Contribute To My 401k Or Invest In An After-Tax Brokerage Account?

The decision to contribute to a 401k or invest in an after-tax brokerage account is a dilemma that will be solved in this post. As someone who has built up millions in both accounts, there are some key considerations you need to make.

The great thing about a 401k is that you are contributing witth pre-tax money. The higher the tax bracket you are in, the more tax savings you will have. If you can start withdrawing from your 401k when you're in a lower income tax bracket, then you've successfully conducted some tax engineering to boost your wealth.

The problem with the 401k is the 10% early withdrawal penalty before age 59.5. If the government gets desperate, they can raise the early withdrawal penalty percentage or increase the age limit. I ascribe a 75% chance one of these two things will occur over the next 30 years.

It's easy to understand why saving for retirement is difficult. The value proposition is that you put your money away in an institution like Fidelity, which operates under the confines of the omnipotent government, who punishes you if you err from their rules, all for the chance that your money will grow decades down the road.

With no assurances from your money manager or the government that your money will be there in retirement, spending money now on instant gratification makes perfect sense. Give me the latest iPhone vs. the potential to have $25,000 more in retirement!

Therein lies the dilemma of the 401k contributor who can't max out his or her account every year, and who therefore doesn't have excessive after tax savings for liquidity and other purchases.

How Much To Contribute To A 401k

An easy way to determine how much to contribute to a 401k or after-tax investment account is to ask yourself what is the purpose for your savings. Having a more comfortable retirement isn't a good enough answer. It's important we be more specific with our wants, such as buying a car, a house, paying for graduate school, or taking care of a sick family member.

When I first started contributing to my 401k in 1999, I told myself the purpose for saving was to GET THE HELL OUT of Wall Street within 10 years! I knew I wasn't going to last for decades like my parent's lasted in their respective careers.

The hours and stress was just too punishing. I was fortunate to earn enough to max out the then $10,500 a year limit and contribute another 20% or so of my after tax income to my E*Trade account.

My target was to accumulate $100,000 in my 401k by age 27 along with $100,000 in my after-tax brokerage account so I could have the option of taking a two-year business school vacation, or moving back to Hawaii and just chill for a couple years. During either of these journeys, I'd really search deep to figure out what I really wanted to do with my life.

I aimed for $100,000 because it was a large enough amount where if I returned 10%, I was almost matching the maximum contribution amount at the time. Given I wouldn't be working or contributing for a couple years, I was hoping that I could continue my retirement savings momentum through performance.

Why Don't People Contribute More To A 401K?

Over the years, I've observed the #1 reason why more people aren't willing to max out their 401k is because of their desire to save up for a house. Everything else seems obtainable through regular cash flow e.g. car payments, furniture, food, clothes, vacations, etc. But a down payment is a whopper of an expense that continues to torment the diligent saver.

Although I desired to own a piece of Manhattan real estate in 2001, I was about $50,000 short for a downpayment on a 2/2 condo and I wasn't so sure about my career after the internet bubble burst. What a bad financial move not buying then!

Fortunately, the 401k system allows you to borrow from your 401k to buy a house. It's just not exactly good financial practice borrowing to be able to buy something with more debt.

Borrowing From 401k To Buy Property

When you borrow from your 401k, you pay interest to yourself. The rate is typically a couple percentage points above the prime rate, which means it's generally higher than your typical 30-year fixed mortgage rate. You can usually borrow up to half of your balance, or a maximum of $50,000.

It's good such limits are created because you can imagine people pilfering their 401k for lots of superfluous things. Most loans must be repaid within five years, although some employers will give you up to 15 years if the money is used to buy a home.

Your 401k loan won't count in your debt-to-income ratio when you apply for a mortgage because the loan is secured by the money in your 401k plan. 401k loans aren't reported to the three major credit bureaus either, so the loan won't hurt your credit score. In a way, I'm glad that nobody is punishing us for using our 401k money to buy a home. Applying for a mortgage is already a very cumbersome process.

But I would be very careful about going through the process of borrowing from your 401k to use as a downpayment to borrow more money to buy a home. Borrowing from your 401k isn't as easy as snapping your fingers. Once you set the precedence that it's OK to borrow from your retirement savings, then chances are higher that you will continue to borrow and borrow again.

Sure, you might get lucky and withdraw right before a crash. After all, buying something tangible is generally better than having your stocks disappear like vapor. But over the long run, you will likely lose out on some healthy returns. As they say, “Time in the market is more important than timing the market.

401k savings targets by age - Contribute To My 401k Or Invest In An After-Tax Brokerage Account?

The average 401k balance for all Americans is around $100,000 as of 4Q2017. The maximum contribution also rises to $18,500 for 2018.

Practice “Tax Location”

Contributing to a 401k or after-tax investment account is all about tax location.

Let's say you have the luxury of maxing out your 401k and also growing a hefty after-tax investment account. It's generally wise to buy growth stocks, or stocks that pay no dividends in your after-tax account. So long as you hold onto these stocks, they will hopefully grow at a faster compounded rate than non growth stocks and cause no tax liability.

On the flip side, you might want to buy more dividend income stocks in your pre-tax 401k or IRA. Your dividends and earnings gets compounded tax free until you finally have to withdraw from your account. If you are buying actively managed mutual funds with higher turnover, it makes sense to keep these funds in your pre-tax retirement accounts as well.

Whether you are maxing out your 401k or not, if you plan to hold income and growth stocks, you might as well allocate your positions accordingly. Nobody knows for sure the future of taxation rates, so it's best to diversify and hedge. Here's why I prefer investing in growth stocks over dividend stocks.


