Maxed Out My 401k, Now What

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Have you maxed out your 401(k) or 403(b)? What should you do now? There are a lot of different options—what do those look like, what might be a good out, and what to pass on. 

In this episode of the Finance for Physicians Podcast, Daniel Wrenne talks about  401(k)s and what to do after you max those out.

Topics Discussed:

  • Max Contribution Amount: $20,500 for an employed physician
  • Financial Plan: Allows you to match your goals with dollars to put them to work
  • Is the 401(k) enough? If not, how much do you need to save? Assume more
  • What’s the next best option? Maximizing tax shelters for added tax benefit
  • HSA: Use as healthcare savings account instead of healthcare spending account
  • Backdoor Roth IRA: Fund a traditional IRA and then convert it into a Roth
  • More Options: 457(b), cash balance, deferred compensation, and after-tax 401(k)
  • What to consider? Complexities, different structures, expenses, and side jobs
  • Tax-Loss Harvesting: List of things you can do to minimize taxation
  • Alternative: Investing in real estate business can be active or passive income
  • Short- vs. Long-Term Capital Gains: Which are least and most tax-efficient?




Using Your HSA To Build Wealth

Why the HSA is a Hidden Gem

Everything You Need To Know About Backdoor Roth IRA with Jennifer Quire

Are You Saving Enough For Retirement

Digging Into Tax Loss Harvesting

Before You Buy Into Passive Income

Why is Permanent Life Insurance Such a Terrible Short Term Investment

Contact Finance for Physicians

Finance for Physicians

Full Episode Transcript:

Hey, guys. Hope you’re having a great day. I am planning to talk about 401(k)s and what to do after you max those out. That’s a pretty common question that comes up, and I think there are a lot of different options after that, so we’ll talk through what those might look like, what might be a good out and what might be options to maybe pass on.

Before we get into that, I want to give you guys a quick update on just the podcast in general and tell you a couple of things we’ve been working on. If you’ve listened awhile, you know my goal is really to help physicians (in general) use money to live better. I think what’s different about us is we’re focused on the ‘live better’ part and not necessarily the ‘more money’ part. That’s been great to focus on that in this avenue.

In my day job, I work with a lot of individuals. It’s more of a one-on-one basis. Our planning firm—Wrenne Financial Planning—have several financial planners, including myself, working one-on-one with physician families. This has been a really great way for me to work more in a one-to-many avenue. It seems like, so far, we started to gain some traction.

Surprisingly, it’s been almost two years. I think it was October of 2020 when I started this, maybe more like a year-and-a-half since I’ve been recording. At this point, we’re averaging about 5000 downloads a month, which I still really don’t know what to compare that to other than the past, and it’s going up consistently. To me that’s great news, but I have no frame of reference of what to compare that to.

Based on the past, it does look like we’re getting some traction, so that’s always good to see. More people are listening, which is awesome. Thanks to you guys that are listening; that’s great to see.

My plan going forward is to start promoting the podcast a little bit. Up to this point, we’ve not promoted it at all. My goal has been to just produce content, record shows, get in the routine, and give it a try. So going forward, my goal is to start promoting it a little bit more, start to get the word out and that sort of thing. A lot of it probably will be online and that sort of avenue.

I’m actually going to a podcast conference this weekend. I’m recording this in late May, but I’m going to a podcast conference this weekend. It’s like they’ve got conferences for everything. This is apparently a big conference and it is where you go to learn the art of podcasting. Hopefully, I can learn some things. I’m still an amateur. I really don’t exactly know what I’m doing. I’m just kind of rolling with the flow, so hopefully this conference will allow me to pick up some new strategies I can pass along to you guys.

In the future, the goal will be to get a little bit more tactical with trying to grow this thing. Always continue to provide great content and even better content in the future. At the end of the day, that’s what this is about, is we got to add value for you guys, and that will allow us to grow.

I also wanted to say again thank you for listening. You guys are the reason I’m doing this. And thanks for the feedback that some of you have given and for sharing. Also, keep the topic suggestions coming. That’s been helpful. Any of the questions you have are great, going to be great topics for us to cover in the future.

