Why Your Account Choice Matters
Two investors might earn identical pre-tax returns but end up with very different after-tax results. Why? Because the type of investment account they use makes a big difference.
In this blog, we break down the major account types:
- Traditional and Roth IRAs
- Roth 401(k)
- Taxable brokerage accounts
- Health Savings Accounts (HSAs)
- 529 plans
We’ll explore how each is taxed going in (contributions), while growing (investment gains), and coming out (withdrawals). We’ll also share sample scenarios showing how strategic account selection can affect long-term returns.
At Fortis Financial Group, we help clients navigate these options within a broader financial strategy, covering retirement income, estate and legacy planning, and smart tax moves, so every dollar lands in the most tax-efficient home possible.
2025 Quick Reference: Key Investment Limits and Tax Rules
Stay on top of key thresholds for retirement, health, and investment accounts. Here’s a summary of limits and updates for 2025:
401(k), 403(b), 457(b) Plans
- Employee contribution limit: $23,500
- Catch-up contribution (age 50+): $7,500
- New super catch‑up contribution (ages 60–63, if plan allows): $11,250
- Combined employee + employer contribution cap: $70,000
Traditional and Roth IRA
- Contribution limit: $7,000
- Catch‑up contribution (age 50+): $1,000
- Roth IRA income phase‑out starts at:
- $150,000 MAGI for single filers
- $236,000 MAGI for joint filers
Health Savings Account
- Self-only: $4,300
- Family: $8,550
- Catch-up contribution (age 55+): $1,000
Required Minimum Distributions (RMDs)
- Age raised to 73 by SECURE ACT 2.0
- Will rise to 75 starting in 2033
Capital Gains in Taxable Brokerage Accounts
- Long‑term gains: Taxed at 0%, 15% or 20%, depending on income
- Short‑term gains: Taxed at ordinary income rates
Side‑by‑Side: How Account Types Differ on Taxes and Use
Compare key characteristics across popular investment vehicles so you can match your money with the right strategy.
| Account Type | Contribution | Growth | Withdrawals | RMDs? | Typical Use Case |
| Traditional 401(k)/403(b)/457 | Pre‑tax (lowers current taxable income); some plans also allow Roth and after‑tax buckets | Tax‑deferred | Taxed as ordinary income | Yes, at age 73 | High earners seeking current-year deductions or lower future tax brackets |
| Roth 401(k) | After‑tax | Tax‑free (if rules met) | Tax‑free (if qualified) | Yes, but avoidable by rolling to Roth IRA before RMDs start | Savers expecting higher (or similar) future taxes; younger or estate-focused investors |
| Traditional IRA | May be deductible (based on income and plan coverage) | Tax‑deferred | Taxed as ordinary income | Yes, at age 73 | Workers without employer plans; those wanting deductible savings |
| Roth IRA | After‑tax (income limits apply) | Tax‑free (if rules met) | Tax‑free (if qualified) | No RMDs for original owner | Tax diversification, legacy planning, or young investors in low brackets |
| Taxable Brokerage | No contribution limit | Taxable annually (on dividends/interest) and at sale (capital gains) | Long-term capital gains: 0%/15%/20%; Short-term capital gains: ordinary income rates | No | Liquidity, tax‑loss harvesting, step‑up basis for heirs |
| HSA | Pre‑tax or deductible (even without itemizing) | Tax‑free | Tax‑free for qualified medical expenses; post‑65 non‑medical taxes like IRA (no penalty) | No | Most tax‑efficient for those eligible: “triple tax advantage” |
| 529 Plan | After‑tax (state deductions/credits may apply) | Tax‑free | Tax‑free for qualified education; new Roth IRA rollover paths with limits | No | Education funding, potential legacy or wealth transfer tool |
Three Simple Scenarios That Show How Account Choice Shapes Tax Outcomes
These examples demonstrate how different investors, based on age and income level, might choose between account types for better after-tax results.
Scenario 1 – High Earner (Age 45): Pre‑Tax vs. Roth 401(k)
Assumptions
- Current marginal tax rate: 32%
- Expected retirement tax rate: 22%
- Annual contribution: $23,500 for 20 years
- Annual return: 6%
Pre‑Tax 401(k)
- Immediate tax savings for the year: $7,520 (32% × $23,500)
- Contributions grow tax-deferred
- Withdrawals are taxed at 22% in retirement
Roth 401(k)
- No upfront tax deduction
- All qualified withdrawals are tax-free
Takeaway: If you’re confident you’ll retire in a lower tax bracket, a traditional 401(k) likely delivers better after-tax results. But if future tax rates rise, your income spikes later (e.g., business sale), or you plan to leave assets to heirs, a Roth 401(k) may offer superior lifetime tax control. (Many investors split contributions across both to “tax-diversify.”)
