example, if your 17-year-old daughter has a $300,000 529 plan, while you only have a $200,000 401(k) balance at age 50, it is much better to focus all your contributions on yourself. She is set. You are not.

The only way to know whether you're on track for your age is to make honest assessments about your future income needs and expenses. I've provided guides with:

The portfolio which is furthest behind based on age should get the largest concentration of contribution. And given you should put on your oxygen mask first before helping others, you may want to skip all custodial investment portfolios, custodial Roth IRAs, and 529 plan contributions altogether.

Instead, after you max out your tax-advantaged retirement portfolios, you may want to invest all remaining after-tax, after-tax-advantaged retirement portfolio contributions into your taxable accounts. Although this is less tax-efficient, depending on your deficiency, you should concentrate your contributions for your own financial security.

Once your retirement portfolios are back within a suitable range for your age, you can then proceed to start investing for your kids again. Investing for your kids is a luxury option for most families.

4) The Early Retirement Scenario For Investing Allocation

If you plan to retire early and have limited funds, then the most appropriate investment contribution order is to build your taxable investment portfolio. Also, work on building your real estate portfolio, and all other non-tax-advantageous investment accounts first.

Given you can't tap your 401(k) and traditional IRA without a 10% penalty before age 59.5, you need to build your taxable accounts in order to survive off the passive income. However, before you retire early, you should still contribute at least up to the maximum 401(k) match, if you have one. Saying no to free money is unwise.

If you have enough funds to max out your tax-advantaged retirement accounts and contribute to your taxable investments, then you should max out your tax-advantaged retirement accounts even if they are of no use for a while. Your 401(k) and IRA will act as your retirement insurance policy in your 60s and beyond.

And if you get desperate, you can always borrow from your tax-advantaged funds without penalty. Or, you can withdraw from your funds early and pay a penalty.

If you have a reasonable amount of retirement income, but still plan to earn supplemental retirement income after achieving FIRE, then you should open up a Solo 401(k) and contribute as much as possible. Depending on what's left, I would continue to contribute to your taxable investments even though you are retired.

My Example For Investing As I Head Into Retirement Again

When I “retired” in 2012, I forgot to open up a Solo 401(k). I was exhausted and just wanted to go travel. It didn't even occur to me until mid-2013 that I could have opened one up and contributed $17,000, the maximum at the time. Don't forget to contribute to a Roth IRA as well if your income is low enough.

Today, my company contributes the most it can to my SEP-IRA. Then I invest over 50% of my after-tax income into my taxable brokerage accounts, venture debt funds, venture capital funds, and real estate crowdfunding.

I don't know how long my supplemental retirement income (online income) will last. Hence, I just reinvest as much of the proceeds as possible in investments that require minimal or no work.

However, after my 45th birthday, I will be focused on decumulation because I don't want to die with too much money. Otherwise, a lot of my time and stress will have been a waste.

Lean FIRE financial requirements by age chart

5) Buying A House Scenario

If you eventually want to buy a primary residence, as the majority of people do, then the right investment contribution order is trickier. It depends on your income, the current size of the down payment, when you plan to buy, and the cost of the house you want to buy.

First, calculate the house you want and the estimated price. Then you need to accumulate hopefully 30% of the house for a 20% down payment and 10% buffer. This follows my 30/30/3 house buying rule.

Your priority in your 20s should be your career, not buying a home. You're still discovering what you really want to do. Further, you may go back to graduate school and switch fields.

Therefore, the right investment contribution order is to almost always contribute as much as possible to your tax-advantaged accounts first. As you gain more experience, your income should grow to the point where you can max out your tax-advantaged accounts and start contributing to your house fund.

Go Where The Best Opportunities Take You

Of course, if you find the perfect job in the perfect city early on, then your priority for buying a primary residence should become a priority. Therefore, you should at least contribute the minimum to your 401(k) to get a 100% match. Then invest as much as possible in your taxable accounts to eventually buy your home.

The closer you get to your house purchase date, the more conservative your investments should be. Here's an article that discusses more about how to invest your house down payment.

My Example Of Real Estate Investing

Immediately, I wanted to buy a Manhattan property the day I started my job in 1999. However, I didn't have the down payment. As a result, I just maxed out my 401(k) each year, invested aggressively in stocks in my taxable brokerage account, and tried to make more money.

