Maxed Out Your 401k? Here's What to Do Next
For most retirement savers their 401(k) plan is their main retirement savings vehicle. For 2016 the contribution limits are $18,000 and for those who will be 50 or over at any point during the year it is $24,000. Saving those amounts annually will go a long way towards proving a comfortable retirement for many. But what if you’ve contributed the maximum to your 401(k) but still want to save additional amounts for retirement? Here are some options beyond your 401(k).
Everyone is eligible to contribute $5,500 to an IRA (as long as their earned income is at least that much) in 2015 and 2016. Those 50 or over can add another $1,000 as well. Certain IRA options do have income restrictions, however. Deducting a traditional IRA contribution is subject to income ceilings if you are working and covered by a retirement plan at work. In this case for single taxpayers the deduction phase-out starts at modified adjusted gross income (MAGI) of $61,000 and goes away completely with a MAGI of greater than $71,000 for 2015. (For more, see: 401(k) Contribution Limits in 2016.)
For those who are married and filing jointly, the phase-out starts at $98,000 and goes away for a MAGI above $118,000. For those who are single or married filing jointly who are not covered by a workplace retirement plan and with a spouse who is also not covered by a workplace retirement plan there are no income limits on their ability to deduct their contribution to a traditional IRA account. For those who are married filing jointly who are not covered by a workplace retirement plan with a spouse who is covered by a workplace retirement plan, there is an income phase-out starting at MAGI of $183,000 and going away with a MAGI above $193,000. For 2016 the income limitations and phase-outs are the same with the exception of a married filing jointly taxpayer who is not covered by a workplace retirement plan but whose spouse is covered by one, the phase-out starting point has been raised by $1,000 to $184,000 with the upper end also going up by $1,000 to $194,000.
Contributing to a Roth IRA also entails income limitations and phase-outs. For single taxpayers for 2015 the income phase-out starts at a MAGI of $116,000 and goes away for incomes in excess of $131,000. For married taxpayers filing jointly the phase-out begins at a MAGI of $183,000 and ends completely above a MAGI of $193,000. For both single and married taxpayers filing jointly the phase-out thresholds and limits went up by $1,000 at both the lower and upper income levels for 2016. (For more, see: Why Some Advisors are Shy to Convert Roth IRAs.)
Spousal IRAs are a vehicle for a non-working spouse to make a deductible contribution to an IRA account. Their contribution is limited only to the extent that their working spouse has earned income if less than $5,500 (or $6,500 if 50 or over).
For those who do not qualify all or in part to make their traditional IRA contribution on a pre-tax basis they can still make a non-deductible IRA contribution up to the contribution limits. Their investments will still grow on a tax-deferred basis. Upon withdrawal they will need to have kept track of their non-deductible contributions.
Health Savings Accounts or HSAs are available to those with a high-deductible health insurance plan whether via their employer or one purchased independently. Contributions are made on a pre-tax basis and, if used for qualified medical expenses, withdrawals from the account are tax free. Additionally, money does not have to be withdrawn at the end of each year so it can function like another retirement plan. This is a great way to save for healthcare costs in retirement. The contribution limits for 2016 are $3,350 for an individual and $6,750 for a family. The catch-up contributions for those who are 55 at any time during the year are and additional $1,000. (For more, see: Pros and Cons of a Health Savings Account.)
Taxable investments are a viable way to accumulate retirement savings. While dividends and capital gains are subject to taxes, long-term capital gains (for investments held at least a year) are taxed at preferential rates. For those who have maxed out their 401(k) they should be cognizant of asset location, which investments are held in taxable versus tax-deferred accounts.
Annuities often get a bad rap and frankly many annuity contracts deserve it. However, a variable annuity can provide another vehicle to allow after-tax contributions to grow on a tax-deferred basis. Variable annuities generally have sub-accounts which are similar to mutual funds. Down the road the contract holder can annuitize the contract or redeem it in total or in part. The gains are taxed as ordinary income and far too many contracts have onerous fees and surrender charges so anyone considering a variable annuity should do their homework before writing a check. (For more, see: 3 Variable Annuities to Consider.)
The Bottom Line
For many retirement savers their 401(k) is their main retirement savings vehicle. For those who have maxed out their contributions there are other avenues for their retirement savings and they should use one or more of them based upon their situation. (For more, see: I Maxed Out My 401(k)! Now What?)