By: Gary Hirsh, CPA, CFP®
It's somewhat ironic that I'm writing this article on the 46th anniversary of my first day as an accountant. I started as an audit junior at Coopers & Lybrand (now PwC) after realizing that professional baseball and basketball weren't in my future. After spending the early part of my career in auditing, I've worked in tax for the past twenty years—and throughout this journey, I've learned that the most impactful financial advice often comes from real-world experience, not textbooks.
I still remember those early IRA advertisements encouraging contributions of the then-maximum $1,500. Had I started contributing at the beginning of every year back then, my projections showed I'd have over $19 million today. The reality? Interest rates dropped to as low as 1%, and while contribution limits increased, that $19 million target remains elusive. This taught me an important lesson: theoretical projections are helpful, but practical strategy matters more.
The Question Every Client Asks
"Where should my money go first?" It's the question I hear most often, and it became even more complex with the introduction of Roth IRAs in 1998 and Roth 401(k)s in 2006. When you have limited dollars to save and multiple investment vehicles available, the choices can feel overwhelming.
The answer isn't one-size-fits-all, but there is a strategic approach that can help maximize your financial future. Here's my recommended priority order for allocating your savings dollars—an approach that may differ from other advice you've encountered, based on decades of seeing what works (and what doesn't) for real clients.
The Strategic Savings Hierarchy
1. Maximize Your 401(k) Match First
Start by contributing enough to your employer's 401(k) plan to capture the full company match. This is essentially free money—a guaranteed return on your investment that's hard to beat, regardless of market performance. Stay through the vesting period to secure these benefits fully. You may also borrow from a 401(k) if necessary, though this isn't generally recommended.
Once you've captured the full match, consider funding a Roth IRA outside your company plan if your modified adjusted gross income is under $150,000 (or $236,000 if married filing jointly) for 2025.
2. Build Your After-Tax Savings
This is where my approach differs from many financial advisors, and it's based on what I've observed over two decades of practice. I strongly recommend prioritizing after-tax savings as your second step.
I've seen too many clients approaching retirement with "lopsided" portfolios—substantial tax-deferred accounts but minimal after-tax savings. What they don't realize is that they have a partner in their retirement plans: the IRS, along with states that tax retirement income. Every distribution triggers taxes that can substantially impact their retirement lifestyle.
For younger savers, after-tax funds provide crucial flexibility for major purchases like homes or cars. In today's housing market, having 20% available for a down payment can save thousands in mortgage costs and eliminate private mortgage insurance.
3. Additional 401(k) Contributions
Once you've built adequate after-tax reserves, return to maximizing your 401(k) contributions beyond the match amount. If you're younger, the time horizon for tax-deferred investing provides more opportunity for growth. The benefits of investing in stocks within tax-deferred accounts can be substantial over long periods, even after accounting for ordinary income tax rates on distributions rather than capital gains rates.
4. Health Savings Accounts (HSAs)
While HSAs aren't specifically retirement accounts, they can function as such if you invest the funds and let them compound until retirement. If feasible, I tell clients to pay their current medical bills from other sources and preserve their HSA growth potential.
5. After-Tax Company Plans
If you've maximized all the above options and your employer offers an after-tax plan option, this can provide additional tax-advantaged growth opportunities.
The Bottom Line
This strategic approach balances tax advantages with flexibility, ensuring you're not putting all your eggs in one tax basket. After 46 years in this field, I've learned that tax diversification in retirement can be just as important as investment diversification during your accumulation years.
Every situation is unique, and this framework should be adjusted based on your specific circumstances, income level, and financial goals. The key is having a strategy—something I wish I'd understood better when I was staring at those $1,500 IRA contribution limits all those years ago.
Questions about implementing this strategy for your specific situation? I'm here to help you navigate these decisions and create a personalized plan that works for your financial future.
The foregoing content reflects the opinions of Highland Financial Advisors, LLC, and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct.
Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns.
Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will act as they have in the past.
The above article was written with the assistance of artificial intelligence (AI).