I have maxed out my 401k and Roth IRA, so now what?

Published November 9, 2015   Posted in How to Save

As you probably know by now, I’m a bit of a saver. In fact, over the past year I have turned into a turbo-saver by throwing every last dollar that I can into savings in preparation for the ever-sweet departure date at the end of 2016.

Pinterest: Maxed out your 401k?In October, I maxed out my 401k and Roth IRA contributions for the year. Now, my paychecks are larger because those automatic deductions are no longer happening. Talk about an awesome first world problem to have!

What in the hell do I do with all this extra cash?

For fun, I did quite a bit of research online to find out what the typical advice is, and I’ll be honest – it’s confusing even to me who has a fairly solid grip on investments and retirement savings. I can only imagine how confusing it might be to the casual investor looking for help on what to do with money after maxing out their 401k.

Here, I’m going to make it easy on you and give you my top three strategies for using that extra money wisely. Hint – what I am about to tell you is going to prioritize your future happiness.

What to do after maxing out your 401k and Roth IRA

1. Check your emergency savings – If you don’t have an easily-accessible emergency savings account with at least 6 months of living expenses, use the extra dough to build this pot of money up. While it is true that this money won’t grow at nearly the same rate as it would if fully invested, it may also be a life-saver if you need substantial cash down the road.

help-153094_640The two critical elements to an emergency fund are safety and accessibility – meaning, your money needs to be both safe as well as accessible at a moment’s notice.

This means storing $10,000 under your mattress is a bad idea because while the money is accessible (when you’re home), it’s definitely not safe. What happens if your home catches on fire while you’re at work, or your dog chews through your mattress (and money stash!) one day because he’s pissed that you didn’t fill up his food dish before you left for work? This violates the safe rule.

Storing your emergency fund in the stock market, while safe (not withstanding capital losses, of course!), does not offer the accessibility that we need out of our emergency funds. Stocks can be sold, but the process can take a couple of days before we actually see that cash in our hand. Emergency funds need to provide us with immediate cash, often necessary in an emergency.

My wife and I maintain an easily-accessible Ally high interest savings account to keep our emergency savings with an annual percentage yield of 1.00%, which isn’t bad for savings accounts. Capital One 360 is another online bank option. Emergency funds can be saved anywhere so long as the money is “liquid”, or in other words, easily withdrawn into spendable cash any time.

Do you really need 6-months of living expenses in your emergency fund? “Need” is such a strong word and there are no established rules in play here, but it comes down to the level of risk that you are comfortable with taking on. My wife and I prefer a larger emergency fund to account for job losses or any major expenses due to “shit happens”. Your level if risk may differ, and that’s okay.

The bottom line: Establish an emergency fund if you do not already have one, and if you do, ensure that you are comfortable with the amount that’s in it.

2. Open an HSA (Health Savings Account) – One of the better-known smart guys in this investment business, the “Mad FIentist”, calls the HSA the “Ultimate Retirement Account“, and for good reason. An HSA is a tax-advantaged (aka: pre-tax) account available for those who are enrolled in a high deductible health insurance plan. The idea is since your deductible is so high, the HSA will help provide an incentive to save for those potentially costly deductible payments.

The best part about the HSA is its tax advantaged status which, like your traditional 401k, reduces your taxable income by the amount contributed. Thus, if you contribute $3,000 in a year into an HSA, your taxable income gets reduced by $3,000 as well.

Even better, an HSA account can provide tax-free contributions, growth and withdrawals because there are no hard and fast rules that state HSA money needs to be used to pay for deductibles directly. This means that deductibles can be paid by using a regular credit card (instead of the HSA debit card), allowing us to keep that money within our HSA longer. We can then decide when to pay ourselves back – so long as we keep the deductible payment receipt. Check out the Mad FIentist article (linked above) for more detail on how this might work.

If HSA money is never used, it can be withdrawn from the account at age 65 without penalty, which essentially turns this account into another tax-advantaged 401k. This money will be subject to income tax at the time of withdrawal, but don’t forget that this money also enjoyed years of tax-free growth, all the while reducing your taxable income during your working years.

At the present time (2015), individuals can contribute $3,350 and families $6,650 into HSA accounts. The IRS said it will raise the amount of money that families can contribute by $100 in 2016.

3. Open a brokerage account – If your emergency savings is up to snuff and you’ve looked into an HSA as another pre-tax savings option, consider opening a taxable brokerage account.  Brokerage accounts provide investors with another way to invest money in the stock market similar to a traditional 401k, except you’re investing after tax dollars. Any capital gains are taxed upon withdrawal. Investors pay a fee to the brokerage house with each transaction.