Eventually, I saved up enough to buy my first property in 2003, a condo in San Francisco. Then, I kept maxing out my 401(k) every year and saved between 30% – 80% of my after-tax, after-401k-contribution income as my income grew. By 33, I really wanted to leave finance. Hence, I ramped up my savings and investments to 80%.

Today, I've reached my limit for the number of properties I want to own due to tenant and maintenance headaches. Hence, I've invested $953,000 in real estate crowdfunding through platforms like Fundrise and CrowdStreet to earn more 100% passive income.

The ability for me to diversify into Sunbelt real estate is huge since all my physical real estate is in expensive markets like San Francisco, Honolulu, and Lake Tahoe. I believe in the long-term trend of Americans spreading out across lower-cost areas of the country thanks to technology and work from home.

6) The Bull Market Scenario

In a bull market, you want to at minimum, max out your tax-advantaged accounts first. Then aggressively invest in taxable risk assets. This is the time to increase your saving rate to a painfully high amount so you can invest as much money in your taxable investments as possible.

Hopefully, you can invest a much, MUCH greater amount in your taxable investments than your tax-advantaged investments. You only need to get rich once. And one of the easiest ways to get rich is during a bull market where bubbles often form.

Therefore, your aim is to also make as much money as possible by job-hopping, starting a business, and working on side hustles. Bull markets don't last forever. Therefore, you must take full advantage while the going is good.

Always Be Investing In All Your Accounts

It's always a good idea to take full advantage of all tax-advantaged accounts. Taxes are a big drag on returns. If you're just starting out on your financial journey, shoot to accumulate $250,000 – $300,000 in your combined investments. This is the minimum portfolio balance where you start to feel financially free. The momentum really starts building upon itself at this level.

As you gain more experience, aim to accumulate $250,000 – $300,000 in your tax-advantaged accounts only. Then shoot to accumulate $250,000 – $300,000 in your taxable accounts as well. By this point, you will likely gain a lot of motivation to keep on going. Your income will be higher so your investment contributions will go more towards your taxable investments.

Ultimately, if you want to have an above average net worth and achieve financial independence sooner, try and accumulate 3X more in your taxable investments compared to your tax-advantaged investments. Your taxable accounts have a much higher ceiling. Therefore, you should eventually focus on building these accounts as large as possible.

Invest In Real Estate To Build More Wealth

The best way to get rich and stay rich over the long term is to invest in real estate. Real estate is the best asset class to build wealth because it is tangible, generates income, and has steadily outperformed inflation over the past 100 years. 

Check out Fundrise, my favorite private real estate platform. Fundrise runs private real estate funds that predominantly invests in the Sunbelt region where valuations are lower and yields are higher. Its focus is on residential and industrial commercial real estate to help investors diversify and earn passive returns. 

Fundrise currently manages over $3.5 billion for over 500,000 investors. I've invested $954,000 in private real estate funds since 2016 to diversify my investments and make more money passively. After I had children, I no longer wanted to manage as many rental properties. 

Another private real estate platform to consider is CrowdStreet. Crowdstreet is a marketplace that mainly sources individual commercial real estate deals from various sponsors around the country. This way, you have more customization to build your own select private real estate portfolio.

Make sure you diversify your portfolio and do your due diligence on all the sponsors. Look up their track record, their management, and whether they have had any blowups before. Although CrowdStreet screens the deals, you have to do your screening as well. 

Both platforms are sponsors of Financial Samurai and Financial Samurai is a six-figure investor in Fundrise funds. 

Stay On Top Of Your Finances

During volatile times, it's imperative to stay on top of your finances. To do so, I use Empower, the best free wealth management tool today. Before Empower, I had to log into eight different systems to track 35 different accounts. Now I can just log into Empower to see how my stock accounts are doing. I can easily track my net worth and spending as well. 

Empower's 401(k) Fee Analyzer tool is saving me over $1,700 a year in fees. It's important to analyze your net worth allocation to see if it's appropriate. Finally, there is a fantastic Retirement Planning Calculator to help you manage your financial future.

For more personal finance content, join 60,000+ others and sign up for my free weekly newsletter. I’ve been helping people achieve financial independence and slice through money’s mysteries since 2009.

27 thoughts on “The Right Contribution Order Between Your Investment Accounts”

  1. You don’t have to do a roth conversion every year because you can do a backdoor roth IRA. This is done by contributing to a traditional IRA with after tax dollars and then immediately rolling that to a roth IRA. This loophole was on Biden’s docket to be closed last year but it didn’t make the cut so you are still in luck for the time being.

