5 Ways to Save for Retirement After Maxing Out Your 401(k) and Roth IRA

Thinking of retiring? Great! But before you hang up your hat, do you have enough savings set aside for retirement? As it stands, the average American has about $167,944 saved for retirement. But what happens when you max out your Roth IRA and 401k for the year?

The IRS has strict limits on how much you can contribute to your retirement account for the year. It’s likely you’ve exhausted your 401(k) and Roth IRA. If so, that doesn’t mean you can’t save even more for retirement. You just need to be a little more creative about how you do it. And we’ll be happy to tell you how people in your shoes stash more into alternative retirement savings options.

Read on for 5 ways to save for retirement after you’ve maxed out your 401(k) and Roth IRA. We’ll help you make the most of your hard-earned money and ensure you have a comfortable retirement.

Retirement planning

Understanding Roth IRAs

A Roth IRA is a type of individual retirement account designed to help individuals save for retirement. With a Roth IRA, you can save money in a tax-free account and enjoy tax-free withdrawals. You can contribute to a Roth IRA if you meet the eligibility criteria and make your contributions with after-tax dollars.

Unlike a 401(k) plan, the money you put in a Roth IRA is after-tax and can only be deposited in cash, not long-term assets like property. The upside to this is that your Roth IRA savings grow completely tax-free. And since Roth IRAs are not employer-sponsored, it means that there are no required minimum deductions as 401(k)s.

Another advantage of a Roth IRA is that you can pull out any amount of money anytime you want without penalties, as long as you’re past the 59 ½ age requirement. However, touching the earnings on your contributions before you reach 59 ½ may attract fees and penalties, so it would be best to leave that untouched. This money can be used to purchase stocks, bonds, and other investments.

Understanding 401(k)

A 401(k) is a type of retirement plan offered by an employer that lets you set aside money for retirement. With a traditional 401(k), you can save money pre-tax, which means that you don’t have to pay taxes on the money you put into your 401(k) until you withdraw it during retirement. 

If you work for an employer that offers a 401(k) plan, it’s something you will want to take advantage of. In most cases, your company will match a certain percentage of your contribution. Depending on your employer, you may receive a “dollar-for-dollar” match or a percentage of your salary. 

Once you sign up for a 401(k), you agree to have a portion of your earnings go into the retirement account. The employer may choose to match a part of or all your contributions.

There are two kinds of 401(k) plans;

  • Traditional 401(k) — What we just described above pretty much sums up what a traditional 401(k) is all about. Traditional 401(k) plans reduce your taxable income, but withdrawals are taxed.
  • Roth 401(k) — A Roth 401(k) combines the features of a Roth IRA and 401(k). Contributions are made with after-tax dollars, and future withdrawals are not taxed.

In order to access this type of account, you must be currently working and have signed up with your company’s retirement plan. Your 401(k) will likely offer a variety of investment options such as mutual funds and exchange-traded funds (ETFs). 

Roth IRA and 401(k) Contribution and Income Limits

Perhaps no other financial accounts are as widely appreciated as the tax-advantaged retirement savings accounts. Unlike a standard savings or checking account, these accounts allow you to save money on a pre-tax and after-tax basis, which gives you more control over your tax burden in the present or the future.

retirement financial planning

The IRS holds specific income limits on both Roth IRAs and 401(k) as follows:

  • Roth IRA — Annual contribution limits for 2022 are $6,000 or $7,000 if you're aged 50 and above. The catch-up contribution limit is $1,000 for people aged 50 and above. Anyone filing as a single person must have a modified adjusted gross income (MAGI) of less than $129,000. Married couples must earn less than $204,000 to contribute the full amount.
  • 401(k) — In 2022, annual 401(k) contribution limits for individuals are $20,500, or $27,000 if you’re 50 or older. Catchup contributions have a $6,500 limit. If your employer offers a matching contribution, the total should not exceed $61,000 or $67,500 for people aged over 50.

The limits for Roth IRA and 401(k) contributions can change each year. Be sure to check the IRS website for up-to-date information.

What Happens if You Put Too Much in Your IRA/401(k)?

If you’re lucky enough to have a company-sponsored retirement account, such as an IRA or 401(k), your first inclination might be to stuff it with as much money as you can. After all, the sooner and more you save for retirement, the better off you’ll be, right? That is true – but only up to a point. 

What if I contributed too much to a Roth IRA? If you put too much money into your IRA or 401(k) account, there could be negative consequences. Roth overcontribution will attract a 6% penalty charged on the surplus amount. The accrues for as long as it remains on your account and you don’t make an effort to fix the error. 

Are There Any Benefits of Maxing Out 401(k)?

Maxing out 401k and Roth IRA has its benefits, but it depends on your situation. For most people, the best retirement strategy is to make regular contributions to a 401(k) or other retirement accounts and then consider other ways to save or invest if you still fall short of your retirement goals.

  • The primary benefits of maxing out retirement accounts come from the tax benefits - maxing out your retirement accounts helps reduce your taxable income for the year. 
  • Maxing out your 401(k) and IRA contributions also means more money in your retirement, which gives you flexible investment options for a comfortable retirement. 
  • The best part about maxing out your 401(k) is that you don’t have to pay income taxes on the money that you contribute. Instead, the money is taxed when it comes out of the account.

