Beyond Your 401(k): Where Should You Save Next?
You’ve been contributing to your 401(k), taking advantage of your employer’s match, and maybe even working toward the annual contribution limit. But what should you do with your money beyond that?
It’s a question I hear frequently as a financial advisor. People understand the importance of saving for retirement, but they’re often less certain about what to do with the money they have left over.
Should you contribute to a Roth IRA? Maximize your Health Savings Account (HSA)? Open a brokerage account? Or keep more money in savings?
The answer depends on your financial situation, your goals, and when you’ll need access to that money.
After more than 20 years of working with clients, I’ve found that one of the most effective ways to approach these decisions is also one of the simplest: give every dollar a purpose.
Start With Your Goals, Not Your Accounts
Before deciding where to save your next dollar, consider what you’re saving for.
One of the most common things I see when meeting with new clients isn’t necessarily that they’ve made poor investment decisions. It’s that their money isn’t aligned with their goals.
They may have too much money sitting in a checking account earning little interest, or money invested in the stock market that they’ll need to access in the next year or two.
Others have accumulated significant retirement savings but haven’t set aside accessible funds for goals they want to accomplish before retirement.
A financial plan should help connect the assets you’ve accumulated with what you actually want to accomplish.
That’s why I often encourage people to organize their money using a three-bucket strategy.
The Three-Bucket Strategy: Organizing Your Money by When You’ll Need It
The concept is straightforward. Divide your savings into three categories based on when you expect to use the money.
Bucket 1: Short-Term Savings (0–5 Years)
Your short-term bucket is money you may need today, tomorrow, or within the next several years.
This includes your emergency fund and savings for upcoming expenses, such as a home down payment, a vehicle purchase, or a planned renovation.
Because you’ll need access to these dollars relatively soon, the priority should be protecting your principal and maintaining liquidity rather than pursuing aggressive investment growth.
Depending on your needs, options may include:
- High-yield savings accounts
- Money market accounts
- Certificates of deposit (CDs)
- Short-term Treasury securities
The key is making sure your money is available when you need it.
If you’re planning to buy a home next year, for example, you don’t want to be forced to sell investments during a market downturn to cover your down payment.
Bucket 2: Mid-Term Savings (5–10 Years)
Your middle bucket is for goals that are further away but aren’t necessarily retirement-related.
Maybe you’re planning to buy a second home, pay for a major renovation, help your children with a significant expense, or retire early and need to cover health insurance before Medicare eligibility.
This bucket may include a combination of conservative investments, bonds, CDs, and potentially some equities, depending on your timeline and tolerance for risk.
For someone planning to retire at 58, for example, having accessible savings outside a traditional retirement account can be particularly valuable.
It can provide money to cover living expenses and health insurance without relying entirely on retirement accounts that may have withdrawal restrictions or tax consequences.
Not everyone needs a substantial middle bucket. But for those with specific goals in the next five to ten years, it can be an important part of the plan.
Bucket 3: Long-Term Savings (10+ Years)
This is where your retirement savings typically fit.
Your 401(k), IRAs, and other long-term investments are designed to help you accumulate wealth over time.
Because these dollars won’t be needed immediately, you may be able to accept more investment volatility in pursuit of long-term growth, depending on your circumstances.
And remember, your investment timeline doesn’t necessarily end when you retire.
Someone retiring at 65 may still need a portion of their investments to last another 20 or 30 years.
The objective isn’t simply to have different accounts. It’s to make sure the money in those accounts is invested appropriately for when you’ll need it.
Where Should You Save After Your 401(k)?
Once you understand your goals and time horizons, you can start deciding which savings vehicles make the most sense.
There isn’t one universal order that works for everyone, but these are some of the areas I encourage people to consider.
1. Make Sure You’re Getting Your Full Employer Match
Before looking beyond your 401(k), make sure you’re taking advantage of your employer’s matching contribution, if one is offered.
An employer match is an additional contribution toward your retirement that you generally don’t want to leave on the table.
You should also understand the benefits available through your employer. Does your plan offer a Roth 401(k) option? Are you eligible for an HSA? What other benefits could influence your financial plan?
You may already have valuable opportunities available that you’re not fully utilizing.
2. Build an Appropriate Emergency Fund and Address High-Interest Debt
Before aggressively increasing your long-term investments, make sure you have enough accessible savings to handle unexpected expenses.
You’ve probably heard the general recommendation of three to six months of expenses, but that isn’t necessarily the right amount for everyone.
Your income stability, debt obligations, homeownership, and overall financial situation should all influence how much cash you keep available.
It’s also important to consider high-interest debt, particularly credit card balances and other expensive borrowing.
Paying down that debt may be a better use of additional cash flow than increasing certain investments.
3. Consider a Roth IRA
A Roth IRA can be an excellent complement to your traditional 401(k).
With a traditional pre-tax 401(k), contributions generally reduce your taxable income today, but withdrawals in retirement are typically taxable.