  2. We always contribute to the tax-advantaged accounts first to minimize current tax liability.
    After that, we go with Roth IRA then taxable accounts.
    As a result, our tax-advantaged account is about 3x our taxable account. We didn’t make high enough income to save more in our taxable account. I think most normal people are in the same position. It’s hard to overtake your tax-advantage accounts unless you make high income.

  3. Ages 40 & 44. 2 kids (1 & 3). 100% Equities. Late starters so once we meet our number we will rebalance into more conservative portfolios.

    We have access to:

    403b we will max out for first time 2022 to age 65 with top ups.

    457b we will contribute 10k and are starting in 2022 build up to max to age 65 with top ups.

    Pension ~8% pay.

    HSA we contribute to.

    We have our Roth’s established and will contribute max.

    Brokerage account: 100% Equities; 50% VTI 50% VXUS.

    I am curious between a brokerage account that we already have or if we should start contributing to our works DC (defined contributions) after tax contributions?

    We will work to max our both 403b and 457b since we will have to stay at our CA state job to gain our pensions.

    529’s we front loaded and now contribute a few hundred dollars a month. 100% VTI.

  4. Hey FS,

    Great article. I’ve been hoping you’d do this topic for awhile.

    I’m curious about your thoughts on this article from MF. He’s seems to have a different opinion on this subject. My takeaway is that he is saying that for middle income people ( ~22% bracket) contributing to retirement accounts is an optimization for FIRE rather than an insurance policy for old age as you describe above. Only difference I might see is that you are referring to living off income generated whereas he is referring to living off capital gains from selling? What do you think? Did you consider this perspective in your analysis ?

    madfientist.com/retire-even-earlier/

    1. Hi Jay,

      I’m actually not exactly sure I understand what you and MF are saying. If you contribute to your tax-advantaged accounts and not to your taxable accounts, how does one retire early and live off the investment income before age 60?

      MF is in a different situation than I am in. He has no kids and his wife has been working full time as an optometrist.

      I think it’s great more stay at
      home men without kids are owning their retirement. However, I’m way too busy as a dad and writer to say I’m retired.

      Looking back, retiring without kids was a walk in the park. And having my wife earn six figures and provide for healthcare would have made early retirement even easier. Alas, I haven’t been able to convince her to go back to work, yet! :)

      Sam

  5. Sam, great post. I’ve been wondering about the proper contribution order for quite some time. What are your thoughts on after-tax savings vs. saving for our kid’s college savings? We have four kids so it takes a considerable amount of money to max out their 529s each year. I would live to hear your feedback on this topic.

  6. Alec Burgess

    Right now, I contribute enough to my 401K to get the full match. I don’t contribute more due to the high fees. Instead, any extra money is placed in a taxable account. I am curious, at what point are the fees high enough that you would not recommend contributing over the match?

  7. Outdoor Guy

    I plan to retire early and pull money out of my 401k prior to 59 and 1/2 by using the Substantially Equal Periodic Payments (SEPP) method. Which allows you to draw a set amount out without paying a penalty.

    1. You might want to look into the rule of 55 as opposed to SEPP/72t if you have everything rolled into the plan of your current employer. If you separate from them in the year you turn 55, you can take money out of that plan without penalty. It would allow your more latitude than SEPP which I believe would be a more constrained due to a specific calculation, and someone correct me if I’m wrong, but I think once you start SEPP payments, you can’t stop them until you turn 59.5. If you can hold out to 54+ and use the Rule of 55, might be more useful.

      1. Rule of 55 can differ between plans. Many plans don’t even offer them. Look into your individual plan before counting on the rule of 55

        bankrate.com/retirement/rule-of-55/

        Here is some information on SEPP payments. You can change them the latter of 5 years or reaching 59 1/2.

        investopedia.com/terms/s/sepp.asp#:~:text=The%20amount%20you%20withdraw%20will,the%20lifetime%20of%20the%20plan.

  8. Great post, Sam. I am not looking to FIRE, but rather build a career I enjoy that doesn’t take too much of my time. As such, I invest:

    1) 410k deferral
    2) IRA
    3) HSA
    3) after tax 401k
    5) taxable brokerage

    The goal is to make sure I contribute to any tax advantaged accounts first.

