Week 14 Day 5: The Order of Operations

Step 1: Get the free money (401k match). Step 2: Lock in tax-free growth (Roth IRA). Step 3: Maximize tax-deferred growth (401k max). Step 4: Invest the remainder (taxable brokerage). This order is not arbitrary -- it prioritizes the highest-return, lowest-tax options first.

Here is the order with numbers. Assume you earn $80,000 and can invest $20,000/year. Step 1: 401(k) up to employer match. Your employer matches 50% up to 6% ($2,400 of your money + $1,200 match = $3,600). Your cost: $2,400. Step 2: Roth IRA max. $7,000/year. Your cost: $7,000. Step 3: Increase 401(k) beyond the match. You have $10,600 remaining ($20,000 - $2,400 - $7,000). Add $10,600 more to 401(k), bringing total 401(k) contributions to $13,000. Step 4: If you still have capacity, increase 401(k) toward the $23,000 max. There are nuances: if you have high-interest debt (above 6-7%), pay that off before anything beyond the 401(k) match. If you need to build an emergency fund, do that alongside Step 1. But for pure investment allocation, this order is the consensus recommendation from nearly every credible financial planner.

The order of operations is derived from optimizing the after-tax internal rate of return (IRR) across all accounts. The 401(k) match has an infinite IRR on the matched portion (instant 50-100% return). The Roth IRA has the highest long-term after-tax return for investors expecting rising tax rates (all growth is tax-free). The 401(k) beyond the match has the second-highest long-term after-tax return (tax-deferred growth with tax-deductible contributions). The taxable account has the lowest after-tax return but provides liquidity and the step-up in basis at death. The optimization changes for high-income earners who cannot contribute to a Roth IRA directly (income limits) -- they should use the backdoor Roth IRA strategy. For those with access to an HSA (Health Savings Account), many planners insert HSA between Steps 1 and 2 because the HSA is the only account with a triple tax benefit: tax-deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses. After age 65, HSA withdrawals for any purpose are taxed like a Traditional IRA, making it a de facto additional retirement account.