Where Does the Next Dollar Go? 401ks, IRAs, Brokerage & Savings

You’re saving and investing, but do you know which account should get your next available dollar?

This episode orders priorities, exploring 401k matches, IRAs (and how to think about traditional versus Roth without getting stuck), brokerage accounts and your cash reserve. Along the way, we talk about the Roth five year rule, the backdoor Roth option if you're above the income ceiling, and the flush of dread that may show up if it seems you've had it in the wrong order all along.

The goal isn’t to overhaul everything at once. It’s to know what comes next.

In this episode:
01:53 Why account order matters
02:45 401k employer match
04:10 Traditional IRA vs Roth IRA
07:44 Taxable brokerage accounts
09:40 How much cash to keep
10:25 Creating an investment priority order
11:15 Using the Money Reset for somatic regulation
13:54 One financial action for this week
14:55 What comes next: choosing investments

The Rhythm of Money: Living Your True Note
Practical financial education for women who want more clarity, confidence, and intention in the way they manage and grow their money.

https://TheRhythmofMoney.com

No financial advice is offered or implied. For guidance specific to your situation, consult a licensed financial professional. 

Transcript

SPEAKER_00 0:03

Welcome back to the rhythm of money. If you had an extra thousand dollars and could put it in only one place, would you know exactly where it should go? Your 401k, an IRA, a brokerage account, savings. Because where you put the next dollar can matter just as much as what you eventually invested in. This is the rhythm of money, and I'm Indigo. A lot of people know they should be saving and investing. The harder question is what comes first? And if you have several accounts already, it can be surprisingly confusing. Not long before I retired from investment advising, I worked with a woman who had money in four different places. She had a 401k she'd been contributing to automatically for about 20 years. She had a savings account with more money sitting in it than she really needed for emergencies. She had a brokerage account her ex-husband had opened as a joint account that she never touched. And she had a Roth IRA she opened a few years earlier, but barely contributed to. Four accounts, but no real order connecting them. So I asked her a simple question. If you had an extra thousand dollars this month, which account would you put it into? She reacted as if I'd just given her an algebra problem. She had the resources. What she didn't have was the sequence, and that's what we're going to build today. Financial media spends a lot of time talking about what to invest in, which fund, which stock, which strategy. But there's a question that comes before all of that. Where does the next dollar go? Get that sequence right, and a lot of what comes afterward becomes much simpler. So I'm going to give you an order you can use as a starting point. And I do want to be clear about what I mean by that. This is general financial education. It isn't customized to your tax situation, your income, your retirement plan, or everything else going on in your financial life. When you need advice that's specific to you, that's where you want to work one-on-one with the right professional, and that's what's really useful there. I'll be talking much more about how to do that successfully in a later episode. For today, we're talking about the basic logic behind deciding what gets funded first. And I'm assuming here that you already have some basic emergency savings in place, which we talked about in the last episode. So, priority number one, your employer match. If your employer offers a 401k match, contribute enough to capture the entire match. And that isn't because I think a 401k is automatically the best investment account. In a lot of ways, it's actually one of my least favorite account types, other than the option to take out loans from yourself. It gets the first spot solely because of the match. Your employer may offer 50 cents for every dollar you contribute, or perhaps a dollar for every dollar, up to a certain percentage of your salary. If you don't claim this year's match, you don't get to come back and claim it a year from now. It's gone. So if there is an employer match available to you and you're not taking all of it, that gives you a very clear answer about where the next dollar goes. There's no need to make that emotionally urgent. It's simply a valuable benefit with a deadline that's attached to it. And if you just started doing some mental math about how much employer money you might have missed in previous years, don't spend your energy there. You can't fund the account backward. You can only make the decision from where you are now. So find out what the match is and start there. Once you are getting the full match, priority number two is an IRA, either traditional or Roth, depending on your individual situation. We're not going to solve traditional versus Roth today. Your tax situation matters, and that may be a conversation to have with your accountant or a financial professional who actually knows your circumstances. What matters today is understanding why an IRA comes next. An IRA gives you considerably more control than most employer retirement plans. You generally have a much wider range of investments to choose from and potentially lower costs, as well as not needing a spouse's permission to withdraw, no matter what state you live in. And you're still getting tax advantages in exchange for using the account within the retirement rules. Now, this is one of those places where I've seen very smart women get stuck because they start trying to make the perfect choice between a traditional IRA and a Roth IRA, so they don't open either. They're not really competing products. They're two different tax arrangements. With a traditional IRA, depending on your circumstances, you may receive a tax deduction now and pay taxes when you withdraw the money later. With a Roth, you don't get that upfront tax deduction. You contribute money that's already been taxed, and qualified withdrawals later can be tax free. So part of the decision is really about when you want to pay the tax. And there isn't one answer that's right for everybody. Your income matters, your eligibility matters, your current tax rate matters, your expectations about the future matter. But don't let uncertainty about which IRA is best turn into doing nothing indefinitely. You can even have both types of IRA. I have both types of IRA. You don't have to fund both, but simply having both accounts is perfectly possible and doesn't have to cost anything. There are also income limits around contributing directly to a Roth IRA. If your income is above those limits, that doesn't necessarily mean a Roth is completely unavailable to you. There are strategies such as a backdoor Roth that you can discuss with your tax or financial professional if they apply to you. And there's one more Roth detail I want you to be aware of because it becomes especially important as you get closer to retirement. Roth IRAs have five-year rules associated with them. So don't assume that reaching age 59 and a half automatically means