PlanWise today by learning about the 3 bucket strategy, key milestones for accessing 401(k) funds, and how to choose investments with a holistic approach.
Save or invest?
Every now and then, a young investor will ask me, “I want to buy a house in two or three years—how should I invest the money?”
My answer? Keep it in cash.
It’s a dull, unexciting answer. But it’s smart.
Here’s why.
Saving and investing may sound like cousins, but they serve two very different roles. Saving is about safety—keeping your money where you can reach it, intact and reliable. Investing is about growth—putting money to work over time, with the understanding that it may rise, fall, and rise again.
There’s no such thing as a risk-free dollar. But market risk is very real—especially when your time frame is short. The general rule? If you need the money within 3 to 5 years, keep it safe: cash, CDs, or money market accounts.
💡Tip: Look for high-yield savings accounts from reputable online banks like Ally, Marcus, Capital One, or Wealthfront. They often pay far better interest than traditional banks.
Where to put your money while you’re building wealth
The 3 Buckets of Tax Diversification. In general, while you’re accumulating, there are three main account types to put your money:
Traditional / Tax-Deferred:
This is savings you haven’t yet paid taxes on. Withdrawals are fully taxable at ordinary income tax rates. Typically, a 10% penalty applies to distributions before age 59 ½ .
Examples: Traditional 401(k), Traditional IRA
Tax-free / Roth:
You pay taxes upfront on the amount contributed, but future withdrawals (including earnings) are tax-free—if you’re 59½ and have held the account at least five years.
Examples: Roth IRA, Roth 401(k)
The Health Savings Account (HSA) is a powerful tool to save for future medical expenses, and an unsung hero. Contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are also tax-free. That’s a triple win!
Taxable / Brokerage Accounts:
Taxable accounts are non-retirement accounts. You fund these with after-tax money. Earnings are taxed as they’re realized, but there are no contribution or withdrawal restrictions.
Examples: Regular brokerage account, savings accounts, money market funds.
Tax Diversification: Why it Matters
One of the most powerful tools for managing taxes in retirement is spreading your savings across all three account types. It gives you the flexibility to draw from the right bucket at the right time—and could mean a lower tax bill both for you and your heirs.
Maximizing Your 401(k): A smarter way to grow
How to Maximize Your Contributions
A 401(k) is one of the best tools you have to build long-term wealth. But like any good tool, it works best when you know how to use it.
Let’s start with the big picture.
In 2025, the total limit you can funnel into your 401(k), between your contributions and your employer’s, is $69,000. If you’re 50 or older, that rises to $76,500 thanks to catch-up contributions.
Now, let’s break it down.
- Your Contributions (Elective Deferrals)
You can contribute up to $23,000 of your salary in 2025. If you’re 50 or older, you get a $7,500 catch-up—bringing your total to $30,500. - Employer Contributions (Match & Profit Sharing)
This is free money—but only if you contribute enough to earn it. Some employers also offer profit-sharing, which counts toward the $69,000 total limit.
Example:
Shirley earns $100,000 and contributes the full $23,000. Her employer matches 5%, adding $5,000. That brings her total to $28,000—leaving room for $41,000 more in 2025.
- After-Tax Contributions (& The Mega Backdoor Roth)
If her plan allows, Shirley could make after-tax contributions to fill that gap. Then, using an in-plan Roth conversion, she can move that money into a Roth bucket—unlocking powerful tax-free growth.
💡 Tip: Spread your contributions across the year. Maxing out early could mean missing part of your match if it’s paid per paycheck.
Choosing investments in your 401(k)
Too many people pick 401(k) funds like they pick cereal—something familiar, something someone else mentioned, something that “sounds right.”
There’s a better way.
Start by looking beyond your 401(k). Consider the whole household picture—your accounts, your spouse’s, your IRAs and Roths. A well-designed portfolio isn’t built in silos; it’s built across accounts, working in harmony.
Example: Your 401(k) offers a low-cost S&P 500 index fund. Your spouse’s plan has a solid bond fund. Instead of overlapping, coordinate—one holds equities, the other fixed income. You’ve just built a more efficient portfolio with less drag and more clarity. Because when your investments work together, they work harder for you.
It’s not the place we occupy which is important,
but the direction in which we move.
What to do With Your 401(k) When You Leave Your Employer?
When you leave a job, your 401(k) doesn’t have to stay behind. You’ve got four main options—and each comes with its pros and cons to consider:
- Leave it in the plan
Great if you’re 55+ and want penalty-free access
Or if your plan offers standout options like stable value funds
Or if you want strong creditor protection (self-employed? take note) - Roll it into an IRA
Often simpler, with broader investment choices
More flexibility for tax planning and estate strategies - Transfer it to your new employer’s plan
Keeps your funds consolidated—especially helpful if you like the new plan’s offerings - Withdraw it
Not usually advised. Taxes and early withdrawal penalties can take a big bite.
Benefits of Rolling Over:
Rolling your 401(k) to an IRA or a new employer’s plan has several advantages:
- Simpler Management
Consolidating accounts reduces the number of places you need to update for address or beneficiary changes. This streamlining makes it easier to track your retirement funds. - Easier Investment Oversight
Managing scattered accounts can be challenging, especially when plans change providers or fund options. With consolidated accounts, it’s easier to maintain and adjust your investment strategy. - Broader Investment Choices
IRAs offer broader investment choices, and may include options not available in 401(k)s, such as CDs or individual bonds. These can help you create a more customized portfolio. Plus, in an IRA, you control the investments, so employer fund changes won’t affect you.
Note: Be cautious with rollovers—once funds leave your plan, they must be deposited into another qualified account within 60 days to avoid taxes. Ensure the paperwork is completed accurately to prevent costly mistakes.