It's a good idea to treat our 401k like an extra tax we have to pay the government. Given taxes are mandatory, we should contribute the maximum amount to our 401k if we can afford it. After years of contribution, we hope our 401k will be free from penalties during withdrawal time. But if it isn't, we'll just chalk it up to another wasteful tax expenditure for the government to abuse.

Investing money in an after-tax online brokerage account provides good flexibility to grow your wealth while staying liquid. The key is to know yourself and not be tempted to liquidate your investments to buy things you don't really need, or get emotional and sell during panic sessions or buy during euphoria periods.

I know myself and I have a temptation to do both! Having too much extra cash “made” me buy a $78,000 Mercedes Benz G500 when I was 25 years old. The only good thing is that I got rid of the SUV at a $15,000 loss the next year to buy a condo that has since appreciated in value.

Temptation and better long term performance is why I like to invest in private equity or venture debt with multi-year lockup agreements. Knowing my money can't be touched without penalty tends to not only provide greater returns in the long-run, it also allows me to focus on doing more important things with my life.

To Summarize 401k Or Taxable Account:

1) Try to max out your 401k to save on taxes and get in a super-saver mentality. The maximum contribution amount for 2023 is $22,500 a year. The maximum contribution amount goes up $500 on average every two years o so.

2) Once you've been able to max out your 401k, aim to save at least 10% of your after-tax income after maxing out your 401k in a low-cost digital wealth advisor like Empower, which automatically rebalances your money for you each month based off your risk tolerance.

Contribute To My 401k Or Invest In An After-Tax Brokerage Account?

3) The only major expense most people will really need to save up for is a downpayment on a property and college education, which is what the 529 plan is for. Hopefully everybody has disaster prevention health insurance. Calculate the downpayment amount based on 20% of the realistic purchase price for a home and divide it by your monthly after-tax, after-401k savings to figure out how long it will take for you to come up with your downpayment.

Adjust your 401k contribution and after-tax savings amounts to align with your desired time frame of owning a home. If your desired time frame for owning a home is ASAP, then contribute the maximum 401k amount that provides for a company match. To not do so would be to reject free money. Save all other proceeds in an after-tax investment account, savings, or CD account.

4) If you're within a couple years of your goal to come up with the full downpayment, consider de-risking your investments from 100% equities to a 50/50 mixture of index equity funds and government bonds, and then to CDs or a simple money market account.

The worst thing that could happen is an obliteration of your downpayment right before you're ready to buy. The proper asset allocation of stocks and bonds is important.

5) Once you've purchased a home, your number one mission should be to ramp up a comfortable after-tax liquidity amount so that you will never be a forced seller of your home.

I like a minimum of 6 months liquidity, but the number of months depends on you. Once you've developed your minimum liquidity amount, refocus on maxing out your 401k as much as possible. Your older self will thank you in 10 years!

6) Always do both. If you have aspirations of retiring before the age of 59.5, then you should consider aggressively building an after-tax investment account that generates passive income. Give yourself early retirement options! See the chart below as a basic guide.

Lean FIRE financial requirements by age chart

Manage Your Finances In One Place

The best way to become financially independent and protect yourself is to get a handle on your finances by signing up with Empower. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize.

Before Empower, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances. Now, I can just log into Empower to see how my stock accounts are doing and how my net worth is progressing. I can also see how much I’m spending every month.

The best tool is their Portfolio Fee Analyzer which runs your investment portfolio through its software to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was paying! They also recently launched the best Retirement Planning Calculator around, using your real data to run thousands of algorithms to see what your probability is for retirement success. 

Once you register, simply click the Advisor Tolls and Investing tab on the top right and then click Retirement Planner. There's no better free tool online to help you track your net worth, minimize investment expenses, and manage your wealth. Why gamble with your future?

Retirement Planner Personal Capital
Personal Capital's award-winning retirement planning calculator. Are you on track?

Real Estate Diversification

In addition to investing in your 401k and taxable brokerage account, look to invest in real estate as well. The global pandemic has accelerated demographic shifts towards lower cost areas of the country due to the work from home trend.

Check out Fundrise and their eREITs. eREITs give investors a way to diversify their real estate exposure with lower volatility compared to stocks. Income is completely passive and there is much less concentration risk.

If you are bullish on the demographic shift towards lower-cost and less densely populated areas of the country, check out CrowdStreet. CrowdStreet focuses on individual commercial real estate opportunities in 18-hour cities.

Both platforms are free to sign up and explore. I've personally invested $954,000 in real estate crowdfunding across 18 properties to earn income 100% passively.

Invest In Private Growth Companies

Finally, consider diversifying into private growth companies through an open venture capital fund. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment. 

Check out the Innovation Fund, which invests in the following five sectors:

  • Artificial Intelligence & Machine Learning
  • Modern Data Infrastructure
  • Development Operations (DevOps)
  • Financial Technology (FinTech)
  • Real Estate & Property Technology (PropTech)

Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!

The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum. In addition, you can see what the Innovation Fund is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.

About the Author:

Sam began investing his own money ever since he opened an online brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at Goldman Sachs and Credit Suisse Group. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered.

In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $200,000 a year in passive income largely thanks to real estate crowdfunding investments in the heartland of America. He spends time playing tennis, hanging out with family, consulting for leading fintech companies, and writing online to help others achieve financial freedom.

