401(k), Roth IRA, and HSA: Which Account Should You Fund First?

It's payday. You've got some money left after the bills, and three acronyms are competing for it: your 401(k) at work, that Roth IRA you keep meaning to open, and the HSA your benefits packet mentioned once and never explained. Which one gets the next dollar?

Here's the good news: you don't have to guess. Financial educators have long taught a simple order of operations — a "waterfall" — that walks your money through the accounts in a sequence that captures the biggest advantages first. You don't need to memorize tax code. You just need to know which bucket fills next.

One honest note before we start: this is education, not a prescription. The classic order fits a lot of people, but your debts, your health plan, your income, and your goals can all shuffle the steps. Think of what follows as the map most people start from — then adjust with a professional who knows your full picture.

Why this matters

Order matters because the accounts are not created equal. Some come with free money attached. Some come with tax advantages you can't get anywhere else. And every year you fund them in a scrambled order, you may be leaving part of your own compensation unclaimed — or paying taxes you didn't have to.

The dollar amounts are real. For 2026, the IRS lets employees defer up to $24,500 into a 401(k), and the IRA limit is $7,500. Most people will never hit both ceilings — which is exactly why sequence matters more than size. If you can only fill part of the waterfall, you want to fill the most valuable buckets first.

There's a behavioral reason to learn the order, too. Research on retirement saving shows that people who automate their plan — automatic enrollment, automatic increases — save meaningfully more than people who rely on willpower. Once you know your sequence, you can set each step on autopilot and stop re-deciding every payday.

The waterfall, at a glance

Picture your savings flowing downhill. Each bucket fills, then spills into the next:

In words: capture every dollar of your employer match first, fund an HSA if your health plan qualifies, then a Roth IRA (or traditional IRA), then circle back and push your 401(k) toward its limit, and finally invest anything extra in a regular taxable account. Let's walk each step.

Step 1: Capture the full employer match

If your employer matches 401(k) contributions, that match is part of your pay. Contributing too little to capture it is like telling payroll, "No thanks, keep that part of my compensation."

The math is hard to beat anywhere else. A common formula is "100% of the first 4%": for every dollar you put in, up to 4% of your salary, your employer adds a dollar of its own.

Match captured = match rate x your contribution (up to the plan cap) Hypothetical: $60,000 salary, 100% match on the first 4% Your 4% = $2,400 per year -> employer adds another $2,400

That hypothetical employee just turned $2,400 of saving into $4,800 of retirement money before any market growth at all. No other step in the waterfall starts with that kind of head start, which is why the match comes first — even before extra debt payments in many educators' frameworks, and even though the match may follow a vesting schedule before it's permanently yours.

Step 2: Fund the HSA — if you're eligible

This is the step most people skip, usually because nobody explained it. A Health Savings Account is only available if you're covered by a qualifying high-deductible health plan, but if you are, it's the only account in the U.S. tax code with a triple advantage: contributions are deductible, growth isn't taxed while it stays in the account, and withdrawals for qualified medical expenses are tax-free under current law.

Two features make the HSA more powerful than it looks. First, it's not "use it or lose it" — that's a flexible spending account. HSA money rolls over year after year, and at many employers it can be invested, letting compound growth work on it for decades. Second, after age 65 the extra penalty on non-medical withdrawals goes away; you'd simply owe ordinary income tax, much like a traditional pre-tax account. Used patiently, an HSA can function as a health-focused retirement account — and health costs are one of retirement's biggest line items.

The IRS sets HSA contribution limits each year (they're published in IRS guidance and Publication 969), and eligibility rules have details worth checking — your HR team can confirm whether your plan qualifies and whether your employer contributes anything on your behalf.

Steps 3, 4, and 5: Roth IRA, back to the 401(k), then taxable

Step 3: an IRA — often Roth. With the match captured and the HSA handled, the classic next stop is an IRA you open yourself, up to that $7,500 limit for 2026. Many educators point to the Roth version for this step: you contribute after-tax dollars now, and qualified withdrawals later — including all the growth — are tax-free under current law. A Roth IRA also gives you investment choices beyond your employer's menu. Note that Roth IRA eligibility phases out above certain income levels, and traditional IRA deductions have their own rules — IRS Publication 590-A spells both out, and which flavor fits you is a genuinely personal question about today's tax bracket versus tomorrow's.

Step 4: circle back to the 401(k). Still have savings capacity after the IRA? Now push your 401(k) deferral higher, toward that $24,500 ceiling. This is where a plan feature called auto-escalation shines: it raises your contribution rate automatically each year — say, by one percentage point — so your savings climb without you ever feeling a single big jump. If you're 50 or older, the IRS also allows additional catch-up contributions on top of the standard limit.

Step 5: taxable investing. If you've filled every tax-advantaged bucket — a milestone worth celebrating — additional savings can flow into a regular brokerage account. It has no special tax treatment, but also no contribution limits and no withdrawal age rules, which adds flexibility to your overall mix.

You don't need to reach Step 5 for the waterfall to be working. Most people spend years on Steps 1 through 3 — and a fully captured match plus a steadily funded IRA is already a strong plan in motion.

Five questions to ask HR this week

Your HR or benefits team can answer most of the unknowns in your waterfall in one short conversation — these are routine questions they hear all the time.

One last thing, because this article touches tax rules from several directions: contribution limits, income phase-outs, and the tax treatment of each account all depend on your specific situation and on current law, which changes. Before you act on anything here, it's worth a conversation with a tax professional or CPA who can look at your whole return.

The waterfall isn't about being perfect. It's about pointing each dollar at the most valuable open bucket — and then letting automation do the remembering for you.