What Should I Do if I Have Maxed Out My 401(k)?
If you read my blog, or watch my videos, you will notice that I talk about 3 separate buckets you should have for your investments.
Bucket #1 is the tax-deferred bucket. This bucket includes your investment accounts that hold your 401(k), 403(b), 457, IRA, etc. These are investments that you will pay ordinary income on when you take out money.
Bucket #2 is the tax-free bucket. This bucket includes your investment accounts that hold your Roth 401(k), Roth IRA, etc. These investments you have already paid tax on, so that when you remove money from this account you won’t have to pay taxes on the money you invested, or the growth of those investments.
Bucket #3 is a taxable bucket. In this bucket, you have investments that are invested outside retirement vehicles (although this account is very much a part of your retirement plan). The money in these accounts has been taxed before investing. Therefore, when you invest that money, you only pay taxes on gains you make after you sell your investment, AND if you hold that investment for more than a year the capital gains are taxed at a LOW rate.
Why discuss these buckets?
A client of mine called me with a concern. She noticed that in October, November, and December of this last year she had more take-home pay in her salary than the rest of the year. Not a bad problem to have right?! It turns out that by the end of September, her company had stopped taking her 401(k) contributions out because she had put away her limit ($23,000 for 2023). Nothing was sent to her, the contributions just stopped.
My client wanted to know what she would do to save her income for the final 3 months of the year. It is a perfect example of how she can make use of her financial buckets. She has a brokerage account where she invested her excess income. She has paid taxes on her leftover income and has invested it so it can make money for her. She is prepared for next year to move her money into her brokerage account as soon as her 401(k) is maxed out.
There are so many cool ways to invest your assets so that your money works for you with minimal effort. The bucket approach is just one of many options. If you have investments in all 3 buckets you are doing a great job investing in your future. For more fabulous ideas on how to grow your assets, contact me.