When A 401(k) Isn’t Enough

I know, I know.  We all had a ton of fun right out of college and with our first real (!) job.

We signed up for the 401(k) without much thought.

We likely only contributed the % that got us the company match, and then we didn’t think much about it.

Life was happening, we were falling in love and getting our hearts broken.

We were getting our footing in our new careers.

Paying off student loan debt.

Thinking about retirement was just not at the forefront of our priorities.

But we started increasing our contribution little by little through the years until we were actually, finally, maxing it out.

‘Wow!’, we thought.

We are hitting on all cylinders now, contributing whatever that year’s maximum is, all while trying to keep all the other financial plates in the juggle (buying a house, having babies, buying a new car, paying down student debt…).

And you know what?

That’s a great place to be.

But it’s still not necessarily quite enough.

I know.  Not fair of me to say.  Discouraging, actually.  But wait: This mostly applies if you have 1) become really good at what you do and 2) are now making some pretty sweet scratch at it.

That’s not so bad, right?

In other words, if you are clearing 6 digits, you may want to start thinking about revving up the IRAs and contributing to them too.


Because 401(k) contributions are not indexed by % to how much you make.  You still max out at that  year’s $ amount, regardless of your income.

The same $16,500 (current level) applies to someone making $50,000 as it does to someone making $500,000.

To ensure the annual % you are applying to your retirement is ~17% (very rough, very general estimate) of your gross income, you need to max out, or at least start contributing toward, IRAs.

That’s another $5,000 a year.

But when even that isn’t enough, it might be time to get creative with tax deferred accounts and tax deferred assets, or at least with tax efficient assets.

Some people advise cash value life insurance, which may be suitable for some clients, especially those looking to do an ILIT.

There are other options.: one may be income-producing, cash flow positive rental property (yes you have to pay property taxes, but any capital gains are not realized until you sell).

It’s not for the faint of heart.

It is definitely only for a very few who can stomach an asset that needs physical management (I almost said ‘active management’, but I don’t want to confuse anyone wrt active management because of the context in which I blogged about it last week!).

But, for the person who has maxed out their employer sponsored retirement plan, their IRA, and is looking at other tax deferred opportunities, it might, maybe, might make sense.

(Full Disclosure: I have a rental property.  It is not easy.  It is not fun.  I was somewhat in the right place at the right time when I bought it (circa 1999 Ballard).)

Beyond cash value life insurance and/or rental property, are there other tax deferred or tax minimizing options?

It all depends. 

Some people might say if you are healthy, an HSA (Health Savings Account) might make sense.

It is also a tax deferred account that can be accrued through time and then used for health costs in retirement (note: you can use the HSA for current health care costs too, but the idea is to get the individual to be saving towards future health care needs).

On a macro level, this is a good problem to have if this is you:  You have accomplished alot of great things, especially in your Financial Life, and having to save more money beyond employer sponsored plans and individual retirement accounts is a very good place to be.

You just have to figure out how to do that now.

Working with a Fee-Only Financial Planner (hi!) who can look at all the options available to you for retirement assets and make recommendations that best fit your risk tolerance, temperament, lifestyle, and goals would not be the worst way to go about it.