Elevate Your Retirement Savings: What to Do After Maxing Out Your 401(k)

Published on September 4, 2024 | LPL Financial

The 401(k) plan is an excellent way for HENRYs, high earners not rich yet, to save for retirement. Hitting the maximum contribution limit is a goal many work toward to reap the benefits of this tax-deferred saving strategy fully.

But what happens after you have maxed out your 401(k) contributions? What are your other options for saving for an independent and comfortable retirement? This article provides additional investment strategies for HENRYs seeking to elevate their retirement savings outside their 401(k) plan.

Additional retirement savings strategies

IRAs

One of the most common options when you’ve maxed out your 401(k) is contributing to an Individual Retirement Account (IRA). An IRA offers similar tax benefits to 401(k), where your contributions grow tax-deferred.

Roth IRA

The Roth IRA differs significantly from traditional IRAs and employer-sponsored 401(k)s, which are funded with after-tax dollars. The benefit of a Roth IRA comes at retirement, as you are able to withdraw funds, both contributions and accumulation, without incurring additional taxes, which is beneficial if you anticipate being in a higher tax bracket upon retirement.

To qualify for a Roth IRA, your income must fall within certain limits, which are adjusted annually. HENRYS must talk to a financial professional to determine if they can invest in a Roth IRA based on their income.

Health Savings Account (HSA)

An HSA is another great supplemental retirement saving strategy. These accounts are used with high-deductible health plans, giving individuals the advantage of triple tax benefits: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. After age 65, non-medical withdrawals are taxed at the regular income tax rate, turning the HSA into a supplemental retirement income account.

Taxable brokerage account

Investing in a taxable account is another saving strategy when you’ve maxed out your 401(k). Although these accounts don’t offer the same tax benefits as 401(k)s and IRAs, they provide increased flexibility in withdrawal times and without penalties. A balanced mix of stocks, bonds, and mutual funds in brokerage accounts can offer substantial accumulation over time.

Alternative investments

Suppose you have already maxed out your 401(k) and these above savings strategies. In that case, it may be time to consider alternative investment strategies, like buying a rental property or investing in real estate investment trusts (REITs) or private investments.

These alternative investments can provide a steady source of income and potential appreciation. However, HENRYs must conduct due diligence by consulting financial and tax professionals to ensure these strategies are appropriate for your situation as they come with risks.

Maxing out your 401(k) is a significant achievement toward securing an independent financial future. However, several other investment strategies offer tax advantages and asset accumulation potential so you can continue investing toward your retirement savings goal.

Whether you invest in an IRA, HSA, a taxable brokerage account, real estate, or private investments, the key is maintaining a diversified portfolio to spread risk and increase growth and asset accumulation opportunities. Consider enlisting the help of a financial professional to help navigate these decisions in line with your specific circumstances and objectives.

Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Investing involves risks including possible loss of principal.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal.  Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by Fresh Finance.

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Sources:

“Can You Have an IRA and a 401(k)?” Investopedia https://www.investopedia.com/ask/answers/111015/can-you-have-both-401k-and-ira.asp

“How To Use Your HSA As A Retirement Plan,” Bankrate https://www.bankrate.com/retirement/using-your-hsa-as-a-retirement-plan/