How Each Account Works, the Limits for 2026, and the Order Many Investors Follow

For most American investors, the biggest decision is not which ETF to buy. It is which account to put the money in first: a 401(k), an IRA or a taxable brokerage account.

The account you choose decides how much of your money goes to tax, whether your employer adds money of its own, and when you can take it out again. Over decades, getting the order right can make a large difference to the wealth you build, even if you invest in exactly the same funds.

This guide explains the order many US investors follow, how each account works, the 2026 contribution limits, and where the common framework may not suit your situation. FRC has no stake in what you buy or where you invest: we do not sell investments, manage portfolios or earn commission, so everything here is explained impartially.

Watching rather than reading? The 401(k), IRA or brokerage video is in the FRC Retail Investing playlist on YouTube.

The Three Types of Account

A 401(k) is a retirement plan offered through an employer. You contribute directly from your paycheck, often with a contribution from your employer on top, and the money grows without being taxed each year.

An Individual Retirement Account, or IRA, is a retirement account you open yourself at a brokerage firm. It comes in two main forms, traditional and Roth, which are taxed in opposite ways, as explained below.

A taxable brokerage account is an ordinary investment account with no special tax treatment. FRC’s guide on what a brokerage account is explains how it works, and FRC’s ETF Investing for Beginners course explains how to choose and buy ETFs inside any of these accounts.

The Foundations Before You Invest

Before putting money into any investment account, many people build two foundations. The first is an emergency fund, cash set aside for unexpected costs such as a job loss or a large repair, so you are not forced to sell investments at a bad time.

The second is paying off high-interest debt, particularly credit cards. Interest rates on credit card balances are often far higher than the long-term returns investments have historically produced, so clearing that debt can be one of the most reliable returns available.

Neither step is exciting, but both protect the wealth you go on to build. Investing while carrying expensive debt can mean running to stand still.

Step One: Your 401(k), Up to the Employer Match

Many employers match part of what you contribute to your 401(k). A common example is a match of 50 cents for every dollar you contribute, up to 6 percent of your salary, though every plan sets its own formula.

That match is money added to your account on top of your salary. If you contribute less than the amount needed to receive the full match, you leave that money behind, which is why so many investors put the match first.

Some matches come with a vesting schedule, which means you must stay with the employer for a set period before the matched money is fully yours. Your plan documents and summary plan description explain the match formula and any vesting rules.

How a 401(k) Is Taxed

With a traditional 401(k), contributions come out of your pay before income tax, which lowers your taxable income today. The money then grows without annual tax, and you pay ordinary income tax when you withdraw it in retirement.

Many plans also offer a Roth 401(k). Contributions are made after tax, so they do not lower your tax bill now, but qualified withdrawals in retirement, including all the growth, are tax-free.

Withdrawals before age 59 and a half generally trigger income tax plus a 10 percent additional tax, with some exceptions. Traditional accounts also carry required minimum distributions later in life, under rules set by the IRS.

Step Two: An IRA

Once you are receiving the full employer match, many investors turn to an IRA. A key reason is choice: a 401(k) usually offers a limited menu of funds selected by the plan, while an IRA at a brokerage firm lets you choose from a wide range of ETFs and index funds.

Many investors choose a Roth IRA at this stage. You contribute money you have already paid tax on, the investments grow without annual tax, and qualified withdrawals in retirement are tax-free, including all the growth.

A traditional IRA works the other way. Contributions may be tax-deductible now, depending on your income and whether you have a workplace plan, and withdrawals in retirement are taxed as ordinary income.

Roth or Traditional: How to Think About the Choice

The choice between Roth and traditional comes down to when you would rather pay tax. If you expect your tax rate to be higher in retirement than it is today, paying tax now with a Roth can make sense, and if you expect it to be lower, a traditional account’s deduction today may be worth more.

Younger investors early in their careers often have lower incomes than they will later, which is one reason many favour Roth accounts. Higher earners may get more value from the traditional deduction.

A Roth IRA also has a flexibility advantage. Your own contributions, though not the earnings, can generally be withdrawn at any time without tax or penalty, although the money then stops growing tax-free.