All right, so 401(k)s. We’ll say 401(k)/403(b). I’m sure many of you have those plans available, and if you’re in practice or you have a spouse with a higher income, odds are you’re getting close to or have already maxed that account out.  As of this recording in 2022, the max is $20,500 for an employee contribution. If you’re self-employed, that’s going to be quite a bit higher, but for the employed physician, you max that $20,500 out and you’ve filled the bucket up.

A lot of you guys in that situation might be asking what’s the best next step. I think the first question to ask yourself is whether that 401(k) is enough. I would never assume these things. Some people assume it is enough or maybe they assume it’s not enough. First takeaway is don’t assume either way that it’s enough or not enough.

You got to always go back to your financial plan. I’ve said this a bunch of times, but that’s part of the value of having a financial plan. It allows you to match up your goals with the dollars, and you could put those dollars to work to help you move towards those goals.

A financial plan should help you get an idea of how much you need to be saving for whatever long-term goal—retirement is a big one. It’s going to help you get an idea how much you need to save to reach the goal.

In some cases, it might be that your financial plan is indicating that maxing out the 401(k) is perfect, but that’s you’re on track. In that case, you don’t need to do anything. That’s all you need to do.

In other cases, you need to save a lot more. For the average physician in practice, the latter is going to be the case just because your income is higher than average, and typically you need to save more than just your 401(k) or 403(b). I’m wrapping the 401(k) and 403(b) together as one. They are two different types of plans, but they both have that combined total limit.

Anyway, first question is, is the 401(k) enough? If not, how much do you need to save? There’s a good chance most of you are going to need to save more than your 401(k), so we’re going to assume today that you do need to save more than your 401(k).

In that case, the question is what’s the next best option. The second thing to focus on is really about maximizing tax shelters. What I mean is putting it in vehicles that provide some added tax benefit.

The first tax shelter I’ll point out, which is actually the best tax shelter (really) of all of them that we’ll talk about, is the HSA. I’m going to link to some shows about the HSA because some of you that haven’t heard those are going to be like, what are you talking about HSA? The stooge is crazy. Check those out to get more on this.

Basically, you have to have access to an HSA with your health plan through work. That qualifies you to be able to fund an HSA. If you’re able to access the HSA, then you can fund this fantastic tax shelter.

Not everybody’s going to have access. But assuming you do have access or have that choice and you end up choosing it and funding the HSA, then the second part of the equation is you’re using it as a wealth-building vehicle as opposed to just a healthcare spending account. I guess you’re using it as a healthcare savings account instead of a healthcare spending account.

By using it as a wealth-building account (or in other words, investing it)—most HSAs allow that—you’re able to leverage that fantastic tax shelter. I would consider it the best tax shelter (like I said) of all these that we’ll talk about. Like I said, I’ll link to the other shows where we talked more about what that tax shelter is and why this is a beneficial strategy. I would rank the HSA, using it as a wealth-building vehicle, as probably the number one alternative tax shelter beyond just maximizing your 401(k). So that’s the first one.

Second one to potentially consider tax shelter–wise, would be the backdoor Roth IRA. Backdoor Roth IRA is actually just a made-up term. Technically, that doesn’t actually mean anything. What’s technically happening is you’re funding a traditional IRA and then converting it into a Roth. It’s a way to fund Roth IRAs no matter what your income is.

This is kind of a multi-step strategy. The key is you have to understand the rules. There are some hurdles or problems that can crop up in funding a backdoor Roth IRA that you have to be aware of. But as long as you’re following the steps correctly and taking into consideration all these potential issues, it’s a fantastic tax shelter that allows you to save in addition to your 401(k), and save those dollars very tax-efficiently.

I’ve covered backdoor Roth IRAs a few times in prior episodes, so I’ll link to those as well in case you want to dig into how the backdoor Roth IRA works.

Going back to point number one, if the answer to that question is yes, you do need to save more than just your 401(k) to reach your long-term goals, then you should be considering backdoor Roth IRA as a really good alternative to start filling those buckets up to get you on track for that long-term goal.

Beyond that, other options that work would be worth considering. Oftentimes, the question is raised to us, like what do I do? I’ve already maxed out all my work retirement plans, but I know I need to save more. Where do I save? What people sometimes don’t realize is there are actually other work retirement plan options available through their employer.

Some examples that come to mine are 457(b) plans, cash balance plans, deferred compensation, after-tax 401(k). Those are just some of the more common options. But a lot of you will have additional options where you can save on top of that max from the 401(k) or 403(b).

