Once you’ve maxed out your 401(k) for the year, what comes next? If you’re looking for ways to save outside your retirement plan, most individuals have three options: IRA, Roth IRA, and brokerage account.
Individual Retirement Account (IRA)
Contributing to an IRA in addition to your 401(k) is one option. Both Roth IRA and traditional IRA will grow tax-free until you retire just like it does in a 401(k). However, this option can be tricky since earning too much can prevent you from maximizing this option.
The Roth IRA is one of my favorite investment accounts. With the Roth IRA, you make contributions with after-tax dollars and your money grows tax-free over time.
For 2022, phase-out limits for Roth IRAs are as follows:
- Single taxpayers and heads of household: $129,000 to $144,000
- Married, filing jointly: $204,000 to $214,000
- Married, filing separately: $0 to $10,000
The Roth IRA even lets you withdraw your contributions (but not earnings) without any penalties. For more information on Roth IRAs, check out 6 Hidden Benefits of Roth IRAs.
With a traditional IRA, you get the benefit of a tax deduction on the contribution you make, and you don’t pay any taxes on the money until you make withdrawals in retirement.
For 2022, phase-out limits for traditional IRAs are as follows:
- Single taxpayers covered by a workplace retirement plan: $68,000 to $78,000
- Married couples filing jointly when the spouse making the IRA contribution is covered by a workplace retirement plan: $109,000 to $129,000
- A taxpayer not covered by a workplace retirement plan married to someone who’s covered is making the contribution: $204,000 to $214,000
- $0 to $10,000 – Married filing a separate return and covered by a workplace retirement plan: $0 to $10,000.
The max contribution for an IRA is $6,000 ($7,000 if age 50 or older). The IRA limits apply to your combined traditional and Roth IRA contributions.
Health Savings Account (HSA)
Health Savings Accounts are designed to help you save for medical care, but they can also double as a retirement account. This type of account is available for individuals who have a high deductible health plan, or HDHP.
For 2022, the IRS defines a high deductible health plan as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family. An HDHP’s total yearly out-of-pocket expenses (including deductibles, copayments, and coinsurance) can’t be more than $7,050 for an individual or $14,100 for a family. (Source: Heatlhcare.gov)
An HSA is the most tax friendly account available. Your contributions reduce your taxable income, investments grow tax-free, and qualified withdrawals (used for medical expenses) are tax-free.
Once you’re 65, your HSA is treated like a traditional IRA if you withdraw money for non-medical expenses.
The max contribution for an individual is $3,650, and $7,300 for a family in 2022.
Once you have used up all your tax-advantaged investment options, look to a taxable brokerage account.
While you won’t save on taxes here, this account offers the most flexibility.
For one thing, you are not restricted by contribution or income limits. You also don’t have to worry about penalties when taking money out. You can access your cash whenever, no matter the reason.
A brokerage account can be a great financial tool if you’re planning to retire early.
Don’t think you have to stop saving once you hit your 401(k) limit for the year. Diligent savers have other retirement savings options at their disposal. For individuals or families with a high income and ability to save, a brokerage account is probably the best way to save after maxing out your 401(k).
Sources and Disclaimers:
The maximum amount you can contribute to a 401(k) is $20,500 for 2022. If you are 50 or older you can add an additional catch-up contribution for $6,500. In other words, if you’re 50 or older, your maximum total 401(k) contributions are $27,000 for 2022.
High Deductible Health Plan information from HealthCare.Gov
These steps assume you already have an emergency fund established and have paid down high interest debt (5% or more).
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