Laura answers a listener's question about how to invest wisely after maxing out a retirement plan at work.
Laura answers a listener's question about how to invest wisely after maxing out a retirement plan at work.
Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.
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Welcome back to Finance Friday, another special edition of Money Girl, where I answer your burning money questions! Today's topic comes from Bobbie, who says:
"This year, I cut back on my expenses so I could afford to max out my 401(k) for the first time. Next year, I'm fortunate to be getting a promotion and salary increase. So, I plan to max out the account again. But how should I invest extra money after using my 401(k)?"
Thanks for your great question, Bobbie! You can use various investment accounts after maxing out a 401(k), depending on your finances, tax filing status, and goals. This post will review five of the best places for your money after you max out a workplace retirement plan, plus terrific options when you don't have a job with a retirement plan.
I appreciate you listening to episode 890 of the Money Girl podcast! I'm Laura Adams, an award-winning author, female financial speaker, money spokesperson, and consumer advocate. Please reach out if you're interested in collaborating for a speaking event or PR campaign!
As always, you can reach me using my contact page at LauraDAdams.com. That's also where you can sign up for my free Substack newsletter, The Money Stack. Subscribers get my Money Success Toolkit, which includes a Financial Planning Workbook and Personal Financial Statement calculator to assess your financial situation, set goals, and track your wealth!
I'd love to feature your money question! Send it by email using my contact page at LauraDAdams.com or by calling 302-364-0308.
Where should I invest after maximizing a 401(k)?
If you have a retirement plan offered by an employer, it should be your go-to retirement account. Depending on where you work, the account might be a 401(k), 403(b), 457, or TSP retirement plan. If you have one, I recommend first investing exclusively in your workplace account because they have high contribution limits and your employer may contribute additional matching funds as an incentive to participate.
Even if you don't get employer matching funds, I still recommend maxing out a workplace plan first. They come loaded with benefits, including:
For 2024, the contribution limit is $23,000 or $30,500 if you're over 50. It will increase to $23,500 or $31,000 in 2025. Starting in 2025, those aged 60 to 63 qualify for a higher, super catch-up contribution limit of $11,250, for a total of $34,750 ($23,500 + $11,250).
Those high limits and benefits make maxing out a workplace plan your first investing priority a wise money move.
RELATED: What should I do with an old 401(k)?
5 best investing accounts after maxing out a 401(k)
If you're like Bobbi, max out a workplace retirement plan, and still have more to invest, here are five of the next best accounts to prioritize.
1. Roth IRA.
After maxing out a workplace retirement plan, determine if you qualify for a Roth IRA, which is an excellent place to invest more money. It's available when you have earned income that doesn't exceed an annual limit, which I'll review in a moment.
For 2024, you can contribute up to $7,000 or $8,000 if you're over 50 to a Roth IRA. Roth contributions get taxed; however, withdrawals are entirely tax-free in retirement. Because you make taxable contributions, you can withdraw them (but not earnings) without taxes or penalties. That's why many people use a Roth IRA to save for college or other long-term financial goals.
Because a Roth IRA provides so many advantages, it comes with annual income limits that reduce or eliminate contributions for 2024 as follows:
For 2025, the Roth income limits will increase to the following:
Note that unlike a Roth IRA, a Roth retirement account at work, such as a Roth 401(k), doesn't have income limits.
READ ALSO: Think you’re too rich for a Roth? Think again
2. Traditional IRA.
If you're a high earner, ineligible for a Roth IRA, the next best investing account after maximizing a workplace plan is a traditional IRA because it has no income limits. 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 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, traditional IRA contributions are allowed but are nondeductible. The traditional IRA deductibility limits for 2024 are as follows:
For 2025, the traditional IRA income limits for deductibility will increase to the following:
Additionally, if you're not covered by a workplace retirement plan but your spouse is, the phase-out range for deducting traditional IRA contributions is $230,000 to $240,000 for 2024. That limit will also increase to $236,000 to $246,000 for 2025.
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. However, you may not get the full tax benefit for your traditional IRA contributions.
Related: Should You Have a Traditional or Roth IRA?
3. Self-employed retirement account.
If you do freelance work or run a business on the side of a job where you participate in a workplace retirement plan, 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 annually than with an IRA or 401(k) but depend on your net compensation.
For 2024, the maximum contribution is up to $69,000. However, unlike SEP-IRAs, solo 401(k)s allow catch-up contributions, giving those over 50 a maximum contribution of $76,500 ($69,000 plus $7,500).
The self-employed retirement contribution limits will increase to $70,000 or $77,500 if you're over 50 for 2025. The super catch-up rules apply to solo 401(k)s, giving those from 60 to 63 a total limit of $81,250 ($70,000 + $11,250).
READ ALSO: When should I do Roth conversions?
4. Health savings account (HSA).
After exhausting retirement account options, the next best investing account after maxing out a workplace retirement plan 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 2024 contribution limits are up to $4,150 when you have an individual health policy or $8,300 for a family plan. Those limits will increase to $4,300 and $8,550 in 2025.
HSA contributions are tax-deductible, and you can invest them for tax-free growth. You can withdraw them to pay (or reimburse yourself) for a broad range of eligible healthcare expenses tax-free.
5. Taxable brokerage.
A taxable brokerage account is the next best place to save after maxing out various tax-advantaged accounts. While it doesn't lower your taxes, it's incredibly flexible because you can tap it for any reason at any time without penalty.
To learn more about taxable investing options, listen to or read Money Girl episode 833, 8 Robo Platform Benefits Investors Should Know.
If you're like Bobbie and max out a workplace retirement plan, that's an excellent accomplishment. But don't stop there! Consider investing additional funds in one or more of the accounts covered here to build as much wealth for your future as possible.
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
Money Girl is a Quick and Dirty Tips podcast, and I want to thank our fantastic team! Steve Riekeberg audio-engineers the show. Brannan Goetschius is our director of podcasts, Holly Hutchings is our digital operations specialist, Morgan Christianson is our advertising operations specialist, Davina Tomlin is our marketing and publicity associate, and Nathaniel Hoopes is our marketing contractor.