For more nuanced personal finance content, join 100,000+ others and sign up for the free Financial Samurai newsletter. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009. Everything is written based off firsthand experience. 

90 thoughts on “Contribute To My 401k Or Invest In An After-Tax Brokerage Account?”

  1. So i have roughly 108k in property value which i can get via cash out refinance. I am looking to purchase a rental property. I can do that or wait another 5 years (i am in no rush) and wait till i am able to take enough out of home for a full 20% down payment on a rental property. I live in the Bay Area the property here is stupid expensive…like i am sure you know. Anyways i can do that or i can pony up 20 k from my savings. Any recommendations?

  2. Sam, I agree with you that having the proper asset allocation is critical. While I am a major advocate for investing in the stock market; I agree with you that a 100 percent equities allocation is not the prudent move for those who will need the capital within a short time frame. Also, I like 401k’s but I am an advocate of after tax brokerage accounts because they give you the opportunity to access your wealth before 59 1/2.

  3. My company does not match contributions to a 401K. I max out contributions each year, however, I fall victim to the IRS’ Highly Compensated Employees Rules. Each year I receive about $8K back from my 401K contributions, leaving me with only $10K in pre-tax contributions. I am currently in the 28% tax bracket. In addition, the fees are about 1.2%, which is higher than I would like to pay. I’ve considered halting contributions to the is account and instead saving the money for a down payment on my next property (I have 2 at the moment, and plan to fund a good portion of my retirement with rental income). I also contribute the max to an IRA each year (all after tax), and save about 50% of my after tax income. My plan is to retire at 55, if not sooner. I am currently on track for that, but am willing to do anything needed to move that date sooner. Would you recommend halting the contributions to pay for rental property?

  4. So, I can either max out a Roth 401k or a traditional one — which should I choose? I am in 28% now and anticipate being in the 25% in retirement.

  5. Is it better to invest into an after-tax investment account( i.e. lending club) that has an average return of 6-9% versus investing more into your 401k plan that has a return of 1.5% ?

    – It seems as if the higher return would yield more profit in the long run, than investing into a 401k account that doesnt perform well.

    I understand you (I) will pay more taxes on your income by contributing less to your 401k, but is there something I am not seeing?

    Thanks in advance.

  6. Signed up for the Personal Capital site from a link in this story. I know that I have reviewed the fees before in my 401k based on other threads you have. I had them run the fee analyzer and it showed .23%. Im pretty happy with this number.

    Sadly even with this low number it still takes away over $50k in estimated fees when Im ready to retire.

    Its an interesting site, and a good place to view all our accounts together.

    As far as the 401k in general I believe its a good thing overall. Id consider myself an above average saver, but when we have a lot of cash around or easy access to it it gets spent quicker. The 401k is an easy way to save without easy access. As another poster said I can roll some of it into an ira that gives me many more investment options.

    Thanks for the story Sam.


    1. Hi Gary,

      Nice job analyzing your 401k for excessive fees! 0.23% is on the low side for a 401k, so that’s good. If you could buy index funds or ETFs, the expense ratio would be even lower. But, an investor is limited by what a 401k can offer.

      $50K in fees is a lot, but hopefully you also run your investments through their Retirement Planning Calculator to see what your investments could be worth during retirement.



  7. we are going for the maxed out 401k (husband and wife) but now we want to buy a rental property next year. should we just do a company match (4%) and pour all the money in saving for the 20% downpayment then later on maxing it again?

    1. You should look into your 401k plan’s rules. Some plans allow you to take 5-year loans for any reason and 30-year loans for purchase of a primary residence. Thus you might be able to use pre-tax money for the downpayment and pay it back into 401k over 5 years via regular payroll deductions. This will allow you to keep on with your regular 401k contributions and utilize tax-free money for the downpayment.

        1. Hmmm… $150 one-time fee seems okay if you’re borrowing a significant amount and you’re paying the balance back to yourself over a period of between 12 to 54 months.

          Presumably you want to borrow as much as possible; I believe the max. borrowing is $50,000 for most (or all) plans.

          Just do the math though to make sure you can stomach the per-paycheck-payroll deduction within your overall budget. If the property is a good one, you could probably even make up the difference in reduced paycheck with the cash flow you’re getting on the property!

          If so, then in my mind you’ve basically funded a purchase of a rental property with pre-tax dollars and shifted some of those dollars from 401k index funds into rental real estate, which is diversification!

  8. I took a $33,000 loan out from my 401k to fund a portion of the downpayment on my Manhattan condo a couple years back.

    How it worked was as follows:
    – The principal of the loan was delivered to me by Fidelity (plan admin) via direct deposit or paper check;
    – The funds came from the proceeds of a pro rata sale of all my investments (I was not allowed to pick and choose which investments I wanted to sell so I had to sell xx% of growth funds, bond funds, REIT funds, etc.);
    – Because the payments were for a qualified purchase of a residence, I was able to structure the loan as a 30-year fixed rate fully amortizing loan;
    – The interest was fixed at the prime rate in effect at the time which was 3.25%;
    – The principal and interest payments on the 30-year loan are deducted directly from my paycheck each month for as long as I’m employed there;
    – However, after I leave the company I will be able to continue to make the payments to myself for as long as I have the 401(k) plan (there no additional principal payments allowed but I can pay the entire loan back back early if I do so all at once);
    – When the principal and interest payments are paid back to my 401(k) account, the proceeds are used purchase additional investments according to whatever investment elections I have made at that time.

