By Matt Becker

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Quick note: The following is a lightly edited sample chapter from Investing Made Simple, an action-oriented guide that shows you how to create an investment plan that works, no matter where you’re starting from. This chapter was originally published on the blog in June 2015 and has since been updated to reflect current rules and regulations.

Now that you have your monthly savings target (from the previous chapter in the guide), the next big question is: “Where should you be putting it?” Specifically, what types of investment accounts will make it easiest for you to reach financial independence as soon as possible?

You have a number of options and in this section we’ll walk through the pros and cons of each one.

First Rule: Take Advantage of Tax Advantages

The government has created certain types of savings accounts with built-in tax advantages, and there are a few big reasons why you should generally take advantage of these accounts before looking elsewhere:

Some of them offer a tax deduction for contributing, which means that you will actually get money back at tax time just for saving. Those that don’t offer a deduction DO allow you to eventually withdraw the money tax-free. So it’s either tax-free on the way in or tax-free on the way out. They all allow your money to grow tax-free while it’s inside the account, which means it will grow faster than if it were subject to taxes every year. Contributing to these accounts may qualify you for the saver’s credit, which can save single parents up to $1,000 and married couples up to $2,000 at tax time.

Basically, these accounts make it easier for you to reach financial independence sooner.

For the most part, what we’ll be talking about here are these different types of tax-advantaged accounts and how you can use them.

Option 1: 401(k) or 403(b) with an Employer Match

If your employer offers a 401(k) or 403(b) with a matching contribution, then that’s the place to start pretty much no matter what.

An employer match works like this: for every contribution you make up to a certain amount, your employer will match that contribution. In other words, your employer will put extra money into your 401(k) or 403(b) on top of what you contribute yourself.

A typical employer match might look something like this:

100% match up to 3% of your salary. If you save 3% of your salary, your employer will put in another 3%. You immediately double your money simply by contributing. 50% match above that, up to 5% of your salary. If you contribute another 2% of your salary, your employer will match half of that additional contribution. You’re allowed to contribute more than 5% of your salary (up to the annual limits), but any amounts above that would not be matched.

In other words, in this scenario every dollar you contribute up to 5% of your salary earns an immediate and guaranteed 50%-100% return on investment.

That’s a far better deal than you’ll find anywhere else.

Now, all matching programs look different and some employers don’t offer a match. You can request your 401(k) plan’s Summary Plan Description to get the details about your specific program.

But the moral of the story is this: If your employer offers a match, you’ll want to contribute enough to get that full match before you even think about using another type of account. It’s simply the best deal around.

Quick note: In some cases the employer match will be subject to something called vesting, in which case you would only receive the entire match if you stay with the company for a certain number of years.

For example, your employer might increase your vested amount (the amount that’s fully yours) by 20% for each year of employment. In that case you would have to be with the company for 5 years before the entire employer match you have received will be yours.

Keep in mind that the money YOU contribute is always 100% yours. It may gain or lose value based on investment performance, but there is no vesting schedule. That only applies to contributions your employer makes.

Option 2: 401(k), 403(b) or 457(b)

If your employer doesn’t offer a match, or if you’re already contributing enough to get the full match and still want to save more, there are a few more variables to consider when it comes to your employer plan.

The 401(k), 403(b) and 457(b) are all different types of retirement plans your employer might offer, but they share a lot of similarities so I’m grouping them together. (Note: I didn’t mention the 457(b) in the previous section because they typically don’t offer an employer match.)

One big advantage of these plans is that it should be relatively easy to get started. You can simply ask your Human Resources department about setting up your contribution and it will be taken right out of your paycheck. That’s about as low-hassle as it gets.

Some plans (the better ones) may also have access to lower-cost investment options than you can get on your own. If so, that might be a good reason to prioritize these accounts before others.

Finally, the annual contribution limit here is higher than in any account you can open on your own, so they allow you to save more money. For 2017, the annual contribution limit for these accounts is $18,000.

The big potential downside to look out for here is the cost involved. Some of these plans have lots of fees, and those fees will affect your bottom line. Fees might include the cost of paying an investment manager, the cost of the investment options themselves, and administrative costs like record-keeping and accounting.

