What Do I Do After I Max Out my 401(k)?


About 13% of plan participants max out their 401(k) each year. If you’re one of the 13% – congrats! Maxing out your 401(k) is an amazing accomplishment, and it can help to put you on the path to living the retirement you’ve always imagined.

However, maxing out your 401(k) doesn’t mean you’re done saving! Depending on your retirement goals, you may need to go above and beyond maxing out this account. There are so many different ways for you to save for your future goals (while in some cases also continuing to save money on your taxes). If you have the extra cash flow to maximize some of these strategies, it’s wise to take advantage of them!

What Does Maxing Out Your 401(k) Look Like?

In 2019, the deferral limit to your 401(k) is $19,000. If you’re age 50+, you can add an extra $6,000 in “catch up” contributions. This limit only applies to your money. Any matching contributions made by your employer are icing on the cake.

Remember to check your employer’s policy. In some cases they may stop matching contributions if you hit your $19,000 contribution limit part-way through the year. There’s no reason to leave free money on the table, so make sure that you plan to contribute up to your maximum limit over the course of the full year to keep receiving your employer’s matching contribution.

Backdoor Roth IRA

A backdoor Roth IRA isn’t as complicated as it sounds. To fund a “backdoor” Roth IRA, you start by funding a Traditional IRA. Then, once a year (or every few years) you do a one-time conversion of your contributions from the past year to a Roth IRA.

Let’s look at an example:

You have $6,000 you’d like to contribute to retirement savings, but you don’t meet the income restrictions to open and fund a Roth IRA. So, you open a Traditional IRA, and contribute the $6,000 as a non-deductible contribution. Once the money hits the IRA account, you can convert the $6,000 into a Roth IRA  (thus working around the income restrictions) at a future point.

When does a Roth conversion make sense?

Roth conversions are a fantastic way to boost your retirement savings and save money on taxes during retirement. You can stagger when you do a Roth conversion depending on what tax bracket you’re in that year, or whether you have the extra cash flow to pay the income taxes on the amount you’re converting to a Roth IRA.

It’s also worth noting that a Roth IRA can be used for more than just retirement income. After the funds have been in the account for five years or more, you can withdraw them without penalty for specific expenses, like a first home purchase, or education expenses. This gives you the opportunity to go through the Roth conversion process with the intention of saving for retirement, but also allows you to have some flexibility with how you spend that money down the road.

Contribute to a 529 Plan

When you know that you’re on track to achieve your retirement savings goals, you can shift your focus to other financial milestones you’re working toward. For a lot of young parents, being able to help their kids pay for college is a big priority.

Contributing to a 529 Plan for your kids helps to set them up for future success, and encourages generational wealth. 529 Plan contributions also grow tax-free – which means you’re able to save now without paying exorbitant taxes later when you withdraw the funds for qualified educational purposes. You can use the tools and calculators here to crunch numbers on what to set aside for future college expenses.

Consider Investing

If you still have additional cash flow and want to take advantage of the growth that come with investing, you could consider opening a standard investing account. Although contributions to these accounts aren’t pre-tax, they’re still a good way to grow your savings and diversify your portfolio.

Investing accounts don’t have to be retirement-specific. A traditional investment account allows you the flexibility to access your money before retirement, while still incorporating a wide range of investment options into your strategy.

When clients have maxed out their employer-sponsored retirement plans, we typically begin to weigh options of contributing to after-tax investment accounts versus doing non-deductible IRA contributions. Investing in an after-tax account gives you the flexibility to access the funds at an earlier age (pre 59 ½) than if you have the age-restrictions around retirement accounts.

Fund Your HSA

Your HSA (Health Savings Account) is an excellent way to continue saving for medical expenses in retirement without sacrificing the flexibility to use the funds now. Contributions to an HSA are all pre-tax, which helps to lower your taxable income. When you use your HSA on a qualifying medical expense, you aren’t taxed on any capital gains the funds have earned in your account over the years.

But how can you use your HSA for retirement expenses?

The funds in your HSA rollover year to year. There’s no urgency to spend them now, and you don’t have a deadline to use them by. Even if you’ve started your HSA through your employer, you are the sole owner.

So, if you should change jobs, you get to take your HSA with you. However, if you do run into a medical emergency now, you can still use the funds in your HSA to cover the expenses. The flexibility your HSA gives you is reason enough to consider funding one for you and your family, and the fact that you can continue to use the funds for growing medical expenses in retirement is an added bonus!

Stock Options

Does your company allow you to buy into stock options or RSUs? If you’ve already maximized your other retirement savings options, you might look into leveraging the stock options your company offers to their employees. These stock options can help you to boost your income using long-term capital gains strategies. Because many stock options are discounted for employees, you may even be able to use them as a way to get more exposure to the stock market for relatively low upfront cost.

Before diving head first into stock options or RSUs (restricted stock units – another form of employee stock option or compensation), make sure that you understand exactly when they’ll vest, when you can exercise them, and what you can expect from a tax perspective. Stock options can be a really good way to grow your wealth quickly, but the taxes you owe on them, and the upfront cost need to be planned for. This is especially true if your employer hasn’t discounted the options enough to make them a good deal for you and your family’s unique financial situation.

Build a Plan That Meets Your Goals

It’s easy to get stuck in the constant cycle of focusing only on retirement saving. After all, most of the financial planning articles out there push two main savings “goals” that everyone should be working toward:

1. Emergencies.
2. Retirement.

Beyond that, there’s not a ton of information out there on what to do after you check both of those boxes.

Saving for retirement is fantastic, and it’s a goal that a lot of people should be taking more seriously. But if you’re on track to have more than enough saved for retirement, it’s worth figuring out how saving can positively impact your life right now.

When you build a savings plan, don’t just save for the sake of saving. Squirreling money away without goals can be a recipe for burn out. You wind up not achieving your short-term goals, or living the life you want to live, because you’re so focused on the future.

As you build savings goals beyond maxing out your 401(k), it can be helpful to work backward. Start by outlining what you want to achieve through savings, then start outlining the steps you’ll take to reach those goals. Your goals might be long-term: like saving for your child’s education expenses, or buying a rental property. They might also be short-term: like purchasing your first family home in the next few years, or saving so that you can buy a new-to-you vehicle using cash.

Maxing out your 401(k) is really only the kick-off point. You’re entering a world of exciting saving options that are going to benefit you for the rest of your life!

Want help? Schedule a call today – I’d love to talk to you about how to organize a savings plan that sets you up for success right now and in the future.

Mary Beth Storjohann, CFP® is an author, speaker, and financial coach who takes a fun, no-nonsense approach in working with individuals and couples across the country, helping them make smart choices with their money.

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