Deciding where to invest is just as important as deciding what to invest in.

If you put money into your Brokerage account before maxing your 401(k) match, you are literally throwing away free money. If you max your 401(k) before paying off credit card debt, you are losing a guaranteed 20% return to pay for a potential 8% return.

To build the 75% / 25% split efficiently, you need to follow the Financial Waterfall. You pour your income into the top bucket, and only when it overflows do you move to the next.

Step 1: The Employer Match (The Free Lunch)

Account: 401(k) Goal: Contribute exactly enough to get the full match.

This is the only place in finance where you get a guaranteed 100% return on day one. If your employer matches 4%, you contribute 4%. Do not contribute a penny more yet.

  • Why? The match is free money. The rest of the 401(k) is just tax deferral. We have better options for the next dollar.

Step 2: High-Interest Debt (The Guaranteed Return)

Account: Credit Cards / Personal Loans Goal: Pay off anything with an interest rate above 7-8%.

Paying off a 20% credit card is mathematically identical to earning a guaranteed 20% return on an investment. No stock market index can promise that. Kill the snakes before you try to grow the garden.

Step 3: The Stealth IRA (HSA)

Account: Health Savings Account (HSA) Goal: Max it out ($4,400 for individuals in 2026).

If you are eligible for an HSA, this is actually the best retirement account in existence. It is triple tax-advantaged:

  1. Tax deduction on contribution.
  2. Tax-free growth.
  3. Tax-free withdrawal (for medical).
  • Pro Tip: Don’t use it for medical bills now. Pay cash for the doctor, save the receipts, and let the HSA compound for 20 years. It turns into a Super-IRA.

Step 4: The Roth IRA (The Flexibility Bucket)

Account: Roth IRA Goal: Max it out ($7,500 in 2026).

This is where your “25%” comes in. Why prioritize this over the rest of the 401(k)?

  1. Investment Choice: You can buy anything (Tesla, Bitcoin ETFs, Index Funds), unlike the limited menu in your 401(k).
  2. Liquidity: You can withdraw your contributions anytime, tax-free and penalty-free.
  3. Tax Diversification: This builds your tax-free retirement bucket.

⚠️ WARNING: Income Limits (2026) You are effectively barred from contributing to a Roth IRA if your Modified Adjusted Gross Income (MAGI) exceeds:

  • Single: $168,000 (Phase-out starts at $153,000)
  • Married: $252,000 (Phase-out starts at $242,000)

If you are over this limit, skip to the “High Earner Hack” below.

Step 5: Max the Traditional 401(k) (The Heavy Lifter)

Account: 401(k) Goal: Fill the remaining space up to the limit ($24,500 total).

Now you go back to the 401(k). This is the heavy lifting of your “75%” bucket. The goal here is to reduce your current year’s taxable income. If you are in the 24% or 32% tax bracket, every dollar you put here saves you 24-32 cents in taxes today.

💡 The High Earner Hack: Using Step 5 to Save Step 4

If your income is just slightly over the Roth limit (e.g., you earn $165,000 as a single filer), you can use Step 5 to save Step 4.

Contributions to a Traditional 401(k) lower your MAGI.

  • Scenario: You earn $165,000 (Ineligible for Roth).
  • The Move: You contribute $24,500 to your Traditional 401(k).
  • The Math: $165,000 - $24,500 = $140,500 MAGI.
  • The Result: You are now under the $153,000 limit and can fully contribute to your Roth IRA.

Step 6: The Overflow (Taxable Brokerage)

Account: Brokerage Goal: Everything else.

Once the tax-advantaged buckets are full, the water flows here.

  • The Strategy: Since you pay taxes on dividends here, prioritize “tax-efficient” assets like broad Index Funds (VTI/VOO) or Municipal Bonds. Avoid high-dividend stocks or REITs in this bucket.
  • The Benefit: This money is accessible anytime. It is your bridge to early retirement (before age 59½).

Summary: The Perfect Flow

  1. 401(k) up to Match.
  2. High-Interest Debt.
  3. HSA (if eligible).
  4. Roth IRA (Watch the income limits!).
  5. 401(k) (Use this to lower MAGI if needed).
  6. Brokerage (The leftovers).

Now that you have secured your spending, let’s talk about securing your retirement from taxes. 👉 The 100k Illusion: Why Your Salary Tax isn’t Your Retirement Tax

Disclaimer: This content is for educational purposes only and does not constitute financial advice. I am not a financial advisor. Please consult with a qualified professional before making financial decisions.

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These are the cards I use to secure my spending and earn the “Discount on Life.”