Maximizing Retirement Savings: Which Accounts to Max Out and In What Order

Retirement Planning | Tax Planning | Investment Strategy

 Brian Watson By: Brian Watson
Maximizing Retirement Savings: Which Accounts to Max Out and In What Order

Navigating the landscape of retirement savings can be complex, especially for high earners with sizeable assets and significant retirement goals. 

With competing financial priorities and various retirement account options available, developing a strategic plan to maximize growth and minimize your tax burden can be a lofty task. 

There are many different approaches to retirement savings, as well as many account types that all come with their own set of contribution limits, tax implications, and investment options.  

This may leave you wondering what the best approach for maximizing your money and lessening your tax obligation is. Is there an order of operations when it comes to optimizing your retirement savings that will set you up for success and a comfortable retirement?  

In this comprehensive guide, we will walk through six crucial steps high earners should tackle one by one to optimize their retirement plans.  

1. Start with a Healthy Emergency Fund  

Building a robust emergency fund is typically the first step of any financial plan, even before you begin retirement savings contributions. 

Before contributing to retirement accounts, ensure you have 3-12 months of expenses, depending on your specific situation, set aside in a High-Yield Savings Account (HYSA). These accounts offer competitive interest rates while providing easy access to your funds when needed.   

By establishing a solid financial cushion, you will be better prepared to weather unexpected expenses or income disruptions without derailing your retirement savings strategy.  

We know 3-12 months of expenses is a really big range, so we recommend checking out this helpful article to determine what amount is best for you and your family. 

2. Max Out Your Employer Match

We’ve all heard the phrase, “don’t leave money on the table”—and that’s especially true when it comes to the employer matches that may be offered as part of your employer-sponsored retirement plans, such as 401(k)s or 403(b)s.  

Be sure to maximize this benefit by making large enough plan contributions to receive the full employer match. By doing this, you will have more dollars in a tax advantaged account exposed to compounding growth. 

3. Max Out Your Health Savings Account (HSA) 

If you're enrolled in a high-deductible health insurance plan, a Health Savings Account (HSA) presents a valuable opportunity to save for both current and future medical expenses.   

These are several tax benefits for investing in an HSA:  

  1. Contributions are tax-deductible 
  2. Funds can be invested for potential growth over time 
  3. Withdrawals for qualified medical expenses are tax-free

That makes the HSA a triple-tax-advantaged account. Aim to make the maximum contribution allowed to your HSA annually, allowing you to cash in on the tax benefits and letting the account grow as a supplemental retirement savings vehicle.   

While some HSA plans require a minimum cash balance, the remainder of your contributions can be invested for long-term growth potential. If you can cash flow your typical medical expenses, leaving the funds invested will provide immense long-term growth potential. 

Good news! Most employers also offer a match on HSAs to boost savings even further. It is important to note, the match from your employer counts towards the maximum allowable contribution. This is a key difference from retirement savings plans.

4. Save for Upcoming Spending

In addition to retirement savings, it is essential to set aside funds for short-to-medium-term financial goals and upcoming expenses.   

Allocate funds into your high-yield savings account for any anticipated expenses within the next 0-24 months or for goals where you are unwilling or unable to take on investment risk.   

This could include saving for a down payment on a home, funding a child's education, making major home renovations, purchasing new cars, or funding vacations.   

Pro Tip: If you participate in an Employee Stock Purchase Plan (ESPP), consider selling shares upon purchase and directing the proceeds into your savings account.

Even after tax, your rate of return from selling vested ESPP shares as soon as you receive them is likely higher than today’s highest-yielding savings accounts. It’s like supercharging your savings every time you sell new shares. (This all depends on your specific ESPP details, though. We recommend using our calculator to determine when the best time is to sell.

However, when it comes to equity compensation, such as ESPPs, it's crucial to develop a long-term financial plan that aligns with your overall goals and risk tolerance.  

5. Save Into Taxable Investment Accounts 

While retirement accounts offer significant tax advantages, they also come with restrictions on when and how you can access your funds.  

To bridge the gap between retirement and other financial goals, consider investing in taxable brokerage accounts once you have reached the maximum amount of retirement contributions allowed per year 

(Back to the leaving money on the table concept: it can be enticing for those at higher income levels to jump right to this step. But in doing so, you could be missing out on lucrative tax-advantaged milestones. We recommend contributing to these accounts once you’ve taken full advantage of your employer match and optimized your HSA for all its tax benefits.) 

Taxable investment accounts provide flexibility and liquidity, allowing you to take distributions of your funds at any time without penalties or restrictions.   

Additionally, taxable accounts can serve as a source of income during retirement, especially if you plan to retire before age 59.5 when penalty-free withdrawals from retirement accounts become available.   

By diversifying your investment portfolio across retirement and taxable accounts, you will have greater flexibility in managing your finances throughout various life stages.  

6. Save Into Additional Retirement Accounts and Max Out 401(k)

Once you've maximized employer-sponsored plans and HSA contributions, explore additional retirement account options to further bolster your savings.   

This may include contributing to a pre-tax traditional individual retirement account (IRA), a Roth IRA, or making a Backdoor Roth IRA conversion. The choice between pre-tax traditional IRAs and Roth contributions depends on your current tax bracket and what you anticipate it being at retirement age, as well as your long-term financial goals.   

A mix of both pre-tax and Roth IRA contributions, along with taxable investment accounts, can provide tax diversification and flexibility that is key to an efficient cash flow plan when those paychecks stop coming in! 

Next Steps  

While this guide provides a roadmap for the best order of operations for maximizing retirement savings, it is important to recognize that financial planning is not one-size-fits-all.  

Every individual's financial situation is unique, particularly at higher levels of wealth, and factors such as income, expenses, risk tolerance, and tax considerations must be taken into account. 

Consider consulting with a qualified wealth manager or financial advisor to develop a personalized retirement strategy tailored to your specific needs and goals.  

By taking proactive steps to optimize your retirement savings plan, you can set yourself on the path to a financially secure and fulfilling retirement. 

Curious how your financial plan stacks up? Our 2-minute analysis will offer insights into how you are doing in specific areas of your financial plan and provide curated resources tailored to your needs. 

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Brian joined Plancorp in 2020 as a financial planner. Prior to Plancorp, he worked at Edward Jones and had his own office in Litchfield, Illinois. His experience taught him how to build relationships and truly get to know clients as people first. He believes that is how you can truly impact clients' lives. Brian came to Plancorp because of the more collaborative and team-driven environment. He enjoys turning advanced financial concepts into easy to understand strategies for his clients. He especially enjoys helping clients navigate equity compensation! More »