You Maxed Out Your Roth IRA: Now What?

Here are some other smart ways to save for retirement.

Suppose that you’ve contributed the allowable maximum to your Roth individual retirement account (IRA) for the year but still have money left over to stash away for retirement. That’s a problem that a lot of people probably wish they had. And never fear—there are plenty of other good places to put your money.

While it’s hard to top the tax-deferred growth and tax-free withdrawals that a Roth IRA offers, you’re limited to contributions of $6,000 a year if you’re under age 50 or $7,000 if you’re 50 or older. Any additional money that you want to save will have to find another home, ideally one with at least some of a Roth IRA’s tax benefits.

We’ve listed a few of the benefits that you may be eligible for below.

Key Takeaways

  • Roth individual retirement accounts (IRAs) allow individuals to take advantage of tax-deferred growth and tax-free withdrawals.
  • You can contribute up to $6,000 to a Roth IRA ($7,000 if you’re age 50 or older) for 2021 and 2022.
  • You can save for retirement through 401(k)s, Simplified Employee Pension (SEP) or Savings Incentive Match Plan for Employees (SIMPLE) IRAs, or Health Savings Accounts (HSAs) if you’ve maxed out your Roth IRA contributions—as long as you’re eligible.
  • Be sure that you’ve funded your 401(k) enough to get the full employer match even before you put money in a Roth IRA.
  • Investment-only annuities don’t come with the high fees associated with regular annuity products.

401(k)s and Other Defined-Contribution Plans

The first option to explore is a 401(k), 403(b), or 457 retirement plan at work. If your employer offers one of these plans, you can contribute up to $19,500 ($26,000 if you’re age 50 or older) for 2021 and $20,500 ($27,000 if you’re age 50 or older) for 2022.

Many employers provide matching contributions, which is one of the best perks around. It’s important to contribute at least enough money to your account to receive the full match even before you put a penny into your Roth IRA.

Contributions to these accounts are generally tax deductible for the year when you make them. This means that your money will grow tax deferred and you’ll pay tax only when you take withdrawals during retirement. If you choose the Roth version of one of these plans, you won’t get any up-front tax break, but your withdrawals in retirement will be tax free, much like a Roth IRA.

If you have any self-employment income, consider funding a SEP or SIMPLE IRA.

SEP IRAs

Simplified Employee Pension (SEP) IRA is a retirement account that offers tax breaks for small business owners, including those who are self-employed. If you have self-employment income, whether it’s from a full-time job or a part-time gig, you can contribute up to 25% of your compensation or $58,000 in 2021 ($61,000 for 2022), whichever is less. If you’re self-employed, you’re considered to be both employer and employee.

Keep in mind that if you have other employees, you generally have to contribute on their behalf, too. And it has to be the same percentage of compensation that you contribute to your own account. So, if you contribute 15% of your compensation, then you also have to contribute 15% on behalf of any employees who:

  • Are age 21 or older,
  • Have worked for you for at least three of the last five years, and
  • You’ve paid at least $650 during the year (for 2021 and 2022).

Similar to a traditional IRA, SEP IRA contributions are tax deductible for the year when you make them, but you’ll have to pay tax when you withdraw the money in retirement.

SIMPLE IRAs

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is like a 401(k) plan geared for small businesses with 100 or fewer employees. Employees can contribute up to $13,500 in 2021 and $14,000 in 2022 ($16,500 and $17,000, respectively, if 50 or older). As with a SEP IRA, if you are self-employed, you’re considered to be both employer and employee.

If you have other employees, you have to contribute for them, too, using one of two options:

  • Make a dollar-for-dollar match of up to 3% of an employee’s pay, or
  • Contribute a flat 2% of compensation, whether or not the employee contributes.

As with SEP IRAs, your contributions are tax deductible for the year when you make them, and your withdrawals in retirement will be taxed as ordinary income.

Setting Up Every Community for Retirement Enhancement (SECURE) Act

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law in late 2019, making broad changes to retirement legislation. Under the act, if you have employees, then as a small business owner, you receive some benefits for establishing retirement plans for your employees. This applies to 401(k)s, 403(b)s, SIMPLE IRAs, and SEP IRAs, as mentioned above.

Small businesses receive an increase in tax credits from $500 to up to $5,000 for establishing a retirement plan. For adopting an automatic enrollment process, they receive a tax credit of $500. These credits apply for up to three years.

