tldr: max out your 401k and HSA with stocks, then your Roth/deductible IRAs with stocks, put the rest in taxable accounts. Note, this is contrary to what many popular sources claim: that you should put tax-inefficient assets like bonds into tax advantaged accounts.
Since we're interested in maximizing our tax advantage, we'll look at the tax advantage of each of these account types, for both stocks and bonds, in absolute dollar terms.
We'll use the same illustrative example presented in part 1
- $1,000 pre-tax contribution amount
- 28% income tax bracket
- 28% retirement income tax bracket
- 15% capital gains tax rate
- 8% stock growth
- 3% fixed-income yield
- 20 year investment horizon
- 50% employer 401k match
| Account Type | Withdrawal Amount | Advantage |
|---|---|---|
| Regular | $2961 | |
| HSA | $4661 | + $1700 |
| Roth and Traditional 401k | $5034 | + $2073 |
| Roth and Traditional+Deductible IRA | $3356 | + $395 |
| Traditional, non-deductible IRA | $2618 | - $343 |
And similarly for bonds
| Account Type | Withdrawal Amount | Advantage |
|---|---|---|
| Regular | $1104 | |
| HSA | $1806 | + $702 |
| Roth and Traditional 401k | $1951 | + $847 |
| Roth and Traditional+Deductible IRA | $1300 | + $196 |
| Traditional, non-deductible IRA | $1138 | + $34 |
The above table gives you a sense of how far $1000 (pretax) of stocks will go versus bonds. Once you have decided on a stock/bond allocation, you should allocate those dollars starting from the most advantaged places and moving to the least advantaged.
For example, let's say we plan on putting (in terms of pre-tax dollars) $50,000 into stocks and $50,000 into bonds. The above table would suggest maxing out our 401k first with stocks, so we put in $18,500 there. Then we should max out our HSA with stocks, so we put $3,400 there. Then (assuming we're eligible) we should max our our Roth/deductible IRA with stocks, so that's another $5,500. If we were not eligible for the Roth/deductible IRA, then we should max out our non-deductible IRA with bonds. Finally, once we've exhausted our tax-advantaged accounts, everything else should go into our taxable account. If we do this, our $100,000 investment will grow to $249,553 over the course of 20 years. If instead we had put bonds into our tax-advantaged accounts, it would only have grown to $222,384. In this scenario, this roughly corresponds to a 12% difference by simply putting assets in the right account.
The results are pretty robust to the input parameters chosen. I've made this spreadsheet (make a copy to edit) to play around with the parameters yourself if you don't believe me.