You maxed out your 401(k), now what?


First of all, congratulations to those of you who are able to put the max allowable into your company sponsored retirement account!

That’s a great achievement, something to be proud of, and an excellent way to maximize the potential for your retirement nest egg.

For those of you looking to save over and above your 401(k) or company sponsored plan maximum, you have several viable options:

After-Tax Contributions – Find out if your company retirement plan has an “After-tax” contribution option.

While only $18,500 ($24,500 for those over age 50) can be contributed either Pre-tax or Roth, your After-tax contributions fall under the “all in” $55,000 annual 401(k) contribution limit ($61,000 for those over age 50).

Another advantage is After-tax contributions can be rolled into a Roth account when you leave the company, and the earnings can roll into a Pre-tax account.

Some employers may even continue to match After-tax contributions!

Roth IRA – If your modified adjusted gross income falls under $135K for single filers, or $189K for married filing joint, you can contribute to a Roth IRA account.  Roth IRA earnings are tax free when withdrawn, providing an excellent way to build additional retirement savings.

Spousal IRA – Income limits on IRA contributions are only subject to those who are covered by workplace retirement plans. If your spouse is not covered by a plan, or does not have earned income, you can make either a tax-deductible Pre-tax IRA or Roth IRA contribution on his/her behalf up to the IRS maximum.

Tax Sensitive Investment Account – If there is no other way to get money into a retirement account, a traditional investment account is another great way to save for retirement as long as the account is thoughtfully managed in regard to taxes.

Passively managed exchange traded funds that simply follow an index, distribute little to no taxable capital gains distributions. Mutual funds, which are actively managed investments, can be subject to taxable capital gains distributions at the end of each calendar year.

Be weary of portfolio turnover, or how much trading is being done inside of your account as investment gains can be subject to capital gains taxes.

Avoid Annuities – While they are touted as a tax deferred investment vehicle, the fees can be very high, your money could be subject to years of surrender charges, the investment options can be limited, and you lose the control of withdrawals which means:

When you begin withdrawing from an annuity, the earnings come out first and they are taxed at your ordinary income tax rate. With a regular investment account, you can choose the investments to sell, and if there are investment losses they can be deductible on your taxes.

Some annuity companies do not allow you to choose the investments you want to sell, meaning they sell your account pro-rata, across the board when you take a withdrawal. In a down stock market you could be forced to sell your stocks to meet withdrawal needs, a huge disadvantage to you as an investor.

While the fact that you can max a 401(k) plan is great, for those of you looking to save over and above those limits you have several viable choices.  I hope this article was helpful, and if you have any questions don’t hesitate to contact the office.

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