Scenario 2 – Younger Saver (Age 30): Roth IRA Advantage
Assumptions
- Current tax rate: 12%
- Future expected rate: 24%
- Savings ability for the year: $6,000
Roth IRA Contribution
- Paying 12% tax now secures decades of tax-free growth
- Often beats the small deduction today, plus higher taxes later
Note: If income exceeds Roth contribution limits, explore a backdoor Roth IRA. Just be careful—pro-rata rules can trip you up, so it’s wise to consult a tax advisor.
Scenario 3 – Near-Retiree (Age 68): Strategic Withdrawal Across Buckets (Taxable + Tax-Deferred + Roth Accounts in Play)
Smart withdrawal sequence:
- Start with taxable: Harvest losses, take gains within the 0% or 15% capital gains bracket, and allow IRAs to keep growing tax‑deferred.
- Convert slices of Traditional IRA to Roth annually: “Fill up” lower tax brackets before RMDs begin at age 73.
- Use Roth assets last: Ideal for legacy planning—no RMDs and tax-free inheritance (usually within 10 years for heirs).
Takeaway: Strategic sequencing boosts after-tax returns and gives you more control over your tax picture across retirement.
HSA: The Most Tax‑Efficient Investing Vehicle You Might Be Overlooking
For those enrolled in a high-deductible health plan, HSAs offer an unmatched trio of tax advantages that make it one of the most powerful tools for long-term wealth building.
- Pre‑tax or tax‑deductible contributions: Save on federal taxes and most state taxes upfront.
- Tax‑free growth: Investments inside the HSA compound without triggering taxes.
- Tax‑free withdrawals: Use funds for qualified medical expenses (now or decades later) with zero tax impact.
After age 65, you’re allowed to withdraw HSA funds for any purpose. These withdrawals are taxed like traditional IRA distributions but without penalties. That makes an HSA a flexible backup retirement account, especially if you can afford to cover current health costs out of pocket and let the HSA grow.
Taxable Brokerage Isn’t “Bad”—It Just Demands Strategy
It’s easy to overlook taxable brokerage accounts in favor of retirement plans, but with a thoughtful approach, they can be remarkably tax-efficient.
Unlike retirement accounts, taxable accounts don’t come with built-in tax shelters. But they offer flexibility and, with the right techniques, can help maximize after-tax returns.
Here are smart strategies for tax efficiency:
- ETF-heavy portfolios: Minimize turnover and unwanted capital gains
- Municipal bonds: Great option for high earners seeking tax-free income
- Capital gains management: Time sales to stay within favorable tax brackets
- Tax-loss harvesting: Use market dips to offset gains and reduce your tax bill
Below are the key benefits of a taxable account:
- No contribution limits or RMDs
- Preferential tax treatment on long-term capital gains and qualified dividends (0%, 15%, or 20%)
- Step‑up in cost basis at death—a valuable tool for estate and legacy planning (Tip: Coordinate with your attorney or CPA to align strategies.)
A Simple Asset‑Location Framework
Once you understand how each account type is taxed, the next step is aligning your investments within them strategically. A commonly used, research-backed rule of thumb helps guide this, but your specific situation may vary.
| Account Type | Ideal Investments | Why It Works |
| Tax‑Deferred (Traditional 401(k)/IRA) | Taxable bonds
High‑turnover active strategies |
These generate ordinary income, which is deferred until withdrawal, helping smooth your tax exposure across time. |
| Roth Accounts | Small-cap growth
Private equity Other high-return, low-tax-efficiency assets |
Gains grow tax-free, so high-growth investments get optimal upside without a tax drag. |
| Taxable Brokerage | Tax-efficient ETFs and mutual funds
Municipal bonds (for high earners) Assets with estate potential |
Preferential capital gains/dividend rates, and a potential step-up in basis at death for heirs make this a strong vehicle for long-term planning. |
The goal is to maximize after-tax returns by matching each investment with the account type that best neutralizes its specific tax burden.
How Fortis Financial Group Can Help
Managing where your dollars go—whether it’s choosing the right account type, timing a Roth conversion, structuring HSAs and 529s, or planning retirement drawdowns—is far more than just tax work. It’s a complex, interdisciplinary challenge that weaves together your estate plan, retirement cash flows, and legacy goals.
That’s where Fortis comes in. Our team coordinates every piece of the puzzle: investment strategy, tax planning, and estate/legacy considerations, so you can focus on living confidently, knowing your financial future is designed to endure.
Want a personalized road map for tax‑efficient investing? Reach out today for a complimentary 360° review of your accounts and withdrawal strategy, and start making your money work smarter.