Minimizing the cost of your investments is one of the best ways to maximize return, which is something we’ll be talking about in more detail later on. If your employer plan has a lot of fees, you may want to look elsewhere once you’ve secured your employer match.

Summary of Pros

Easy to get started. Contributions are taken directly out of your paycheck.

In general, your contributions are tax-deductible in the current year, meaning you will get an immediate tax break. Your eventual withdrawals will then be taxed.

These accounts may also offer a Roth option, which would not give you a current tax deduction but would allow you to eventually withdraw the money tax-free.

High annual contribution limit ($18,000 for 2017). If you are 50 or older, you can contribute an additional $6,000 per year.

May offer high-quality, low-cost investment options you can’t find on your own.

When you leave your job, you can take this money with you by either rolling it over into your new employer plan or into an IRA (we’ll talk about IRAs just below).

Summary of Cons

Some plans have high fees, which will drag down your returns.

Your investment options are limited to what your employer chooses to include in the plan. In some cases these options may not be great.

Technically, your money is supposed to stay in the account until age 59.5, but there are some ways around that rule.

Moral of the Story

Take full advantage of the employer match first, no matter what the plan looks like.

If your plan offers low-cost investment options that fit your desired investment strategy, this is a good option for your additional savings above that match.

If your plan has a lot of fees, or if the investment options don’t fit your desired strategy, you might want to contribute additional money elsewhere first.

Option 3: Traditional IRA and Roth IRA

If your employer doesn’t offer a retirement plan, or if you’re looking for a lower-cost option, an IRA is likely to be your best bet.

An IRA is a dedicated retirement account, just like a 401(k) or 403(b). But instead of getting it through your employer, you open it with an investment company of your choosing.

One of the big advantages of using an IRA is that you have a lot more control than you do with an employer plan. You get to decide which investment company you use, which investment options to choose, and which fees you’re willing to pay.

There are two types of IRAs: the Traditional IRA and the Roth IRA. There are several differences between them, but the main difference is in the tax benefit they offer:

A Traditional IRA works a lot like a traditional 401(k). You get a tax deduction for your contribution, your money grows tax-free inside the account, and your eventual withdrawals will be taxed as regular income.

A Roth IRA is exactly the opposite. There is no deduction for contributions, but your money grows tax-free inside the account and your contributions will eventually be tax-free.

Essentially, it’s a choice between a tax-deduction today or tax-free withdrawals later.

Both are fantastic options, and the truth is that there isn’t a simple answer as to which one will end up being best for your specific situation. But there are a few rules of thumb that may help you make your decision:

The higher your current tax bracket, the more likely it is that a Traditional IRA will be most beneficial.

If your decision is whether to contribute the same dollar amount to either a Roth or Traditional IRA, the Roth will win simply because that money will never be taxed. But keep in mind that you should be able to afford a bigger Traditional IRA contribution because that contribution will save you some tax money.

Since it’s taxed differently, a Roth IRA can be a nice supplement to an employer 401(k).

Generally, I tend to favor the Traditional IRA as long as you’re using the tax savings to make a bigger contribution. The exception to that is someone who is already paying very little in taxes.

Since Traditional IRA contributions lower your taxable income, they can help you qualify for income-dependent tax breaks like the saver’s credit. It may be worth consulting with an accountant or financial planner to understand the specifics of your situation.

If you’re really not sure which way to go, you could always open one of each and split your contribution 50/50. Best of both worlds.

And again, these are both great options and the truth is that it’s impossible to know for sure which one will end up being better. So, while it is worth putting some thought into the decision, it’s much more important to just pick one and get started.

For more on this topic, check out this detailed breakdown: Traditional vs Roth IRA – Some Unconventional Wisdom for Young Investors.

What Investment Company Should You Open Your IRA With?

Choosing where to open your IRA can be a tough decision, and there are too many options to list them all here.

So I’ll simply say that while I can’t possibly give you a personalized recommendation, and you should do your own research before making any decision here, my default answer would be to open your IRA with Vanguard. It’s the company I use for my personal investments, and the one I end up recommending to most of my clients.

Here are a few reasons why I like Vanguard:

They basically invented index investing , which is at the core of my personal investment philosophy (we’ll talk more about this later on).

