What to Do if You Max Out Your 401(k)


If you are maxing out contributions on your 401(k), you’re on a great path toward a comfortable retirement. This is an awesome feeling, but it may also leave you feeling a little lost about the best way to continue saving. So, which accounts should you turn to once you can no longer contribute to your 401(k)?

If you are maxing out contributions on your 401(k), you’re on a great path toward a comfortable retirement. This is an awesome feeling, but it may also leave you feeling a little lost about the best way to continue saving.The first thing to do is ensure that you have actually maxed out your 401(k). That may seem obvious, but the regulations do change from year to year. The contribution limit in 2015 is $18,000, which is $500 more than in 2014. It is important to note that some workers earn too much to contribute up to this maximum.

Another thing to consider is your age. If you are age 50 or older, you can make catch-up contributions. For 2015, workers in this age group can contribute $6,000 more than younger workers can, giving them a contribution limit of $24,000.

“Older workers need to save $2,000 per month or $1,000 per [bi-weekly] paycheck to take maximum advantage of their 401(k) account,” says Emily Brandon, senior editor for retirement at U.S. News. “Older workers who manage to max out their 401(k) will reduce their income tax bill by $6,000.”

If you are saving for retirement while saving for your child’s college education, you should consider investing in a taxable account after you’ve reached the contribution limit on your 401(k).

“If you come up short while your child is in college, you can tap your taxable account without paying income taxes and early-withdrawal penalties,” says Sandra Block from Kiplinger’s Personal Finance.

Many investment experts suggest that this is the ideal next step for workers at the limit of their 401(k), regardless of whether they are also saving for college. So, it is a strategy that is definitely worth discussing with your financial planner.

When saving in a taxable account, you can keep the taxes lower by using a combination of tax-efficient investments like those that qualify for long-term capital gains rates, such as stock index funds. Investing in tax-free municipal bonds will also help keep the overall taxes down for the account.

“The most tax-efficient—that is, the lowest-taxed—stock investments are individual stocks that you buy and hold rather than actively trade. That’s because you get taxed on the dividends (if any) every year, but you don’t get taxed on the capital gains until you sell,” states CNN Money’s Ultimate Guide to Retirement.

If you are still looking for other savings options aside from taxable accounts, consider nondeductible IRAs. Withdrawals are taxed as income and not at long-term capital gains rates (which are lower). So, they are better for people with long-term investment plans, such as those saving for retirement, than for people looking for short-term investments.

“Unlike [with] a deductible IRA, anyone with earned income from a job or self-employment can open one,” says Bill Bischoff from MarketWatch. “And since these accounts grow tax deferred, if you have a long investment horizon, the tax savings can be significant.”

In 2015, the contribution limit for nondeductible IRAs is $5,500 for people under 50 and $6,500 for workers who will be age 50 or older at the end of the year. Stop by today to find out more or to speak with one of our retirement specialists.

 

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