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How to Invest Outside of Your 401k

Have you ever wondered if you should be investing in something other than your 401k? Let me just give it to you straight – you should. Your 401k is a great investment tool (especially if your employer matches your investment), but it should not be the end all be all for your investments.

20120326 - closeup moneyFor the last 4 years of my life, I have been focusing on one thing in regards to my personal finances: paying off debt.

At first, I paid off my student loans, and then my credit card debt, and then I tackled the home loan (which I am still working on today, but it shouldn’t take much longer). At this point, I am starting to think, “Ok…what’s next?” I mean, it’s easy to focus on paying off debt. You just decide what you’re going to pay down and then throw your savings at it for a while. Easy peasy.

BUT, what about investing??

What if all of your debts were paid and you had additional savings dollars to invest? Is it really wise to put more money into your 401k? Or, maybe it’s just time to enjoy the fruits of your labor and buy some nice stuff (boats, cars, etc.). Or, maybe you could go the complete opposite route and save up to retire early. But hmmm, wait a minute. If you put additional money into your 401k, then how can you really retire early? If you retire before the age of 59, then you will not only be taxed on your withdrawal, but you’ll also be penalized! This is exactly why I do not max out my 401k each year.


Reasons for Investing Outside of Your 401k

Some people decide that they would rather invest outside of their 401k (myself included). So what are their typical reasons for this?

  1. Don’t want to get penalized for early retirement
  2. Want to further diversify their money
  3. Want more control over their money
  4. Investing outside of the 401k will make them more aware of their gains and losses

There are some downsides to this method, however. The main one relates to taxes. By investing in a 401k or a Roth IRA, you will only get taxed once on your invested dollars. If you invest on your own after the taxes have been taken out of your paycheck, and then you earn additional money with your earned income, then you will also pay capital gains tax. So, this route does mean that your financial mountain may be a little steeper, but I believe that the financial control that you will have more than makes up for this downfall.

Other Areas of Investing Besides Your 401k

Off the top of my head, here are some other great investment options outside of your 401k:

  1. Start your own business – This doesn’t have to be big, just start a small service company (mowing lawns, washing windows, tutoring children, etc.) for less than $1,000 and turn it into a nice side income each year. Once your clientele grows, you can start hiring others to do the work for you, but still earn a nice revenue.
  2. Annuities – This is pretty simple. For an annuity, you simply hand over a lump sum of money to an organization, and they will agree to pay the money back in monthly installments, with interest. Many times, the interest rates are quite low, but it is a definitely possibility for another investment option, especially if you like getting paid regularly.
  3. 20120323 - houseReal Estate – This is where I plan to put a large portion of my money. I want to buy single family homes and rent them out to responsible tenants ( hopefully!) for a monthly profit. It takes a bit of money to start, but once you get rolling the income can really add up.
  4. Small Start-ups – You might not be an “idea man”, but I bet you know someone that has an awesome idea for a new business – they just need some funding. It may be risky, but if you believe in that person and their idea then it could mean some pretty crazy wealth in your future.
  5. Land – This is a easy one. Find some land on the outskirts of a farmer’s property and ask them if they would rent the land if you bought it. If yes, just pay for the land and begin collecting the monthly payments from the farmer.
  6. Buy a Business – This could be a wide range of items. Maybe you are interested in buying a car wash or a quick lube place. These can be purchased for $250,000 or less and will provide a healthy income each month. Maybe there are some vending machines around town that you would like to own – this could be a possibility as well. This list could go on and on…
  7. CD’s/Money Market – These are typically pretty low returns, but if you want a safe investment that is fairly risk-free, this would be the place to do it.
  8. Credit Union Checking Accounts – If you have $15,000 in your savings account earning nothing, then perhaps you should transfer it over to a credit union. Many of them offer between 2-3% on your checking account balance. I personally earn $400 or more each year just because I have a decent amount of money in my account!
  9. Your Home – This will not bring money to your mailbox each month, but if you are good at fixing up homes then you might want to look for a fixer-upper, polish it up, live there for two years, and then sell it for a hefty profit. You won’t have to pay tax on the earnings and you could do this over and over again throughout your life.
  10. Education – An additional degree could earn you many more dollars of income each year. Over the course of your life, it would probably be well worth the investment!

