Stop Overfunding Your 401(k). Do This Instead

You can do everything right and still feel stuck. Save aggressively. Max out your 401k. Build a large portfolio. And then one day realize you can’t actually use it when you want to.

In this episode, James explains why the type of account your money sits in can matter just as much as how much you’ve saved. When too much is locked inside pre tax accounts, retirement becomes a waiting game. Access comes with rules, penalties, or large tax consequences, even when the balance says you should be free.

That is where the brokerage account quietly changes everything. Not because it produces higher returns, but because it gives you control. Control over when you access your money. Control over how income shows up. Control over how much tax you actually pay along the way.

The difference is subtle at first. But over time, it becomes the gap between having wealth on paper and having the ability to actually live on your terms. Someone with less money but better account structure can often move more freely than someone with a larger balance tied up in the wrong places.

The takeaway is simple. Retirement is not just about accumulation. It is about accessibility. When your plan includes both, your money stops feeling restricted and starts feeling like what it was meant to be. Freedom.

--

Advisory services are offered through Root Financial Partners, LLC, an SEC-registered investment adviser. This content is intended for informational and educational purposes only and should not be considered personalized investment, tax, or legal advice. Viewing this content does not create an advisory relationship. We do not provide tax preparation or legal services. Always consult an investment, tax or legal professional regarding your specific situation.

The strategies, case studies, and examples discussed may not be suitable for everyone. They are hypothetical and for illustrative and educational purposes only. They do not reflect actual client results and are not guarantees of future performance. All investments involve risk, including the potential loss of principal.

Comments reflect the views of individual users and do not necessarily represent the views of Root Financial. They are not verified, may not be accurate, and should not be considered testimonials or endorsements

Participation in the Retirement Planning Academy or Early Retirement Academy does not create an advisory relationship with Root Financial. These programs are educational in nature and are not a substitute for personalized financial advice. Advisory services are offered only under a written agreement with Root Financial.

Create Your Custom Strategy ⬇️

Get Started Here.

Join the new Root Collective HERE!

