How To Talk To Clients About Options After They’ve Maxed Out Their 401(k)

Using Your Expertise To Help Clients Serious About Saving

Fact checked by Vikki VelasquezReviewed by David KindnessFact checked by Vikki VelasquezReviewed by David Kindness

When only roughly one-third of non-retirees feel like their retirement plans are on track, you may be surprised when a client comes in who is fully funding their 401(k) and still has more to save. These unicorn clients may not appear every day, but the questions they ask you about retirement savings are ones you will likely see repeatedly in your practice. 

This article and the downloadable guide linked below can help you prepare for such conversations and answer clients’ questions about what to do next if they max out their 401(k).

Download: Client-Advisor Discussion Guide: I’ve Maxed out My 401(k). Now What?

Key Takeaways:

• Ask clients to come to meetings prepared with the information from line 11 of their most recent 1040. 
• Consider and explain the IRS rules governing retirement accounts before opening additional retirement accounts for clients. 
• For clients interested in additional retirement savings with a Roth IRA, consider a backdoor IRA or mega-backdoor IRA. 
• Use model portfolios to illustrate strategies to help clients visualize meeting their goals.

Client: “What Investments Would Help Me Reach My Financial Goals?”

Don’t assume that a client who maxed out their 401(k) has extensive investment knowledge and wants to continue maximizing savings for retirement. Before the initial meeting, send the client a questionnaire to ascertain their risk tolerance, goals, and information about their current investments and overall financial picture. 

These questionnaires not only provide a comprehensive understanding of your client’s financial situation, but they also set the stage for you, as the advisor, to proactively align their investments with their future needs. Regardless of their investment experience, your clients trust your expertise for recommendations. One effective way to demonstrate your proactive approach is to prepare model portfolios based on their risk tolerance in advance, aligning with the goals they have outlined in their questionnaire.

Tip

Having your clients complete a questionnaire before meeting with them is a proactive step to ascertain their risk tolerance, goals, and overall financial picture.

Client: “Am I Eligible for a Roth IRA?”

If your client knows enough to ask if they’re eligible for an IRA, you can bet they know at least a little about the Roth IRA and why it’s an attractive retirement savings vehicle. You’ll know whether they qualify for a Roth IRA once you see the answers on their questionnaire, which will provide information from line 11 of their most recent 1040, tuition-related costs or deductions, student loan interest, losses written off from rental properties, or self-employment taxes they paid during the year. 

If they do qualify for a Roth IRA, go forth and conquer those retirement goals. If they do not qualify for a Roth IRA, don’t just answer “no.” Consider your options: 

1. You can recommend a backdoor or mega-backdoor Roth IRA based on their modified adjusted gross income and the company’s 401(k) plan allowances. 

2. You can high-five them and tell them they are on track for their retirement goals based on the information they have given you. You will revisit this in your annual review. 

It’s important to note that unless your client intends to maintain a zero balance in the account they’re rolling over from, the pro rata rule of backdoor and mega-backdoor Roth IRAs can be complex and may require advanced accounting measures. A CPA can help clients ensure these strategies don’t backfire and inform them of the potential risks involved.  

Client (for Married Couples): “How Can My Spouse and I Maximize Our Savings?”

Start by asking your clients if both spouses have earned income. If so, do both spouses have access to company-sponsored retirement plans?  

Roth and traditional IRAs can help your clients maximize their retirement savings. While contribution limits for IRAs are considerably lower than 401(k)s, you can use portfolio modeling to create plans based on each spouse’s risk tolerances to illustrate the value of IRAs and the impact of dollar cost averaging and compounding interest. 

Important

Note that a spouse without earned income can also have a Roth IRA.

Maximizing savings is about more than just saving more money. It is about saving money and using that money to grow your account through investment products that consider risk tolerances and goals.

According to a study by the Investment Company Institute (ICI) in 2019, 60.2% of participants in employer-sponsored plans held target-date funds. Chances are good that you will encounter many clients in your practice with their 401(k) in these funds. Target-date funds aren’t bad. In fact, they’re great for many investors, but are they the best investment to help your clients maximize their savings in the long run? 

If both clients participate in employer-sponsored retirement plans to at least the matching contributions threshold, now is the time to add value to your services by reviewing your clients’ employer-sponsored retirement portfolios to ensure their assets are allocated appropriately for their risk tolerance in quality investments. 

Client: “When It’s Time To Retire, Do I Have To Take This Money?”

New IRS regulations made it so that Roth 401(k)s are no longer subject to required minimum distributions (RMDs) starting in 2024, but traditional 401(k)s still have them starting at age 73, and RMDs are a source of angst for many investors. We know Uncle Sam will get his cut from retirement accounts, so warning your clients in traditional 401(k)s about the hefty 50% excise tax if they don’t take RMDs is just good business.  

Clients who ask if they have to take this money either anticipate that they will not need it or are unsure what they should do with it if they do get it. 

As a trusted advisor, you have an opportunity to clarify what happens to this money when it’s withdrawn. A high-level review of 401(k) taxation and suggesting strategies for RMD funds, like putting them in a Roth IRA to grow tax-free, can go a long way toward easing your client’s concerns. 

Client: “How Should I Best Allocate My Money Based on My Risk Tolerance?”

As a prudent investment advisor, you should review your client’s employer-sponsored plan to ensure their portfolio reflects investments that make sense for their risk tolerance. After you congratulate them for reaching maximum contributions, you might also show them a model portfolio that can give them an idea of what their account will look like when they retire. These models are based on past performance and will likely demonstrate more conservative investments when the client is closer to retirement. 

Because you know your client, you realize that they probably have some goals unrelated to just retiring. They may want to build a house, take a dream vacation, or put kids through college, to name a few priorities. This is the point in your conversation where you need to show them what saving for their other goals looks like, too, using other investments that are appropriate based on their risk tolerance. Additionally, you can model portfolios because, ultimately, how much they have to invest, their risk tolerance, their goals, and when they need the money dictates what investments are best for them. 

The Bottom Line

When you encounter a rare client who has maxed out their 401(k) and wants advice on how to continue saving, use the opportunity to demonstrate your expertise and help them stay the course. 

By understanding clients’ financial goals, risk tolerance, and current investments, you can offer relevant advice that’s more complex than what you would provide an average investor. Whether that means exploring backdoor and mega-backdoor Roth IRAs, optimizing spousal retirement contributions, or strategically planning for required minimum distributions, you can help clients navigate the complexities and provide clear, actionable recommendations that help them make the most of their hard-earned savings. 

Read the original article on Investopedia.