A savings waterfall is a financial plan that helps investors prioritize their savings options and navigate the financial complexity available to them. By having a savings waterfall, you always know where to direct your next dollar and which savings goals to forgo if you do not have enough.

Here’s how it works:

Initially, new income is allocated to cover essential expenses. This can be imagined as a static pool at the top of the waterfall.

Once your income exceeds your spending, the pool overflows. Without a savings plan in place, the surplus unintentionally builds up on the banks of your pool in your day-to-day checking account. With a savings plan in place, the surplus is deliberately channeled into intentional account types, supporting your financial plan.

In this article, we have designed a standard guide to creating your savings waterfall, because generic financial planning advice here applies to most investors. That being said, your unique account types, risks, and goals may benefit tailoring this generic design into a custom plan.

Without further ado, here are our 2026 account funding priorities:

This time is not different.

We have a saying around here: It is always a good time to have a balanced portfolio.

This saying reminds us that even when we are faced with market uncertainties, we have previously put in the work to design our portfolios to weather disappointing market returns.

We recommend investing for the long term such that your portfolio is optimized not for one set of politics but for what is expected to do well over the next two or three decades. Such uninteresting advice will not make the news headlines, but we believe it will result in better long-term portfolio growth.

Like the whims of the crowd who make it, the stock market is inherently volatile. The stock price is like the tip of a whip being cracked by someone on an escalator. You’ll get dizzy tracking the tip of the whip, but if you take a long-term perspective and watch the escalator, you’ll be able to relax and enjoy the ride.

For this reason, regardless of what happens in the news, our funding priorities remain nearly identical to last year.

Overall Guidelines

By default, choose Roth.

Most retirement accounts offer a choice between either contributing pre-tax traditional or post-tax Roth. In our experience, most people benefit from Roth contributions. We have written several articles on this topic including “Fund Your Roth IRA Even When You Can’t Afford It” and “The Role of a Roth IRA in Early Retirement.”

Our guide assumes that you benefit from Roth funding. However, there is a chance that you may benefit from contributing to a traditional IRA instead of a Roth IRA. If you have one of those cases, then our generic advice doesn’t fit your situation as well.

Unless stated otherwise, our advice is to fully fill each bucket before moving on to the next one.

By default, we recommend that you maximize the account mentioned in the current step before moving on to the next one. However, there will be a few accounts where we specifically advise otherwise.

Additionally, if you already have money saved in a taxable brokerage, checking, or bank account, pour those funds back into the mix to flow into a better savings account.

You can find the updated 2026 contribution limits here. Many have increased with inflation since 2025. Hopefully, your own salary has also increased with inflation and you can easily use that extra income to increase your savings. If it hasn’t, consider asking your employer for a raise or raising your prices.

Pay the minimum on any debt not explicitly mentioned.

Consider the minimum payments on each type of debt part of your living expenses and make them diligently each pay period. Do not pay more than the minimum unless the step tells you to. As you will quickly notice, we advise that credit card debt be eliminated entirely and immediately. Other types of debt can typically be managed to your advantage.

Student loans have low or subsidized interest rates and moderate duration, so we recommend that you pay the minimum and start saving and investing toward your future financial security.

Mortgages are the best of all loans. Most Americans have a home mortgage. The rich often have two. The best repayment strategy is normally to pay your mortgage back as slowly as possible. A 30-year fixed mortgage with a low interest rate tied to a house that generally appreciates with inflation is typically a good strategy for building wealth. Even if your mortgage does not have a low interest rate, you should still consider paying the minimum while watching for opportunities to refinance to a lower 30-year fixed rate.

Other loans and especially short-term loans are more questionable. In general, if you cannot afford to pay for something out of pocket, you should not get a loan to purchase it. For this reason, home improvement loans, personal loans, payday loans, or even short-term business loans should generally be avoided. However, if you already have one, you can check the interest rate to decide if you want to pay it off before continuing on to other savings.

1. Pay off any credit card debt and high-interest-rate debt.

Each month you fail to pay off your credit card balance in full, you subject all your past and future spending to exorbitant interest rates of 18% or higher. This compounding of debt generating more debt while you generate new debt is a vicious cycle.

To a financial planner, credit card debt is like having a cluster of thousands of baby spiders crawling on your body and under your clothes: You cannot act fast enough and there is no amount of modesty worth leaving the situation unresolved.

