Maxing out Your 401(k) and What to Do Next

There are other ways to save for retirement

A 401(k) is a powerful retirement savings tool. If you have access to such a program through work, it's shrewd to take advantage of any employer match. If you still have money left over, there are other ways to save for retirement.

Retirement planning ensures individuals will live out their golden years in comfort, so it's vitally important to understand the ins and outs of this practice. This article outlines some of the other options you have available to make the most out of your retirement savings strategy and to help you lower your tax liability.

Key Takeaways

  • Try to max out your 401(k) each year and take advantage of any match your employer offers.
  • Contributions are tax-deductible the year you make them, which can leave you with more money to save or invest.
  • Once you max out your 401(k), consider putting your leftover money into an IRA, HSA, annuity, or a taxable account.

401(k) Employer Match

Many employers offer their employees 401(k) plans. And they may even match contributions to sweeten the pot. This means that for every dollar you contribute to your employer-sponsored plan, the company matches a certain percentage. This increases the amount of money saved in your account. Some match as much as 50% of your contribution, while others do a dollar-for-dollar match up to a specific limit.

Employers typically match Roth 401(k) plans at the same rate as traditional 401(k) plans. Some employers do not offer Roth 401(k) plans, however. One notable difference between traditional and Roth 401(k) contributions is that the employer's contribution is placed in a traditional 401(k) plan—taxable upon withdrawal. The employee's part of the contribution is placed in a Roth 401(k).

Some financial planners may encourage investors to max out their 401(k) savings. On average, individuals earn about $0.50 on the dollar, for a maximum of 6% of their salaries. That's the equivalent of an employer writing a $1,800 check to a worker who earns $60,000 every year. Furthermore, the $1,800 is essentially free money and can grow over time by investing in the financial markets.

You Don't Have to Be an Investing Pro

Although 401(k) offerings can be challenging for non-professionals to understand, most programs offer low-cost index funds, which are ideal for new investors. As individuals approach retirement age, it's prudent to modify their asset allocation by shifting a portion of their retirement assets from stocks or equities into bond funds. Many adhere to the following age-based allocation model:

  • At age 30, invest 30% of retirement money in bond funds.
  • At age 45, invest 45% of retirement money in bond funds.
  • At age 60, invest 60% of retirement money in bond funds.

Those opposing the age-based approach may instead elect to invest in target-date funds, which provide investment diversification without choosing each individual investment.

"Target-date funds also trend towards being more conservative closer to the selected date. The combination of these benefits can make this a one-stop-shop for 401(k) participants," explains David S. Hunter, CFP and president of Horizons Wealth Management.

Investing After Maxing out Your 401(k)

Those who contribute the maximum dollars to their 401(k) plans can augment their retirement savings with a number of different investment vehicles. We've listed a few of them below.

Individual Retirement Accounts (IRAs)

You can contribute up to $6,000 to an individual retirement account (IRA) in 2022 and $6,500 in 2023, provided your earned income is at least that much. If you're 50 or over, you can add another $1,000 in both years, although some IRA options carry certain income restrictions.

If you make too much money, you can't contribute to a Roth IRA. If you make more than a certain amount and are covered by a workplace plan, you can't deduct contributions to a traditional IRA.

Traditional IRA Income Limits

Deducting a traditional IRA contribution is subject to income ceilings if you are covered by a retirement plan at work.

For single taxpayers, the deduction phase-out starts at a modified adjusted gross income (MAGI) of $68,000 and goes away completely if your MAGI is $78,000 or higher, for 2022. This range increases to $73,000 to $83,000 in 2023. For those who are married and filing jointly, whereby the spouse making the IRA contribution has a workplace retirement plan, the phase-out starts at $109,000 and goes away at $129,000 ($116,000 and $136,000 in 2023).

If you don't qualify to deduct all or part of your traditional IRA contribution, you can still contribute up to the contribution limit. Your investment will still grow on a tax-deferred basis.

Roth IRA Income Limits

Contributing to a Roth IRA also involves income limitations and phase-outs. But unlike traditional IRAs, the limit determines your eligibility to contribute.