Transcript

You Need To Save Less

SPEAKER_00 0:00

In order to retire, you might need to save less. Not less overall, but less into the wrong accounts. Because I don't care if you have$10 million in your 401k. If you're 52 and want to retire, that money's locked up. You'll either need to jump through complicated hoops, pay a big penalty, or pay a massive tax bill in order to access that money. And that is exactly how people become qualified rich, but cash poor. Today I want to explain how saving less money into qualified accounts like 401ks and more into what I'm going to call a freedom account may very well be the key to you actually retiring when you want to. For 30 to 40 years, people hear one single message: max your 401k, max your traditional IRA, defer taxes, build up those accounts. That advice isn't wrong, but it is incomplete and it's incomplete because retirement is not just about accumulation, it's about accessibility. And accessibility is where too many retirement plans break down. Let's look at a real world scenario to illustrate this. You're 52 years old. You have$5 million, but it's all in 401ks and pre-tax IRAs. You very clearly saved diligently. But now all of a sudden, you're done working. You're burned out, you're exhausted, maybe your job was eliminated and you don't know where you're gonna go to find the next one. You want freedom and looking at your portfolio balance, you'd think that you have it. You have$5 million there. But that's when you realize that if you actually want to access that money, you either need to wait until 59 and a half, implement what could be a very complicated 72T distribution, do a Roth conversion ladder, which still isn't gonna free your money up immediately, pay penalties on everything you pull out, or trigger massive ordinary income taxes. That's not freedom. That is restriction because you did everything right. You have the money, but you don't have the accessibility. And because you don't have the accessibility, you don't truly have the freedom. So all of a sudden you're in this position where the account type that your money is in is what's dictating your freedom, not the amount of money that you have that would ordinarily put you in a position to be completely financially independent. So let's clarify something important. Putting money into a 401 doesn't eliminate taxes, doesn't even save you taxes. It simply defers your taxes. Now this works beautifully when in your working years, you're in the 35% tax bracket, saving 35 cents on every dollar that you put into your 401k. And then in retirement, you're in the 12% bracket, pulling money out at a 12% tax rate. That's the tax arbitrage that we love to talk about when it comes to 401ks. But let's look at another example. Maybe an example that's far more common. You save all of your money to 401ks and IRAs. You build a large pre-tax balance, but you still maintain a healthy retirement lifestyle even after you're done working. A 12% tax bracket doesn't exist for you. And it doesn't exist for you because all the money you're gonna be pulling out is pre-taxed money that hasn't been taxed yet. And when you're maintaining that same lifestyle, you're not gonna be in the 12% bracket. You're going to be much higher, in which case, some of those early tax deferrals maybe didn't benefit you all that much. So you saved aggressively, but in doing so, you really concentrated your future tax liability and the concentration of that tax liability is now what's restricting your freedom. So what do you do? This is where the freedom account comes in. Legally, it's just a brokerage account, but think of this as the freedom account because this is going to be the thing that separates your ability to actually do what you want to do from feeling trapped by the type of accounts your money's in. Now, the beautiful thing about a freedom account: no age restrictions, no penalties, no contribution limits, no arbitrary IRS timelines for required distributions from this account. What does this mean in practice? It means you can use this money at 65 or at 55 or at 35 and have the same access to it. In other words, you control when do you sell, when do you realize gains, and at what tax rates are you doing so? So it's this freedom account that creates optionality, and optionality is what ultimately supports your ability to retire, not just your portfolio balance. So let me compare that scenario that didn't work to something a little bit different. You have$5 million, but it's all tied up in a 401k versus your neighbor, they only have$4 million. But of that$4 million, some is pre-taxed$0.00K, a big chunk is a brokerage account, and some is in a Roth IRA. Who's better off? Well, you have more money, but they very well may have more freedom. They may have more access. They may have fewer restrictions on their ability to actually use their money when and where they want, as opposed to waiting for some arbitrary pre-imposed time at which you can actually use your money. They fully control their income timing, their withdrawal sequencing, which means they have far more control over the taxes they do or don't pay as they pull money out in retirement. Now you may be saying, James, that's great, but I'm already 59 and a half. Here's the reality though. This isn't just a benefit for people who are under ordinary retirement age. This is also a benefit for those of you in retirement. Because here's the thing I see my clients run up against. All their money is in a pre-tax 401k, they want to retire. And what do they want to do when they retire? They want to buy an RV. They want to take a big trip. They want to enjoy the money they've worked so hard for. But here's the thing the RV you want to buy, the remodel you want to do, the trips you want to take with your kids, you think you know what that costs. But if all of your money's in pre-tax accounts, increase that by 60%. You think you need$100,000 to do a remodel and to take a trip with the kids? You really need$160,000, depending on your tax brackets, of course, because all of that money is pre-tax. So if you actually want$100,000, you need to take$160,000 out. Now on paper, you can say, yeah, that makes sense, but here's the psychological impact. When you just finished accumulating and working and growing your money so you could finally retire, the difference between taking that money out pre-tax versus taking that out of a brokerage account or cash account that's already been taxed is only part financial. A big part of that is psychological. Good luck convincing yourself to take out$160,000 so you can write a$60,000 tax bill to the IRS and have enough left over to pay for that RV, to pay for that remodel, to pay for that trip. That's something that's gonna be very difficult for you to do. When every decision you make in retirement is done through the lens of that withdrawal is gonna cost me an extra 32% of taxes, you're just not gonna do it. You're gonna be far less likely to do it. The result of that is all these things you actually dreamed about in retirement, you don't end up doing because of the psychological barrier to pulling money out and paying a lot of money in taxes when all of your money is tied up. Now compare that to having a mix of pre-tax money, Roth money, brokerage money, with brokerage accounts. Those gains are taxed at long-term capital gains, much lower rates than ordinary income. You have a 0% tax bracket you could potentially work with. You could borrow against these money. You can pull some money from there, some from your IRA, some from your Roth. There's so much more control you have when you've got a diversified group of types of accounts, not just assets within the account. So financially, the Freedom Account is gonna provide lower cost access to your money when you look at lower taxes paid to get it. But it's gonna provide something even more important. And that's that it feels different. It feels like freedom. It feels like something you can actually access instead of jumping through those psychological hurdles of pulling money out and paying a whole bunch of taxes on it. Now, if this is helpful, don't make sure that you subscribe to this video every single week releasing more videos to give you the tools and the information you need to retire with confidence. But as we start to wrap this video up, don't hear this message as don't save to your 401ks, don't save to your traditional IRAs. Those are powerful, powerful tools you should absolutely be looking to save to. But what I am saying is don't blindly put all of your money there without context. Don't blindly put everything there without understanding the full picture of where that account's gonna benefit you, but also where it's going to restrict you. Often the right answer when it comes to a 401k is absolutely save enough to get the match. Evaluate your marginal tax brackets and use your 401k to manage that. And then build flexibility alongside this. So this isn't either or, this is both and, but have the right strategy that shows you the intentional amounts you should be saving to both to set you up for your future goals. So in order to retire, you may need to save less. Again, not less overall, but less to the wrong types of accounts. Make sure the accounts you're saving to are for a specific purpose, a purpose that empowers you and supports you and that delivers freedom, not restraint. Because retirement is not about hitting an age or hitting a number in your portfolio. It's about having options. The more optionality you bake into your plan, the more freedom you're gonna have in the future. If you want help designing a plan that balances all of that, this is exactly what we do at Root Financial. Go to our website at rootfinancial.com and click on see if we're a fit. Because the goal isn't just building wealth, it's building freedom. And freedom on your timeline, not the IRS's.