Before you do any other kind of saving, get out of credit card debt or debt with interest rates above 12%. You need to create a static pool of water that meets your basic living expenses before you try to create a waterfall.

2. Flow qualified education expenses through a 529 plan.

529 plans are specialized investment accounts which give tax-advantaged savings for education expenses. They are typically the best vehicle to save for college because they afford a state tax deduction for contributions, and then distributions for any qualified education expenses are free of both state and federal tax.

Qualifying expenses include K-12 tuition up to $20,000 per beneficiary per year (up from $10,000 in 2025 ), student loans up to $10,000 per lifetime, higher education tuition from eligible educational institutions, and many expenses related to college. Practical examples adults often have are graduate school, seminary, gaining professional credentialing from an accredited school, or even one-time classes offered by eligible educational institutions. You can confirm if tuition at your school counts by checking if it is in the U.S. Department of Education’s Database of Accredited Postsecondary Institutions and Programs (DAPIP) or on the Federal Student Loan Program list.

As for getting the state tax deduction, each state has its own 529 plan, and you only receive a state tax deduction for the state who sponsors the 529 plan you open.

In Virginia, contributions to a Virginia 529 plan offer a VA state tax deduction. For those under age 70, the deduction limit is $4,000 per account per year. However, new unique accounts can easily be created, effectively only limiting your annual Virginia state deduction by your willingness to tolerate extra paperwork and complexity.

If your state has an income tax and offers a 529 plan contribution deduction, we recommend opening your state’s 529 plan at this point in your waterfall and funding it enough to pay for this year’s qualified education expenses. In practice, this most often looks like contributing to the 529 plan today and distributing from the 529 plan tomorrow. By flowing money through the 529 plan, you save on your state taxes.

For example, in Virginia where we have a 5.75% tax rate, by flowing $20,000 of tuition expenses through Virginia 529 accounts, a Virginia taxpayer could effectively receive a $1,150 discount on those expenses come tax time. This can be as simple as putting the money in one day, leaving it invested in cash, and taking the money out the next day.

At this step, only contribute to the 529 plan what you would have spent anyway. In a later step after you’ve taken care of some important retirement savings, we will suggest circling back to the 529 plan. If your state has no income tax or you have no qualified education expenses in the current year, then you can skip this portion of the waterfall.

3. Repay, contribute, or defer to receive the full employer match.

Many employers sponsor a retirement plan such as a 401(k) or a 403(b), and some also offer a match program. An employer match is extra tax-deferred compensation from your employer which you only receive if you contribute to the retirement plan.

A common safe harbor match is the employer contributes 100% of the first 3% of the employee’s salary contributed and then the employer matches half of the next 2% as well. This results in contributing 5% of your salary and immediately earning an additional 4% of your salary. Because this is an amazing 80% return on your money, you should prioritize contributing enough to get the full match offered.

Congress has recently expanded what qualifies as eligible contributions for an employer match. Generally speaking, the funding options for receiving an employer match are:

1. Payments on qualified student loans (loans incurred by you to pay for higher education expenses for yourself, your spouse, or your dependent taxpayer)
2. Contributions to a pension-linked emergency savings account (ESA) (only available to non-highly compensated employees)
3. Deferrals to your Roth retirement plan
4. Deferrals to your traditional retirement plan

Generally, the choices should be considered in the above order, starting with qualified student loans if you have them.

Next, consider the pension-linked emergency savings account (ESA). The funding limit is minimal, but it enables you to get part of your employer match while still being able to withdraw the funds penalty-free. This is very beneficial if your waterfall is starting to run dry, but skip the pension-linked emergency savings fund and get your employer match through employee deferral if you have plenty of savings left.

After those two options have been considered, the last one is employee deferrals. A traditional deferral can always be used, but the terms of your plan dictate if a Roth option is available. Because Roth deferrals allow for tax-free growth, Roth is generally preferable. If that option is not available, use a traditional deferral in order to get your full employer match. The benefit of the free money far outweighs potential downsides of the traditional account type.

It is important to note that funding your 401(k) or 403(b) match is not sufficient retirement savings. Safe harbor match funding invests only 9% of your take-home pay when at least 15% is needed. You will need to invest more if your retirement plan doesn’t offer a match or you are starting late and need to catch up.

For now, we recommend only deferring enough to get the full employer match available. At a later step, we will recommend deferring more into your employer plan if your savings allow.