The 457, let’s look at that example. The 457 has a completely separate limit. The dollar is the same for employees. You can put in the $20,500 this year (2022) in the 457, but it’s a completely separate limit beyond the 401(k). In other words, you can max out both at the same job.

The thing to watch out for 457 is there are two main categories of them—governmental or non-governmental. Governmental 457s are fantastic. They’re basically like the 403(b)/401(k) but a little bit better, typically.

Non-governmental 457 is the second category. They’re not nearly as awesome. Especially if you have a non-governmental 457, you want to be a little cautious with that. Understand how it works and dig into it before you start funding that kind of a plan. But it’s definitely an alternative tax shelter to consider.

Cash balance plans, I mentioned that. That’s an additional bucket to fill up beyond the limit of the 401(k). That type of plan, similarly to the 457, you really need to understand how it works because they’re a little more complicated and there are a lot of variances that you’ll see.

The most common negative with a cash balance plan is no flexibility on how it’s invested, and you’re limited to a conservative investment option. If you’re really young and getting started, that’s not great because you can take risk and it’s going to lower your expected return and ultimate efficiency by being super safe with the money. But it’s definitely still worth considering, especially the more you need to save in the higher tax bracket.

The other one I’ll mention just for today would be the after-tax 401(k). That’s a provision that your company’s 401(k) would sometimes offer and allows you to fund more than just the $20,500 employee limit. It’s a separate bucket that they allow you to fund as an employee, and it’s more like the employer part of the equation. It’s not Roth. It’s after-tax 401(k) funding.

This is another one you have to look into and understand how it works, and see what your specific company allows or offers. If that is an option, that can be an additional bucket to save into.

I think the big consideration I would start to throw out on these other options through work you got to look out for is first of all, some of the complexities I’ve already thrown out. You got to understand these. There are a lot of different types of structures. You have to understand the pros and cons.

The second thing is expenses. Sometimes, the expenses are extremely high on these add-on plans, to the point where it even eats into the tax benefits. Sometimes, it completely eats into it to where it’s not even worthwhile.

They can also get really complicated. As you start to consider these options, you want to be aware of the expenses, the complexity, what type of plan, pros and cons of that specific plan that you’re offered. Other options through work can be fantastic, but you really need to look at the specific plan that is available.

There’s also another category of options I would consider for those of you that have second jobs or even side hustles where you’re self-employed. This gets even more complicated in terms of the rules that you have to be aware of, especially for the self-employed setup. But it’s definitely something we advise often with our one-on-one clients, and it’s something I know many of you would potentially benefit from.

If you have two jobs (for example), you can often fund both company 401(k)s. But you have to be aware of how that coordinates. I’ll give you just an example of one that might come up. Let’s say you’re a partner in a practice and you’re maxing out the 401(k) there. But let’s just assume that it’s all coming from your employer, which often happens.

Let’s say you’re in a small practice and the “employer” (the practice) is funding all that 401(k) 100%. When the practice is funding, it is a much higher number than that $20,500. But let’s just say the practice is funding all of it. Let’s also assume on the side, you’re self-employed in an unrelated business. And let’s just say you’re making $20,500.

In that example, you’re actually able to fund, through that side hustle, 100% of it to a solo or individual 401(k) as an employee contribution and max out that $20,500 bucket. The reason is because your practice was 100% funded by the employer. In other words, you’ve not yet filled up your employee 401(k) max bucket.

That number actually can be even higher than the $20,500 if you’re making higher through the side hustle. That can allow you to fund a lot, but it gets complicated quickly. For example, if you have a 403(b) through your primary job, that messes with the rules here a little bit. It adds some additional limits that can often restrict us.

Another thing when you’re looking at this situation is you want to focus on making sure you’re maxing out the matching dollars. Oftentimes, you’ll have a match with both employers. You have to coordinate the two together and make sure you’re leveraging that.

The key when you start to get into this realm of stuff is hiring or leveraging advisers or consultants or those sorts of things, especially if you get into self-employed retirement plans. You’re going to be able to save quite a bit—tax sheltered when you have that setup—but you have to be really careful that you’re following all these extra rules between the two plans.