every dollar in a newly opened Roth becomes immediately available under the same rules. Your original contributions and the earnings on those contributions are treated differently. And there are separate rules that can apply depending on how the money got into the Roth. Contribution versus conversion, for example. The larger point for today is simply this. If a Roth may eventually make sense for you, don't wait until the moment you want to withdraw money to learn how those rules work. Now, let's say you've captured the employer match and you're funding an IRA, and you still have money available to invest. Where does that go? That brings us to priority number three: a taxable brokerage account. Now this is much simpler. There's no special retirement tax treatment, there's no annual contribution limit. You put money you've already paid taxes on into the account and invest it. And unlike money inside a retirement account, this money isn't locked behind retirement age rules or timing rules. That flexibility can be extremely valuable. Maybe you want to retire before a traditional retirement age. I retired the first time at 51. And I recall not long ago, I had a call with a man in exactly a similar situation. He had over $1 million in his retirement accounts and wanted badly to retire at his current age, which was 55. But the only reason he couldn't is because he didn't want to take a $300,000 penalty on early withdrawal. He had nothing in any account that he could touch without that penalty for the next four and a half years. Now, maybe it's not about early retirement for you. Maybe you want money available for a future opportunity, a second home purchase, or who knows what I mean, a new business, could be anything. Maybe all your long-term goals are already being fully funded, and you simply have more money that you'd like to put to work staying ahead of inflation. That's what the brokerage account gives you. Flexibility to make any and all of these choices. And for some of you, this is actually the least complicated part of the whole sequence. No debate about traditional versus Roth, no employer plan menu, no retirement laws to keep track of. It's just an investment account. Priority number four, we come back to the cash. In the last episode, we talked about deciding how much cash you actually want to keep available. Once you've established a basic reserve, additional cash savings can sit alongside the brokerage account depending on your needs. Maybe you have two months of living expenses saved and you've decided that three months would make more sense for your life. In that case, some of your available money can continue building that reserve while some goes into the brokerage account. But once you've reached the cash level you want, continually adding more money to cash doesn't necessarily make you safer. At some point, you're simply choosing not to invest money that could be working to get you ahead. So now we have the sequence. Once you have basic emergency savings in place, first, capture the full 401k match. Second, fund an IRA. Third, use a taxable brokerage account while for continuing to build any additional cash reserve you've decided you really need. That's the map. And notice that we still haven't talked about what stocks or funds to buy. That comes later. Right now, we're simply deciding which container gets filled first. But there's something else I want to address because I've seen what can happen when someone hears an order like this and immediately starts comparing it with everything she's done for the last 10, 20, 30, 40 years. You may realize you funded a brokerage account while leaving part of an employer match unclaimed. Maybe you've accumulated far more cash than you intended because investing it felt like a much bigger decision, too big a decision. Or maybe you've been putting a lot into retirement accounts and were suddenly realizing you'd also like investments that are accessible well before retirement. And sometimes the realization lands physically before you've even had time to think about it like this. A tightening in your chest, a drop in your stomach, a nausea. That little internal jolt of, wait, have I been doing this wrong? That's a good place to use the reset from season one. One breath in and out. Feel your feet on the floor or the seat underneath you. Then a quick scan. Just bring your awareness up through your body from your feet up to the top of your head. Two seconds is enough. And that's it. You don't need to analyze the reaction. You're giving your body a moment to catch up with the new information before your mind starts turning it into a story about everything you should have known or should have done before you knew it or did it. Okay? Because seeing something you want to change is useful. Beating yourself up for not seeing it earlier is not. That's what happened with the client I told you about at the beginning. Once we had all of her accounts laid out and actually gave them an order, the whole situation became easier to understand. And that clarity brought the peace and then the actions that were needed. The problem hadn't been that she didn't have enough accounts. She had plenty of accounts. In fact, she kind of had the perfect accounts. The problem was that every financial decision had been happening separately, and so she didn't really have a sense of peace and clarity. The 401k was doing one thing, the savings account was doing another, the Roth was sitting there barely funded, the brokerage account had essentially been forgotten. Once she could see how those pieces fit together, she had a way to make the next decision, and that's what we wound up doing. And that's really what I want you to leave with today. You don't need to solve your entire financial life every time some extra money becomes available. You need to know what comes next from where you are. So here's the one thing I'd like you to do this week. Find out exactly what your employer matches in your retirement plan and whether you're currently capturing all of it. That's it. Look in your benefits portal or contact HR. If you're already getting the entire match, priority one is handled. If you're not, you've just found the first place to look when you're deciding what to do with your next available dollar. And if you already know you're capturing the entire match, take one look at your IRA instead. Is money actually going into it? And once it gets there, is it actually getting invested? Don't assume. You don't need to solve traditional versus Roth this week. You're just finding out what's happening now. One account, one honest look. That's enough. And this leads directly into where we're going next. Today we answered where the money goes. We haven't answered what you buy once the money gets there. Those are two completely different decisions, and separating them makes both of them easier. So next time, we'll start looking inside the accounts and talk about what it actually means to put that money to work. If this episode helped make that sequence clearer, a rating or review or subscribe, all of that helps another woman find the rhythm of money when she's looking for this kind of clarity. This is the rhythm of money. And you are living your true note in this very moment.