If more than one member of your family has a match, contribute enough to earn both employer matches before going on to the next step, starting with the more generous one.

Additionally, since 2023, employers could amend their retirement plans to permit employees to change employer contributions to Roth by default if they are 100% vested in the funding type. Now, three years later, enough employer plans have adopted this policy that it is worth noting: If you can elect that your employer contributions be Roth, we recommend that you do so. That makes your elections Roth for both employee deferrals and employer contributions.

4. Budget at least 10% for unknowns.

None of us can anticipate all of our expenses. Every stage of life brings a whole new set of unanticipated needs. Your work hours are cut back. You are widowed. The car breaks. You need to go to the emergency room. The roof leaks. Your daughter gets married. Or more!

In economics, these are called financial shocks, and they cause many people to borrow from credit cards. For this reason, we recommend constantly budgeting for surprises by setting aside at least 10% of your expenses each month into an “Unknown Budget.” This account has its name because you do not know how it will be spent.

When you are always contributing to and replenishing your unknown budget, you are protecting yourself from the financial shocks that life will inevitably bring. Although for many years this budget might accumulate in long-term savings, you will also be grateful for an unknown budget more often than you’d think.

This budget can be saved inside other retirement accounts, so long as you can withdraw from that account in an emergency. When you see a double asterisk (**) in one of the other funding options below, you will find our note on using that account type as your unknown budget.

5. Fund your Health Savings Account (HSA).

A Health Savings Account or HSA is a rare type of account where you can get a tax deduction when you contribute and then pay no tax when you distribute for qualified medical expenses. High income earners who are not allowed to contribute to their Roth IRA or deduct contributions to traditional IRAs are still allowed to deduct contributions to HSAs.

Effective January 1, 2026, the One Big Beautiful Bill changed the definition of a high deductible health plan. Now, as the IRS states , “bronze and catastrophic plans available through an Exchange are considered HSA-compatible, regardless of whether the plans satisfy the general definition of an HDHP.” Additionally, “Notice 2026-05 clarifies that bronze and catastrophic plans do not have to be purchased through an Exchange to qualify for the new relief.” If you have a qualifying health insurance plan under any of the three definitions, we recommend that you contribute to your HSA at this point in the waterfall.

Funding your HSA has many advantages and few disadvantages. We recommend that you contribute the maximum limit each year and that you keep funding it to the maximum as long as possible, regardless of how much money you have in the account.

Most HSA investors use their entire balance during their lifetime because of an HSA’s versatility. For example, HSAs can help provide a tax-efficient way to self-insure for long-term care, can be used to pay Medicare premiums (even IRMAAs), and can even function like an IRA with no required minimum distributions after age 65.

In 2026, HSA contribution limits are $4,400 for a single plan (only one insured person) or $8,750 for a family plan (two or more insured people). Additionally, if you are age 55 or over, you are entitled to a $1,000 catch-up contribution. (Note that the HSA catch-up starts later at age 55, rather than age 50 like most other accounts). Both spouses can make the HSA catch-up contribution even if they are on the same insurance.

Additionally, adult children who file their own tax return are entitled to their own, separate contribution limit based on the type of insurance even if they are on the same plan as their parents.

** Several potential emergencies are health related. As a result, saving some of your emergency budget in your HSA is a wise strategy. Additionally, some of your regular spending is likely to be qualified medical expenses. If that is the case, it is smart tax planning to contribute to the HSA even if you are going to spend the money that year on medical expenses. By flowing those qualified expenses through the account, you receive a federal tax deduction.

6. Contribute to Roth IRA or use a Backdoor Roth IRA strategy.

Roth IRAs are exceptional tax saving tools. Even though there is no deduction for contributions, a Roth IRA provides the long-term benefits of tax-free accumulation and tax-free distributions after age 59 1/2.

Contributing to an individual retirement account (IRA) requires that you have “taxable compensation” (most commonly wages) for the relevant tax year. If you have this type of income, you likely benefit from contributing something to your Roth IRA.

The IRS limit for contributions is the lesser of your taxable compensation or the contribution limit. Married couples can pool their taxable compensation together for this calculation, meaning non-working spouses can fund their Roth IRAs using the excess from the working spouse’s earned income qualification.

For 2026, the IRA contribution limit is $7,500 for those age 49 or under and $8,600 for those age 50 or older. These limits are shared by Roth IRAs, traditional IRAs, and backdoor Roths (nondeductible contributions to traditional IRAs).

