Retirement Account Strategy: Priority List

The average person can be easily overwhelmed with all of the different retirement account choices. The rules can be complex and some wonder where they should put their money to be sure they are getting the best deal. Taxes and investment choices have to be considered.

I have come up with a prioritized list of how to invest your retirement money. You should do number 1 first, number 2 second, and so on. I also explain why each one is important.

  1. Company 401(k) or similar plan - Do this only until you have maxed out the amount the will match. If the company offers no matching contribution skip to step 2.
  2. Roth IRA - If you qualify contribute until you max out this one. Currently $5000 per year or $6000 if over 50. If you earn too much to qualify then do this in a Traditional IRA which everyone can have.
  3. Company 401(k) or similar plan - once you max out the 2 above you can contribute over and above the matching limit to save on taxes. If your company plan has poor choices for investment then I suggest skipping to the next step. The tax benefit would be outweighed by poor returns.
  4. Taxable Brokerage Account - If you max out all of the above (which is unlikely for most of us) you should continue to invest in a taxable brokerage account.
All of the accounts mentioned here comprise your total retirement assets. If you are investing some in a taxable account I would suggest having the bonds/cash portion in this account. They have historically lower returns and therefore less tax burden for you. You should not comprimise your asset allocation, though. If you max out the bond/cash portion in the taxable account continue to invest in stocks in the taxable account. Big picture is very important here.

This is a good general guide for everyone to use. Employer match is free money that should not be left on the table. The Roth IRA is tax free withdrawals in retirement and can save you thousands later. Following the above plan will ensure that you get the most for your money in the long run no matter how you invest.