, which is at the core of my personal investment philosophy (we’ll talk more about this later on). They are investor-focused . Since their founding, Vanguard’s mission has been to provide high-quality investment options to people of all levels of wealth.

. Since their founding, Vanguard’s mission has been to provide high-quality investment options to people of all levels of wealth. They are dedicated to keeping costs low and have been from the beginning. Given that cost is one of the biggest factors determining your investment return, it’s nice to know that they’re on your side.

There are plenty of other companies that can meet your needs as well, so Vanguard isn’t the only game in town. Schwab is a good one, and Fidelity can be good as well. You could even go with an automated investment platform like Betterment if you like their investment philosophy.

But for my money, Vanguard is the cream of the crop.

Summary of IRA Pros and Cons

Summary of Pros

An IRA gives you more control than an employer plan.

You have more investment options, meaning you can definitely implement your desired investment strategy.

You can keep costs low.

You have the option of using a Roth IRA, which may be beneficial depending on your situation.

You have until April 15 of the next year to make your contributions for the current year. For example, you have until April 15, 2017 to make your 2016 contributions.

Summary of Cons

As of 2017, your annual contribution is limited to $5,500. If you are 50 or older, you can contribute an additional $1,000 per year.

That contribution is further limited, and potentially even eliminated, for high-income earners. Here’s an overview of those income limits: IRS – IRA Contribution Limits.

Moral of the Story

An IRA is a great way to contribute additional money beyond your employer plan.

It’s also a great alternative if your employer plan is high-cost or doesn’t offer investment options you like.

Both the Roth IRA and the Traditional IRA are fantastic options, and the right decision for you really depends on the specifics of your situation.

Option 4: Health Savings Account (HSA)

Many people don’t know about this option, but it can actually be the most powerful place to put your financial independence savings, if you know how to use it.

An HSA is a special type of account that is only available to people with a qualifying high-deductible health insurance plan. For 2017, that means a health insurance plan with a deductible of at least $2,600 for families or $1,300 for individuals.

The HSA is meant to help with the cost of medical expenses, and it provides a few tax breaks to do so:

Contributions are tax-deductible, just like a 401(k) or Traditional IRA.

The money grows tax-free while inside the account.

The money can be withdrawn tax-free for eligible medical expenses.

That’s all pretty cool and can certainly make it easier to handle the cost of your medical bills.

But there are a few more characteristics that ALSO make it a pretty fantastic place to put your financial independence savings:

The money is 100% yours and rolls over year-to-year, even if you haven’t used it. This is in contrast to a flex-plan you might have at work — which can also help pay for medical bills — where any unused money is forfeited at the end of the year.

You can invest your HSA money just like you would inside of an IRA, if you choose the right provider.

While there is typically a 20% penalty in addition to taxes on any withdrawals that aren’t used for medical expenses, that penalty goes away once you reach age 65.

What this means is that if you’re willing to pay your current medical expenses out-of-pocket, you can use an HSA just like a 401(k) or IRA and invest it for the long-term.

In fact, it can be even better than a 401(k) or IRA because it’s the ONLY account that offers a triple tax break:

Deduction on the way in

Tax-free growth inside the account, AND

Tax-free withdrawals for medical expenses

Since we’re all going to have medical expenses when we get older, it’s a pretty safe bet that you will be able to withdraw this money tax-free at some point. And if not, the worst-case scenario is simply waiting until age 65, when you can withdraw the money penalty-free for any reason (just like a 401(k) or Traditional IRA).

So if you have the option available to you, an HSA is a pretty useful place to put some of your financial independence savings.

Where Should You Open Your HSA?

One of the downsides of the HSA is that it can be a little confusing trying to figure out where to open one. It’s something you have to do on your own, even if you have health insurance through your employer, and many of the major banks and investment companies don’t offer them.

Luckily, I’ve already done some of the work for you.

When I do the research for clients, I keep coming back to three different companies as the best places to open a health savings account. Each one offers access to high-quality, low-cost index funds, which we’ll talk about more below. And while they all charge at least a small fee for the opportunity to invest, the fees are smaller than the other options I’ve seen to this point.

Here’s the list:

Again, all three are good options and will serve you well. But they do each have a different fee structure and one of them may save you more than the others depending on how you plan to use it. I wouldn’t worry about it too much since none of these companies are gouging you, but it’s worth doing a little research into their fees to see if one stands out as better for your specific situation.