For single taxpayers in 2022, the income phase-out starts at a MAGI of $129,000 and goes away for incomes in excess of $144,000 ($138,000 to $153,000 in 2023). For married taxpayers filing jointly, the phase-out begins at a MAGI of $204,000 and ends completely above a MAGI of $214,000 ($218,000 and $228,000 in 2023).

Health Savings Accounts

Health savings accounts (HSAs) are available to those with high-deductible health plans (HDHPs), whether they access them through their employers or purchase them independently. Contributions are made on a pre-tax basis.

If used for qualified medical expenses, withdrawals from the account are tax-free. And since users are not compelled to withdraw the money at the end of each year, HSAs can function like another retirement plan, making them ideal vehicles for saving on healthcare expenses during retirement.

For 2022, the Internal Revenue Service (IRS) defines a high-deductible health plan as a plan with a minimum annual deductible of $1,400 for self-only coverage ($1,500 in 2023) or $2,800 for family coverage ($3,000 in 2023).

Also, under a high-deductible plan, annual out-of-pocket expenses (such as deductibles, co-payments, but not premiums) do not exceed $7,050 for self-only coverage or $14,100 for family coverage for 2022, but for 2023, do not exceed $7,500 for self-only coverage or $15,000 for family coverage.

The contribution limits for 2022 are $3,650 for an individual and $7,300 for a family; however, the 2023 contribution limit is $3,850 for individuals and $7,750 for families. The catch-up contribution for those who are 55 for both 2022 and 2023 is an additional $1,000.

Taxable Investments

Taxable investments are a viable way to accumulate retirement savings. While dividends and capital gains are subject to taxes, long-term capital gains on investments held for at least a year are taxed at preferential rates.

If you have maxed out your 401(k), be cognizant of asset location to ensure investments are held in taxable versus tax-deferred accounts.

Variable Annuities

Annuities often get a bad rap—sometimes deservedly. Still, a variable annuity can provide another vehicle that lets after-tax contributions grow on a tax-deferred basis.

Variable annuities generally have sub-accounts similar to mutual funds. Down the road, the contract holder can annuitize the contract or redeem it partially or fully, where the gains are taxed as ordinary income.

However, please be aware that many contracts have onerous fees and substantial surrender charges. If you are considering a variable annuity, conduct thorough due diligence and seek help from a financial advisor beforehand.

Frequently Asked Questions

How Much Do You Need to Save for Retirement?

The amount that an individual will need to save for retirement will differ for everyone depending on their current lifestyle, desired lifestyle in retirement, expenses, health, and dependents. One suggestion is to take the desired income you need in retirement and divide that by 4%. So, for example, if you need $70,000 in annual income, you will need a retirement nest egg of 70,000/0.04 = $1.75 million.

What Are 4 Common Retirement Plans?

Common retirement plans include 401(k)s, traditional and Roth IRAs, SEP IRAs, SIMPLE IRAs, and Solo 401(k)s.

What Is the Best Retirement Plan?

One of the best retirement plans is a 401(k) retirement plan. Not everyone has access to a 401(k), as it has to come from an employer and not all employers provide them; however, 401(k)s have high contribution limits, are tax-advantaged, and many employers match the contributions made by the employee.

The Bottom Line

When it comes to your future, investing money is always a good thing to do. Diligent savers who max out their 401(k) contributions have other retirement savings options at their disposal.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
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  2. Financial Industry Regulatory Authority. "Retirement Isn't Free—But Your 401(k) Match Is."

  3. Vanguard. "How America Saves 2022," Page 17.

  4. Internal Revenue Service. "401(k) Limit Increases to $22,500 for 2023, IRA Limit Rises to $6,500."

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  8. Internal Revenue Service. "Rev. Proc. 2021-25," Pages 1-2.

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  10. Internal Revenue Service. "HSA Contribution Limits."

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  12. National Association of Insurance Commissioners, Center for Insurance Policy and Research. "Annuities."

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