Where to Put Extra Savings After You've Maxed Out Your 401(k)
Your 401(k) is one of the best tools you have at your disposal for retirement savings because of tax benefits and potential company matches.
Most people won’t max out their 401(k) in a year. Most people can contribute a maximum of $19,500 to the account annually.
However, if you can max out your contributions, you’ll need some other way to save.
It’s a good problem.
Find out about all the additional options that you can use to push your savings, whether to boost retirement funds, invest more, or to crank up your general savings.
Individual Retirement Accounts (IRAs)
If you want to keep saving money for retirement, you can put your extra cash in an individual retirement account (IRA).
IRAs are similar to 401(k)s. You can contribute a limited amount each year and enjoy tax benefits.
The two most common types of IRAs are:
- traditional IRAs
- Roth IRAs
Traditional IRAs work like 401(k)s.
You can deduct any money you contribute from your income when you file your taxes. This reduces your income tax bill in the current year.
When you withdraw from the account, you pay income tax on the amount withdrawn.
Roth IRAs reverse these benefits.
You pay taxes as normal when putting money in the account. When you withdraw from the account, you pay no taxes.
That means that your investments can grow tax-free.
As a bonus, you can withdraw your contributions to a Roth IRA at any time without paying a penalty.
If you withdraw from a traditional 401(k) or IRA before turning 59 1/2, you pay a 10% penalty.
IRAs also give you far more flexibility to choose your investments.
With a 401(k), you have to choose investments from a list offered by your employer’s 401(k) plan administrator.
You can open an IRA at almost any brokerage and choose your own investments.
You can trade options, buy individual stocks, and even hold real estate in an IRA if you want to.
Keep in mind:
If you earn too much money, you may lose out on some of the tax benefits or be barred from contributing to the account.
What makes SEP IRA better than a regular IRA is that you can contribute to a SEP IRA as both your employer and an employee.
The limit for employee contributions to a SEP IRA is shared with regular IRAs and caps out at $6,000.
Employee contributions have a much higher limit: the lesser of 20% of your self-employed income or $57,000.
If you freelance, drive for a ride share company, or otherwise earn money outside of a regular job, you can call yourself self-employed and open a SEP IRA, making these a valuable savings tool for many people.
Health Savings Accounts (HSAs)
You can open an HSA as part of your health plan and must have a high deductible health plan to be eligible.
HSAs offer significant tax incentive for saving. The money you contribute to an HSA goes into the account pre-tax.
You can deduct contributions from your income to lower your tax bill.
If you use money in the account for a medical expense, you can withdraw it tax-free. It’s like combining the perks of a traditional and a Roth IRA in one account.
Of course, saving for medical expenses has other benefits.
For example, you get into an accident you can use your savings to pay your medical bills instead of borrowing money and paying interest.
If you don’t need the money for medical costs, the good news is that your contributions aren’t locked in the account.
Once you turn 65, you can withdraw from your HSA for non-medical expenses. If you do this, you will have to pay taxes on the money you withdraw, making the account work very similarly to a traditional IRA.
Most HSAs will put your money in a savings account by default, but you might be able to save your money to invest in stocks, bonds, and mutual funds. Talk to your HSA provider about your options.
Taxable Brokerage Accounts
If you want to keep investing after you’ve maxed out your retirement accounts, a taxable brokerage account is one of the best places to do it.
There are many financial services companies that offer brokerage accounts and each has benefits and drawbacks.
Some are very basic but don’t charge any fees or commissions, making it easy to trade frequently. Others are more expensive but offer powerful research tools.
The benefit of taxable brokerage is that you can add and withdraw money whenever you’d like.
There are no contribution maximums or tax penalties for early withdrawal.
The downside is that you have to pay taxes on any money you earn in a taxable brokerage account.
When you have money in a 401(k) and a taxable brokerage account there are different strategies that you can use to minimize your tax burden.
Generally, you’ll want to use tax-advantaged retirement accounts to hold investments that produce dividends or other taxable income.
Consider a robo-advisor
If you don’t want to have to manage your own investments, you might consider using a robo-advisor for your taxable brokerage accounts.
With most robo-advisors, you answer a few questions to tell the software about your goals and risk tolerance.
Then, all you have to do is deposit money to the account. The robo-advisor manages your investments for you, rebalancing your portfolio and maintaining a mix of stocks and bonds based on your investment needs.
A perk of using a robo-advisor for taxable investments is that most of them offer tax-loss harvesting. This service can help you reduce the tax burden of your investments and help you save money.
Usually, robo-advisors charge a fee for the service, typically a percentage of the amount you’ve invested. It can be hard to know whether the service is worth the cost.
Certificates of Deposit (CDs)
A certificate of deposit (CD) is a type of bank account designed for long-term savers
When you put money in a CD, you have to commit to keeping the money in the account for a set period of time.
You must leave the money in the CD for the full term. If you try to withdraw your money before the term ends, you’ll need to pay an early withdrawal penalty.
In exchange for the commitment that opening a CD requires, banks usually offer higher rates on CDs than they do for savings accounts.
CDs are useful if your saving money for a specific date. You can plan things so that the CD’s term ends right when you need the money.
This has the dual benefit of making it hard for you to spend the cash on something else and maximizing the interest that you earn.
Don’t discount the value of stashing extra money in a savings account.
Everyone should have an emergency fund of at least a few months’ expenses and a savings account is the best place to keep your emergency fund.
Usually, online savings accounts will be your best bets. They rarely charge monthly fees and offer market-leading interest rates.
Having access to cash in a pinch can save you from borrowing money or going into credit card card debt if you encounter a financial emergency.
When the 401(k) is maxed out, a high-yield savings account is still a great option for low-risk savings growth.
If you can max out your 401(k) you’re already doing pretty well financially.
If you have more money left to save, you have a lot of options available to you.
Knowing the best way to save that extra money can only help you in the long-term.