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There are many places to put your money after maxing out 401(k) contributions.
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You could enjoy the triple tax benefits an HSA offers.
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You could continue investing for retirement in an IRA, or switch to a taxable brokerage account.
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If you’re thinking about retiring or know someone who is, there are three quick questions causing many Americans to realize they can retire earlier than expected. take 5 minutes to learn more here
Maxing out a 401(k) can be a great way to build wealth for retirement. This workplace account allows you to make pre-tax contributions to a retirement plan and, in many cases, your contributions also entitle you to receive matching funds from your employer.
However, while most people know they should contribute to a 401(k), they aren’t necessarily certain about what to do next. If you have a maxed-out account at work and you’re trying to figure out what else to do with your money, here are some options to consider.
If you don’t already have an emergency fund in a high-yield savings account, that should be your top priority after making 401(k) contributions.
Your emergency fund should typically contain a minimum of three to six months of living expenses although you may want to put even more aside for emergencies if you are the sole breadwinner in your household, if your job isn’t very stable, or if you have concerns about your health.
An emergency fund can save you from financial disaster when things go wrong. This money can help you avoid borrowing for surprise costs, and if you get laid off or sick, it can cover your mortgage, other bills, and medical expenses. You don’t want to have to withdraw money early from your 401(k) to pay for these things, so prioritize preparing for emergencies as soon as you can.
If you are carrying debt, you may want to pay it off as a primary financial goal once you have taken care of your 401(k) contributions. However, whether you should pay it off early or not depends on the kind of debt.
If you have credit cards, medical debt, or personal loan debt at a high interest rate, then you’ll want to get serious about making extra payments to eliminate it. The ROI on paying off high-interest debt is good since you get a guaranteed return by avoiding months or years of expensive interest.
If you have lower-interest loans designed to be paid off over the long haul — like student loans or a mortgage — then early payoff may not actually be for you. These kinds of debts may have low rates and interest may even be tax deductible, depending on your income and tax filing status. It doesn’t make much sense to pay off this type of debt early when you could earn a better ROI by investing in the stock market.
A 401(k) is not the only account you can use to make tax-advantaged contributions to a retirement plan. Depending on your income, you may also be eligible to put money into a traditional or Roth IRA.
A traditional IRA offers similar tax benefits to a 401(k), but unfortunately, there are no employer-matching contributions available. The upside is that you can open your IRA with any brokerage firm that you want and you can also invest in almost anything you want. This provides much more flexibility than a 401(k), which usually limits you to a small pool of investments including mutual funds or ETFs. With an IRA, you can invest in individual stocks if you want, or even other assets like gold or crypto with the right IRA provider.
A Roth IRA is another great choice, but its tax benefits work differently. You won’t take an upfront deduction, but instead will invest with after-tax dollars and can make tax-free withdrawals in retirement. Like with a traditional IRA, though, you get a choice of where to hold your account and what to invest in.
Traditional and Roth IRAs have a combined annual contribution limit, which is much lower than the 401(k) contribution limit. However, as long as you don’t earn too much, you may want to take full advantage of the extra tax breaks these accounts offer to help you create a more secure retirement.
If you have a qualifying high-deductible health plan, you also have another great account to invest in: A Health Savings Account. HSAs can actually be one of the best accounts for retirement investing and it may be worth prioritizing these accounts even before maxing out your 401(k) once you have earned your full employer match.
HSAs are a fantastic account because you get to make contributions with pre-tax dollars, you can grow your money tax-free, and you can withdraw it tax-free for qualifying medical expenses. This triple tax break only exists with this account, as both 401(k) and IRA accounts require you to choose between saving on taxes up-front or when you make withdrawals. HSA allows you to save at both ends.
Tax-free withdrawals are available only for qualifying medical expenses, though, which isn’t a huge downside since many retirees spend a lot of money on medical care. The good news is, if it turns out you are healthy and don’t need costly medical services, you can still benefit from an HSA because you are allowed to take money out penalty-free after age 65. The distributions are just taxed at your ordinary income tax rate, so the account is essentially treated like a 401(k).
Saving for other financial goals is another good thing to do with your money — depending on where you are in life. For example, you may want to save for a home down payment if you have not bought a house yet. If you want to avoid car loans in the future, you can save up for a vehicle. You can even save up for a lavish vacation if travel is important to you.
The money you are saving for these other financial goals can go into a high-yield savings account or a Certificate of Deposit if you won’t need it for a few months to a few years. Alternatively, you may decide to save for your kids to go to college, in which case you can open up a 529 account and invest for their future.
While there’s a lot of focus on investing in accounts with tax breaks, you may also want to put some of your money into a taxable brokerage account.
These accounts don’t offer you the opportunity to take deductions for contributions or to enjoy tax-free withdrawals, but you can still invest and earn generous returns by putting your money into the market. Plus, as long as you hold assets for at least a year, you will be subject to capital gains tax, rather than ordinary income tax, when you sell those assets. That’s typically a lower tax rate, so there are still tax benefits to investing.
One big benefit of taxable brokerage accounts is that you don’t have strict rules about when you can withdraw money you have in them. If you are considering early retirement, this will be important as you can live off the interest in your taxable account while you wait to reach 59 1/2 to become eligible for penalty-free withdrawals from your 401(k) or IRA.
Finally, you can consider alternative investments like cryptocurrency, real estate, precious metals, or other assets outside of the stock market. While alternative investments often carry more risk, there is also more potential for higher earnings in some cases. A financial advisor can help you to determine what if any, alternative assets deserve a place in your portfolio.
All of these options are great ones, so consider working with an advisor to decide which makes sense based on your current financial status.
Most Americans drastically underestimate how much they need to retire and overestimate how prepared they are. But data shows that people with one habit have more than double the savings of those who don’t.
And no, it’s got nothing to do with increasing your income, savings, clipping coupons, or even cutting back on your lifestyle. It’s much more straightforward (and powerful) than any of that. Frankly, it’s shocking more people don’t adopt the habit given how easy it is.