The further we go down this list, you have to look out for expensive products. Salespeople start to come out the further we get down this list. You have to look out for expensive products that are overly complicated and potentially so expensive that they would eat into that tax benefit. Sometimes, there are products that are not even in these categories I’ve thrown out that are often brought up as these tax shelter alternatives.

Some examples are annuities or permanent life insurance. They’re typically sold as the answer to this question. This podcast we’re talking about is like, I’ve maxed out my 401(k). What should I do next? Oftentimes, these financial services companies or salespeople will sell these vehicles, like annuities or permanent life insurance, as solutions in themselves to this issue of where to save next.

The problem with them is they’re typically extremely expensive. Often, it’s very difficult or impossible to figure out the expenses. That’s always a warning sign. If you can’t figure out what’s going on, don’t do it. They’re typically sold as the Swiss army knife style, like this is going to provide this additional tax shelter. I’ll link to a podcast where we talk about some of these a little bit more. You’ll have to look out for those vehicles.

I would encourage you to focus on the traditional vehicles first and not the products themselves. What I’m talking about is focus on the 401(k), 403(b), 457, like the IRS-blessed tax sheltered retirement plans, HSAs or those sorts of things. Those are vehicles that the IRS has signed-off on and created code around.

On the flip side, I would be cautious with some of these insurance company–created products that are in themselves designed to be tax shelters. That doesn’t mean that they’re always bad. You just want to be cautious with those.

In some cases, your work plans can be really, really expensive. Maybe you have access to a 457(b) plan as an alternative through your work. But it’s just really expensive funds in the plan. That can be a restricting factor, maybe even to the point where it’s not worthwhile.

The further down we get on this list, you just want to be aware of the expense aspect and the complexity aspect. I think a good rule of thumb is you need to be able to explain it to somebody else, at least the general pros and cons, understand the expenses, and understand the basics before doing it yourself. If you don’t understand it, you don’t want to put your money into it.

That’s a big, broad bucket. The second big point is maximizing the tax shelters. As I said, as you get further down the list, you want to exercise some caution. Once you max out that 401(k) or 403(b), typically the next thing you go to is what other tax shelters are available.

In a lot of cases, many of you will max everything out. Let’s say you have a 401(k) through work. You max it out $20,500. Let’s say you have a 457 as well, but you’ve maxed it out $20,500. Let’s say you’re also maxing out backdoor Roth IRAs. And let’s assume again your plan says you still need to be saving more on top of that. Then, what next after that?

If you maxed all of these tax shelters that are available, which often happens, then you go to things like non-qualified investments. Stuff like a non-retirement plan. I call them non-qualified investments. Sometimes, people call them a brokerage account. Basically, that’s just like investing in your name instead of investing in a tax-qualified vehicle that has some special tax treatment like a 401(k), IRA or whatever.

Non-qualified investing is basically just investing outside of all these vehicles we were just talking about. A plain Jane brokerage account investing in your name. Technically, a savings account is a non-qualified investment. That’s typically the third thing to look at, is if you need to save more on top of the tax shelters, typically you’re going to start looking at some of these non-qualified or less tax-efficient investments.

The vehicle itself is actually pretty simple. It’s just like invest in your name. What you have to keep an eye on when you get into this realm is when you invest in these types of accounts, you can trigger taxes and they will cause harm sooner. There’s less or no tax protection, whereas with a Roth IRA or something, or even a 401(k).

Let’s say you buy an investment in a 401(k) or Roth IRA. It’s just growing crazy, pays all kinds of dividends, generates all kinds of income, it just explodes in value and pays out income, interest, dividends, and all sorts of income. That doesn’t affect your taxes. Let’s say you sell that investment that’s grown a ton in a Roth IRA, 401(k), those sorts of things. It doesn’t affect your taxes.

With non-qualified investing, that’s a completely different story. Same investment is growing crazy, generating interest, dividends, and spitting out income. Everything is theoretically going well. But each of those different avenues of growth will (in some cases) generate tax for you in the current year. You have to be much more aware of the tax impact of the investments you placed in the vehicle, and ideally it’s tax-efficient stuff.

For example, real estate funds, when you just buy real estate in an investment fund. Generally, that’s not very tax-efficient. Just the income it kicks out is typically not as tax-efficient. So that’s not the best vehicle to own in your taxable investments.

