Have you ever wondered if you’re doing everything possible to maximize your long term financial outlook by taking advantage of tax deferred programs? There are many to choose from, and some are provided by the fed, whereas others are provided by the state and even your employer!

Tax planning and optimization is a huge component to building wealth long term by reducing your current tax liability. Below are several of the most popular such programs that the majority of the working mass-population can employ, and the sequence in which I recommend using them, with corresponding reasoning. I strongly suggest you first read about how each program works through my write-ups and also research on your own which programs work best for your scenario and limitations.

Order of operations:

401k – up to company match only. The company is giving you free money, sometimes dollar for dollar up to a certain percentage. For example, if your company matches 3%, you should certainly elect to at least contribute 3% of your income to the 401k, as, with the company match, your 3% automatically becomes 6% when vested. This is a 100% return on your investment! You can use this account to elect which investment opportunities are best for your goals further grow your contributions. This ranks 1st due to the nature of the 100% return on investment instantaneously.

HSA/FSA – up to annual maximum. I would recommend maximizing this account as a second priority if it is an HSA account, as it is exempt from income taxation. You can make purchases using pre-tax dollars! FSA accounts are a little different since that money may evaporate if you don’t use it In the same year, so I wouldn’t consider maxing out to the annual limit unless you anticipate using it all. You can use this account to elect which investment opportunities are best for your goals to further grow your contributions. This ranks 2nd due to the valuable nature of it being completely tax-free.

401k – up to annual maximum. If you don’t need the extra money right away, consider stashing as much as possible as a 3rd priority, up to the annual maximum, into your 401k. This is especially useful if you are a high income earner and want to reduce your current tax liability while having the belief that your tax liability will be lower when you’re ready to retire and take distributions. You can use this account to elect which investment opportunities are best for your goals to further grow your contributions. This ranks 3rd due to the nature of having the greatest ability to exponentially grow your contributions over time, utilizing the power of compounding with pre-tax dollars ($100 Pre-tax can grow faster than $100-tax post-tax dollars).

529 Plans – up to the annual maximum. Consider this as a 4th priority if your state allows you to. By funding it with after-tax dollars, you can then use this as a brokerage account to grow your contributions. You can then use these funds for educational purposes for yourself or assigned beneficiaries. The returns from the investments are tax-free and penalty-free as long as they are used for approved, educational purposes. This ranks 4th, preceding the Roth IRA as you can use the funds without any age restrictions.

Roth IRA – up to the annual maximum. This should be your 5th priority as it is a powerful way to use your post-tax dollars to invest into stocks or other instruments with tax-free growth. This means regardless of how much money you put in and how much it grows, you will never have to pay any taxes withdrawing the contributions or returns of this account, ever! This ranks 5th because you do need to meet the age criteria to be able to withdraw the “earnings” or profits without a penalty, as it is meant to be a retirement account.