If you have a 401(k) at work, it’s a good idea to contribute as much as you can, up to the IRS limit, to get the employer’s match. 

5 Practical Tips on What to Do After Maxing Out Roth IRA Contributions

What to Do After Maxing Out Roth IRA

Once you hit the current year’s Roth IRA contribution limit, you have a couple of options. It’s worth pointing out that you would be better off not putting your eggs in the same basket. An estate planning expert can help you find the most suitable investments based on your needs.

Here’s what to do after maxing out 401(k) and Roth IRA:

1. Consider a Supplemental Life Insurance Policy

This idea makes sense if you already have enough life insurance to meet your family's needs and you’re maxing out all your other available options. In that case, you should consider a supplemental policy that offers the lowest death benefit possible so you can maximize the cash value component earnings. You’ll want to look at permanent insurance as opposed to term since you’ll need to hold onto the policy for over 10 years to make this strategy viable. 

The policy should also offer some kind of investment options similar to a variable universal policy to maximize your return. The growth in the account will grow tax-deferred and withdrawals will be tax-free if structured properly. There no-load and commission based offerings in the marketplace depending on which strategy works best for you.  

2. Invest in Real Estate

Another option for those who are looking to save more money is to invest in real estate. You can do this by purchasing rental properties or by investing in a mutual fund that focuses on real estate. Ultimately, real estate is a great investment when it comes to retirement savings. 

There are a few different ways that real estate can help your savings. First, if you invest in rental properties, you will have a cash flow stream coming in every month. This can help offset some of the costs associated with owning the rental properties. Second, rental properties will usually appreciate over time. This means that you can sell them for more money than you originally paid for them.

3. Contribute to a Health Savings Account

A health savings account (HSA) is a tax-advantaged savings account that is connected to a high-deductible health insurance plan. The money that you deposit into your HSA is not taxed as long as you spend it on qualified medical expenses, such as copayments, ambulance costs, and prescription drugs.

HSAs require you to have a high-deductible health plan (HDHP) to qualify. Annual HSA limits for 2022 are $3,650 for self-coverage and $7,300 for family coverage. People aged 55 and above can leverage catch-up contributions of up to $1,000 for self-coverage.

4. Brokerage Accounts

Brokerage accounts are a type of investment account that allows you to buy and sell stocks, mutual funds, and other securities with help from a licensed financial advisor. Most will require you to deposit money from your bank account. Once the money has been deposited, you can start buying and selling investments through the account.

Some of the best brokers have no minimum deposit and no monthly fees, which means that you can start small and add to your account over time. One of the biggest advantages to investing in a brokerage account is that you are not limited to the number of accounts you can have, meaning a lot more flexibility and control over your capital than you would have with a traditional retirement account.

While at it, don’t forget to seek investment management in Portland, Oregon to help you through the hundreds of investment options in the financial market.

5. Invest in Business

Finally, you can invest in a business to supplement your retirement savings over the long term. A business will also give you more control over your finances. Just make sure that you are willing and able to work hard and make sacrifices in order to make the business a success. 

There are a number of business ideas you can embark on with very little up-front investment. For instance, remote work is becoming increasingly common. You can sell products online, and provide services remotely if you have certain skills.

Seek professional advice if you’re not sure where to start. A little financial planning for small business owners can help protect your small business against risks.

Frequently asked questions about maxing out Roth IRA

maxing out Roth IRA

Can I buy stock with my 401(k)?

You can choose from a variety of mutual funds and stocks. In fact, most employers offer a list of mutual funds and exchange-traded funds (ETFs). It’s worth noting that most 401(k)s do not offer individual stocks. For those that do, you’re only allowed to open a brokerage account with an employer-selected brokerage firm and invest in mutual funds, individual stocks, and bonds. 

How to withdraw the excess contribution?

Withdrawing excess Roth IRA contributions is not complicated. If you make a mistake, such as putting excess money into your retirement account, simply get in touch with your bank or investment company for withdrawals. However, make sure and take out your excess contribution before the prior year’s tax filing deadline of April 15th. Otherwise, it will become very complicated. If the amount was too high, think of it as an unexpected surplus in your account and seek sudden wealth management services to put the money to good use?

Where to invest after maxing out 401(k) and Roth IRA

One of the best ways to generate a solid and reliable stream of income in retirement is to invest in stocks. Stocks are traditionally considered to be risky, but they can also be very rewarding. To reduce risk, you should diversify your assets by putting your money in various asset classes, like real estate, CD’s, money market funds, and so on. Get in touch with professional IRA planning services for more ideas about where to invest.

Can I contribute to an IRA if I maxed out my 401(k)?

You can contribute to an IRA regardless of how much you have in your 401(k). You can contribute to an IRA and 401(k) at the same time as long as income, age, and other IRS limits are kept in check. However, it may not be tax deductible. Check with your tax professional to be sure.

Summing up

Ready to call it in? A financial advisor for retirement planning can help you start and navigate the long journey of saving for retirement. If you’re stuck in the complicated world of personal finance and investing, don’t hesitate to get in touch with a financial planner in Portland

At Interactive Wealth Advisors, we would be more than happy to help you plan for retirement, grow, and manage your wealth through the industry’s best practices.

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