My wife and I have a brokerage account with Vanguard with holdings in stocks, bonds as well as mutual funds. Less experienced investors who wish to invest their money in something without needing a lot of knowledge might consider the Vanguard LifeStrategy Growth Fund, which is a broadly diversified 80/20 stocks to bonds collection of funds.

A wide variety of companies offer brokerage accounts, like Vanguard, Fidelity, Charles Schwab, T.Rowe Price, Scottrade and many others.

What say you? What would you do with your extra cash after maxing out your 401k and Roth IRA?

We track our net worth using Personal Capital


51 responses to “I have maxed out my 401k and Roth IRA, so now what?”

  1. TSR,
    I went over my day job paychecks last night and saw that I hit the 401k limit for the year. Nice. Adds a real boost to the bottom line cash flow. I hadn’t thought much about where it’s going. We haven’t reached the max on Mrs. RBD’s Roth this year so that will probably be first. Then I think I’ll use some to increase our ‘opportunity fund’ which is basically a stash of cash for a rainy day.

    • Steve says:

      Nice! It’s awesome knowing that you’ve already hit the limit and there are still a couple months remaining. Nothing wrong with topping off that opportunity fund. The more you save now, the earlier you can retire later – perhaps WELL before dad. 🙂

  2. Steve it seems like we do the almost the exact same thing with our money. Ally for the emergency fund and Vanguard for everything else (except HSA). I set my HSA and 401k contribution to max out by calendar year end, and then monthly I make a transfer over to Vanguard for the difference of my take-home pay and expenses for that month, and shove it in some index funds I can “forget” about 🙂

  3. The only problem with meeting your 401k contribution limit early is that then for the last few paychecks of the year you won’t be contributing the required amount to get your employer match. Is that not true?

    My contributions are kind of pesky because my income is a variable (I’m a nurse and make varying amounts on call). I have to guess what percentage to contribute to spread the total among all my paychecks. I wish Fidelity had the option to just divide the total contribution limit equally among my paychecks.

    • Steve says:

      Hi Miss GF – my employer-match has been long since met, actually. My company does things differently, too – they match a particular dollar figure rather than a percentage of your income. But even in the case of a percentage match, it still would have easily been met much earlier in the year, probably in the February to March timeframe. So, no worries there. 🙂

      Thanks for your comment.

      • Rick says:

        Employer match is a real gotcha for many. For my wife, her employer deposits 6% of her income quarterly, regardless of her contribution. For me, my employer will match 4% of my 401(k) contribution in each paycheck, so if I max my contribution before the last paycheck of the year, they have nothing to match. Luckily, I can deposit a fixed amount each paycheck to make sure I max out on the last payday.

        • Steve says:

          Hey Rick – wow, your wife has an awesome setup there! I’ve never worked for a company that even MATCHED 6% of your contributions, much less just put that amount in on your behalf. Wonderful perk.

          The companies that I’ve worked for will match up to a certain percentage of your salary and then stop matching, so in my case, finishing up early isn’t a big deal. In fact, my current company only matches $500, total – but it makes up for that with quarterly-bonuses.

  4. Jover says:

    My extra cash this year is going into peer to peer lending at Lending Club. It is a nice way to have some money invested that is not directly correlated with the stock market, and my returns so far, over the last 7 months have been over 13%. I understand my returns will go down as these loans mature, & I suffer the unfortunate default of some of my riskier loans, but the automatic reinvestment of both principal and interest payments makes this a nice product to invest in.

  5. Maggie says:

    Time to get my cash out of my mattress! We don’t have access to an HSA… but we’re not maxing all of our possible accounts out yet… so we’ll have to get there first! 🙂

    • Steve says:

      Hey Maggie – yeah, some people don’t have access to an HSA, so that might be off the table for some. But in due time, I’m sure you’ll have your tax advantaged accounts filled to the max! 🙂

  6. Just a throw in here….many people have a side business or are self employed. Those should consider a SEP-IRA. Allows for moving funds into a tax deferred account and the limits are large……Steve

    • Steve says:

      Yep! Thanks for adding that, the SEP-IRA is definitely something to consider if you’re self employed, no doubt about it. Good call, thanks for the comment.

  7. Sometime in early 2016 I need to actually look at our HSA and invest the money. I only started it in August and increase the contribution in order to max out this account.

    I think the minimum to invest the idle cash in the HSA is $2K and we now have $4K in it. So, need to make time to take a closer look under the hood for investment options.