    Overall, if you’re happy with where you performance of your 401(k) investments at the time you’re taking out the loan, selling a piece of them to fund the purchase of a home can be a very tax-efficient way to come up with the down payment, especially in high-tax New York City.

    When I knew I was about to take a loan out for my down payment, I started contributing as much as I possibly could to the 401(k) plan each paycheck in order to jack the balance up as high as possible because, at the time, 50% of my 401(k) balance was less than the $50,000 maximum and I wanted to maximize the amount of tax-free money I could use to fund my down payment. $33,000 was basically half of my balance at the time. When I was doing this, I was putting about 30% of my paycheck in twice a month and I was allocating 100% of the contributions to money market and Pimco Bond Fund so I wouldn’t end up losing money when I cashed out.

    Finally, I should note that I viewed this as a way to diversify my 401(k) holdings into real estate, too, because I basically took $33,000 out of the 401(k) and used it to buy Manhattan real estate. I am going to be leaving NYC soon and I do intend to hold onto the property as a rental property investment (historically, Manhattan rents have stayed relatively strong so I”m pretty comfortable with this as a good investment approach). And of course I’m going to continue to pay the 30-year 401(k) loan down over time.

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  11. supernova72

    My employer allows 401K withdraws at 55 with no 10% penalty as long as we “retire” at that time. I’ve found by talking to others this is not always the case at the rule of 59.5 applies so it’s driven by your employer.

    I’m trying to figure out the best way to minimize tax liability with a mix from pension income and 401K investment income. If I draw 4% from my 401K at 55 (a bit of a pipe dream) my pension of ~42k annual will cover the remainder of my expenses.

    The pipe dream part is I still owe 150K on my home. Value is 450K. 4% loan. 54 years old. Do I feel lucky? Ha!

    1. I guess there are a few of us moldy oldies on this site after all (I’m 53).

      I don’t think you have to “retire” from the company you just have to no longer be employed by them to withdraw penalty free (you must be employed by them into January of the year you turn 55 for this rule to apply). It’s not an employer rule, it’s an IRS one I think. May be a technicality or may not.

      1. Oh wow–another person over 40?? Ha.

        That is good to know. A buddy of mine has been asking his HR and they claim he can’t draw until 59.5 unless he does the 72T rule. So since I could without I thought it was a company policy vs. an IRS rule.

        Good to know. he’s 53 but want to be done maybe before 55 (has 35+ yrs with company).

  12. Question: I have a substantial amount saved in my 401(k) plan and have been advised it would be good to transfer it to a self-directed IRA for the purpose of purchasing a contract that 1) guarantees a return of 6% (if the market is at or below that rate) or higher if the market exceeds that rate (you get all of the upside and they insure the downside).

    What are your thoughts on such an instrument? I have no reason to distrust the advice, just looking for some other opinions.



  13. I was thinking of contributing to 401(k) until I got the feeling that I was jumping into shark-filled pool: I found that many co-workers in my company don’t participate in 401(k), which doesn’t match any contributions and all the funds have fees from 1.4-1.6%/yr.

    I guess the only reason to do this now is because the money can be transferred to another institution in my next job. Will it still make sense to max out the contribution now in such a situation?

      1. Thanks for the comment – I guess I’ll consider starting the plan when the family’s combined income start to be closer to the next tax bracket.

        I totally understand your view about Roth IRAs not being worth it either – but as inefficient as the government is, it does fund some worthwhile endeavors (as a former scientist supported by government funds) that private sectors will never do (as someone who works in in the industry). Perhaps it’s irrational, but paying tax sounds better than paying these …people… that charge me 1.5% of my money regardless of whether their management makes profit or not!

      2. Similar question, I’m at a company with a Hancock 401(k). 1% company match at 4%, but all funds have an expense ratio between 1.05%-1.8%. I have been thinking to max this out ($19,000 contribution for 2019), but after reading several blogs/forums about expense ratios, I’m wondering if I should just invest the bare minimum (4%) to get the company match (free money) and take the rest as taxed income and contribute to a Roth IRA? I am in the 24% tax bracket for 2019 ($82,501 to $157,500). There is a John Oliver bit where he rips US retirement plans apart, and specifically references the Hancock brand. Wish I had a Vanguard option to contribute to.

  14. The more I save the more I wanna save. I max out the 401k, save 30% of my after tax, own 1 house fully paid, have a small mortgage on my primary residence and a net worth of 1,5 mil but boy, I want that Panamera!!!!
    Best of luck to all.

  15. I am surprised no one mentioned that if you leave your employer (where you have a 401k) after the age of 55 and leave your 401k in place (at that former employer). Then the pre 59 1/2 10% withdrawal penalty no longer applies. That is, you can start withdrawing penalty free at any time. This is the only reason in my opinion NOT to roll to an IRA because in the new IRA you have just re-established the 59 1/2 penalty rule. Knowledge is power and flexibility is king. Thanks for all the useful info Sam, I just found this blog a month ago and I am totally hooked.

    1. Welcome newbie, and thanks for pointing this out. I guess nobody pointed it out yet is because most of us are 25-40 years old and haven’t thought about this 55+ angle that is not often discussed. Hence, the great power of the community! Cheers

      1. I believe its the ‘year you turn 55’, so technically, you can do this at 54. There, I saved everyone a few months

        1. I believe you have to retire at 55 to be able to do this. Which means you cant work and contribute to your 401k anymore. its known as 55t.

  16. I have been doing everything I can to max out my 401k for the last several years. It’s gotten easier with time and I’ve never regretted maxing it out! I still wish I started contributing earlier in my career, but better late than never. Saving for retirement can become addicting and I think that’s a good habit to form.

