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Strategies

Chapter 5: Account Types

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Chapter 5: Account Types

The difference between building wealth and treading water is often not the return you earn, but the account you choose to hold it in. A 7% annual return in a taxable account leaves you 1–2 percentage points behind the same return in a tax-sheltered IRA or 401(k). Over thirty years, that gap becomes millions of dollars.

This chapter is about account architecture: choosing the right wrapper for your money. Every country has its own menu of tax-advantaged accounts, each with different contribution limits, withdrawal rules, and tax treatment. The United States offers a bewildering array — Traditional IRAs, Roth IRAs, 401(k)s, 403(b)s, 457 plans, HSAs, 529 plans — plus taxable brokerage accounts. The United Kingdom uses ISAs, pensions, and general investment accounts. Canada has RRSPs, TFSAs, and RESPs. Australia has superannuation.

The default mistake is to spread money across all available accounts without priority or purpose. A more sophisticated approach is to run the math: which account offers the most tax advantage for your specific situation? Capture that advantage first, then move to the next-best account.

For most people, the priority is straightforward: capture any employer 401(k) match (free money), then max out Roth or Traditional IRAs depending on your tax bracket, then HSAs if you have access, then max out the 401(k) itself, and only then consider taxable accounts. For high-income earners, the order shifts: maximize employer matches, capture backdoor Roths and mega-backdoor opportunities, then use mega-backdoor Roths or taxable accounts for overflow.

The account type determines not only how much tax you pay, but when you pay it. A Traditional IRA defers tax to retirement. A Roth pays tax now, but never again. A taxable account forces tax annually on dividends and gains. These timing differences compound across decades, making the choice of account one of the most consequential financial decisions you will make.

This chapter walks through each major account type: how it works, who can use it, contribution limits, withdrawal rules, and how to choose between competing options. By the end, you will have a framework for architecting your account portfolio — not randomly, but with clear logic.

What's in this chapter​

How to read it​

Start with the taxable brokerage account, the foundation of all portfolios. Then move through the retirement accounts in order of contribution limit and availability: IRAs first (available to everyone with earned income), then employer-sponsored plans (401(k), 403(b), 457), then specialized accounts (HSAs, 529s, and for UK residents, ISAs).

The framework in each article is identical: how the account works, the tax benefits, contribution limits, and withdrawal rules. Use the "Related concepts" links to cross-reference accounts you are comparing (Traditional vs. Roth, for example).

The core principle underlying all of these accounts is the same: tax-advantaged accounts allow money to compound without the drag of annual taxes. A dollar saved in taxes today is a dollar earning return tomorrow. Every article in this chapter is about maximizing that compounding opportunity for your specific situation.