The 2026 IRA Limits and Income Rules

For 2026, the IRS has set the IRA contribution limit at $7,500, with an additional $1,100 catch-up contribution allowed for people aged 50 and over. The limit applies across all your traditional and Roth IRAs combined, not to each account.

Roth IRA contributions are limited by income. For 2026, the ability to contribute phases out between $153,000 and $168,000 of modified adjusted gross income for single filers, and between $242,000 and $252,000 for married couples filing jointly.

The deduction for traditional IRA contributions also phases out at certain incomes if you are covered by a workplace plan. The IRS updates all of these figures each year, usually in the autumn, so always check the official limits for the current year.

Step Three: Back to Your 401(k)

After funding an IRA, many investors return to their 401(k) and increase contributions towards the annual limit. For 2026, the employee contribution limit is $24,500.

Investors aged 50 and over can make an additional catch-up contribution of $8,000 in 2026, and those aged 60 to 63 can make a higher catch-up of $11,250. These limits apply to the money you contribute, not to your employer’s match.

The trade-off at this stage is fund choice. If your plan offers low-cost index funds, filling the 401(k) is straightforward, while a plan with only expensive funds may change how much you put in beyond the match.

Where a Health Savings Account Fits

If you have a high-deductible health plan, you may be eligible for a Health Savings Account. An HSA offers a tax deduction on contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.

Many HSA providers allow the balance to be invested in funds once it reaches a minimum level. Because of its tax treatment, some investors place an HSA alongside or ahead of additional 401(k) contributions.

Eligibility and contribution limits are set by the IRS and depend on your health plan. Check the official rules and your HSA provider’s investment options before relying on it as part of a wealth plan.

Step Four: A Taxable Brokerage Account

Once your tax-advantaged accounts are funded, a taxable brokerage account is the next step. It has no contribution limit, no income limit and no restrictions on when you can take money out.

The trade-off is tax. Dividends are taxed in the year you receive them, and gains are taxed when you sell, at short-term or long-term rates depending on how long you held the investment.

That makes fund choice more important in a taxable account. FRC’s guide on how to choose tax-efficient ETFs for a taxable brokerage account explains which fund structures tend to produce less tax each year.

Why the Order Works

Each step uses the most valuable benefit first. The employer match is extra money that no investment can reliably match, so it comes before everything else.

Next come accounts where growth is sheltered from tax every year, and only then fully taxable investing. Over decades, keeping dividends and gains away from annual tax allows more of your money to compound, which FRC’s dictionary entry on compound interest explains in detail.

The order also builds in flexibility. A Roth IRA’s contributions and a taxable account’s balance can be reached before retirement in a way that most 401(k) money cannot, without penalties.

A Worked Example

Imagine a 30-year-old earning $70,000 a year whose employer matches 50 cents on the dollar up to 6 percent of salary. By contributing 6 percent, $4,200 a year, she receives a further $2,100 from her employer.

Next, she contributes to a Roth IRA and invests it in a low-cost broad market ETF. If she still has money left to invest after that, she raises her 401(k) contribution, and only after that does she open a taxable brokerage account.

The figures are an illustration, not a recommendation, and her plan’s rules and her own circumstances could change the order. But the structure shows how each dollar is directed to where it gains the most benefit.

When the Common Order May Not Suit You

The framework is a starting point, not a rule. If your 401(k) offers only high-cost funds, you may decide to put less in beyond the match and more in an IRA or taxable account.

If you need the money before retirement, for a house deposit or a business, a taxable account’s flexibility may count for more than tax savings. If you are a high earner above the Roth income limits, the IRA step looks different.

Self-employed investors use different accounts altogether, such as a SEP IRA or a solo 401(k). A licensed financial professional, such as a fiduciary investment adviser, can help apply the framework to your specific situation.

What to Invest In Inside Each Account

The account and the investment are separate decisions. Once you have chosen where the money goes, you still need to choose what to buy, such as a broad index ETF, a target date fund or a mix of stock and bond funds.