Would you ever invest outside of your 401k account? Where would you put your money?

Investing Make Money


My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.


  1. I max out our retirement accounts: 1 401K, 1 ROTH IRA, 1 Traditional IRA. I do this to take advantage of the tax breaks. At our income, we need it. I’m saving up to invest outside of our retirement accounts. We have a brokerage account and next is a savings fund for a rental property.

    • What if the stock market takes a dive? Sounds like you have all of your money in one place (basically) – the stock market. When do you think you’ll start investing outside of these retirement accounts?

      • Just because it’s in a 401k, etc. doesn’t necessarily mean it’s all stocks. She’s probably diversified (depending on her age) between stocks and bonds.


        • I still consider that to be very little diversification, Jay. Back when the stock market crashed, nearly every stock took a turn for the worst and then do you remember what happened to bonds? They tanked as well because the confidence in our country and their ability to pay their bills (therefore, the bonds) was falling to an all-time low! To be truly diverse, one must invest 30% or more of their retirement funds outside of their 401k.

  2. We definitely have money in the market outside of retirement. Why do I have to wait 25-30 years to reap the rewards if things go well? I think this is a must have as long as your debt and such is in check.

    • Exactly. Sure, it’d be great to have a few million in my 401k when I’m 65, but what if I don’t want to wait that long? If I could get my hands on that money at 40 years old, then why not retire at that point? Thanks for the comment MB.

  3. My husband and I have not invested that much (little if at all), but we do put money into CDs. It is an easy way to increase our profit because of the higher interest rates compared to just putting money away into a savings/checking account.

    • It is better than a savings account, but why not set your sites a little higher? I bet you could find a better return on your money with one of the other investment choices above.

  4. I can still remember when my wife and I first realized “if we only invest in our 401k’s and Roth IRA’s there’s no way we can retire early!” That led us to begin looking into investment properties, and that’s our plan for early retirement. While the traditional retirement accounts are excellent, you have to have a plan to get you to age 59. Your list brings up some very cool propositions for what to do with your extra cash.

    • Right on Jon. For some reason, people never seem to think about this (probably because we all have many other things to think about and make decisions about in life) and they just continue to work until they are 60 years old (at least). If they were thinking ahead, they would start investing in the market early so they can eventually have a couple million bucks in their retirement account, but they should also be putting some money into alternate investments should they want to retire early, or if they are no longer able to work their job. Thanks for the comment!

      • Absolutely. Yes in a Roth IRA you can withdraw your contributions but that probably wouldn’t last someone who tries to retire at age 50. That would mean almost 10 years of retirement before you can access your gains. We definitely plan to supplement our income by increasing cash flow. Rental properties are going to be our first foray into doing that. Thanks for the response Derek.

        • Same here Jon. I plan to have my first rental house by the end of next year. We should really stay in touch on our lessons learned and on the progress we are making.

  5. Derek,
    Interesting topic and I must admit that both me and spouse are maxing out our 401’s and 457’s and putting a little bit in a couple of roths – but, frankly, our tax liability is going way down once we retire so I’m struggling with the roll over idea (when we reach 59 1/2, hence no penalties, “JUST” the taxes and I’m still not seeing much advantage to that. Thoughts?

    • If I remember right Jim, you are pretty close to the traditional retirement age. Since this is the case, I wouldn’t worry as much about altering your investment style at this point. But, once you do retire, I would definitely look to spread your money around beyond the typical stock and bond choices that you have in your retirement fund. As you might remember from 2009, it really didn’t matter what you owned in the market – it pretty much all tanked because the overall economy was so lousy. Try your hand at a small business venture that you might enjoy. Maybe buy a house that you could rent out. Just brainstorm a bit and see what might give you some additional cash in those retirement years that does not depend on the volatile stock market.