  17. Sam,

    I’ll probably need somewhere in the realm of $100k in cash for a 20% down payment, for my next home. I actually have that in cash right now (most in laddered CDs which I suppose isn’t completely liquid) but I don’t know when I will buy my next home. My market is not particularly favorable right now due to very low inventory. What do you suggest I do with this money in the meantime? I’m hesitant to throw it into the equities because I want the nimbleness of being able to purchase a home at any time should the right opportunity arise. Could be six months, could be two years, could be four years… I don’t know.

  18. Another Reader

    Watch those 401k’s and other government subsidized retirement accounts like a hawk. If the folks in Washington that think they now how to manage your money better than you do have their way, you will be forced to convert these accounts to annuities at retirement. Read up on Theresa Ghilarducci and her ideas to understand the pitch. You will no longer be able to pass these accounts to your heirs. The money will go to the issuer of the annuity when you die. That will be the federal government, or more likely their friends, the insurance companies.

    My approach was to minimize my taxes by owning a lot of rental real estate as well as contributing to tax deferred and tax free retirement accounts. I also funded taxable brokerage and mutual fund accounts. In my personal case, I also collect pensions.

    No one has successfully attacked the real estate sacred cow yet. A few bites here and there, but the tax benefits remain largely intact.

    It’s all about balancing and hedging, and keeping an eye on the Washington parasites. Stay nimble and hedge, that’s your best bet.

    1. Good points. I’m as wary about the government as anybody.

      I don’t think real estate will get blizted, because the majority still own real estate, and I doubt that will ever change.

  19. We both max out our 401K’s and our Roth IRA’s every year. In addition, we save money in 2 529 plans for the kids education and have money automatically invested in taxable accounts every month. We are 36 and I often wonder if we are saving too much?? Though, at the current time, I would love to retire at 55 and enjoy some of our money. We have recently witnessed the decline of elderly parents due to dementia and heart issues and feel like we might want to enjoy our money while we are young and can still do so. Time will tell how we will feel in 20 years.

    1. Wow, that is awesome. I don’t think you are saving too much. I’m not even sure that is possible provided your basic needs are being met.

      Keep it up. I wish I could say I was doing the same.

      1. It took us a few years to get where we are today, but we are pretty happy. I sometimes wonder if we would be better off spending more now, but there is nothing else that we want to do. We are very fortunate to have the incomes we have and the fact that we are both savers. Neither of us likes to spend money on things we don’t need. Though now that the kids are a little older, I have found that I enjoy traveling and taking them to see new things.

        Thanks for the kind words! And keep the saving going….you will get there eventually!

  20. I’m glad you wrote an article geared towards people with “lower” incomes. Saving for a down payment versus retirement is a big dilemma. As for existing homeowners, high-interest checking accounts (often paying 2-3% apy) could be a good place to park their 6 months of liquidity. There are usually some strings attached, but they could be a great option for the right person.

    1. Good suggestion on those high interest checking accounts. Even though the amount limit is usually low e.g. under $20,000, it’s still something, safe, and liquid.

      If you have any thoughts on pre-tax vs. post-tax investing, feel free to share!

  21. To me, the process is simple: If you are contemplating the purchase of a company with a high internal growth rate (which I define as expected growth north of 10% for the next ten year years), and it pays no dividend or a negligible dividend, then stuff the investment in a taxable account provided you have already gotten any possible matching from a company’s retirement account.

    When you’re contemplating investments in things like BP, AT&T, GlaxoSmithKline (where the dividend is a substantial part of the total return), then it seems more wise to use tax-deferred wrappers so you can protect the dividends from getting escheated to the state capital and our overlords in Washington.

    To me, it’s all about the contemplated investment. Just my $0.02.

    1. Why? That tax rates are equal (assuming you are in the same income bracket). Dividends are paid more frequently, but the rates are the same.

  22. Why would the government raise the withdrawal age if it were in trouble? A government in trouble I presume would be in need of tax revenue. Then, if anything, it would reduce the penalty-free withdrawal age (so that it can get tax revenue sooner). Also, by allowing people to withdraw at 59 1/2 or sooner without penalty, it would allow them to raise the Social Security age (since people now, in theory, would be able to survive longer without that income).

  23. Sam,

    Do you believe in using your 401K for early retirement, through rolling it into a traditional IRA after work, then moving it over to a Roth, slowly to avoid taxes and waiting the 5 years, like a Roth IRA ladder?

    1. I can’t speak for Sam, but I imagine that he isn’t going to have the same tax bill at year-end as Brandon (the Mad Fientist: a popular one who mentions this) or others and won’t be able to utilize, to his advantage for tax purposes, the avoidance structure you mention. It is possible that he could get access to his money quicker through that method, but the money he seeks to make each year would give him a tax bill waaay above $0.00.

      The only way he could take advantage of it was if his tax guy somehow helped get his AGI down from his ideal income of $200k/year (or likely current – given content of recent articles – income of $150k/year). It’s not impossible, but unlikely, that Sam would make an effort to make the difference that Mini Financial Samurai, like you and I, might be able to.

  24. Great post, Sam. 401Ks are the ultimate ‘delay of gratification’ vehicle — the rewards of which are nearly impossible for late 20s-early 30s folks to see.

    I might be missing a logic thread here, but I find it hard to believe the gov’t would increase the age limit. If anything I think they’d reduce the age at which RMDs are required cuz they want their money!

