At 41, I only have $40k in my 401k—how much should I contribute moving forward?

Not everyone starts planning their retirement early. Some people start in their 30s and 40s and want to catch up. It’s still not too late to retire on good terms if you get started in your 40s, and that’s relevant given this recent Personal Finance Reddit post.

A 41-year-old posted that they only have $40,000 in their 401(k). The Redditor proceeded to ask how much they should contribute to the account moving forward and what else they could do for their long-term retirement goals. Commenters quickly pounced on the post. I’ll share their comments and some of my thoughts as well.

Max Out the 401(k) Plan

Reddit commenters seemed to be united on this thought. The original poster should max out their 401(k) plan to enjoy more tax deductions. You can currently contribute up to $23,500 into a 401(k) plan, and the IRS periodically raises this limit.

Sure, you have to pay taxes on a traditional 401(k) plan when you withdraw cash. However, you will likely be in a lower income bracket by the time you are ready to make those withdrawals. The IRS tax brackets should also continue to spread out, allowing you to enjoy lower tax rates on a higher percentage of your money.

Maxing out your 401(k) plan is one of the easiest ways to shield your funds from taxation and get closer to your long-term retirement goals.

Use a Roth IRA Next

Your modified adjusted gross income needs to be under $150,000 to make a full Roth IRA contribution. If it’s more than $150,000, you can use the backdoor Roth method. This method involves contributing to a traditional IRA and then transferring the funds to a Roth IRA.

The great thing about Roth IRAs is that you don’t pay any taxes when you withdraw money. You don’t even get taxed on your capital gains. It’s a good way to balance a traditional 401(k) where you will get taxed later but don’t have to deal with any taxation on those contributions when you make them.

Roth IRAs also lock up your money until you turn 59 1/2 years old. However, the 41-year-old probably won’t need the money until reaching that age. The individual still has a good amount of work to do before they are ready to retire.

Invest Any Extra Cash into Your Brokerage Account

After you have maxed out your traditional 401(k) and Roth IRA, you should put the remaining cash into your brokerage account after paying for expenses. A brokerage account doesn’t come with the tax advantages of a traditional 401(k) or a Roth IRA. However, you can access cash in your brokerage account right away while investing it in good ETFs and individual stocks.

It’s good to only invest cash into a brokerage account if you do not need it for the next 3-5 years. That way, you don’t have to sell stocks during a market correction to cover necessary expenses.

The Redditor can still retire in the next 20 years if they stay focused on long-term financial goals. A brokerage account serves as a good complimentary piece as you continue to max out your retirement accounts.