You may have been leveraging a 401(k) plan for quite some time—using employer matches, tax advantages and automatic withdrawals to save money for retirement. It's a smooth process—until you reach the annual limit on 401(k) contributions. Then you may wonder what to do after maxing out your 401(k).
The good news is you still have plenty of investment options to make the most of your money. A variety of strategies can help you prepare for your retirement goals, including the legacy you want to leave, while keeping your tax bill manageable. Let's take a look.
Where to invest after maxing out a 401(k)
Deciding what to do after maxing out your 401(k) involves learning what each kind of investment can do for you, your family and the causes that matter to you. Each one has the potential to bring you closer to a particular goal for your life and your finances.
1. Invest in your IRA—or your spouse's
Individual retirement accounts (IRAs) offer tax advantages either now or at retirement, and their benefits are separate from the contribution limits associated with an employer-provided 401(k). If you want to withdraw your money generally without incurring additional taxes, a Roth IRA might be the right fit. Or, if you want to reduce your tax burden during the year you contribute money, a traditional IRA might fill the bill. Other options exist for business owners, like Simplified Employee Pension (SEP) IRAs—making an IRA a valuable additional savings and investment vehicle. Just be aware that many IRAs have much lower yearly contribution limits than 401(k) accounts.
2. Fund your health savings account
Interested in a high-deductible health plan (HDHP)? Enrolling in one also gives you access to a health savings account (HSA)—including its tax savings and investment potential. These accounts are considered triple-advantaged accounts because you can deposit money tax-free, spend it on health expenses tax-free and—if you still have a balance after age 65—turn it into a tax-free retirement account that can be spent beyond health care.
3. Max out your spouse's 401(k), too
If your spouse hasn't yet maxed out their 401(k), it may be helpful to rebalance your household budget so that they also may be able to do so. By maxing out both your 401(k)s, you'll grow your overall wealth as a family for retirement and other future goals. Working as a team within your family can help you grow closer together while watching your investments develop.
4. Fund permanent life insurance or extended care insurance
Children and grandchildren often worry about the mounting costs of health care and long-term care for their loved ones. One way you can ease everyone's mind is to put some protection in place for such future expenses.
Extended care insurance can potentially lift many financial pressures and help you access long-term care if an ongoing health concern arises. Permanent life insurance offers a variety of benefits, including the ability to accumulate cash value during your lifetime, as well as contributing to the legacy you leave to the people and causes that matter to you.
What should your retirement savings focus be?
Help prioritize your retirement savings goals by exploring tailored advice for your age.
Save for retirement in your 30s, 40s, 50s and 60s 5. Boost your emergency fund
If you've contributed automatically to your 401(k) for years, you might have accidentally prioritized the future over the potential for present-day challenges. Putting money in a high-yield savings account or short-term certificate of deposit can be an easily accessible way to pay for medical costs, home repairs or other urgent and unexpected needs that might otherwise put your family into debt. Being prepared for these moments with an emergency fund may help reduce your money worries.
6. Fund your deferred annuity
Deferred annuities are savings vehicles that you fund ahead of time to pay out as reliable income during retirement. If you've already maxed out a 401(k) and are in the decade or so before retirement, deferred annuities can provide a separate stream of income and bring valuable predictability to your plan for meeting day-to-day needs during retirement.
7. Contribute to a 529 account or other education savings
Depending on the state where you choose to open one, a 529 account may reduce your state tax burden. These accounts, specifically designed to be spent on education expenses, offer one way for parents and grandparents to help the next generation of their family pursue higher education and begin a meaningful career. These savings can be very rewarding emotionally in addition to potentially providing tax benefits in the here and now.
8. Invest through traditional brokerage accounts
If you have used your tax-advantaged methods of investing for the future or if you anticipate major expenses before retirement, a brokerage account that allows you to invest in mutual funds, stocks and bonds can be a valuable tool. These accounts are subject to taxes on a yearly basis from interest, dividends and capital gains. But in return, they benefit from the growth potential of the stock and bond market. You also can liquidate them quickly to make necessary purchases using that cash.
Financial advisors help your savings fit your values and goals
When you work with a Thrivent financial advisor, you won't have to wonder where to invest after maxing out your 401(k). By getting to know you and what matters to you and your family, your advisor will help you discover investment vehicles that fit your goals—whether that involves a smart tax strategy for today or helping a child or grandchild graduate debt-free from college in the years ahead.
