· Listen
The U.S. tax code treats different account types very differently. Knowing what each one does is one of the highest-leverage moves in personal finance.
Tax-deferred (pay tax later)
- Traditional 401(k) and Traditional IRA: you contribute pre-tax money. It grows untaxed until you withdraw it in retirement, when it is taxed as ordinary income.
- 457 and 403(b): government and nonprofit employee versions of the 401(k). Similar rules.
Tax-free (pay tax now, never again on growth)
- Roth 401(k), Roth IRA: contribute post-tax money. All future growth and qualified withdrawals are tax-free.
- Health Savings Account (HSA): if you have a qualifying high-deductible health plan, the HSA is uniquely powerful (tax deduction going in, tax-free growth, tax-free withdrawals for medical costs). Often called the triple tax advantage.
- 529 plans: for education expenses. Contributions are post-tax (sometimes state-tax deductible); growth and qualified education withdrawals are tax-free. The Saving for kids pillar lesson walks through 529 vs UTMA vs custodial brokerage side by side; the 18th Birthday Reveal calculator projects both side by side.
Taxable (no special treatment)
A regular brokerage account. No contribution limits, no withdrawal restrictions. But every dividend, interest payment, and realized gain is taxable in the year it happens.
Common priority order
A common educational framework: contribute to your 401(k) up to the employer match → pay off high-interest debt → fully fund an HSA if eligible → max a Roth IRA → return to maxing the 401(k) → invest the rest in a taxable brokerage account. Your situation may differ. This is a starting point, not a personal recommendation.
What this lesson is NOT
This lays out the menu of account types and a common default order for filling them. It is not a calculation of your bracket, and not a ruling on which specific dollar belongs in which account for your situation.
Quick check on this lesson
Answer each question and we’ll show you why the right answer is right, and why the others aren’t.
- 1.
Per the lesson, how is a Traditional 401(k) or Traditional IRA taxed?
- 2.
Per the lesson, what's the 'triple tax advantage' of an HSA, and what's the requirement to use one?
- 3.
What are 529 plans designed for, per the lesson?
- 4.
Per the lesson, what's a regular taxable brokerage account?
- 5.
Per the lesson's 'common priority order' framework, what's the first step recommended?
0 of 5 answered