You can also use the following tool to do even more research into the health savings accounts available to you: HSA Search.

Summary of HSA Pros and Cons

Summary of Pros

It’s the only account with a triple tax break – Deduction on the way in, tax-free growth, and tax-free withdrawals when used for medical expenses.

– Deduction on the way in, tax-free growth, and tax-free withdrawals when used for medical expenses. With the right provider, you can invest the money like you would inside an IRA.

There are no age limits when it comes to tax-free withdrawals for medical expenses. You can do so at any time.

If you keep good records, you can even use the money to pay for medical expenses from prior years. (The expense must never have been reimbursed or claimed as an itemized deduction previously.)

Once you are 65, you can withdraw the money for any purpose without penalty. It will be taxed if it’s not used for medical expenses, but in that case it will have functioned just like a 401(k) or Traditional IRA.

Summary of Cons

If you don’t have a qualifying high-deductible health plan, you are not eligible to open an HSA.

It can be hard to find an HSA provider with decent investment options, and even if you do those options are limited.

Some HSA accounts have fees that make them less attractive.

As of 2017, annual contributions are limited to $6,750 for families and $3,400 for individuals. If you are 55 or older, you can contribute an additional $1,000 per year.

Before age 65, there is a 20% penalty plus taxes on any withdrawals that are not used for medical expenses.

Moral of the Story

If you’re eligible to open an HSA, it can be an incredibly powerful way to save for financial independence.

Option 5: Backdoor Roth IRA

If your income is too high to either deduct contributions to a Traditional IRA or contribute directly to a Roth IRA, you may still be able to take advantage of that IRA space by executing what’s called a Backdoor Roth IRA.

Here’s a basic overview of how it works:

Open a Traditional IRA. Contribute to the Traditional IRA up to the annual max. Convert the Traditional IRA to a Roth IRA anywhere from one month to one year after making the contribution.

This works for a few reasons.

First, you are allowed to contribute to a Traditional IRA even if you make too much money for the contribution to be deductible. It’s simply counted as a non-deductible contribution, meaning that there is no immediate tax benefit gained from making the contribution.

Second, you are allowed to convert money inside a Traditional IRA to a Roth IRA at any time, regardless of income. You will be taxed on the conversion, but in this case you will only be taxed on the earnings since the contribution was made after-tax. So if you contribute $5,500 and convert after the account has grown to $6,000, you will only be taxed on $500 of the conversion.

Third, once the money is inside the Roth IRA, it will grow tax-free and be available for you to withdraw tax-free in retirement. In other words, you’ll have achieved essentially the same result as if you had contributed directly to a Roth IRA.

Now, there are a few potential pitfalls to watch out for.

The biggest is that there could be unintended tax consequences if you have other Traditional IRAs. Because even if you make your non-deductible contribution to a brand new IRA, the IRS considers all of the money inside all of your Traditional IRAs to be part of one big pot. And it considers any Roth IRA conversion to be a pro-rata distribution of pre-tax and post-tax money from that single pot, meaning that significant pre-tax savings in other Traditional IRAs could cause most of your conversion to be taxed.

The bottom line is that you need to be careful before executing a Backdoor Roth IRA, but that when it’s done right it’s a great way for high-income earners to get tax-free money in retirement.

For more detail, including how to avoid the biggest pitfalls, here’s some additional guidance: The Backdoor Roth IRA.

Summary of Pros

High earners ineligible for direct Roth IRA contributions can take advantage of tax-free growth and tax-free withdrawals.

You get all the other advantages of IRAs, including the ability to minimize costs and choose from a wide range of investment options.

Summary of Cons

It’s a more complicated strategy with more room for error.

There are potential unintended tax consequences if you have existing Traditional IRAs, though there are ways around that.

Moral of the Story

You should proceed with caution, but this can be an effective way to create tax-free retirement income, no matter how much you make today.

Option 6: Mega Backdoor Roth IRA

Most people don’t have this option available to them, so I won’t spend a lot of time on it here. If you’d like to learn more, there’s a link to the mini-guide on this topic at the bottom of the section.