Many investors keep their core holdings simple, using low-cost broad market funds. FRC’s comparison of VOO, VTI and QQQ explains how three of the most popular ETFs differ.

Some investors also place investments that produce more taxable income, such as bond funds, inside tax-advantaged accounts, and more tax-efficient stock ETFs in taxable accounts. Building that kind of portfolio is covered in FRC’s ETF Investing Strategies course.

Moving Money Between Accounts

When you change jobs, your old 401(k) can usually stay with the old plan, move to a new employer’s plan, or be rolled over into an IRA. Each option has different rules, costs and fund choices.

How the money moves affects the tax you pay. FRC’s guide to IRA rollovers versus IRA transfers explains the difference and the deadlines that apply.

Getting a rollover wrong can turn a tax-free move into a taxable withdrawal. Checking the process with both providers before moving any money avoids that risk.

Choosing Where to Open an IRA or Brokerage Account

Your 401(k) provider is chosen by your employer, but you choose where to open an IRA or taxable account. Most large US brokers offer both, usually with no account minimum and no commission on online ETF trades.

Whichever firm you choose, check that it is a registered broker-dealer and a member of SIPC, which protects customers’ securities if a brokerage firm fails. FRC’s guide on how to use FINRA BrokerCheck shows how to look up any firm’s registration and disciplinary history in a few minutes.

Common Mistakes

The first mistake is not contributing enough to receive the full employer match. The second is cashing out a 401(k) when changing jobs, which can trigger income tax and the 10 percent additional tax.

The third is contributing to a Roth IRA when your income is above the limit, which can lead to penalties until it is corrected. The fourth is ignoring fees inside a 401(k) plan.

The fifth is leaving contributions in cash. Money deposited into an IRA or brokerage account does not grow until it is invested, and some investors discover years later that it never was.

Questions to Ask Before You Decide

First, does your employer offer a match, and what is the formula and vesting schedule? Second, do you expect your tax rate to be higher or lower in retirement?

Third, are you eligible for a Roth IRA at your income, and do you have access to an HSA? Fourth, when might you need this money, and could early withdrawal penalties apply?

Finally, check the IRS website for the current year’s limits and your plan documents for your employer’s rules. Official sources are the ones to rely on.

Common Questions

Should I invest in a 401(k) or an IRA first? Many investors contribute to their 401(k) up to the employer match first, then fund an IRA, then return to the 401(k), because the match is extra money that an IRA cannot offer.

What is the 401(k) limit for 2026? The employee contribution limit is $24,500, with an $8,000 catch-up for people aged 50 and over and an $11,250 catch-up for those aged 60 to 63.

What is the IRA limit for 2026? The limit is $7,500 across all traditional and Roth IRAs combined, plus a $1,100 catch-up for people aged 50 and over.

Can I have a 401(k) and a Roth IRA at the same time? Yes, as long as you meet the Roth IRA income limits. The two accounts have separate contribution limits.

When should I use a taxable brokerage account? Many investors use one after their tax-advantaged accounts are funded, or when they need flexible access to money before retirement.

Learning How to Build Wealth Is Open to Everyone

You do not need a finance background to understand how these accounts work. Employer matches, contribution limits, Roth and traditional tax treatment and account order can all be learned, and understanding them is one of the most valuable steps any investor can take.

FRC’s programmes and memberships are open to everyone. Start with ETF Investing for Beginners if you are new, move on to ETF Investing Strategies to build a complete portfolio, and continue to Advanced ETF Investing when you are ready to go deeper.

FRC’s Professional Membership adds structured learning, verified progress and a growing set of tools for investors who want to keep building their knowledge. The FRC dictionary, with explainer videos on the rules behind US investing, is free for everyone.

Your Next Step

Where you invest can be as important as what you invest in. Capture the employer match, use tax-advantaged accounts, and only then invest in a taxable account, adjusting the order to your own circumstances.

Check your plan’s match, confirm the current IRS limits and choose low-cost funds for each account. Then carry on with FRC’s complete step-by-step guide to investing in ETFs to build the portfolio inside them.