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.

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 or invest.
  • Once you max out your 401(k), consider putting your leftover money into an IRA, HSA, annuity, or a taxable account.

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.

401(k) Employer Match

Most financial planners 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 per year. Furthermore, that $1,800 will steadily grow over time. It would be foolish to turn down what's essentially free money.

You Don't Have to Be an Investing Pro

Although 401(k)s offerings can be hard for non-professionals to understand, most 401(k) programs offer low-cost index funds, which are ideal for new investors. As individuals approach retirement age, it's prudent to shift most of their retirement assets to bond funds. Many adhere to the following age-based allocation model:

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

Those opposing the age-based approach may instead elect to invest in target-date funds, which provide investment diversification without having to choose 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 Inc. in Asheville, N.C.

Investing After Maxing Out Your 401(k)

Those who have contributed the maximum dollars to their 401(k) plans can augment their retirement savings with the following vehicles:

Individual Retirement Accounts (IRAs)

For 2021, you can contribute up to $6,000 to an IRA, provided your earned income is at least that much. If you're aged 50 or over, you can add another $1,000, 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 $66,000 and goes away completely if your MAGI is $76,000 or higher, for 2021. 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 $105,000 and goes away at $125,000.

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 2021, the income phase-out starts at a MAGI of $125,000 and goes away for incomes in excess of $140,000. For married taxpayers filing jointly, the phase-out begins at a MAGI of $198,000 and ends completely above a MAGI of $208,000. 

HSA Accounts

Health savings accounts (HSAs) are available to those with high-deductible health insurance plans, 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.

The contribution limits for 2021 are $3,600 for an individual and $7,200 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 on investments held 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. But beware: Many contracts have onerous fees and substantial surrender charges, so if you are considering a variable annuity, conduct thorough due diligence beforehand.

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.