If you have maxed out your 401(k) contributions (voluntary pre-tax deferrals of $18,000 or $24,000 if you are 50 or older by year end) and want to save more for your retirement, here are five more ways to save after maxing your 401(k).
On Investopedia recently, an investor asked ‘How can I save if I already maxed out my 401(k) and IRA?’
If you have the cash flow and desire, you can supplement this savings through other options.
You can contribute up to $5,500 per year (or $6,500 if over age 50). Your account will grow tax-deferred but you won’t receive a current year tax deduction for your contribution. When you do start making withdrawals, you’ll be subject to ordinary income tax rates prevailing at the time. These may be higher than the current maximum federal rate on long-term capital gains and qualified dividends (15% or 20%) which is why this option makes the most sense if you have more than a few years until retirement withdrawals.
This is probably the best and first option to consider. You can contribute up to $5,500 per year (or $6,500 if over age 50). Unlike traditional IRAs or 401(k) plans, you will not be required to take minimum distributions. This means that your investment can have a longer opportunity to grow. While there are income limitations to qualify for this option (modified adjusted gross income less than $132,000 for single filers or $194,000 if married filing jointly), there are loopholes to do a ‘backdoor Roth’ that you can use.
Low-Cost Fixed or Variable Annuities:
For tax-deferred savings without the limits of IRAs or 401(k)s, you can choose to invest in variable annuities. These are offered by insurance companies. In a variable annuity, you get access to mutual-fund-like investments held within an insurance contract which is what qualifies the investment for tax-deferral. For a fixed annuity, you get a guaranteed credit rate (like a CD interest rate) and in some cases a credit rate based on a formula tied to a market index. When you do take distributions, you can set up a stream of income over a set period of time or for your lifetime. Withdrawals will be subject to income tax on the earnings portion of your payment. But a portion of each payment will be untaxed as it will be classified as a ‘return of principal’. I like and recommend low-cost variable options that are stripped of expensive riders that most people never use anyway. Look at offerings from Jefferson National (Monument series) or Ameritas Direct No-Load Annuities. For fixed annuities, I suggest calling Vanguard.
Taxable Investment Accounts:
You won’t have to worry about any limits here as you do with IRAs or 401(k)s. And you’ll have access to a broad range of investments and investment custodian platforms. Your investment gains and dividends will be subject to very favorable (current) tax rates of 15% or 20% (the latter rate applies if you are in a high-income category). This option provides you with the flexibility to access the funds for other goals besides retirement.
After-Tax Contributions to Your 401(k)
The most direct option available? Make after-tax contributions to your existing 401(k) account. The amount that you can contribute depends on your plan document and how much you’ve contributed pre-tax already. You’d have to check your 401(k) plan’s Summary Plan Document for details but all plans allow after-tax contributions. The limit changes from time to time but for 2017 the limit is $54,000 and is the total of your contributions on a pre-tax basis plus employer match or profit-sharing and after-tax contribution limits allowed under the plan. If you have a good selection of low-cost options in the plan, this may be a good place to start.
If you need help figuring out the optimal mix of options that will fit into your retirement plan or need help implementing a ‘backdoor Roth’, then give my office a call at 617-398-7494.