Max Out 401(k) or Make After-Tax Contributions? (We Invest 25%)

May 4, 2023

In this highlight, we discuss when it makes sense to start making after-tax contributions before maxing out your 401(k).

If you want to know how much your dollars are worth, check out our Wealth Multiplier.


All right, let’s move on to Cranny’s question. “Okay, my wife and I are 36 and work full-time. After maxing out our Roth IRAs and contributing up to 25% of our income to our 401ks (not maxed out, but we have not maxed out our 401ks to clarify), should we max them out or should we go after-tax? What’s next for them?”

Man, that’s really hard. Great question. We’ve addressed this a lot because I think a lot of people find themselves in your situation. When you work through the mathematics, looking at your household income and you’re getting your employer match, and you’ve got a fully funded emergency fund, and you’re maxing out your Roth IRA, and you’re maxing out your HSA, and so then you move to step six of the Financial Order of Operations. For me, no, you moved to step six of the Financial Order of Operations, and you say, You know what? I actually just hit 25 before I made it to step seven. I didn’t actually get to the after-tax account. Uh, and I’ve still got a little bit of room left in my 401k. So if I want to save more, if I want to keep saving, should I Brian max out the 401K, or should I open up the after-tax account? Is there a binary right/wrong, yes/no answer, or there’s some other things I got to think about to figure out the answer?

I wish we could have royalty-free music that would play Barry White because I think that when you get to this stage, the crannies, this is the sizzly, sexy part of wealth building. Because once you get to saving and investing 25%, you’re trying to figure out, ‘Are we doing additional retirement? Are we moving to step seven of the Financial Order of Operations, hyper-accumulation? This is when you get to involve your significant other, and you’ll start going, ‘Hey, we’ve reached the goals. We’ve done the 25%. Is this now lifestyle? Is this after-tax investments? Is this, I mean, oh yeah, I mean, that’s the Barry White stuff. I mean, that’s when you get to really get into the fun part of the planning because a lot of this is you’re putting in the hard work of building the foundation. It’s the basics, and that’s why I do get so excited, and I actually want to celebrate when you do get to that step seven of the Financial Order of Operations where you get to kind of now be the decider of your fate for the future and how you want to utilize the resources and use money as a tool to be the best version of yourself or to make the best memories or leave the best legacy. There’s so much cool stuff that goes on once you reach that level. And that’s why I would encourage you, please go download, at a minimum, the Financial Order of Operations. Bo’s already said it at moneyguy.com/resources. If we go a little deeper into some of the goal planning and other things, I know at learn.moneyguy.com. And then maybe even, you even need to use the Know Your Number course to kind of give you purpose. It’s not just to sell products. That’s really is because I’m trying to give you purpose because if you don’t know the why, if you don’t know what you’re doing, you’ve got to get that rudder figured out, you know, so that your ship is driving, as you know, most purposefully in the direction that lets you, because you only get one life on this planet.

Now, I think there’s more beyond that, but while you’re on this planet, you’ve got to make sure that you’re very purposeful in maximizing. Yeah, I think what’s interesting when we’ve answered this, because again, I’m going to summarize what you said, it’s pretty specialized, right? Like your unique situation is specialized, depending on those goals and circumstances. We have seen scenarios where the answer was yes, continue to max out the 401K and do it pre-tax to get the current year tax benefit, and we’ve seen others say yes, continue to max out the 401K but do it raw so you get the tax-free benefit, and we’ve seen it no, don’t max out the 401K, start building the after-tax dollars because there’s a purpose for that. Without beginning with the end in mind and knowing where you are going, it’s really difficult to answer your specific question. So, I think both of the tools that you mentioned would be tremendously helpful in helping you figure that out, Cranny.

Want to know what to do with your next dollar, you need this free download: the Financial Order of Operations. It’s our nine tried-and-true steps that will help you secure your financial future.



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