Contribution Priority Order
With limited capital, contribution order affects long-term wealth through tax efficiency differentials. The standard ordering optimizes for marginal tax benefit — but the reasoning matters more than the memorized order, because your situation may differ:
2024 Contribution Limits
| Account | Under 50 | Age 50+ |
|---|---|---|
| 401k / 403b (employee) | $23,000 | $30,500 |
| IRA (Traditional or Roth) | $7,000 | $8,000 |
| HSA (Family) | $8,300 | $9,300 |
| HSA (Self-only) | $4,150 | $5,150 |
| 401k Total (incl. employer) | $69,000 | $76,500 |
Mega Backdoor Roth: Some 401k plans permit after-tax contributions up to the $69,000 total limit. These can be converted to Roth via in-plan conversion or rollover. Check plan documents for availability.
Traditional vs Roth Decision
The core question: pay taxes at current marginal rate (Traditional) or expected future rate (Roth)? This sounds simple but the real insight is about tax bracket arbitrage:
The Stack Insight: Traditional contributions avoid your highest marginal bracket (often 22-32%). Roth withdrawals fill from the bottom of your retirement income. You're not comparing like with like — you're stacking different buckets for different purposes.
- Traditional favored: High current bracket (32%+), expect lower retirement income, need current deduction
- Roth favored: Lower current bracket, expect higher future rates, value tax-free flexibility
- Uncertain: Split contributions for tax diversification across account types
HSA: Triple Tax Advantage
The HSA is the only account with three distinct tax benefits:
- Tax-deductible contributions: Reduces current-year taxable income (like Traditional IRA)
- Tax-free growth: No taxes on dividends, interest, or capital gains (like Roth)
- Tax-free withdrawals: For qualified medical expenses at any age
HSA Optimization: Pay medical expenses out-of-pocket, save receipts indefinitely, let HSA compound. Withdraw tax-free decades later using saved receipts. After age 65, non-medical withdrawals are taxed as ordinary income (like Traditional IRA).
Roth IRA Income Limits (2024)
Direct Roth IRA contributions are phased out at higher incomes:
- Single: Phase-out $146,000 - $161,000 MAGI
- Married filing jointly: Phase-out $230,000 - $240,000 MAGI
- Backdoor Roth: Contribute to non-deductible Traditional IRA, convert to Roth. No income limit.
Pro-Rata Rule: Backdoor Roth conversions are taxed proportionally if you hold pre-tax IRA balances. Roll pre-tax IRA funds into 401k before executing backdoor conversions.