Under the act, a small business is a business that has no more than 100 employees receiving at least $5,000 in total compensation. The bill also broadens access to multiple employer plans.

Annuities

If you’ve exhausted all of the tax-deferred and tax-exempt retirement accounts for which you qualify, you might want to look into annuities. These are insurance products that make periodic payments of income during retirement.

Annuities have a justly deserved bad reputation for high fees and poor investment options. However, a newer class of annuities, called investment-only annuities, have lower costs. These annuities are created for tax-deferral purposes rather than insurance benefits. It’s essential to pay close attention to any additional features and ensure that the annuity provides enough value to justify the extra fees.

Your contributions to an annuity aren’t tax deductible, but they will grow tax-deferred, and there’s no limit on the amount of after-tax money that you can contribute. You’ll have to pay tax on the gains when you make withdrawals, but you won’t owe tax on the principal.

Health Savings Accounts

Health Savings Accounts (HSAs) are designed for healthcare costs, and withdrawals are tax free only if they go toward approved medical expenses. Still, most of us have those, particularly as the years roll by. You contribute after-tax money to the HSA, and it grows tax free while in the account.

For 2021, you can contribute up to $3,600 to an HSA ($7,200 for a family), and anyone age 55 or older can contribute an extra $1,000. In 2022, the contribution limit is $3,650 for individuals and $7,300 for families.

If you have a high-deductible health plan (HDHP), you may be eligible to contribute to an HSA. According to the Internal Revenue Service (IRS), for 2021 and 2022, an HDHP has a minimum annual deductible of $1,400 for self-only coverage or $2,800 for family coverage.

The HDHP must have maximum annual out-of-pocket expenses that do not exceed $7,000 for self-only coverage or $14,000 for family coverage for 2021 and $7,050 for self-only coverage or $14,100 for family coverage for 2022. Out-of-pocket expenses include deductibles and co-payments, but not premiums.

You can’t contribute to an HSA once you enroll in Medicare, but you can continue to use the funds in the account.

What investment vehicle should I invest in first?

If you are employed and your employer offers a contribution match on a 401(k) or a 403(b), these are the plans to take advantage of first. Employer matches are essentially free money invested on your behalf, so contribute to those before moving on to other tax-advantaged accounts like a Roth or a traditional IRA.

Can I use Health Savings Account (HSA) funds for any purpose in retirement?

Health Savings Account (HSA) funds are specifically earmarked for healthcare costs, even in retirement. You can withdraw the funds for other uses, but you will incur taxes.

Can I have both a 401(k) and an individual retirement account (IRA)?

Yes. Employer-sponsored plans like a 401(k) or a 403(b) count as a direct contribution plan. An individual retirement plan (IRA) is a tool that you can use to increase your retirement savings in addition to employer-sponsored plans.

The Bottom Line

You have many options to choose from after you’ve maxed out your Roth IRA. But how much you can save may be limited by the amount and type of income you have earned and your contributions to other accounts. To be safe, it’s often worth checking with a tax professional.

Article Sources

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  2. Internal Revenue Service. “Income Ranges for Determining IRA Eligibility Change for 2021.”

  3. Internal Revenue Service. “IRS Announces 401(k) Limit Increases to $20,500.”

  4. Internal Revenue Service. “Traditional and Roth IRAs.”

  5. Internal Revenue Service. “How Much Can I Contribute to My Self-Employed SEP Plan If I Participate in My Employer’s SIMPLE IRA Plan?

  6. Internal Revenue Service. “Simplified Employee Pension Plan (SEP).”

  7. Internal Revenue Service. “SIMPLE IRA Tips for the Sole Proprietor.”

  8. Internal Revenue Service. “SIMPLE IRA Plan.”

  9. U.S. Congress. “H.R.1865 — Further Consolidated Appropriations Act, 2020: Division O: Sections 104–105.”

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  11. Investor.gov, U.S. Securities and Exchange Commission. “Annuities.”

  12. Internal Revenue Service. “Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans,” Pages 2–3.

  13. Internal Revenue Service. “Rev. Proc. 2020-32,” Page 1.

  14. Internal Revenue Service. “Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans,” Pages 5–6.

  15. Internal Revenue Service. “Rev. Proc. 2021-25.”

  16. Internal Revenue Service. “Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans,” Page 7.

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