Because you can make prior year contributions until the filing deadline for your tax return, we recommend that you fund your Roth IRA at this stage for all tax years where you are eligible to contribute starting with the oldest one. So if it is between January 2026 and April 2026 and you haven’t funded for 2025 yet, we recommend that you contribute for 2025 first ($7,000 or $8,000 if over age 50) and then make the 2026 contribution directly after ($7,500 or $8,600 if over age 50).

If your joint 2026 modified adjusted gross income (MAGI) is less than $242,000 ($153,000 for single filers) , we suggest that you contribute up to the maximum to your Roth IRA directly. Even if your new income has run dry, we recommend that you use any taxable savings (checking account included) you have stashed elsewhere to contribute to your Roth IRA.

If you really have absolutely no more funds to contribute, you should still open a Roth IRA and contribute $1 to it in order to begin the calendar for the 5-year Roth rule. You only need to do this once, and you can take the dollar out later without penalty.

If your 2026 MAGI is over $252,000 ($168,000 for single filers) or you are within the contribution phase-out range, you can still consider making a nondeductible contribution to your traditional IRA as a part of a backdoor Roth strategy. When implemented properly, a backdoor Roth can be, from a tax perspective, identical to funding your Roth IRA directly.

** Roth IRAs make great emergency funds. At any time, you can withdraw as much as you have contributed to a Roth IRA without tax or penalty. For some families, 10% of their take home pay is less than or equal to the contribution limit. In this way, some families can mentally earmark one spouse’s Roth IRA as the emergency budget and earmark the other as the retirement fund. So long as you are under the contribution limits, there is little downside to contributing more to your Roth IRA.

7. Pay down middle-interest-rate debt.

In step one, we recommended that you eliminate all of your high-interest-rate debt like credit cards. At this stage, if you have debt with interest rates lower than a credit card and higher than a mortgage, we now recommend that you commit 10% of your take-home pay to debt repayment. This is effectively saving for your past unknown budget retroactively.

** Debt repayment does not replace your unknown budget savings. If you’ve gotten to this point without having fully saved your 10% future unknown budget, remaining sums from that budget can be contributed here, bringing the total contributions up to 20%.

Once the debt is repaid, then those contributions should be reallocated to retirement savings, not given back to your lifestyle spending. There is a good chance paying down this debt will put you behind on your retirement savings and you will need to save more in future years.

For interest rates lower than current mortgages (typically 7%), we recommend that you continue to pay the minimum even at this point.

8. Finish funding your Roth 401(k), 403(b) or Thrift Savings Plan.

Now that your Roth IRA and HSA are fully funded, circle back to your employer-sponsored retirement plan to maximize your retirement plan contributions. You can increase the deferrals up to the contribution maximums. For 2026, the maximum employee deferral is $24,500 for those age 49 and under, $32,500 for those age 50 or older, and $35,750 for those specifically in the ages of 60 to 63.

While you may need your salary throughout the year in order to satisfy your basic living expenses and earlier savings goals, some employees receive a bonus and are able to elect to have more funds from this larger bonus paycheck deferred into the retirement plan. For example, you may have been deferring 5% to get the match throughout the year but could elect to defer as much as possible from your bonus in order to top off the account. This strategy can be done by coordinating with your payroll department and employer.

If more than one member of your family has access to employer plans, prioritize the plan with the cheaper funds as investment options. If the investment options are the same, prioritize either the younger spouse or the spouse who will work the longest, because those funds will have RMDs delayed for longer.

Note that starting in 2024, your access to the age 50 catch-up contribution may be restricted or only be eligible as Roth based on your prior year wages. This has little effect though as we already recommend that you choose Roth.

9. Defer to a Roth 457 plan.

The 457 plan is an uncommon type of employer sponsored retirement plan available to governmental employers and some non-profit employers in the United States. Its full name is a 457 Deferred Compensation Plan, but it is called a “457 plan” for short.

A 457 plan has its own contribution limit separate from other retirement plans. Even if you have already fully funded your 401(k) or 403(b) to the maximum, you can still contribute to your 457 plan. For 2026, the maximum employee deferral to a 457 plan is $24,500 for those age 49 and under, $32,500 for those age 50 or older, and $35,750 for those specifically in the ages of 60 to 63.