  25. Sam –
    At this point, it’s beginning to make no difference which one you choose. You can put up to 17,500 (18,000 in 2015) in your 401k, tax deferred, but you can also continue contributing to the account with after tax dollars up to 50k, or 100% of your salary, what ever is lower. This used to be a terrible deal, as you would still have to pay taxes on that money (that had already been taxed) when you were to withdraw it.

    This has changed in 2015, and the IRS now says you can take all of your post-tax 401k earnings and roll them over to a roth IRA. It comes out in Notice 2014-54, but you can read the forbes summary here:

    1. Sure, contributing after tax to the 401k is fine, but only if you love the 401k’s investment options.

      I’d much rather go to an independent online brokerage account and have 100% freedom to invest in what I want. No need to be shackled with after tax dollars.

  26. I contribute 6%, the minimum needed to get my full company match. I absolutely do not believe that mutual funds are a better investment than individual stocks (companies that pay rising dividends over time) over the long run, so I invest the rest of my savings in a taxable account (as well as maxing out my Roth IRA every year, of which individual stocks are purchased). I want control over my investments, and hate having to pay annual fees that are associated with funds. Just my opinion of course…..

  27. Ugh I feel you on not wanting to stay in your industry for more than 10 years. I’m in the same boat. I’ve been maxing out my 401(k) every year except the first year since it’s such a small portion of my total gross comp (~10% at this point). I’m now saving about 75% of my net income and I’m confident I’ll be able to quit around age 30 / the 10 year mark. Or maybe I’ll find a less stressful job in my field (software) by that point.

    I’m 26 now (almost 5 years working full-time) and my 401(k) is worth about $100,000, give or take the stock market a bit, with my overall net worth hovering around $500,000. I’m planning on surpassing $200,000 in total comp soon to enable me to save more.

    1. Sounds like a plan! Definitely try and stick it out for another 5 years and max out and save as much as you can. Once you get a hefty financial nut, you can survive easier b/c the dividends and returns carry so much more weight.

      Good luck trying to quit once you make over $200,000 btw. Not easy to do!


    Question – If you are not saving in your 401K or another tax advantaged account and do not have a company pension what is your savings plan for retirement?


        I guess it was a bad attempt at a rhetorical question/sarcastic comment.while some may be able to do it, without saving in a 401k, equivalent tax advantaged account or having a reasonable pension I just do not see how they will have adequate funds in retirement. People continually think they can beat the market and they can’t. So you have to play with the market, save and compound. Not doing this in a tax advantages account is paramount to disaster.

        Both my wife and I (mid thirties) are able to Max out our 401k annually, with me only having to contribute up to the company match of 6% and I still worry.

        My motivation for savings and our goal is simple, to have the option to retire when our second child goes to college which will be in our late 40’s. though I can’t imagine not working ever in some capacity.

  29. I live in the NY Metro area and work for the federal government. We are afforded two retirement accounts – a 401K and a thrift savings plan (TSP) account. I contribute to both accounts for the matching but I hesitate to contribute more than matching, given the likely path this country is headed financially. There are too many historical examples of governments in Europe, Asia, and South America changing the tax rules at inopportune times and I think the likelihood of these events occurring in my lifetime are high (I’m 33 years old). This means, I think the $$$ in our retirement accounts may not be available to us when we need them as Sam points out in this article.

    I think it is much wiser to contribute excess savings into my after-tax investment accounts for peace of mind, ease of access and liquidity purposes. I have two after-tax accounts I use, one that invests in nothing but uber-low cost broad ETFs (Schwab family is great for this) with automatic dividends reinvested and a second account for fun with options trading and levered ETFs.

    When I purchased my home in June 2013, I borrowed $30k from my TSP to replenish my savings account after the home purchase depleted it. The loan cost me $50 (processing fee) plus I paid myself interest at 1.25%, which was the-then G-fund rate of my TSP. I maintained a loan for about a year before I felt comfortable again that I was able to build up my emergency savings to a satisfactory level and subsequently paid off my TSP loan 14 years early. I gave up on some significant investment gains during that time period but it was assuring to have that money readily available in case something terrible happened like an unexpected repair on my house.

    I think it’s important to utilize retirement accounts as another tool in the toolbox when it comes to home purchases. When the right property comes along, your “forever home”, it would be a shame to miss out on it because your funds were locked away in a retirement account.

    1. My understanding is that the 2 retirement accounts for federal employees is the TSP (which is similar to the 401k) and Fers which is a pension (defined benefit plan). I don’t see where Sam mentioned anything about not contributing more than the max and the possibility that the government will somehow take the money from us. I wasn’t sure if that’s want you were saying…sorry if I’m misunderstanding. I think in prior posts Sam has advocated the traditional over the Roth because possible tax rule changes, but I don’t think that is a different from what you were saying.

      1. Yes – you are correct. There is the TSP (similar to a 401K) and a pension through a defined benefit plan. In addition to those, there is a separate 401K, which allows for more flexibility in investment options than the standard TSP. We receive different matching percentages to both accounts. Both the TSP and 401K are still subject to the maximum allowed contributions rules for retirement accounts.

        Sam discusses in his article that the government could theoretically, “raise the early withdrawal penalty percentage or increase the age limit.” He goes on to ascribe a 75% guesstimate to the likelihood of that occurring in the next 30 years. I”m suggesting that I agree with that assessment and believe there is a strong possibility of a similar event like that occurring within the next 30 years – and therefore see additional risk to concentrating wealth in those vehicles. This is one of the factors I consider when I am trying to decide how much to contribute to my retirement accounts and struggle with every year.

