The best places to save vary based on your situation, such as what's offered at your job or a spouse's job, whether you're self-employed, how much you earn, and your tax filing status.
Laura answers a listener’s question about where to invest for retirement after maxing out a 401(k). Learn seven places to put your money and grow a cushy retirement nest egg.
Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.
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Hello, friends—you're listening to the Money Girl podcast! Since 2008, I've been bringing you personal finance and small business tips every week—for over 15 years!—to build your money wisdom, wealth, and wellness. My name is Laura Adams—I'm a personal finance expert and author of many books, including my most recent title, Money-Smart Solopreneur–A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers.
My mission is to help you get the knowledge and motivation to prioritize your finances, build wealth, and have more security and less stress. I create every show to make sure you come away with practical advice that helps you make better money decisions and takes your financial life to the next level.
This show was inspired by Megan S., who asks, "I'm looking for advice on accounts where I can put away more money for retirement—I'm already maxing out my IRA and employer 401(k). Can you recommend other accounts so I can catch up and save more for retirement?"
Megan, thanks for your excellent question, and congratulations on being a super saver! There are other options for investing after maxing out a workplace retirement account. The best places to save vary based on your situation, such as what's offered at your job or a spouse's job, whether you're self-employed, how much you earn, and your tax filing status.
If you have a retirement plan offered by an employer, such as a 401(k), 403(b), 457, or TSP, it should always be your go-to retirement account. They come with relatively high contribution limits, and your employer may give you free matching funds.
So, Megan is doing the right thing by maxing out her workplace 401(k). But a common question I get is what to do if your employer doesn't offer matching. Even if you don't get an employer match on contributions, I'm still a huge fan of maxing out a workplace retirement plan first. They come loaded with benefits, including:
For 2023, the contribution limits have increased to $22,500, or $30,000 if you're over 50. So always opt to max out a workplace plan when you can. Then, if you still have more to invest, bravo! It's time to turn your attention to more retirement options that we'll cover here.
7 Best Places to Save After Maxing Out a 401(k)
OK, let's review seven of the best places to put your money after maxing out a 401(k). And if you don't have a job with a retirement plan, this show will help you understand various investment options and how to prioritize them.
1. Contribute to a Roth IRA.
After maxing out a workplace retirement plan, your next step is determining if you qualify for a Roth IRA. Megan didn't specify whether her account is traditional or Roth. But if you qualify for a Roth IRA, that's where your next retirement dollars should go because it's so easy to pair with a workplace plan.
For 2023, the IRA contribution limit is up to $6,500 or $7,500 if you're over 50. A Roth IRA is an excellent investment account because it's available to anyone with earned income, including minors and seniors.
With a Roth IRA, you never have required distributions in retirement, but withdrawals are entirely tax-free (because you pay tax upfront contributions). Plus, you can withdraw your contributions (but not earnings) without tax or an early withdrawal penalty. That's why many people use a Roth IRA to save for college or other long-term financial goals.
The downside to a Roth IRA is income limits that reduce or eliminate contributions. When your modified adjusted gross income (MAGI) falls in phase-out ranges, you can have a Roth IRA but not max it out. And MAGI above the following ranges makes you ineligible to contribute.
Note that unlike a Roth IRA, a Roth 401(k) or a Roth 403(b) doesn't have income limits. Also, if you missed episode 757, Roth IRA vs Roth 401(k): 10 Differences Investors Should Know, that dives deeper into the topic.
2. Contribute to a traditional IRA.
Unlike a Roth IRA, a traditional IRA has no income limits, making it an excellent choice when you're a high earner. So, a traditional IRA is the next best place to save for retirement after maxing out a 401(k). With traditional accounts, you make pre-tax contributions, giving you an upfront tax deduction in the current year—even if you don't itemize deductions on your tax return.
However, when your modified adjusted gross income (MAGI) falls in the following phase-out ranges, your traditional IRA deductions get reduced when you also participate in a workplace retirement plan. And when your MAGI exceeds the limit for your tax filing status, contributions are allowed but are nondeductible.
Additionally, if you're not covered by a workplace retirement plan but your spouse is, the phase-out range for deducting your traditional IRA contributions is $218,000 to $228,000.
To clarify, you can still contribute to or max out a workplace plan and a traditional IRA in the same year, no matter how much you earn. But you may not get the full tax benefit for your IRA contributions.
Related: Should You Have a Traditional or Roth IRA?
