Roth, IRA, 401(k), oh my! How to figure out where to put your investment money

If you’re confused about where to put your investment money and in what order, I break it down to a simple order.

There are a lot of different ways to invest your money. You’ve probably heard about 401(k)s and IRAs, and something about a Roth, but you also may have heard about 403(b)s, annuities, and other less-traditional avenues like real estate or gold.

It can be overwhelming, especially if you don’t know all the details. And you probably don’t know all the details.

Never fear, as I’m here to make it simple. I don’t want you to think too hard about investing—indeed, the less you think about it, the less likely you are to make an emotional decision you later regret—so I’ve come up with a simple step-by-step order for how to make determinations on where to put your investment money, should you be fortunate enough to have any.

Do you even have money to invest?

I’ll start with something simple. If you have non-mortgage debt, and you don’t have any emergency fund, then you don’t have money to invest.

You’re just not ready. Take the money that you think you have toward investing, and put it into paying off your car loans and credit cards and put something away for an emergency fund.

If you don’t do this, then you’ll lose so much much more in fees and interest than you gain from your investments. Get out of debt first.

(The only exception to this is taking the match at work, but keep on reading for details.)

Meta-rule: Get the most bang for your buck

When deciding where to put your money to invest, the idea is that you want to make the most impact you can make. And impact here means the most possible returns, the least fees, the least taxes, all if it. The most bang for your buck.

So as we go through the list below, this is the metric that I’m using. Starting with the most impact, and moving to the least impact.

Take the match

The most bang for your buck you can get when it comes to money is: free money.

And the only free money I know of that isn’t a scam is “taking the match” on your retirement account at work.

If you have a 401(k) plan at your place of employment, sometimes the employer will incentivize you contributing to this plan by offering a match on your contribution.

A common situation is a 3% match. This means that if you divert 3% of your paycheck (pre-tax) to your 401(k), the company will put in the same amount. As an an example, if you make a $60,000 salary per year, that’s $150 of your money put into your retirement account, which would become $300 when it gets there.

This is an insane 100% instant return on your investment. It’s actually more than 100%, because it only would reduce your paycheck by a little bit, since it’s a pre-tax investment.

Because this is such a crazy good deal, this is the only investment I recommend for people who are still in debt.

Do the Roth

Beyond the match, or if you don’t have one, the next greatest impact you can have on your money is to contribute to a Roth IRA.

Yes, this is even if you have a 401(k). Anything over the match should go into a Roth IRA. And if no match, start with the Roth IRA.

I’ve talked at length about the benefits of a Roth IRA, but the short version is that you have the most control, the most flexibility, and the most visibility into your money. The money you have in the account is yours, and no taxes will be taken out. You can withdraw your earnings at any time with no penalty, and you aren’t forced to withdraw your money when you reach a certain age, which is rare.

You can see the maximum amount that you can contribute on the IRS website, though this is also dependent on your income. If you make too much money, you won’t be able to contribute as much (or at all). This happened to me once, accidentally.

Here’s how to open an Roth IRA with Vanguard.

Go (back) to the 401(k)

After you’ve maxed out your Roth IRA, or if you don’t have the ability to contribute to one, I recommend returning to your 401(k) and contributing more to it. The 401(k) has a much higher contribution limit than a Roth IRA, so even though it’s not as flexible as a Roth, it’s still pretty good. You can contribute in a tax-advantaged way, saving on capital gains taxes.

(Now, I don’t want to get too confusing here, but you will sometimes have an option to contribute to a Roth 401(k). This means that the money won’t be pre-tax, but still have all of the other tax advantages of a 401(k). I prefer a Roth 401(k) to a regular 401(k), because of the certainty of knowing what you have, but either one is fine.)

If you’re self employed, note that you’re not left out here. You can create a Solo 401(k), also known as an Individual 401(k), and get the same tax breaks as if you were employed by someone else. But that’s a story for another day.

Resort to a brokerage account

If you’ve exhausted all of these other options, your last best option is to open a brokerage account yourself. You won’t get any tax breaks, and you’ll have to pay capital gains tax, but you can still come out ahead if you invest in low-cost index funds, which is what you want to be doing anyway.

Don’t stop before you hit 15%

I’ve often said that 15% of your income is a good goal for investing.

So if you make $60,000 a year, you want to invest $9,000 each year.

Given a 3% match and full eligibility to a Roth IRA, you could do the following:

  • $1,800 401(k) match
  • $6,500 Roth IRA
  • $700 401(k) contribution

Even if the market goes sideways for the entire year, you’ll still end the year with $10,800, because of the match. That’s a return of 20%. Beat that, crypto-heads!


I think the best order of investments for you to explore are the following:

  1. 401(k) match
  2. Roth IRA
  3. 401(k) non-match
  4. Brokerage account

But even simpler, if you just do #1 and #2, you’ll be so far ahead of everyone else.

Just start somewhere. And if you need more specific help figuring this whole investment/retirement thing out, let me know.

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