Don’t automatically assume that just because you are maxing out your 401(k) that you are making the best decision for what account to invest your money in. Yes, it’s an excellent strategy to simply max out your 401(k) and call it a day, but if you are watching this then you can probably do better. It could make more sense for you to put your money to better use elsewhere.
This video was inspired by a video from Jazz Wealth Managers:
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Maxing Out Your 401K Is NOT The Best Strategy
When it comes to planning for retirement, saving as much as possible in your 401K might seem like the best strategy. After all, the more money you have saved, the more comfortable your retirement will be, right? Well, not necessarily.
While it’s true that maximizing your contributions to your 401K can help you build a substantial nest egg for retirement, it may not always be the best strategy for everyone. There are a few reasons why focusing solely on maxing out your 401K may not be the most effective approach to retirement planning.
First, it’s important to consider the restrictions and limitations of a 401k account. Contributions to a 401K are limited to a certain percentage of your income, and there are annual limits to how much you can contribute. This means that even if you are financially able, you may not be able to fully maximize your contributions to your 401K.
Additionally, while 401K plans do offer tax benefits, there are other retirement savings options that may offer more flexibility and potentially better tax advantages. For example, a Roth IRA allows for tax-free withdrawals in retirement, whereas withdrawals from a traditional 401K are taxed as regular income. By diversifying your retirement savings across different accounts, you can maximize your tax benefits and create a more well-rounded retirement portfolio.
Another reason why maxing out your 401K may not be the best strategy is that it can limit your access to funds in the present. 401K accounts are designed for long-term retirement savings, and early withdrawals are often subject to penalties and taxes. If you put all of your savings into your 401K, you may find yourself with limited resources for other financial goals, such as buying a home, starting a business, or funding your children’s education.
Instead of focusing solely on maxing out your 401K, it’s important to consider a more holistic approach to retirement planning. This may include exploring other retirement savings options, such as IRAs, annuities, or taxable brokerage accounts. By diversifying your savings across different accounts, you can create a more flexible and robust retirement plan.
It’s also important to consider your overall financial goals and priorities. While saving for retirement is crucial, it’s not the only financial goal you may have. By balancing your retirement savings with other financial priorities, you can create a more comprehensive and sustainable financial plan.
In conclusion, while maxing out your 401K can be a valuable part of your retirement savings strategy, it may not always be the best approach for everyone. By considering the limitations of 401K accounts, exploring other retirement savings options, and balancing your financial goals, you can create a more effective and well-rounded retirement plan.
This video was inspired by a video from Jazz Wealth Managers:
https://www.youtube.com/watch?v=ZgCX0acJjDI
Maxing your 401K is a great idea. However, it depends on your goal, current marginal tax bracket, and whether you anticipate paying more or less in taxes when you retire. If you want to retire before 59.5 and most of your investment is in a 401K, then you'll be severely limited unless you have so much that you don't mind the penalty hit (highly doubtful).
If your 401K doesn't have a good investment option, then maxing it might not be a good idea.
Another thing to consider is how much taxable income you want in retirement. If most of your income is in a 401K you'll be paying income taxes on that and RMDs can become a nuisance. Having to pull more money for emergencies will lead to more taxes.
A non-retirement brokerage account is great for that long term capital gains. Paying income taxes up front might be the best option if you are far from retirement. Plus you can access the money at any age.
Great topic.
Totally agree
Awesome advice on maximizing this out thanks zach
I only like 401k up until my companies match is maxed. HSA is my favorite tax advantaged account. Other than that, I prefer non tax advantages investing accounts because then I have the freedom to use that how/when I want to.
Would you consider 12% tax bracket to be low enough to do roth instead of t ira? Our take home is 65k after our standard deduction MFJ and I have 2 kids.
This kind of info always seems to leave out quality of life. A higher income job — depending on industry — can increase stress / time investment / personal injury risk immensely leading to burnout & other personal repercussions. Important to weigh that for yourself and your family before throwing money into an advanced degree that MAY result in such a job even if you execute that process perfectly.
Each year, max out 401K, Roth IRA, and HSA. Then invest in taxable account. I front load my 401K and also receive true-up of company match. Works great!
I max 401K, backdoor Roth IRA, HSA and then invest the extra into a taxable brokerage account. Planning on adding a 529 soon to the mix and some properties. My brokerage account is about 80% of my net worth (excluding equity in my home).
I started with maxing out my 457b (401K for gov't employees) then I started watching YouTube videos and decided to manage my own financial account at Fidelity. HSA maxed out each year. I max my Roth IRA first then I put the rest of my money into my investment account. The investment account at Fidelity I run cover calls on stocks I own as well as purchase dividend ETF's. I find this method very rewarding and easy to do. I get paid twice. I pay a fare amount of taxes at the end of the year but not the same as working a job.
1. Contribute to the match in your employer retirement account (401k).
2. Max out your Roth IRA.
3. Contribute into HSA if you’re eligible. 4. Go back and max out your employer retirement account (401k).
5. If you still have money to invest. Contribute to a taxable/brokerage account.
I max out 401k each year and invest in brokerage also. So I have 401k, brokerage account and high yield savings.
Just my opinion but you should only contribute up to the amount that maximizes the amount your employer matches; whether it's dollar for dollar up to 5% or whatever. It's literally free money. Everything after maximizing that employer match would definitely be better served investing in other places. I would never contribute whatever the IRS 401k limit is for the year; $20,500 in 2022.
How would you factor in the option of a 457b rather than 401k? As well I have the option of it being roth, which so far is what I've gone for with 90% of my contributions. I have a hard time determining the order I should contribute for FI. I am currently trying for Coast FI as my main goal. A follow up with that: if I have a specific number I have to get to for coast fi, it seems to me I should view it to be a slightly smaller number if the majority of my funds are in roth. What do you think on how to look at that?
I wish I just reached the matching instead of maxing out my Roth TSP. I should've put the amount over the matching in a regular taxable brokerage account as long term capital gains tax can be zero (if income is under a certain amount) and can withdrawn prior to 59.5 years old (I FIRE'd at 52). Of note, I did max out my Roth IRA with maxing out my Roth TSP.