With the end of the year quickly coming up, you may be close to maxing out your retirement contributions. In 2014, individuals can save $17,500 in a 401(k) – and if they’re over 50 years old an additional $5,500 – for a total of $23,000. You can also contribute up to $5,500 to an IRA in 2014, which increases to $6,500 if you are age 50 or older.
If you’ve reached these limits, it doesn’t mean you should stop saving. On the contrary, it’s an opportunity to build up other savings areas that you may not have paid much attention to.
Here are four things to consider and places that offer retirement investment options once you’ve reached your yearly tax-deductible retirement savings limits. Take a close look at your financial plan and the retirement investment options you’ll need to retire in the manner you’ve anticipated. Talk to your financial advisor about various strategies to make the most of your savings to achieve your specific goals.
1. Consider Certificates of Deposit
A CD is a low-risk, fixed interest rate bank deposit account that increases the interest rate the longer the term of the CD. If you are looking for a dependable return on your money, but don’t need to tap into your money for a length of time, a CD may be a good savings option.
As with any investment, it’s key to decide if a CD fits your particular needs. A CD can be a great way to fund short-term needs, such as a down payment on a house or purchasing a new car. CDs can also be used to build funds for longer-term goals like retirement or college tuition.
Before you lock your money into a CD for any period of time, you’ll want to consider the fees and penalties associated with liquidating the CD prior to the maturity date.
If your purpose is to save for a short-term goal, then a 12-month CD will most likely earn more interest than simply sitting in a checking or savings account, but you can quickly cash it in when you need it without penalties.
For longer-term goals like saving for a big vacation or making future home renovations, you may want to put your money in 2-year or 5-year CD to maximize your interest and grow your savings.
Finally, as part of your retirement savings strategy, you may consider a longer term CD such as a 7-year CD or a 10-year IRA retirement CD. These offer the highest interest rates.
One way to combat interest rate risk is to consider laddering CDs. For example, to build a five-year ladder, you would buy a one-year CD, two-year CD, three-year CD, and so on until you have a total of five CDs in your basket. Each year, when one of your CDs matures, you reinvest it at the end of your ladder. A laddering strategy can help diversify your holdings and increase current income.
Take a look at the latest CD rates below.
2. Contribute to a nondeductible IRA
Unlike Roth or 401(k), a nondeductible IRA does not have any earnings limits. You can make an after-tax $5,500 contribution and then be taxed what you earn in investment gains. Unlike other retirement accounts, you can take money out without penalties. However, you will be taxed at ordinary rates as high as 35 percent.
A taxable account is also a good retirement investment option to diversify your investments using exchange-traded funds. These invest in commodities which generate few capital gains — meaning lower taxes when you eventually sell your investments.
3. Contribute to a SEP plan
A Simplified Employee Pension (SEP) plan can be a great source of income during retirement. Because this plan doesn’t have the start-up and operating costs of a conventional retirement plan, it allows for a contribution of up to 25 percent of each employee’s pay. And since many people work for themselves or run businesses outside their regular full-time jobs, it would be beneficial to maximize your retirement savings with any extra funds from your business and contribute to this type of plan.
4. Put money away in a 529 plan
You can save after-tax dollars for your kids or nephews, nieces or grandchildren or friends’ kids in a 529 plan. The funds can be used for tuition for both undergraduate and graduate school, books and other qualified educational expenses.
There are many financial vehicles to park your investments after you’ve maximized your retirement savings, so carefully consider what type of investment makes the most sense for you and your lifestyle. Remember, this is a great situation to be in, and if you’ve already maxed out your retirement contributions for the year, you are certainly on the right track!