    2. I think you lost me, you borrowed money you had saved in a TSP to sit in a savings account? So you paid 1.25% and lost out on any gains so you could have your personal savings account sit at the right level? Why didn’t you just leave your investments as is and know that you could have taken the loan for a catastrophic or emergency event if one ever came up?

      I’m not maxing out my 401k so I can pay off debt (and I AM sticking to to it, so far). Ugh…debt, I’m probably the only one here that has any non-mortgage debt! Some day I will be one of you!

      In the meantime your stories of success are encouraging.

  30. I would never advise making a significant loan from a 401K. If you lose your job for any reason, then you have a very limited time to repay the loan – failing to do so will be treated as an early withdrawal with penalties, etc. The last thing someone needs when losing their job is to face a large loan repayment or tax bill – just too much risk IMO.

  31. I will always max out my 401k before after-tax savings as long as I’m working for someone else (I might change my position as an entrepreneur trying to grow a business). First, the tax benefit is meaningful. Second, a 401k is judgment proof and bankruptcy proof, and an IRA is as well up to $1m in most states. Third, a 401k is illiquid, so I can’t make an emotional decision with it that I’d later regret. Fourth, I hope to have an early semi-retirement, at which point I’ll stop funding my 401k and focus instead on current income, so there needs to be a good-size ‘nut’ so that it can grow even without new contributions.

    I see how maxing out a 401k can interfere with saving for a house down payment, but buying a home is more akin to consumption than investment, so it shouldn’t take precedence over retirement savings. Plus there are government loans available to first time homebuyers that reduce the amount of money required for a down payment.

    A woman I work with borrowed against her 401k to buy a ski-in, ski-out condo for around $150k during the recession, which she now rents out on a daily basis for a crazy high return, as in her gross rents paid for the entire purchase price after 2 years of ownership, and she’s now paid back her 401k loan. Next recession, I won’t hesitate to do the same thing!

  32. Saving to buy a place was one of the main reason I didn’t max out my 401k…that and I didn’t make that much in the early years. One downside with borrowing from your 401k for many is the possibility of leaving the employer or a layoff and having to immediately pay back the loan. On the radio yesterday, I heard the Roth 401k option was better, but I’m not sure if that’s true for most people (and I know you don’t believe that either). I think it might be better for me since I should have a pension when I retire…but I like the tax savings of the traditional 401K.

  33. SavvyFinancialLatina

    I max out my 401K. The tax benefit is too much to ignore. I actually decreased my 401K contribution while we were saving up for a house, my take home pay did not change much…maybe $100??? When I didn’t invest in my 401K, taxes ate up the rest. I’m doing all…maxing my 401K, maxing out our IRAs, and investing in an after tax brokerage account.

    1. How is it that you can “max out” your 401k, which is $17,500 a year, and stop doing that and your pay only change by “$100.”

  34. Me and my wife have been lucky enough living in NY to max out our 401k’s, save up our 20% and buy a home, build up a few months of liquid and have moved on to more savings. What I haven’t figured out, is what to do with our after tax liquidity (emergency fund)? Invest, savings accounts, mattress?

    1. We are in the same boat. We have been financially smart in terms of savings, i.e. college funds, pay off our home in a short amount of time. We are putting our emergency fund in a lousy 1% Capital One money market fund- we did 2 years of savings since my husband is self employed. At least we won’t lose it. We are putting the rest in safe ETF’s, Index funds, i.e. Vanguard, T.R. Price and Fidelity. We may not be making a ton of returns over the years but at least we are saving at least 30% of our take home- that’s better than getting a guaranteed 5% return is what we are thinking.

  35. I just moved to CT to NYC and my state and local taxes went form about 6.5% to 11%. So I switched from Roth to pre-tax. Has anyone else switched from Roth to pre-tax or vice-versa based on where they live?

  36. I struggled for a long time about maxing out my 401k. I always had a reason to not do it and then 6 years ago when things started coming apart economically I listened to a consultant our company hired to talk us all off the ledge. From that day I was determined to max out. 6 years later we are in a completely different financial situation. Once you max out and leave it alone the excuses go away.

    1. There’s something about money that gets invested automatically and does not go through your accounts that makes it feel like you never even had it. Probably the best thing since it prevents you from being emotional about investing and just keep doing it with every pay cycle.

  37. If the goal is to be rich then you should NEVER contribute to a 401k.

    Let’s face it, do you really think rich people stash cash away for retirement? Most use those funds to drive growth. Is your goal to be wealthy towards the end of your life? When health issues could possibly limit your enjoyment of those preciously squirreled away funds?

    My issues with the government 401k brainwashing:
    1) Zero cash flow – opportunity costs
    2) Paper assets – looks impressive on paper, don’t forget taxes. Weak return.
    3) Job dependency – dependent on a job for income? Need I say more?
    4) Limited tax advantages – need the cash early? Penalty!

    Basically a 401k is a government program designed to create the illusion of wealth. It force feeds enormous amounts of money into the stock market with Wall street directly benefiting. In my opinion artificial growth.

    1. I think there is an element of truth in what you say, though there are many rich people who contribute to 401ks and IRAs. To the extent that they are not, they are rich not because they are not contributing there but because they are using their money elsewhere. They would probably be rich if they contributed or not.

      For the average person (and most people are at or near average), contributing to a 401k is a great forced savings program with immediate tax benefits, particularly as your tax rate increases.