The Mega Backdoor Roth IRA is similar to the regular Backdoor Roth IRA, with the main difference being that the initial contribution is made to a 401(k) rather than a Traditional IRA.

All 401(k)s allow for traditional contributions that are tax-deductible now and will be taxed when withdrawn in retirement. Some 401(k)s also allow for Roth contributions that are not deductible now but can be withdrawn tax-free in retirement.

Then there’s a small percentage of 401(k)s that allowed what are called non-Roth after-tax contributions. These contributions are not deductible, they grow tax-free while inside the account, and the earnings (but not the contributions) are taxed as ordinary income when withdrawn in retirement.

And there are two big reasons why this type of contribution can be incredibly valuable:

They don’t count towards the $18,000 maximum annual employee contribution ($24,000 if you’re 50+). The only limit you have to worry about is the $54,000 combined annual limit across all types of 401(k) contributions, including both employee and employer contributions. You can eventually roll this money over into a Roth IRA. Some 401(k) plans even allow you to roll it over while you’re still working for the company.

In other words, it’s a way to indirectly contribute a LOT of money to a Roth IRA each year, potentially leading to a significant amount of tax-free income in retirement.

Now again, it’s pretty rare for 401(k)s to allow for non-Roth after-tax contributions, and even if yours does there are a number of other complicated logistics to navigate.

But if you’ve already maxed out your other tax-advantaged investment accounts and you’d like to save more money, this is definitely worth exploring.

Here’s the guide that gets into all the details: The Mega Backdoor Roth IRA.

Summary of Pros

You can potentially contribute an extra $36,000, per person, every year to Roth IRAs, no matter your income. The exact amount depends on how much other money is contributed to your 401(k) through normal employee and employer contributions.

Summary of Cons

Most 401(k) plans do not allow for this.

It’s a complicated process with a number of potential pitfalls along the way. You need to do your research well and communicate your goals very clearly to the people you’re working with at every step along the way.

Moral of the Story

While rare, this can be a powerful way to supercharge your retirement savings.

Option 7: Taxable Account

If you’ve exhausted all the tax-advantaged accounts above, the next best place to put your savings is a regular old taxable account. While it doesn’t offer any tax breaks, it does have a few advantages.

The first is that you can invest in pretty much whatever you want. It’s similar to an IRA in that the whole world of options is open to you.

The second is that, again like an IRA, you have a lot of control over how much you pay. You can keep costs to a minimum, leaving more of your money for yourself.

Third, there are fewer restrictions on a regular taxable account than there are on tax-advantaged accounts. Although you don’t want to be dipping into your savings on a regular basis if it’s meant to be set aside for financial independence, the money inside a taxable account is technically available to you at any time for any purpose. (Note: This flexibility can make a taxable account a useful way to fund the early years of financial independence if you get there significantly earlier than typical retirement age.)

Finally, while you won’t get any tax breaks, you can still make efforts to minimize the taxes you pay inside the account. Some examples of that include:

Using tax-efficient investments like index funds (we’ll talk more about these below).

Using a buy-and-hold strategy to minimize the number of transactions that might be subject to taxes.

Tax loss harvesting.

Tax gain harvesting.

You can open a taxable account with most of the same companies that offer IRAs, so once again Vanguard would be my default recommendation.

Summary of Pros

Full control over your investment options.

The ability to minimize costs.

No restrictions on when you can access the money.

Summary of Cons

No tax breaks.

Moral of the Story

Once you’ve maximized your tax-advantaged accounts, a regular taxable account is a fantastic option.

Non-Option 8: Life Insurance

I’m going to keep this short and sweet.

Life insurance is often sold as a way to save for retirement. Insurance agents will wax poetic about the benefits of products like whole life insurance, universal life insurance, variable life insurance, equity-indexed life insurance, and whatever variations they come up with next.

The sales pitch will sound good. It is also, in almost every case, a bad idea to listen to it.

Instead of getting into all the details here, I’m simply going to tell you that 99% of the time you will want to avoid any kind of life insurance that’s being sold as an investment opportunity. I’ve written about this extensively, and if you’re interested you can find all the gory details here: Why Whole Life Insurance Is a Bad Investment.