3. Open a self-employed retirement account.
If you do freelance work or run a business on the side of a day job where you participate in a 401(k), you can also have a self-employed retirement plan. The most popular are the solo 401(k) and SEP-IRA, which both allow you to contribute much more each year than with an IRA or 401(k).
If you have business income, the 2023 maximum for either plan is up to $66,000. However, unlike SEP-IRAs, solo 401(k)s allow catch-up contributions, giving those over 50 a maximum contribution of $73,500 ($66,000 plus $7,500).
Note that the total includes your workplace contributions. For instance, if you're under 50 and max out a 401(k) by contributing $22,500, you could put up to $43,500 ($66,000 - $22,500) in a solo 401(k) if you have that much business income.
That's an excellent way for entrepreneurs who max out a regular 401(k) at their day job to save even more for retirement.
4. Use a health savings account (HSA).
After exhausting retirement account options, the next best place to save after maxing out a 401(k) is a health savings account or HSA. However, it's only available when you have a high deductible, HSA-eligible health plan.
If you qualify, the 2023 contribution limits are up to $3,850 when you have an individual health policy or up to $7,750 for a family plan. HSA contributions are tax-deductible, and you can invest them for tax-free growth. Then you can withdraw funds at any time to pay (or reimburse yourself) for a broad range of eligible healthcare expenses on a tax-free basis.
5. Invest using a taxable brokerage account.
A taxable brokerage account is the next best place to save after maxing out various retirement accounts and an HSA. While it doesn't cut your taxes, it's incredibly flexible because you can tap it before age 59.5 for any reason without penalty.
Plus, you can choose from many investments, such as stocks, bonds, exchange-traded funds, index funds, and mutual funds. Unlike a retirement account, you pay capital gains tax on brokerage withdrawals. That could be much lower than ordinary income taxes, the rate you must pay for traditional retirement distributions.
Some investing firms offer tailored portfolios based on your timeline, goals, and risk tolerance, making it easy to diversify. And terrific robo-investing platforms and apps, like M1, make it simple to get started.
6. Make nondeductible contributions.
Once you reach your annual 401(k) contribution limit, you may be able to make nondeductible or after-tax contributions if your plan allows it. For 2023, the total you can put in a 401(k) is $66,000.
Let's say you max out a 401(k) by contributing $22,500, and your employer adds $5,000 in matching for a total of $27,500 in the account. You may be able to make additional after-tax contributions of $38,500 ($66,000 - $27,500) to get to the plan's overall annual limit.
The after-tax funds grow tax-deferred, and you can withdraw your contributions (but not earnings) without taxes or penalties. However, if you're younger than 59.5, withdrawing any earnings on those contributions would be subject to tax plus an additional 10% penalty.
Not every employer offers an additional after-tax option, so check your plan summary document for more details or ask your benefits administrator. It may be a good option if you want your investments to grow tax-deferred for retirement instead of using a taxable brokerage account.
7. Purchase an annuity.
Another account that allows you to invest more for retirement when you don't want to use a taxable brokerage account is an annuity. Like tax-advantaged accounts, they allow your money to grow tax-deferred.
However, unlike a traditional retirement account, you don't get an upfront tax deduction for annuity contributions. Plus, you typically can't access an annuity until age 59.5 without paying surrender charges and taxes.
There are many types of annuities, such as fixed, indexed, and variable. Fixed annuities pay a fixed return that can't change over time, which can be attractive if you're nearing or in retirement. Indexed annuities promise returns based on an index like the S&P 500. And variable annuities offer a range of investment options that can lose money. The bottom line is that annuities can be complex products and come with relatively high fees.
And here's a bonus tip: once you've maxed out your 401(k) and other tax-advantaged accounts, an excellent next step may be paying off high-interest debt, such as credit cards. While paying off a debt doesn't grow your money, it still gives you an impressive return.
For instance, if you're paying 18% APR to a card issuer, eliminating it gives you an 18% return after taxes, which is pretty impressive!
In summary, if you're like Megan and max out a workplace retirement plan, you're well on your way to a comfortable retirement. But if you regularly put money toward one or more additional options I covered here, you'll have a cushy financial future.
Thanks again to Megan for her question! If you have a money question or a topic suggestion, email me or leave a voice message at 302-364-0308. When you visit LauraDAdams.com, you'll find my contact page and learn more about my work, books, and money classes.
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That's all for now. I'll talk to you next week. Until then, here's to living a richer life.