If you have a fixed sum of money to invest every month or every year, which investment account type gives you the biggest bang for your buck?
There are no one-size-fits-all answers, but this framework for retirement savings is a good starting point.
1: Invest enough in a 401(k)/other company retirement plan to earn matching contributions.
- Why: To take advantage of free money.
- Deprioritize if: Your 401(k) offers no matching contributions. In that case, proceed directly to No. 2.
Even a lackluster match—say, 25 cents per dollar—is hard to beat by investing outside the plan, and it comes on top of any investment earnings.
2: Invest in an IRA.
- Why: Low costs, flexibility, and the ability to contribute to a Roth.
- Deprioritize if: Your company retirement plan features all the bells and whistles, including ultralow costs and a Roth option.
Why choose an IRA over a 401(k)? IRAs often avoid administrative fees, and they offer an array of securities and a Roth option.
But if your 401(k) has no administrative expenses, ultralow-cost investments, and a Roth option, you can make a full 401(k) contribution before moving to an IRA.
2a: Invest in a Spousal IRA.
- Why: Amass retirement savings for a nonearning spouse.
- Deprioritize if: The 401(k) of the spouse with earnings is rock-solid; in that case, fully funding that 401(k) plan could reasonably come before funding IRAs for either spouse.
For married couples with a nonearning spouse, funding a spousal IRA should come next, if the earning spouse has enough to cover both.
3: Invest in your company retirement plan up to the limit.
- Why: The ability to enjoy tax-free contributions and tax-deferred compounding (traditional), or tax-free compounding and withdrawals (Roth).
- Deprioritize if: You have plenty of assets in accounts that will be taxed upon withdrawal, and you’re close to retirement. If that’s the case, you may want to prioritize saving in a taxable (nonretirement) account instead of maxing out the company retirement plan. Ditto if there’s a chance you’ll need the money before retirement.
Higher-income investors should generally exhaust all tax-sheltered retirement-savings options before investing in nonretirement accounts, even if their workplace plan isn’t best of breed. Traditional 401(k) contributions are pretax, compound tax-deferred, and reduce adjusted gross income, thereby increasing eligibility for credits and deductions. Roth 401(k)s offer tax-free compounding and withdrawals in retirement. Those benefits can make even a subpar 401(k) preferable to a taxable account.
4: Make health savings account contributions up to the limit.
- Why: Pretax contributions go in, funds can be invested and grow with tax benefits, and qualified withdrawals for healthcare outlays are also tax-free.
- Deprioritize if: You can’t contribute. You must be covered by a high-deductible health plan to contribute to an HSA.
HSAs can be treated as retirement saving vehicles if you invest the assets and let the money compound until retirement. Qualified withdrawals remain tax-free.
5: Make aftertax 401(k) contributions to the limit.
- Why: The ability to enhance a portfolio’s share of Roth assets, eventually—provided the 401(k) plan allows for the contribution of after-tax dollars.
- Deprioritize if: The 401(k) is especially poor or especially good, as outlined at the bottom of this article.
If you’ve maxed out regular 401(k) contributions of $24,500 ($32,500 if older than 50), you can contribute up to $72,000 total in 2026—provided your plan allows after-tax contributions. Then convert those to Roth inside the plan, if allowed, or once you retire, leave the company, or take in-service distributions.
This strategy is less attractive if you have a poor or costly 401(k).
6: Invest in a taxable account.
- Why: You’re aiming for tax diversification in retirement and already have a sizable share of your assets in tax-deferred and Roth accounts. Ditto if there’s a chance you’ll need to take out your money before retirement, or you expect to be in the 0% tax bracket for capital gains when you withdraw your money.
- Deprioritize if: You have more tax-advantaged account options available to you, and you have a long time horizon for your money.
With a taxable (nonretirement) account, you can invest in nearly anything, and there are no withdrawal requirements. You can access the money anytime, or let it build. And while you’ll invest after-tax dollars, you’ll owe capital gains taxes (lower than ordinary income taxes) when you sell.
This article was provided to The Associated Press by Morningstar. For more retirement content, go to https://www.morningstar.com/retirement.
Christine Benz is director of personal finance and retirement planning for Morningstar and co-host of The Long View podcast. Subscribe to her free newsletter, Improving Your Finances.