    If I start to feel like I’m burning out in the workforce, I’ll bump up the taxable brokerage.

    Once I own real estate, I will prioritize that over the after tax 401k.

  9. Westly Lager

    Do you think it’s still worth doing a Roth conversion each year if you have an income over the cap of allowing you to contribute directly to a Roth?

  10. How do you feel about the correction ongoing right now? Are you playing your strategy out noted above?

    S&P down ~7% from start of January hight. The anticipated 10% correction is happening right now.

    MeTheMillennial

      1. Great article with tailored advice for different groups!

        Where are you finding the capital to deploy? Dry powder? I assume you’re spending less than you earn from all your different income streams but in real time to take advantage of corrections, these savings can’t be that significant unless you were on the sidelines for a bit of time? Or are you fairly consistently buying throughout the year?

        And how do you choose between finding money to test some alternative investments vs putting back to equities? You’re always uncovering different investment options and trying them out, which is impressive.

        1. I always have around 5% of my net worth in capital preservation investments. So I can draw from that pool. Then I’ve got online income that ebbs and flows.

          I often view online income as funny money that won’t last. I say funny money because I just like to write and would happily continue writing if I had no online income.

          So I try and invest the majority of it into passive income investments, that hopefully will last forever. It’s a different mentality compared to plowing business income back into growing a business further, which I also should.

          This is also why real estate is my favorite asset class. If I can turn funny money into a home, that feels really good.

  11. I am in early 40’s. I bought 3 properties last year (2 in austin – with 200K down and a mortgage of 700K) and one in contra costa county (150K down and a mortgage of 575K). I have 400K in 401k. My regular stock trading + crypto is around 70K only

    Should I focus now on stock market or try to acquire one more property? My instinct tells me to acquire property but I am at same time scared of high valuations. What do you suggest?
    Am I into too much real estate and less stocks trading. What should the contributions be between homes and after-tax accounts?

      1. Looks like its split as below
        Real Estate – 85% (including my primary residence) 70% (if i exclude my primary residence)
        Stocks – 38%
        Crypto – 2%

        My Goals
        – To save enough for my daughters education . She is 4 years now.
        – Would like to retire from my high stressfull job by age 50
        -Save my health. I am overweight and not having healthy habits

        1. Awesome you are focusing on your health. Let’s do this! And I love you are thinking about your daughter, as a fellow parent to a daughter. Please read the net worth allocation article.

          I try to limit one asset class to no more than 50%.

          1. Thanks Sam for your insights. I always find that to be useful. I did read your article and its of great help

  12. My wife and I are in our mid-40s and we’ve always prioritized retirement savings over everything else. We’ve maximized every possible retirement account at every opportunity.
    We have 2M in retirement, 1M in non-retirement investments and 1M in home equity (400k owed on mortgage). We also have 50k saved for college for each kid (tweens).
    We’ve been able to accumulate so much in retirement because my wife previously worked at a university and had access to 3 retirement accounts and I’ve worked as an independent consultant for a few years and had access to a Sep-Ira.
    We want to move to a new place, but don’t have the financial flexibility to pull it off due to most of our money being tied up. At the end of the day, it’s not the worst problem you can have.

  13. I think Keogh Plans are highly underrated and under utilized. You can put a ton of money in there and reap the tax benefits. Also a big fan of Whole Life Insurance as long as you start early enough.

  14. Another quote I like in terms of keeping perspective is “more money has been lost preparing for the next crash than in the crash itself” by Peter Lynch. Decide on an asset allocation that you can hold through thick and thin and keep investing when the market is at all time highs and 15 year lows. Timing the market is a losers game.

  15. Thanks for the great article!! I really enjoy your content.

    One thing that would be interesting to consider is family planning. My wife and I both worked prior to having kiddos. Now we have three beautiful children under six and my wife works the hardest by staying home with them!! I would recommend contributing a bit more to taxable accounts while you and your partner are working. This may allow for more flexibility to raise your kids the way you want. For us, this meant drawing down some taxable investments with only one salary and a few more expenses.

  16. Very helpful advice! As a parent it can be rather tricky figuring out when and how much to save for your kids versus your own retirement.

    Looking at which portfolio is the furthest behind by age makes a lot of sense as does the reference to putting on one’s own oxygen mask before helping others!

    Solid tips as always Sam, thanks!

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