  8. Hmmm…We are toying around with the idea of opening a brokerage account, but I’d be lying if I didn’t say it still feels like the deep end of the pool. Our 403b options are terrible in our respective districts, so we’re just working with our pensions, fully-funded Roth accounts, and an emergency fund. We know we need to do more. Now it’s just taking the leap, I guess 🙂

    • Steve says:

      Yeah, understood. In my opinion, just getting that money into the market is the first step. It sounds like you might want to look into one of the LifeStrategy (Vanguard term) at your financial institution, which helps to keep your money diversified throughout the market. It’s pretty much zero maintenance as far as you’re concerned. 🙂

  9. Man, that certainly is a good problem to have. And not one I’m currently having, but here’s to the future! 🙂
    I do, however, have my savings in an Ally account, and am really happy about that. I will also say that I think Betterment is a great option for low-stress investing, especially for people like me who may not have the minimum $3,000 or $10,000 lying around that is needed to start an index fund account at Vanguard.

    • Steve says:

      Hey Sarah! I don’t have any personal experience with Betterment, but I’ve definitely heard positive things. It sounds like that’s another respectable option to consider too.

      Thanks for your thoughts! 🙂

  10. joe says:

    #4 – pay extra on your mortgage or your rentals.. I also fully funded my 401k / roth for the year and same with my wife.. for remainder of year we contribute to brokerage account and make extra principal payments on the mortgage..

    • Steve says:

      Good call, Joe – paying down the mortgage and other debts is definitely a wise decision. The quicker those are done, the quicker you can reduce expenses enough to quit the rat race!

  11. Great idea on having the emergency fund in a place where you can still get a tiny return on it and not put it at risk floating around at home where a burglar might be able to grab it.

    When we have extra money after maxing out our 401ks and IRAs we plan to open a Vanguard brokerage account like you. The fees are so small and I like the advantage of having long-term capital gains tax-free when we get our taxable income down to 15% and below range.

    We’ve thought about an HSA but don’t have a high deductible plan yet. Still weighing whether getting a HDHP is right for us yet.

    • Steve says:

      There are so many options out there to consider. We’ve had our brokerage account for years (separately before marriage). I’m on-board with virtually any investment opportunity at this point…so long as it’s not a start up business or real estate! 😉

  12. I am with Joe on his #4 suggestion: pay extra on your mortgage or your rentals. That is a built in risk free return.

    Knowing what your dreams are in early retirement, I would say start saving for your truck or Airstream. If you purchased the trailer now you could spend time doing the work and updates you have in mind for when you become a full-timer.

    We plan to sock all our extra money after our last debt is paid in March 2016 into our slush fund for bucket list items and travel.

    • Steve says:

      Absolutely agreed, Bryan. In fact, the money in our Ally account will be used, in part, for the purchase of our truck and Airstream (so we’re going way over the 6-month emergency fund).

      The problem with buying the trailer now is primarily storage, and we’d essentially be paying for something that’s just sitting there. We’re actually now looking for something a little bit newer – definitely not brand new, but also not a fixer-upper either. Something that we can do work in progressively after we move in, but is completely, 100% move-in ready.

      Thanks for the comment!

  13. Jack….I put 5K into Lending Club to test the return. I selected the conservative interest rates for a potential return. The higher rates equals higher risk. Within 60 days I went into a negative (-) returns. I immediately sold my holdings and closed the account. It did not take long for some to stop paying. A rep. called me and suggested I reduce my holdings to less the 25.00 per note to reduce the risk. Too late…closed. I’m sure others have positive comments about the program…..Steve

  14. Freedom40 says:

    As others have commented – Lending Club or Prosper could be other options. I’ve been doing lending club for about 9 months and currently have around a 9% net return. Also, what about investing in a Trad IRA for both you and your wife? Unless I’m mistaken, you can do this in addition to the Roth and the 401k. Of course, with FI on the horizon, you may not want to lock this money up until you’re 59…

    • Steve says:

      Nice, nothing wrong with a 9% rate of return! And yeah, we want our money to be as accessible as possible as we move into retirement – that’s where the brokerage account really comes in handy, and it’s almost entirely hands-off and stress free.

  15. Great into about the HSA and brokerage accounts. We had a high deductible plan with HSA for the birth of our second child and it motivated us to negotiate a 30% discount with the hospital for paying before we left. So much better than hearing stories of how people don’t finish paying their childbirth bills until the child is 2 years old!

    • Steve says:

      Hey Kalie! Wow, not finishing paying the bills until the child was 2?!? Phew! But, I bet it made you feel pretty good to pay a third less because you were able to fork over the money on the spot due to your HSA. Good plan, and definitely well set up!

  16. Mr. SSC says:

    This year is the first year I won’t max out my 401k. I’ve got a pseudo-pension/retirement account from work now, plus my personal work retirement account. After realizing we will be fine with our 401k’s where they are if we didn’t contribute anymore to them, we shifted more savings into our pre-retirement account (Vanguard). We don’t qualify for IRA, and until next year didn’t have access to an HSA. I still contribute enough to get the max match amount from my employer, but I’ll be a bit short from maxing it out. I’m fine with it, as it still works towards our overall Lifestyle Change goal anyway. It does feel weird typing out “I’m not maxing out my 401k” though. 🙂 Considering how much went into our pre-retirement accounts this year though, I’m totally fine with it.