With a Roth IRA, you contribute after-tax dollars, and qualified withdrawals in retirement are tax-free.
Why does that matter?
Because one of the challenges I frequently see with retirees is that they’ve accumulated substantial savings in pre-tax retirement accounts but have limited flexibility when it comes to managing their tax burden.
Every dollar they withdraw from those accounts can potentially affect their taxable income, Medicare premiums, and the taxation of Social Security benefits.
Having a combination of pre-tax and Roth savings creates more options.
You don’t necessarily have to choose one over the other. In fact, having both may be beneficial.
Roth IRA contributions are subject to annual limits, income eligibility rules, and other requirements, so it’s important to understand whether you’re eligible before contributing.
4. Don’t Overlook Your Health Savings Account (HSA)
If you’re enrolled in an eligible high-deductible health plan, an HSA may be another valuable savings opportunity.
Many people think of an HSA simply as an account to pay for current medical expenses.
But it can also serve as a long-term savings and investment tool.
HSAs offer three potential tax advantages:
- Contributions may be tax-deductible or made pre-tax.
- Investment earnings can grow tax-free.
- Withdrawals for qualified medical expenses are tax-free.
For someone who can afford to pay current medical expenses from regular cash flow, leaving HSA dollars invested may allow those funds to grow for future healthcare needs.
Healthcare can be a significant expense in retirement, making this an account worth considering as part of your broader strategy.
5. Consider a Taxable Brokerage Account
Not every dollar needs to go into a retirement account.
A taxable brokerage account can provide flexibility, particularly if you have goals that fall outside traditional retirement timelines.
Unlike many retirement accounts, taxable brokerage accounts generally don’t impose age-based restrictions on withdrawals.
That can make them useful for someone who wants to retire before age 59½, fund a major purchase, or simply maintain access to invested assets.
Of course, investment gains, dividends, and other taxable events can create tax obligations.
But having a combination of retirement and non-retirement accounts can provide more flexibility when deciding how to fund your goals.
Why Tax Diversification Matters in Retirement
We often talk about diversifying investments, but I believe it’s just as important to consider diversifying how your savings will be taxed.
Think about someone who has spent 30 years diligently contributing to a traditional 401(k).
They may have accumulated a substantial retirement balance, but most of those dollars haven’t been taxed yet.
When retirement arrives, they now need to consider how withdrawals will affect their overall tax situation.
That’s where having money in different types of accounts can help.
A combination of traditional retirement accounts, Roth accounts, HSAs, and taxable brokerage accounts may allow you to manage withdrawals more strategically.
The goal isn’t necessarily to pay the least amount of tax this year. It’s to make thoughtful decisions about taxes over your entire financial life.
You Don’t Have to Max Out Every Account to Make Progress
When people hear about all these savings opportunities, it can feel overwhelming.
Between a 401(k), Roth IRA, HSA, emergency savings, and other financial goals, it may seem impossible to fund everything.
But financial planning doesn’t have to be all or nothing.
If you can’t maximize your 401(k), perhaps you start by contributing enough to receive the employer match and then allocate a smaller amount to a Roth IRA or HSA.
Maybe you increase your retirement contributions by 1% or 2% each year as your income grows.
Or perhaps your priority right now is building a down payment fund while continuing to save consistently for retirement.
The important thing is to develop a strategy that works with your cash flow and helps you make progress toward multiple goals.
I often encourage people to automate their savings wherever possible. Even relatively small contributions can build over time.
Remember to Enjoy Your Money Along the Way
There’s one final point I think is just as important as deciding where to save.
Don’t become so focused on the destination that you miss the journey along the way.
I’ve worked with people who have spent decades saving and accumulating wealth, only to reach retirement and struggle with the idea of spending it.
And I’ve seen others delay retirement because they wanted a little more money in their accounts, only to experience health challenges or other life changes that prevented them from enjoying the retirement they had envisioned.
Financial planning shouldn’t be exclusively about accumulating the largest possible balance.
It should help you make informed decisions about when to save, when to invest, and when it’s okay to spend.
That’s another reason I like the bucket strategy. When you know you’re funding your future goals, it can become easier to enjoy the money you’ve intentionally set aside for today.
Building a Financial Plan That Goes Beyond Your 401(k)
Your 401(k) is an important retirement savings tool, but it’s only one part of your financial picture.
A comprehensive financial plan considers your cash flow, investments, taxes, retirement goals, and the life you want to live along the way.
At Note Advisors, we help clients understand how these pieces work together and develop strategies that align their financial resources with their priorities.
Because ultimately, the question isn’t just how much money you’re saving.
It’s whether the money you’re saving is helping you build the life you want.
Ready to take a closer look at your financial plan?
Schedule a Complimentary Planning Insights Meeting with one of our Certified Financial Planners to discuss your goals and explore how your savings and investment strategies can work together.
This article is for educational purposes only and should not be considered individualized investment, tax, or financial advice. Investment strategies and account eligibility depend on individual circumstances. All investments involve risk, including possible loss of principal.