      But I agree there is a downside due to the lock up feature that Sam writes about. Having a $500,000 401k balance at age 45 is great, but there is little you can do with it.

      This is good and bad. If you had that much in a liquid account, you may blow it or lose it either on a bad business decision, lifestyle inflation, or through creditors. Having it locked up in a 401k that you cannot touch for another 15 years gives it a chance to grow. But it may prevent you from taking a calculated risk that could have a big payoff, such as starting a business in which you would need part of those funds for living expenses until you get off the ground.

      In general, I would say that 401ks are positive, but when government and big business combine (such as through the pushing of 401ks and IRAs), I am always skeptical.

      1. I max out my 401k to get the tax advantages. I’m also fortunate that my company offers a brokerage 401k option and thus not limited to purchasing mutual fund choices. For people who always say 401k money cannot be “touched” for a long time, I beg to differ. If your company offers a brokerage option and you get lucky with an investment such as buying apple 5 years ago, then I’d gladly pay the 10% penalty to access the funds earlier. I live in California, so I can also move to Washington or Nevada to avoid state income tax for a year if my account value ever became large enough, so that the 10% early penalty fee cancels out with the state income I would’ve had to pay.

    2. Your ignorance is impressive. Any idea what the original intentions of tax code 401 (k) actually were? Hint-it involves government corruption, but was the exact opposite of a “government program designed to create the illusion of wealth.” The original point was for Eastman and Xerox executives to shelter hefty bonuses (and a number of New York politicians were paid off to make this happen). So the original intended audience was EXACTLY “rich” people.

      Businesses eventually realized they could avoid paying for expensive defined benefit plans for their regular employees by setting up 401(k)s for all employees.

      To not contribute to your 401(k) is like saying “Hey, it sucks that I don’t get a pension. Out of spite I’m going to cut off my other leg too!”

      1. It doesn’t matter what the original intentions were. The original intentions in much of the tax code are long forgotten. We deal with the reality that exists now. I’m in favor of 401ks, and I think the benefits outweigh the risks. But there is nothing wrong with being skeptical of a product that is promoted by the government and wall street. That doesn’t mean it should be avoided, but one should always have some skepticsim. Further, there is a risk that funds being locked up in a 401k can be better used today – not for spending purposes but for investment purposes.

        Don’t let your ignorance show. There are very legitimate reasons to not contribute to a 401k.

        1. S,

          I completely agree that for some, using funds from a 401(k) for outside investment purposes could potentially be a benefit. I also agree that a number of companies offer limited funds with exorbitant fees and expense ratios that line the pockets of the provider. However, as Sam outlines in this post, for most people borrowing from your retirement account can be a slippery slope.

          I also think most people do not perform a proper cost benefit analysis before withdrawing funds from their 401(k) or deciding to contribute less. If an individuals current balance and trajectory don’t provide for at least a minimum standard of living throughout retirement, withdrawing any funds and/or contributing less is an extremely aggressive strategy.

    3. Love the absolute paranoia!

      You can invest in the market with your 401k proceeds instead of just hold cash you know.

      Where do you invest all your money and what has been your history to ban all pre-tax retirement funds? Curious to know!

    4. That doesn’t even make sense. In a 401k, you can invest in a wide variety of options in your 401k (only options mine doesn’t have is commodities and real estate which is fine because I have other holdings outside of the 401k that are geared toward those), you get huge tax savings and company matching. The money is as real as anything else with a lot of benefits. And if you change jobs, you can move it to an IRA of your choice (I just did this with my last 401k). Either way, you can withdraw at 59.5+ penalty free or use SEPP to withdraw some earlier.

      PS yes executives do the 401k thing. But at $18k/year + matching it is a small portion of their savings but they all do it. Be dumb not too. Most max it with just a 1-3% contribution of their income.

  38. I ‘make myself poor’ by maxing out both my 401(k) and Roth IRA and then living off what’s leftover and investing even more into a regular taxable account. I shove away as much as possible. For reasons like you’ve said, I may just want to go to Hawaii and chill for a year. I’ll tell your family hi if I see them lol.

  39. We’re lucky enough to be able to max out both of our 401ks every year. At our tax level the savings is too much to ignore, even with regulatory risk.

    We also save 65-85% of our take home pay.

    Once we retire early in a couple of years we’ll start the roth conversion pipeline to be able to access our 401k savings before 59.5. I recognize that the favorable tax rules that make it possible to do that conversion might not be around in the future… but we’d still come out ahead tax-wise if we paid a 10% penalty when accessing the funds in retirement.

    What makes you so certain that the 401k penalty or age will change? Stuff affecting older folks tends to be the last thing that government wants to mess with. They vote!

    1. If anything, I think the govt. might consider making pre-tax accounts have an earlier age where RMD starts rather than extending it, no?

    2. Certainty would be 100%, hence why I’m at 75%.

      I’m certain politicians will continue to mismanage the budget given they make promises they can’t keep to get into office.

      65-85% after 401k and tax savings is great! What level income is your household earning and at what age do you or both of you plan to retire?

    3. Jay @ ThinkingWealthy

      It sounds like you won’t need to access your 401k that early. Think about all the returns you’ll miss out on! Compound interest is your friend… But everyone’s situation is different! Congrats on the insane savings rate…

    4. Look into rule of 72t. It will allow you to tap into your 401k early if you plan to retire early. You can set a fixed withdrawal amount until the 59 1/2 limit. Your financial advisor can work with your 401k provider to turn it on.

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