    • Steve says:

      Hey Mr, SSC – though I always like to maximize pre-tax savings, I understand where you are coming from. As long as you’re still saving that money somewhere (which you appear to be in Vanguard), it’s still going to good use and ear marked for your future enjoyment. Nothing wrong with that! 🙂

  17. What a nice problem to have! 🙂 It’s a bit like us lamenting that we can’t do HSAs because our health insurance is too good. Waaaaahhh!! Poor us! 😉

    We’ve generally both structured our 401K percentages so that we hit the max right around the end of the year, so we’ve never had to figure out what to do with extra income from it earlier in the year. But (please do no further extrapolating) ;-), I just hit the SS max for the year, and saw my paycheck go up because of that. So that’s more money that we’ll dump into Vanguard twice a month. Mr ONL will be right behind. Wohoo!

    On the emergency fund front, we were just having this chat with another blogger — do you plan to maintain an emergency fund in early retirement, or build an emergency budget into your annual spend? We’re planning to keep an emergency fund so we aren’t forced to sell shares when the market is bad or, worse, to incur more capital gains that might screw up our tax/Obamacare subsidy situation. Curious how you guys are thinking about it!

    • Steve says:

      Ha! Agreed, I like having these first world problems. Wow, what do we do with all this extra moneeeeeeeey!?!?

      Regarding your question about our emergency fund, we are definitely going to keep it around, but not all of it. Our plan is to live off of our savings for the entire first year to let our investments continue to grow without withdrawing a dime. But in doing this, we also aren’t going to dwindle our emergency savings down to zero, either. We will still have around 3 to 6 months at the end that we’ll be able to easily live off of if the markets do go south.

      The nice thing is since our planned expenses are so low (in the neighborhood of $30k a year), a 6-month emergency fund only requires us to keep $15,000 in the account.

      We will probably make several adjustments to all this once we finally move into this new lifestyle, but at the moment, that’s the plan. 🙂

  18. […] week, I talked about HSAs and how to take advantage of them. But, Matt Becker from The Simple Dollar wrote one of the most […]

  19. Jenn says:

    How has your experience been so far with your brokerage account? My husband and I really want to do diversified investments, but he’s still a little nervous that we’ll end up losing money. Are you happy with your decision to invest?

    • Steve says:

      Hi Jenn – nothing but positive experiences through our brokerage account, and it couldn’t be easier to manage and maintain (we are very hands-off people when it comes to our investments).

      In my view, it’s not practical to avoid investing because you might lose money. While it is possible that you’ll lose money in the short term as the market ebbs and flows, in the long run I haven’t met ANYONE who hasn’t made serious cash. There are absolutely no guarantees in life, of course, but history has shown that the great majority of people who invest make money over the years.

      What you might consider doing is looking at a LifeStrategy fund that will automatically diversify your money throughout the market. This is very hands off approach to investing. Vanguard generally has the lowest fees around, and my wife and I do have some money in a LifeStrategy fund ourselves and it’s kept up with the market quite well over the years.

      I am very, very happy with our decision to invest. In fact, that’s what is enabling our retirement plans next year. There is no way that I could retire at 35 without money in the market. Absolutely none. 🙂

      Thanks for your comment, and I hope that this helps!

  20. Hannah says:

    I accidentally overmaxed my HSA, I have to get it resolved before the end of 2015, but thankfully it shouldn’t be too much of a hassle. My 401k has an after-tax option, so we’ve just continued that. We usually just invest extra into our brokerage, but for now we’re holding onto the money to push towards our Roth’s for next year.

    • Steve says:

      Hey Hannah – after tax 401k options are always good in addition to throwing additional money into brokerage. And the Roth account can provide income your way before retirement age, penalty free. It’s a win-win!

  21. […] my wife and I maxed out our 401ks. We dumped anything extra into a Vanguard brokerage account. We also have an Ally savings account […]

  22. BRANDON says:

    My wife and I maxed out our 401K and Ira and convert both IRa to Back door. HSA sounds great, but our Health Insurance don’t match. We are now looking into Indexed Life Insurance or 529. Any advise? Thanks.

  23. Actually, come to think of it, you wouldn’t even need the $600 tax. You could just adopt a $600 tax credit, leaving all other rates unchanged. The incentive or ‘mandate’ effect would be the same. Not having any type of insurance would leave one $600 less rich than having it.

  24. Brenda Hall says:

    I wish I would have read this article a long time ago. LOL I changed my medical account. I will be changing it again to take advantage of this

  25. Brenda Hall says:

    What does this mean “convert both IRa to Back door”?

Leave a Reply