With that said, there are a few exceptions that are worth mentioning quickly:

If you already have a whole life insurance policy, you will want to do a little research before you decide to cancel it. A policy that has already been in place for several years is, in some cases, worth keeping.

If you are a high income earner and you have already maxed out all of your tax-advantaged space, it is possible to use life insurance as a reasonable investment. But you would need to make sure you work with an agent or financial planner who can design a policy that minimizes the agent’s commissions and maximizes the return you receive. The run-of-the-mill policies most agents sell are not specially designed this way.

There are some other potential uses for permanent life insurance, such as leaving money for a child with special needs or helping with estate taxes for especially wealthy individuals (generally those with $10 million or more). But those are rare exceptions and have nothing to do with investing, so we won’t be going into more depth on them here.

But again, in almost all cases, you will be better off putting your investment money somewhere else. Life insurance is just very, very rarely a reasonable investment option.

Quick note: I do want to quickly mention that I am a big proponent of life insurance as a tool for financial protection, just not as a tool for investing. But in that case you will typically want term life insurance, which will never be sold as an investment opportunity anyways.

What If You’re Self-Employed?

If you’re self-employed, your retirement account options look a little different. You’re still able to contribute to an IRA or HSA, but you won’t have a 401(k) or other employer-provided plan.

The good news is that there are still a number of excellent options available to you. Here’s a quick overview of what they are:

IRA – The contribution limits, income restrictions, and everything else are the same whether you’re self-employed or an employee. This is a great first option that keeps things simple.

– The contribution limits, income restrictions, and everything else are the same whether you’re self-employed or an employee. This is a great first option that keeps things simple. HSA – Again, this works exactly the same for a self-employed individual as it does for a regular employee. If your health insurance allows it and if you don’t need the money for medical expenses, this would be a good first or second step.

– Again, this works exactly the same for a self-employed individual as it does for a regular employee. If your health insurance allows it and if you don’t need the money for medical expenses, this would be a good first or second step. Solo 401(k) – This is a 401(k) specifically designed for people who work for themselves and don’t have any employees (other than a spouse). For 2017, you can contribute up to $18,000 per year as an employEE AND up to 25% of your net income as an employER, with a combined $54,000 max. This is my favorite self-employed retirement account because of the large contribution limits.

– This is a 401(k) specifically designed for people who work for themselves and don’t have any employees (other than a spouse). For 2017, you can contribute up to $18,000 per year as an employEE AND up to 25% of your net income as an employER, with a combined $54,000 max. This is my favorite self-employed retirement account because of the large contribution limits. SEP IRA – These are a little simpler administratively than Solo 401(k)s, but they only allow the employER contribution of up to 25% of net income, up to a $54,000 annual max (as of 2017). One other advantage is that you have until April 15 of the following year to make a contribution, whereas Solo 401(k)s have a December 31 deadline.

– These are a little simpler administratively than Solo 401(k)s, but they only allow the employER contribution of up to 25% of net income, up to a $54,000 annual max (as of 2017). One other advantage is that you have until April 15 of the following year to make a contribution, whereas Solo 401(k)s have a December 31 deadline. SIMPLE IRA – These allow for up to $12,500 in employEE contributions (for 2017) and EITHER a 3% employER match OR a 2% automatic employER contribution. Again, you’re both the employee and the employer.

The options get a little more complicated as you add employees, so if that’s the situation you’re in then I would suggest talking to a professional before setting up a retirement plan.

But if it’s just you and your business, the Solo 401(k) is generally the most flexible option. Though the SEP IRA also allows for significant contributions and comes with a slightly reduced administrative burden.

For more on these options, you can refer to this guide: The 5 Best Retirement Accounts for the Self-Employed.

Summary: Order of Operations

Whew! That was a lot of information!

So to sum it all up, here’s an order of operations for how you might prioritize your financial independence savings, in terms of where to put your money first:

401(k) or 403(b) up to the full employer match. HSA, if you are eligible. Employer’s plan if it has good investment options and low fees. IRA, either Roth or Traditional. Backdoor Roth IRA, if you’re not eligible for a regular IRA contribution. Mega Backdoor Roth IRA. Taxable account.

This certainly isn’t a golden rule, but it will point you in the right direction.

Reminder: If you want guidance like this through every important investment decision, check out Investing Made Simple.