Are You Really Maxing Out Your Retirement Accounts?

Key Points:

• Retirement contributions are often limited by cash flow, not income.

• Tax-advantaged account space is valuable and permanently lost if unused.

• Roth accounts maximize long-term flexibility with tax-free growth and no RMDs until inherited.

Retirement accounts—such as IRAs, Roth IRAs, 401(k)s, 403(b)s, and similar plans—offer powerful tax-planning opportunities. This is true even for people who feel they “don’t make enough” to contribute. For most of the high-net-worth individuals and couples I work with, maxing out retirement plan contributions each year is a foundational part of the strategy, even when it initially feels uncomfortable or impractical.

In my practice, I often meet individuals who aim to spend nearly all of their earned income and therefore believe they cannot afford to max out a 401(k) or other employer-sponsored plan. Yet many of these same individuals hold substantial assets in non-retirement (taxable) accounts. That disconnect presents a significant opportunity to shift assets over time into more tax-advantaged environments.

Using Taxable Assets to Fund Retirement Contributions

For individuals and families with non-qualified assets—such as individual or joint brokerage accounts—there is often an opportunity to effectively “transfer” those assets into retirement accounts. While retirement contributions must be supported by earned income, the IRS does not require that the dollars contributed come directly from current-year savings. As long as sufficient earned income appears on your tax return, the source of the contribution itself is not traced.

This same principle applies to Roth and “backdoor” Roth contributions. Earned income is required, but the funds used to make the contribution could come from taxable savings. Earned income generally includes wages, salary, and self-employment income.

A Practical Example

Consider a couple who previously received a $400,000 inheritance, now invested in a joint brokerage account. At the same time, they may be struggling to fully fund their retirement plans. Both spouses are over age 50 and eligible for maximum employee deferrals to their workplace plans, one spouse has access to after-tax 401(k) contributions (often used in a “mega backdoor Roth” strategy), and both are eligible for annual backdoor Roth IRA contributions.

Between the two of them, there may be an opportunity to get well over $100,000 per year into qualified and Roth accounts. However, many households understandably find it difficult to stomach that large of a reduction in take-home pay or lifestyle if they attempt to fund those contributions solely from current income.

Rather than drastically cutting spending, they could instead draw $1,000, $2,000, or another amount each month from their taxable brokerage account. That cash replaces income being deferred into retirement plans, allowing them to maximize tax-advantaged contributions while maintaining their standard of living. Even better, funding retirement accounts as early as possible each calendar year allows contributions to grow and compound over a longer period, amplifying the long-term benefits of tax-advantaged accounts (learn more).

Extending the Strategy to the Next Generation

For older clients who are already financially secure, this concept can extend beyond their own retirement planning. Gifting to children or grandchildren during life—rather than waiting to pass assets at death—can be especially powerful when those gifts are used to fund retirement savings for the next generation. By drawing from taxable accounts to help fund a child’s or grandchild’s Roth IRA or workplace retirement plan (assuming they have earned income), families can move assets into tax-advantaged accounts decades earlier than would otherwise be possible. The result is potentially a lifetime—or even multi-generation—of tax-free or tax-deferred growth, while allowing the giver to see the impact of their generosity during their lifetime.

Timing Matters—Especially Near Retirement

This strategy can be particularly powerful for individuals in their peak earning years who expect to retire in the near future. Pre-tax 401(k) contributions may reduce income at high marginal tax rates today, while those same dollars can later be converted to Roth accounts during retirement, when taxable income—and tax rates—are often much lower.

Creative Ways to Avoid Missing the Window

There are even situations where borrowing temporarily can make sense. If someone expects a liquidity event—such as an inheritance, business sale, or property sale—but risks missing a contribution deadline, they may choose to borrow funds short-term to make the contribution. The debt can then be repaid once liquidity arrives. While not appropriate in every case, this approach can preserve valuable tax-advantaged space that would otherwise be lost forever.

Don’t Overlook Self-Employment Income

Each year, I see clients who earn modest side income from consulting, freelancing, or other self-employment activities. Often, they view this income only as something that needs to be properly reported on their tax return. However, even a relatively small amount of self-employment income can unlock powerful planning opportunities.

With Schedule C income, an individual may be able to open a Solo 401(k) or similar retirement plan and make contributions—potentially even Roth contributions—based on that income. In many cases, this is worthwhile even if the income is only a few thousand dollars per year.

Why the Rules Exist

At a high level, retirement tax benefits exist because the government wants to encourage individuals to save for their own retirement, reducing future strain on public safety nets. At the same time, contribution limits are designed to prevent these benefits from disproportionately favoring the highest-income households. As a result, taking full advantage of available contribution limits is often a prudent planning decision.

Roth vs. Pre-Tax vs. Taxable Accounts

Over the long run, the ultimate objective is often to build Roth assets. Pre-tax retirement accounts do not always provide a clear advantage over taxable brokerage accounts—especially when considering the full life cycle of taxation.

Growth in taxable accounts is generally subject to long-term capital gains tax and may never be taxed at all due to a step-up in basis at death. By contrast, pre-tax retirement accounts are generally taxed at ordinary income tax rates, either during the owner’s lifetime due to required minimum distribution (RMD) rules or, after death, within a compressed time frame—often up to ten years—when inherited by non-spouse heirs.

Under current law, Roth accounts have no required minimum distributions for the original owner, allowing assets to grow tax-free without being forced out by mandatory withdrawals. This feature can significantly enhance long-term compounding and estate planning flexibility.

Final Thoughts

At its core, maximizing retirement contributions is not just about how much you earn—it’s about how efficiently you allocate the resources you already have. For many households, the key is recognizing that taxable assets, cash flow timing, and future tax rates all work together. Thoughtfully using today’s flexibility to secure tomorrow’s tax-free growth can materially improve long-term outcomes, without requiring a dramatic sacrifice in lifestyle along the way.