While this may sound counterintuitive, saving and investing for high-income earners is no easy task. Sure, you might earn a hefty income, but what is the best way to invest it to prepare for a successful retirement? Maxing out 401k is a great start, but there are more strategies to consider once you’ve reached this milestone.
401(k)s tend to be one of the most popular savings tools for several reasons. Not only do they typically come with employer matching when offered through work, but they are also tax-advantaged. Contributions made to 401(k)s grow tax-deferred and are tax-deductible if you make a pre-tax election. In some cases, your employer may offer a Roth 401(k), in which your contributions would not be deductible and taxed upon withdrawing money.
However, contribution limits on these accounts may make them insufficient retirement savings vehicles for high-income earners. The challenge, then, is deciding what to do after maxing out 401k and Roth IRA to minimize your investment taxes over time and maximize savings potential.
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Should You Max Out Your 401(k)?
For many, the answer is a resounding yes. Maxing 401k contributions takes full advantage of tax-deferred growth, employer matching, and the opportunity to build a solid retirement nest egg. How to max out 401k involves understanding your contribution limits and making sure you’re setting aside enough each month to reach those limits. However, it’s also important to know what steps to take once you’ve achieved this.
Mind Your Taxes After Maxing Out 401(k)
One way to prioritize savings vehicles is based on your current and future tax liabilities. Keep a long-term view in mind; sometimes, it may be best to prioritize tax savings upfront, while other tax breaks will be more beneficial in the future.
Each account typically falls into one of three categories:
1. Taxable (bank accounts or brokerage accounts)
2. Tax-deferred (such as traditional IRAs or 401(k)s and other employer plans)
3. Tax-free (from Roth IRAs or Roth employer plans)
It’s usually best to spread your tax liability over your lifetime, rather than becoming “tax-deferred rich” and facing the entire bill in retirement. Once you’ve maxed out your 401(k), consider the following savings vehicles for their specific perks and tax advantaged opportunities.
Exploring Other Tax-Advantaged Accounts
Beyond your 401(k), other tax advantaged accounts can provide significant benefits. For example, Health Savings Accounts (HSAs) offer triple tax advantages: contributions are made pre-tax, the money grows tax-free, and withdrawals for qualified medical expenses are also tax-free. These accounts can be powerful tools for those with high-deductible health plans.
Health Savings Accounts (HSAs)
Health Savings Accounts (HSAs) are championed for their triple tax advantage. You can fund this account with pre-tax dollars, allowing for tax-free growth and tax-free withdrawals when spent on qualifying medical expenses. Because account holders are not required to withdraw funds at the end of each year, these accounts can double as a retirement savings tool.
Unfortunately, HSAs are only available to individuals with high-deductible health insurance plans, whether accessed through employers or purchased independently. For those wondering what to do after maxing out 401k and Roth IRA, HSAs present a valuable opportunity to continue tax-efficient saving.
IRAs and Roth IRAs
Traditional IRAs and Roth IRAs both offer tax savings, but they differ in when that saving is realized. Traditional IRAs use pre-tax money for contributions, allow for tax-deferred growth, and are taxed upon withdrawal in retirement. Roth IRAs, on the other hand, are funded with post-tax dollars (meaning there is no tax break on contributions), but they offer tax-free withdrawals in retirement.
Roth IRAs are particularly attractive because there are no required minimum distributions (RMDs). This means you don’t have to withdraw your money if you don’t want to, making them excellent for estate planning. In contrast, holders of pre-tax savings tools must begin taking RMDs from their accounts at age 72, whether they need the income or not, which can complicate tax planning.
Even though high-income earners may face regulatory income caps on Roth-style accounts, many will be eligible for Roth IRA conversions throughout their lives, taking advantage of tax-free growth and distributions. Knowing how these accounts fit into your plan after maxing out 401k is key to optimizing your retirement strategy.
Utilizing Taxable Brokerage Accounts
Taxable brokerage accounts are also available and can be an excellent supplement to retirement savings for various reasons. While they are taxable, with careful planning, investment taxes can be managed effectively. Additionally, capital gains and dividends are typically taxed at lower rates, enhancing the appeal of these accounts. They offer the most flexibility, with no income caps, contribution limits, or required minimum distributions. For those considering how to continue saving after maxing out 401k, these accounts provide flexibility and investment options.
Having a brokerage account allows for relatively easy access to funds in emergencies and helps prevent keeping excess cash in low-yield savings accounts. However, these accounts should not replace a robust emergency fund, as selling securities is a taxable event and could increase your capital gains liability.
Timing Your Contributions: Max Out 401(k) Early in the Year
One strategy some investors use is to max out 401k early in the year. By doing this, you can take advantage of the market’s growth potential throughout the rest of the year and possibly avoid missing out on employer matching contributions if your employer contributes on a per-pay-period basis. This tactic allows you to front-load your retirement savings and potentially maximize returns
Conclusion: Ready to Prioritize Your Retirement Savings?
The longevity of your portfolio depends on your ability to time withdrawals from each account properly, limiting your long-term tax liability. Generally, it’s best to start depleting taxable assets before tapping into tax-deferred accounts. This strategy allows your tax-sheltered accounts to grow longer and reduces the total taxes paid.
If you’re maxing out your 401(k) and looking for the next steps, understanding the benefits of tax advantaged accounts, taxable brokerage options, and HSAs can provide a comprehensive strategy for long-term wealth building.
Ready to prioritize your retirement savings? Call us today to schedule an introductory phone call. We can help you decide which savings vehicles will make the most financial sense for you.
