3 Places to Save After Maxing Out Your 401(k)
Saving in your employer’s 401(k) could be a wise financial move. But believe it or not, it’s not your only avenue for growing a healthy retirement nest egg. If you’re approaching the annual contribution limit to your plan, there are three other accounts you can consider if you’re looking for places to park some extra cash for your golden years.
1. IRA
Individual retirement accounts can be a great tool to supplement your 401(k) contributions and you can enjoy some tax benefits in the process. With a traditional IRA, you get the benefit of a tax deduction on the contributions you make and you don’t pay any taxes on the money until you start making qualified withdrawals in retirement.
A Roth IRA isn’t deductible, but that can work to your advantage if you expect your income to go up over time. Withdrawals of Roth IRA contributions are always tax-free along with any earnings you take out beginning at age 59 1/2. Since you’ll be paying taxes on your 401(k) withdrawals, a Roth IRA can supplement your income in retirement without increasing what you owe to Uncle Sam.
Whether or not you can open a Roth IRA or deduct your traditional IRA contributions depends on your income and filing status. For 2016, the full IRA deduction is available to single filers who also have a 401(k) as long as they earn $61,000 or less per year. The income cap increases to $98,000 for married couples filing jointly. If you’re single and earn $132,000 or more, or you’re married and together you make $194,000 or more, you can’t contribute to a Roth IRA for 2016.
For 2017, the full IRA deduction is available for single filers who also have a 401(k) if they earn $62,000 or less annually. For married couple filing jointly, the income cap is $99,000. You can’t contribute to an IRA for 2017 if you’re single and your salary is $133,000 or more, or if you’re married and combined you make $196,000 or more.
2. Health Savings Account
Health Savings Accounts (HSAs) are designed to help you save for medical care, but they can also be a source of retirement income. The money you contribute is tax-deductible and distributions that are used for qualified health care expenses can be tax-free. Some employers may even offer to match a certain percentage of what you put in.
You can use money in your HSA for any purpose other than healthcare, but you’ll pay taxes on the withdrawal, along with a 20% penalty if you pull the money out prior to age 65.
Health savings accounts are only available if you’re enrolled in a high deductible insurance plan. For 2016, the contribution limit for someone with individual coverage is set at $3,350. It goes up to $6,750 if you have family coverage. For 2017, the contribution limit for someone with single coverage is $3,400 and for family coverage is $6,750. If you’re 55 or older, the catch-up contribution is an additional $1,000 for both single and family coverage.
3. Taxable Investment Account
With a 401(k), HSA or IRA, you’ll get some tax benefits if you’re able to deduct what you put in, defer taxes on earnings or avoid them altogether. But it can still be a good idea to have a separate brokerage account for investing. While your earnings may be subject to capital gains tax, that’s easily overshadowed by the other advantages a taxable account offers.
For one thing, you’re not restricted by annual contribution limits. Tax-advantaged accounts cap what you can put in each year, but the sky’s the limit with an investment account. You also don’t have to worry about taking required minimum distributions when you reach age 70 1/2, which is a condition of having a 401(k) or traditional IRA.
What’s more, you’re not barred from saving by your income. Compared to a 401(k) or similar account, you’re also going to have a much wider range of investments to choose from.
Final Word
Thinking that you have to stop saving once you hit your 401(k) limit for the year is a mistake that could keep you from reaching your retirement goals. There are other opportunities for building wealth.
This article originally appeared on SmartAsset.com.
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