Account Types

Taxable, Roth, Traditional – Which to Use When

Once you know where your money lives (the brokerage), the next question is: which type of account?

This is where taxes come in.

The account you choose determines:

  • When you pay taxes (now or later)
  • How much flexibility you have to access the money
  • What contribution limits apply

I'm not going to pretend there's one perfect answer for everyone. But I can walk you through how I think about the tradeoffs.

1. The three main buckets

At a high level, you're choosing between three types of accounts:

  1. Tax-deferred (Traditional 401(k), Traditional IRA)
  2. Tax-free (Roth 401(k), Roth IRA)
  3. Taxable (individual brokerage account)

Each has different rules about when you pay taxes and when you can access the money.

2. Tax-Deferred Accounts (Traditional 401(k), Traditional IRA)

How they work:

  • You contribute pre-tax money (or get a tax deduction)
  • This lowers your taxable income for the year
  • The money grows tax-free while it's in the account
  • You pay taxes when you withdraw in retirement

The benefit:

  • Tax break now – lowers your current tax bill
  • More money to invest immediately (since you didn't pay taxes on it yet)

The tradeoff:

  • You'll pay ordinary income tax on withdrawals later
  • If tax rates go up or your income stays high in retirement, this could hurt
  • Required Minimum Distributions (RMDs) start at age 73 (as of 2024)

When I'd prioritize this:

  • You're in a high tax bracket now
  • You expect to be in a lower bracket in retirement
  • You want to maximize the immediate tax savings

3. Tax-Free Accounts (Roth 401(k), Roth IRA)

How they work:

  • You contribute after-tax money (no immediate deduction)
  • The money grows tax-free while it's in the account
  • Withdrawals in retirement are completely tax-free

The benefit:

  • Tax-free growth and tax-free withdrawals later
  • No Required Minimum Distributions for Roth IRAs
  • More flexibility – Roth IRA contributions (not earnings) can be withdrawn anytime without penalty

The tradeoff:

  • No immediate tax break
  • You have less to invest up front because you already paid taxes

When I'd prioritize this:

  • You're in a moderate or lower tax bracket now
  • You expect your income (and tax rate) to be similar or higher later
  • You want tax-free growth and no tax bomb in retirement
  • You value the flexibility of Roth IRA contributions

4. Taxable Brokerage Accounts

How they work:

  • You contribute after-tax money (no deduction)
  • You pay taxes on dividends and interest each year
  • You pay capital gains tax when you sell for a profit
  • No contribution limits, no age restrictions, no penalties for early withdrawal

The benefit:

  • Complete flexibility – access your money anytime
  • No contribution limits – invest as much as you want
  • Long-term capital gains tax rates are often lower than ordinary income
  • Great for goals before age 59½ (like early retirement, house down payment, bridge years)

The tradeoff:

  • You pay taxes along the way (dividends, capital gains)
  • Less tax-efficient than retirement accounts

When I'd prioritize this:

  • You've maxed out tax-advantaged accounts and still want to invest more
  • You're saving for goals before retirement age
  • You value flexibility over tax optimization

5. Contribution Limits (2024)

Each account type has different limits:

401(k) / 403(b) / TSP:

  • $23,000 per year (under age 50)
  • $30,500 per year (age 50+, with catch-up)
  • Employer match doesn't count toward your limit

IRA (Traditional or Roth):

  • $7,000 per year (under age 50)
  • $8,000 per year (age 50+, with catch-up)
  • Roth IRA has income limits that phase out eligibility

Taxable Brokerage:

  • No limit – invest as much as you want

6. How I'd build the order of operations

Here's a practical sequence that balances taxes, flexibility, and long-term growth:

  1. Get the 401(k) match
    • This is free money – instant 50-100% return
    • Contribute at least enough to capture the full match
  2. Max out Roth IRA
    • $7,000/year (or $8,000 if 50+)
    • Tax-free growth + flexibility with contributions
  3. Go back to 401(k) if you have more to invest
    • Traditional or Roth depending on your tax situation
    • Max it if you can ($23,000/year)
  4. Add to taxable brokerage
    • Once tax-advantaged accounts are maxed
    • Or if you need flexibility for pre-retirement goals

This isn't the only right way, but it's a solid default framework.

7. Roth vs Traditional: how to decide

The classic question: should I do Roth or Traditional?

Simple way to think about it:

  • If your tax rate is high now and will be lower later: Traditional (save taxes now)
  • If your tax rate is moderate/low now or will be higher later: Roth (pay taxes now, avoid them later)

Reality check:

  • You don't know what tax rates will be in 20-30 years
  • You don't know exactly what your income will be in retirement
  • Having both gives you flexibility

My approach:

  • Early career (lower income): lean toward Roth
  • Peak earning years (high income): lean toward Traditional
  • Always keep some mix of both so future-me has options

8. What about HSAs?

If you have access to a Health Savings Account (HSA) through a high-deductible health plan:

  • It's actually the most tax-advantaged account available
  • Triple tax benefit: deductible going in, tax-free growth, tax-free withdrawals for medical expenses
  • After age 65, you can withdraw for any reason (taxed like Traditional IRA)

If you can afford to max it and pay medical expenses out of pocket, it's an incredibly powerful tool.

9. The big picture

Account types matter, but they're not everything.

What matters more:

  • That you're actually investing consistently
  • That you're using low-cost index funds
  • That you're not jumping in and out based on headlines

The "perfect" account mix is less important than building the habit of saving and investing month after month, year after year.

Pick a reasonable order of operations, automate it, and let time do the heavy lifting.