Should You Ever Save More Than the Max in Your 401(k)?

Should You Ever Save More Than the Max in Your 401(k)?

In our  “Ask a CFP” Q&A series, we’re ceding the floor to a CFP® who will address some of the trickiest money topics out there.

Today Hank Lobel, CFP®, of LearnVest Planning Services, talks about what to do when you want to stash away extra cash for retirement especially if you've maxed out your 401(k).

As a financial planner, I’ve noticed that there's a lot of confusion about the retirement savings process.

On the one hand, it may seem pretty straightforward: Just imagine yourself lounging on a beach somewhere—and sock away enough cash for your future self to spend on sunscreen and snacks.

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But there are actually a lot of considerations that can make saving for your golden years a highly puzzling process. A common stumbling block? Knowing how much you’re allowed to save—and exactly how to do it.

Unless you're self-employed or over 50 and playing catch-up with your contributions, the yearly maximum you can save in a regular 401(k) is $18,000, per IRS rules. Yet that doesn't stop people from wondering: What are my options if I'm financially prepared to keep saving after I max out my 401(k)?

To set the record straight, I'm shedding some light on one of the most common questions I hear from my retirement-minded clients.

Q: Should I ever save more than the max in my 401(k)?

Why So Many People Ask This Question: Between potential cuts to Social Security and the decreasing prevalence of pension plans, many people are concerned about their ability to be self-reliant throughout retirement. They want to make sure they’re in a position to save everything they’ll need to live comfortably in the future—without having to depend on outside help.

What I Tell Them: Before I dive into this question, I have one of my own: Do you know how much you'll really need to save in order to build up a solid nest egg?

If you're unsure, check out this free retirement calculator, which uses info like your annual pay and the age you plan to stop working in order to tell you what your current contributions could grow to by the time you reach retirement.

RELATED: What's Your (Retirement) Number?

If, after calculating that number, you realize that your current savings strategy is, in fact, keeping you on track, it's time to take a closer look at your top financial priorities. Is it worth it to throw more money toward retirement in order to quit working sooner? Or would you rather spotlight another goal, like putting your kids through college?

If you choose the latter, there's no need to switch up your strategy. Simply allocate any excess cash in your budget toward other savings goals.

The other (very) important factor to consider is whether you’ve achieved basic financial security—meaning you have a plan to pay off credit card debt within five years, have an emergency fund with three to nine months of take-home pay, and are taking full advantage of your employer's retirement contributions match. If you're not quite there yet, consider putting any extra cash you were thinking of using to beef up your retirement savings toward these more immediate to-dos.

RELATED: 7 Reasons You Need an Emergency Fund

Start off by contributing to your company-sponsored 401(k)—but only to the point of your employer's match. After that, shift your focus to your Roth IRA, and completely max it out.

But let's say you are financially secure—and still consider retirement your biggest priority. Now it's time to talk about some smart places to save.

Your specific action plan will depend on your age, tax bracket and income, but one of my favorite strategies is to utilize a 401(k) in conjunction with a Roth IRA, if you qualify—a well-balanced plan designed to help you reap benefits now and in retirement.

With a 401(k), you're saving money today by contributing pre-tax dollars—and lowering your taxable income at the same time. The funds in your Roth IRA, which you contribute after taxes, are what I consider tomorrow's savings because they'll grow completely tax-free until you take qualified distributions—which are also tax-free!—in retirement.

So here's a strategy to consider: Start off by contributing to your company-sponsored 401(k)—but only to the point of your employer's match. After that, shift your focus to your Roth IRA and completely max it out. (The 2017 limit is $5,500, or $6,500 if you're 50 and over.) As a final step, funnel any remaining funds you'd like to save for the year into your 401(k) to max out the IRS limit for the year.

Voilà!

You're now stashing away as much as $23,500—in addition to any complimentary cash you amass courtesy of your employer match.

Bottom Line: Never save without a plan. Calculate your nest-egg cash goal, and then weigh your top financial priorities before adjusting your retirement strategy.

And no matter what you do, take advantage of that match, if it's available to you. Trust me, it should come in handy later.

RELATED: 5 Ways to Retrain Your Brain to Save More for Retirement

LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. Unless specifically identified as such, the people interviewed in this piece are neither clients, employees nor affiliates of LearnVest Planning Services, and the views expressed are their own. LearnVest Planning Services and any third parties listed or linked-to in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

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