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Maxing Out Your 401(k)

Saving using your employer’s 401(k) plan is generally seen as a wise financial move. But believe it or not, it’s not your only avenue for growing a healthy retirement nest egg. If you’re approaching the annual contribution limit for your plan, there are a few other accounts you can consider if you’re looking for places to park some extra cash for your golden years. If you have questions about how to build a robust retirement plan for your future, consider speaking with a financial advisor.

What It Means to “Max Out” Your 401(k)

Because 401(k) plans have such strong tax advantages, the IRS limits how much you can contribute to them each year. However, the earning potential of a 401(k) is still dramatically strong due to their combination of investing, tax deferral and compound interest. Nearly every year, the IRS updates its contribution limits for retirement plans to account for inflation.

For 2021, 401(k) account holders can contribute up to $19,500 to their account. If you’re at least 50 years old though, the IRS will allow you to make extra contributions. These are referred to as “catch-up” contributions. For 2021, the IRS is allowing $6,500 in catch-up contributions, in addition to the base $19,500. That equals a total contribution limit of $26,000 for those 50 and older.

Once you reach these limits on your 401(k), you’ve “maxed it out” for the current tax year. This is when you can begin to look elsewhere for other places to save for retirement. Below are three integral accounts you can use after maxing out your 401(k) to further your savings goals.

1. Individual Retirement Account (IRA)

IRAs can be a great tool to supplement your 401(k) contributions and you can enjoy some tax benefits in the process. With a traditional IRA, you get the benefit of a tax deduction on the contributions you make and you don’t pay any taxes on the money until you start making qualified withdrawals in retirement.

A Roth IRA isn’t deductible, but that can work to your advantage if you expect your income to go up over time. Withdrawals of Roth IRA contributions are always tax-free along with any earnings you take out beginning at age 59.5. Since you’ll be paying taxes on your 401(k) withdrawals, a Roth IRA can supplement your income in retirement without increasing what you owe to Uncle Sam.

Whether or not you can open a Roth IRA or deduct your traditional IRA contributions depends on your income and filing status. For 2021, the full IRA deduction is available to single filers who also have a 401(k) as long as they earn $66,000 or less per year. The income cap increases to $105,000 for married couples filing jointly. In addition, if you’re single and earn $140,000 or more, or you’re married and together you make $208,000 or more, you can’t contribute to a Roth IRA for 2021.

2. Health Savings Account (HSA)

Maxing Out Your 401(k)

Health savings accounts are designed to help you save for medical care, but they can also be a source of retirement income. The money you contribute is tax-deductible and distributions that are used for qualified health care expenses can be tax-free. Some employers may even offer to match a certain percentage of what you put in.

You can use money in your HSA for any purpose other than healthcare. However, you’ll pay taxes on the withdrawal, along with a 20% penalty if you withdraw before age 65.

Health savings accounts are only available if you’re enrolled in a high deductible insurance plan. For 2021, the contribution limit for someone with individual coverage is set at $3,600. It goes up to $7,200 if you have family coverage.

3. Taxable Investment Account

With a 401(k), HSA or IRA, you’ll get some tax benefits if you’re able to deduct what you put in, defer taxes on earnings or avoid them altogether. But it can still be a good idea to have a separate brokerage account for investing. While your earnings may be subject to capital gains tax, that’s easily overshadowed by the other advantages a taxable account offers.

For one thing, you’re not restricted by annual contribution limits. Tax-advantaged accounts cap what you can put in each year, but the sky’s the limit with an investment account. You also don’t have to worry about taking required minimum distributions (RMDs) when you reach either age 70.5 or 72 (depending on your birthday), which is a condition of having a 401(k) or traditional IRA.

What’s more, you’re not barred from saving by your income. Compared to a 401(k) or similar account, you’ll have a much wider range of investments to choose from.

Bottom Line

Maxing Out Your 401(k)

Don’t think that you have to stop saving once you hit your 401(k) limit for the year. This could be a mistake that keeps you from reaching your retirement goals. There are plenty of other opportunities for building wealth over the long term.

In fact, diversifying the places your assets exist can actually be quite beneficial. That’s because each of these various accounts provides their own unique benefits. By taking advantage of a piece of each of them, you can really maximize your earnings.

Retirement Planning Tips

  • Planning for retirement can be a daunting venture. Consider getting some help from a financial advisor if you have specific questions. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Social Security can be an integral part of your long-term income plan for retirement. Try SmartAsset’s Social Security calculator to get an idea of what you’ll receive.

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Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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