When it comes to saving for retirement, a 401(k) is a powerful tool. If you have access to one at work, it pays to max out your 401(k) and take advantage of any employer match. If you still have money left, there are other ways to save for retirement.

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. That tax break can leave you with more money to save and invest.
  • Once you max out your 401(k), consider putting your money into an IRA, HSA, annuity, or a taxable account.

Arguably, the most important financial decisions you will make revolve around your retirement accounts. Sure, buying a home is a big decision. But if you make the wrong retirement decisions now, having enough money during your later years is nearly impossible.

That’s why you have to understand how your retirement accounts work and how to maximize their effectiveness. You don’t have to be an expert, but you should aim to understand enough about your financial future to know where to direct your money.

401(k) Contribution Limits

Study after study decries Americans' lack of or limited retirement savings. If you’re like the majority of people, you need to save aggressively.

“With millions of Americans behind in their retirement savings, it is important not only to save, but to save more each year,” says Greg McBride, CFA and chief financial analyst with Bankrate.com.

For many retirement savers, their 401(k) is their main retirement savings vehicle. In 2019, you can contribute up to $19,000 to your 401(k) plan. To do that, you'll have to contribute $1,583 a month. If you’re age 50 or older, you can contribute $6,000 more—up to $25,000. That's a monthly contribution of $2,083.

Contributing that much may not be possible. Bt if it is, it might be a good idea.

401(k) Contributions are Tax Deductible

“Participants who make tax-deferred contributions to their 401(k) are allowed to write them off of their income come tax time," says Mark Hebner, founder and president of Index Fund Advisors, Inc., in Irvine, Calif.

"You will eventually pay taxes once you withdraw funds in retirement," Hebner adds. "But it may be advantageous to make tax-deferred contributions, especially if you expect to find yourself in a lower tax bracket in retirement."

If you contribute the full $19,000 and fall into the 24% tax bracket for 2019, that's $4,560 you won't owe to Uncle Sam. If you’re 50 or older and making catch-up contributions, you could save as much as $6,000. It’s hard to say no to savings like that.

401(k) Employer Match

Not all financial planners believe you should max out your 401(k) savings—some believe it isn't a good idea. But most do agree that you should contribute up to your employer match. You’re probably getting about $0.50 on the dollar for a maximum of 6% of your salary if you fall into the average.

That’s the equivalent of your employer writing a check for around $1,800 to a worker making $60,000 per year. And don’t forget that over time, that $1,800 will grow. That makes your employer’s contribution worth a lot more than $1,800. Don’t turn down free money.

You Don’t Have to Be an Investing Pro

Once you contribute up to your employee match, you have choices to make. Many 401(k)s have mediocre investment options. You’re probably forced to choose among a limited number of mutual funds with higher fees and lower performance.

You may read articles or receive well-meaning advice to “evaluate the available funds in your plan” or “speak to a financial advisor”—good recommendations if you actually know how to do it or whom to consult.

But no matter how bad the choices are in your 401(k), they’re all better than doing nothing at all. If you barely understand anything having to do with investing and finance, and you aren’t going to pay for a financial advisor, maxing out your 401(k) is the best choice. Not because it’s necessarily the best way to save, but because it’s better than doing nothing at all.

Most 401(k)s have at least a few low-cost index funds as their offerings. If you’re young, put a lot of your money into a stock index fund. As you get closer to retirement, shift the majority of it to a bond fund. Some people say to allocate by your age. If you’re 30, keep 30% of your retirement funds in a bond fund. If you’re 60, make it 60%. If you don’t want to mess with allocation, consider a target-date fund.

“Target-date funds in a 401(k) can be a very good investment," says David S. Hunter, CFP® and president of Horizons Wealth Management, Inc. in Asheville, N.C.

"They provide investment diversification without having to choose each individual investment. They 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.”

Maxed Out 401(k): Here's What to Do Next 

Now, if you’ve contributed the maximum to your 401(k) but still want to save more money for retirement, here are some options to consider beyond your 401(k).

Individual Retirement Accounts (IRAs)

For 2019, you can contribute up to $6,000 to an IRA as long as your earned income is at least that much. If you're age 50 or over, you can add another $1,000. Certain IRA options do have income restrictions, however.

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 $64,000 and goes away completely if your MAGI is $74,000 or higher (for 2019).

For those who are married and filing jointly, the phase-out starts at $193,00,000 and goes away for a MAGI of $203,000 or more.

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 entails income limitations and phase-outs. But unlike traditional IRAs, the limit determines your eligibility to contribute.

For single taxpayers in 2019, the income phase-out starts at a MAGI of $122,000 and goes away for income in excess of $137,000. For married taxpayers filing jointly, the phase-out begins at a MAGI of $193,000 and ends completely above a MAGI of $203,000. 

HSA Accounts

Health savings accounts, or HSAs, are available to those with a high-deductible health insurance plan—whether via their employer or purchased independently. Contributions are made on a pre-tax basis and, if used for qualified medical expenses, withdrawals from the account are tax-free.

You don't have to withdraw the money 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 2019 are $3,500 for an individual and $7,000 for a family. The catch-up contribution for those who are 55 at any time during the year 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 (for investments held at least a year) are taxed at preferential rates.

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

Variable Annuities

Annuities often get a bad rap and, frankly, many annuity contracts deserve it. Still, 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 that 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.

Far too many contracts have onerous fees and surrender charges, so if you are considering a variable annuity, do your homework before writing a check. 

The Bottom Line

For the sake of your future, putting your money to work somewhere is better than nothing. If you are a diligent saver who has maxed out your 401(k) contributions, there are other avenues to consider that can boost your retirement savings.