  6. After I finish paying off debt, my next step is to increase investments.

    Right now my TSP (federal employee version of 401K) is 5% with max 5% match
    My next move will be ROTH IRA and CD Ladders
    I would LOVE to get into real estate with my husband. We may turn our current home into rental property, then look for other properties in the next few years.
    I may also give peer lending services a try.

    Curious — why did you decide to pay your student loans before credit cards? Typically student loans are higher balance and lower interest? Unless you had a 0% interest introductory card offer….its really none of my business, but I’m curious since you mentioned it!

    • Sounds like you have a great plan MomCents. Love it!

      The credit debt was paid after because I actually incurred the debt after the student loans were paid off. Long story short, my ex NEEDED (note the sarcastic tone) to have a brand new living room set, and I finally caved and put it on credit. If it were just me, I would have certainly never made that purchase with my credit card.

  7. Right now, neither my employer nor my husband’s offers a 401(k) or 403(b) option, so we have to! I’m trying to decide between a Traditional or Roth IRA, given our current financial circumstances.

    • Based on the way our economy is going, I would probably go with the Roth IRA since our taxes will almost certainly be on the rise in the next few years. It’s better to pay the tax now when they are “low”. Best of luck to you and your future investments!

  8. Derek,
    Thanks for your thoughts. I agree that investing outside of the stock market is a great idea and we’ve still got 10-12 years before we reach a traditional retirement date (tho not sure either of us wants to wait that long). Buying a rental place is something we’ve considered but we’re not sure we want the “tenant hassle” and really don’t think we want to pay someone to do that – the expenses of that are astronomical. As for a side business – love that idea, but are clueless as to where to begin. Hmmm… we’ve got more thinking to do. Thanks again for your input. Good luck getting that mortgage paid off. Can’t wait to raise a glass to you when you get that done.

    • As for starting the business, just think about things that you enjoy doing. Some men are great with woodworking and end up selling home-made dressers, chairs, or benches. Find a hobby that you would enjoy doing and could actually charge money for when you complete a finished product. Keep churning those wheels – you’ll come up with something.

  9. Outside of my 401k, I invest in real estate, my side business and the stock market. When it comes to the stock market, I pick investments that are tax friendly (tax free bonds, tax managed mutual funds) to help keep the taxes I pay on gains low.

    • Sounds like you are pretty diverse with your investments Jon. Nice job! I’m glad that you aren’t only investing in your 401k.

  10. Derek,
    Hi – Jim’s wife here – still loving your blog (and hoping and praying for you to kill that mortgage). When Jim showed me your comment re: starting a business as a side business, I laughed out loud – not at your idea but at what I attempted to do. We’re still in our 50’s and I love old people and I love to cook so I sent an email to a nearby retirement home offering to cook their residents’ favorite meal for their b-days. (Also offered to have a background check run on us and have our kitchen inspected).

    Well hell! Do you think anyone actually read my offer? Oh hell no. All they saw was an “inquiry” and my “inquiry” must’ve gone out to a gazillion retirement homes. Next thing I knew I was getting 5 calls and 3 mailers a day “inviting” me to come visit their retirement homes (as a resident, not a volunteer). I’m not sure who’s the biggest dumb-ass, me or them. So, as much as I’d love to and could really do a side gig with cooking, I am seriously lacking in marketing skills – ha!

    • That is pretty funny! It sounds like we have the same marketing skills. 😉

  11. I have been wondering about this myself and at 45 I had never thought about this before. I am still working on my mortgage. My job matches 8% and I reduced my percentage to match that.
    What do you think. Should I keep plowing away at my mortgage at 5.875% only or invest outside my 401k as well. I had side jobs but I am trying to figure if I want to go that route or get creative at a home thing.

    • That’s exactly what I did when I was paying off my house….but it only took me 1 year. How long do you think it’s going to take you? If it’s more than 3 years, then I’d probably invest upwards of 10% if I were you.

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