Many people I talk to think that they should just max out their 401(k) and they will be set when it comes time for retirement. That is definitely better than doing nothing, but this overly simplified tactic leaves some opportunity and even flexibility on the table. I think that with some intentional planning, you can do better.
When planning your retirement savings, it’s important to prioritize your contributions strategically; here’s what I recommend in just 4 steps:
You should start by contributing enough to your 401(k) to take full advantage of any employer match. This is the closest thing to free money and an immediate return on your investment. For instance, if your employer offers a 50% match on the first 3% of your contributions, you should contribute at least 3% to maximize this benefit. Also, 401(k) growth is tax-deferred, which means you don’t pay taxes until you make withdrawals.
Next, focus on fully funding your Roth IRA, if you qualify for one (check income limits here). Roth IRAs offer the unique advantage of tax-free growth and withdrawals in retirement. Plus, you can access your contributions at any time without penalties or taxes; however, to withdraw your earnings without taxes and penalties, you must be at least 59 ½ and have had the account open for at least 5 years. Another benefit of Roth IRAs is that they don’t require mandatory withdrawals (required minimum distributions/RMD’s), unlike traditional retirement accounts.
One potential drawback of a Roth IRA is that it does not provide an immediate tax deduction like a Traditional IRA. If you truly need that immediate tax deduction, a Traditional IRA might be a better route. It's important to keep in mind that the total contributions to any IRA cannot exceed the annual limit, which often changes, but for 2025 is $7000, plus an extra $1000 if you are 50 or better.
After maxing out your Roth IRA contributions you should then allocate any additional savings toward maxing out your 401(k) contributions. The 401(k) contribution limit for 2025 is $23,500, with extra catch-up contributions allowed for those aged 50 or better. By contributing more to your 401(k), you take advantage of its higher contribution limits while still benefiting from the Roth IRA’s tax-free growth.
Finally, once you’ve reached the limits for your 401(k) and IRA, I recommend investing any additional funds in a brokerage account. While these accounts don’t offer tax advantages on contributions and you’ll owe taxes on any gains, they do offer a great deal of flexibility since there are no constraints on when and how you use them, which makes them an effective tool for building wealth over the long term.
In summary, this strategy blends the tax-free advantages of a Roth IRA with the higher contribution limits and potential employer matching typically offered by a 401(k), providing both flexibility and a balanced approach to retirement planning. After that, if you're fortunate enough to have extra capital to invest in a taxable brokerage account, it can be the perfect complement to your overall financial plan, providing both flexibility and growth.
Feel free to email me with your questions. Otherwise, hang in there with me; we’ll dive in a little deeper next week.
Sincerely,
