I Maxed Out My IRA! Now What?

September 22, 2015 — 4:30 PM EDT

If you’ve maxed out your IRA contributions for 2015 (or expect to by next April 15th), you’re doing well. But the last thing you should be is complacent. To ensure a comfortable retirement, you must find other investment options.

IRAs: Your Income and Contribution Limits

As you probably know, there are actually two types of IRAs. A traditional IRA is funded with pre-tax dollars, and withdrawals are taxed. Many savers start with a traditional IRA, since presumably income (and the resulting tax rate) will be lower in retirement. A Roth IRA is funded with after-tax dollars; withdrawals are tax-free. The 2015 contribution limit to all IRAs combined is just $5,500 or your total taxable compensation for the year, whichever is smaller (it rises to $6,500 if you are 50 or older by December 31).

To be eligible to contribute to a Roth account, a single person cannot earn more than $116,000 (adjusted gross income) ($183,000 for married couples filing jointly). Anyone under the age of 70½ with earned income can contribute to a traditional IRA. (See New 2015 Contribution Limits: Advisors Take Heed.)

If you’ve maxed out your IRA, your Roth IRA or both, you must find other ways to invest money for retirement, says Keith Klein, CFP and principal at Turning Pointe Wealth Management in Phoenix, Ariz.

“A single person with a Roth IRA and the ability to max it out is making less than $116,000 adjusted gross income [AGI]," says Klein. The $5,500 a year limit means she needs to find another place to put money.”  

Use Your 401(k)

If you have access to a 401(k) or Roth 401(k), that should be your first choice. In fact, if your employer matches contributions, you should invest in your 401(k) up to the employer matching level even before putting money in an IRA – otherwise you're giving up free money. (For more, see If Your Company Is Matching 401(k)s, Max It Out!

There is no income limit disqualifying high earners from participating in a 401(k). Each taxpayer can contribute up to $18,000 in 2015 to all 401(k) accounts combined. Those who are 50 or older can make additional contributions of $6,000, for a total of $24,000. Whether you choose a traditional or Roth account depends on whether you want the option to take tax-free withdrawals in retirement. (For additional information, see What are the main differences between a Roth 401(k) and a 401(k)?)

Low-Risk Investment Options

Taxpayers who do not have access to a 401(k) must be especially vigilant in seeking out investment opportunities. “When you don’t have that employer-sponsored program, it’s easy to fall into the trap of using only the smaller accounts,” says Klein. The modest contribution limit on these plans makes them insufficient to fund a lifestyle in retirement that is comparable to the taxpayer's pre-retirement lifestyle.

Low-risk investment options for retirement include municipal bonds, fixed indexed annuities and universal life insurance.

Municipal bonds earn interest income that is usually tax-free. Another key advantage is that they are liquid. The owner has the option to either sell them or hold them to maturity – though be aware that selling a bond for a profit before it matures may trigger capital gains tax.

A fixed indexed annuity is a less liquid option. It is sold by an insurance company which later makes payments to the owner at regular intervals. The annuity’s growth is tied to an equity index and there is a cap on the rate of return offered to the owner; the issuer usually guarantees the original investment against losses. The investor may incur tax penalties for withdrawing funds prior to age 59 ½.

Universal life insurance, if structured and used correctly, can offer tax advantages. Growth is tax-deferred and the cash value of the policy is accessible in the form of policy loans before the insured reaches retirement age.

Options with Greater Risk

Riskier investment options include variable annuities and variable universal life insurance.

Variable annuities allow the investor to allocate portions of the funds to various asset options. Most issuers guarantee a minimum return, but payments fluctuate in value. Contributions are tax-deferred until withdrawn, and gains are tax-deferred until age 59½. A death benefit allows the cash value to be assigned to a beneficiary (though the earnings the beneficiary receives are taxed).

Variable universal life insurance is similar to the life insurance product described above, but the cash value is invested in various accounts whose performance inevitably fluctuates. There is a chance that the assets can drop to a value of zero.

Tax-loss Harvesting for Retirement Savings

Tax-loss harvesting is the practice of selling an asset that has experienced a loss in order to offset the tax liability on gains and income. Klein points out that focused tax-loss harvesting can lead to a 1% increase in the overall rate of return on investments. That 1%, compounded over the taxpayer’s working life, can obviously equate to a significant increase in retirement savings. (Also see Tax-Loss Harvesting: Reduce Investment Losses.)

Maximize Earnings in Creative Ways

Consider all opportunities to maximize returns. In some cases, that means challenging traditional wisdom. Take the home mortgage, for example. “Do the math,” says Klein. Some advisors say to always pay cash and avoid paying interest, but mathematically that might not bring the greatest advantage, particularly if the potential gains are greater than the cost of the mortgage. The big picture includes interest charges, opportunity costs, rates of return on investments, differences in payments and the options presented. “A disciplined saver might accumulate more wealth by taking a 30-year mortgage, says Klein, rather than taking a 15-year-mortgage or even paying cash. That's because she might enjoy a higher interest rate on her investments than the interest rate she is paying for the mortgage, especially when in light of the fact that the mortgage interest is tax-deductible and that lower mortgage payments free up cash for investments that otherwise would have gone to higher mortgage payments. 

Don’t shy away from investment products, such as insurance, that have a mixed reputation. “There is a reason why the Fortune 500 and S&P 500 companies have used life insurance to fund retirement benefits,” says Klein. As with any type of product, bad apples exist. The key to avoiding them is to work with a qualified, trustworthy financial advisor.

Save Now, Save More

Some retirement advisors counsel their clients to start saving 10% of their gross incomes in their 20s. Klein believes the target should actually be 20%. “It might not all be for retirement," he notes. "The savings can be for education, vacations and other financial goals. The important thing is to get used to saving 20%.”

The Bottom Line

Much about retirement is uncertain (for instance, who knows what the cost of living will be by the time you retire?), but one thing is certain: Investors who limit their retirement savings to their IRAs alone will not have sufficient funds when retirement rolls around. So after contributing the annual maximum to those accounts, these investors should investigate other options for retirement savings.

While no investment is perfectly risk-free, it deserves serious consideration, says Klein, if it is tax-favorable and offers the opportunity for compounded earnings. "A dollar saved and invested today will always be worth more than a dollar 15 years from now. The sooner a taxpayer starts compounding earnings, the better off he will be."