It’s not the worst thing, but you probably have a lien towards owning that, like a Roth IRA or a tax-sheltered investment, and would probably be a little less appealing to own it than just a non-qualified investment because it’s going to fully realize that tax hit.

Even more of an extreme example, let’s say you have an investment account that you’re trading on E*TRADE or Robinhood or something like that, and you’re trading a lot. Let’s say you’re buying stocks here and there, and selling stocks here and there. You’re investing your money, so that part of it is good. But the problem with it is oftentimes, you’re kicking out short-term capital gains.

If you buy an investment and sell it in a short period of time—let’s say a few months—if you only owned it a few months, that’s going to cause short-term capital gains, and they’re the least tax-efficient. If anything, you keep it for over a year and get long-term capital gains, those are much more tax-efficient. Ideally, maybe you don’t even trigger long-term capital gains. You just hold it for a really long time.

Typically with taxable investments like non-qualified investments like this, you want to defer taxes as much as possible and avoid triggering tax now. That’s the general strategy. The more you trade or the more the funds that you even own trade, the more it generates taxation.

Trading a lot is typically an issue with these kinds of accounts. Or even have them a broker. A lot of brokers have high turnover. Even the funds that they put you in are high turnover. High turnover means the stocks get traded a lot. That’s typically terrible for tax sheltering purposes.

The key to non-qualified investing is you have to watch taxes. Taxes become an added expense. On top of normally paying attention to the expense of the vehicle itself, the tax it generates is an added expense on top of it all. If it’s managed well, you can be pretty tax-efficient with your non-qualified investing. You can pay attention to those investments that you own.

Ideally, your tax laws harvesting, that’s another term I’ll throw out. I’ll link to a show where we cover that a little more. There are basically a list of things you can do to minimize the taxation on this type of an investment vehicle, knowing that it’s more sensitive to tax.

The nice thing about a non-qualified investment vehicle is there’s no limit. You can put a ton of money into it. You don’t have to worry about the funding limits that you would typically see in all the other tax shelters.

Also, it’s ultra flexible. There’s not really any limitation when you take it out. It might trigger a tax, but it’s not going to be penalized. It’s not like retirement accounts you have to hold it in there for a certain time, in a lot of cases to avoid any adverse tax penalties or whatever. With this type of investment it’s super flexible.

That can be a solid alternative, particularly when you’ve already checked off those first two boxes, like you know you need to save more, and you know you’ve maxed out all the good tax shelters. That’s when this comes into play. So that’s non-qualified investing.

The other thing I’ll throw out is a side note. I meant to mention this. If your goal long-term is saving for education, sometimes that can be an additional tax shelter that you might consider saving in an education savings account. If the goal is for education, you might explore that tax shelter as well. That can be a really fantastic vehicle to save into.

First thing, figure out are you saving enough? Should you be saving more on top of your 401(k)? That’s when you consult your plan to see what that should look like and how much you should save. Second thing, look at all the tax shelters. Make sure you’re maximizing those. Third thing, if you still need to save more, look at non-qualified investing.

The last thing I’ll throw out before we jump off, this often comes up, like what about getting into real estate, or I got this investment deal and my buddy’s doing, or syndications or whatever. I would lump those altogether in more active businesses. Even if they sometimes call them passive investing, when I say active I mean it’s going to require some effort on your part to screen or manage them.

Let’s say buying/investing real estate. You’re going to have to be the one that decides which type of real estate you want to invest in. Especially if you’re directly owning property, you’re going to have to manage it and make sure you get tenants. That can be a pretty intensive business.

It often comes up like, I heard that it’s worthwhile to invest in real estate as an alternative. That can be fantastic, actually, but I would look at that as more of a business. It’s an investment, but it’s more like a business you’ll have to be active in, depending on what business it is at varying levels.

I don’t think that’s for everyone. I would definitely not do that or go that route just because of the tax benefits or because people said it’s a good thing. You need to have good reasons to do that outside of all of those things.

Maybe for example, you have a passion for doing real estate or you really are interested in it, and you enjoy building something. Ideally, you have some solid reason for doing it that’s independent of all this stuff. In that case, it can be a fantastic thing, but you have to look at it differently. It’s not for everyone.

That’s the last thing I wanted to throw out. I hope this has been helpful. As always, I enjoyed chatting with you today, and I will look forward to catching up with you next time.