Many 457 plans offer a Roth option, which we recommend you select.

10. Contribute to a SEP IRA.

A SEP IRA (Simplified Employee Pension IRA) is a type of retirement plan which is similar to a 401(k) plan except that it is only available to self-employed workers or contractors.

While Congress created a SEP Roth IRA as a valid account type in 2022, most custodians do not yet let you open one. If you do have a SEP Roth IRA available to you, we would suggest that you contribute to it directly and ask that you contact us to let us know which custodian you found that hosts one.

For others, because SEP assets are immediately accessible by the account owner, you can effectively make a Roth election by converting the balance to a Roth IRA shortly after your employer’s contribution.

If you have access to both a SEP IRA and a 401(k) or 403(b) plan through different employers, you can contribute to both of them. For example, some university professors also have self-employed business income from the speaking or consulting work they do on the side. In this case, they can contribute to their SEP IRA from their self-employed business income while also deferring some of their university pay into their employer 403(b) plan.

The SEP IRA contribution limit for 2026 is the lesser of 25% of your compensation or $72,000. Because of self-employment tax, calculating for precisely how much can be contributed can be tricky, but your tax preparer can find this out for you. Also, just like other IRAs, contributions can be made for the prior year until you file your taxes.

If you have made a pre-tax SEP IRA contribution, we also recommend converting your SEP IRA to Roth IRA each year. You will receive a deduction for the SEP IRA contribution while also reporting the Roth conversion amount as taxable income. These two numbers (taxable distribution and deduction) should offset each other, making the conversion akin to a backdoor Roth.

** Because assets can be converted to Roth IRA at any time, SEP IRA funding can be considered another place to save your emergency fund. Just keep in mind, the contribution basis will only be accessible without penalty when you are over age 59 1/2 or it has been 5 years after you convert to a Roth IRA.

11. Consider deferring to other employer sponsored plans.

There are many different types of employer-sponsored plans. Some of them are great financial planning vehicles. If you ask your current employer what options you have, you may find that you have options you didn’t even know about.

For example, you can consider deferred compensation or employer stock options at this stage. If you haven’t contributed yet, you could also consider fully funding your pension-linked emergency savings account (ESA) at this stage.

12. Save for future education expenses in a 529 plan.

As mentioned before, 529 plans are typically the best vehicle to save for college. This step is a great time to contribute to a 529 plan for long-term savings goals.

If you want to pay for your children’s education without the need for student loans or scholarships, then the best plan is to start saving the day they are born. However, we recommend prioritizing your retirement over education saving. You can help your children pay back their student loans much easier than replacing lost retirement savings.

Even though a 529 plan is one of the last accounts you should fund, it can be very versatile. 529 plans can be used for many types of education expenses, can even be transferred from one family member to another, and can help you with your estate planning.

Most of the money in the 529 plans we help manage is owned by grandparents for a wide variety of reasons. However, if you have extra savings left at this point and anticipate future education expenses, you would likely benefit from saving in a 529 plan.

13. Consider a systematic Roth conversion plan.

Generally speaking, if you have a taxable brokerage account you might benefit from engaging in a systematic Roth conversion plan. Roth conversion plans can get complex, but there are some simple rules that can guide you. Overall, doing something is often better than nothing.

Since Roth conversions cannot be undone, make sure that you understand how much tax you will owe before you complete a Roth conversion.

For more on this concept, you may enjoy reading “The 30-Year Value of a Single Roth Conversion,” watching “Video: The Value of Systematic Roth Conversions,” or studying “The Benefits of Roth Conversions” series.

14. Save in a regular, taxable brokerage account.

If you still have money left, the default place to save is a regular, taxable brokerage account. The dividends, interest, and realized capital gains are all taxed each year in a taxable account. This consistent taxation slows your compound growth and creates a drag on your investments.

If you already have large sums saved in a taxable account, then consider using these funds to support your lifestyle spending so you can increase your deferrals and/or contributions elsewhere until your taxable account is depleted. This is what we mean when we say that you should fund your Roth IRA even when you can’t afford it.

** A taxable account is obviously a fine location to save your unknown budget.

Conclusion

These are our generic savings priorities. If you have access to a type of account which we did not include in this list, send us a message on our Contact Form and we will consider including it in next year’s priorities.

If you’d like more support or customized advice, then you may appreciate our ongoing investment management and financial planning services.

Photo by Megan Marotta Russell.