Where to Invest After Maxing Out Both Roth IRA and 401k?

maxing out your Roth IRA

Not sure what to do after maxing out your Roth IRA? Well done on making smart moves for your financial future! Even though you’ve hit the limit for your Roth IRA contributions, there are still many other ways to keep growing your money.

How is a Roth IRA different from a 401k?

When it comes to saving for retirement, Roth IRAs and 401k plans have some important differences: 

  • Tax Treatment: With a Roth IRA, you put money in after paying taxes on it, so when you withdraw it in retirement, you don’t owe taxes on it. However, with a 401k, the money you contribute is generally deducted from your salary before taxes. This means you must pay taxes on it when you withdraw it in retirement.
  • Contribution Limits: Roth IRA limits for 2024 are $7,000 for folks under 50 and $7,500 for those 50 and older. Meanwhile, 401k limits are much higher: $23,000 for those under 50s and $30,500 for those 50 and up. This means you can stash away more money each year in a 401k compared to a Roth IRA.
  • Employer Match: Lots of employers add money to your 401k when you contribute, which is like getting free cash for retirement. But Roth IRAs are funded only by you, so they don’t come with any employer match.
  • Investment Options: Roth IRAs usually offer more investment choices than 401k plans, which might only have a few options picked by your employer. With a Roth IRA, you have more say in where your money goes, with options like stocks, bonds, mutual funds, and more.
  • Tax Treatment in Retirement: When you take money out of a Roth IRA in retirement, you don’t owe taxes on it if you’ve had the account for at least five years and you’re at least 59½ years old. However, withdrawals from a traditional 401k are taxed as regular income in retirement, which could mean paying more taxes depending on your tax bracket and other income sources.

How do you max out your Roth IRA and 401k?

When you max out your Roth IRA and 401k, it means you’re putting in the most money allowed by the IRS rules. In 2024, the most you can put into a Roth IRA is $7,000 if you’re under 50, or $7,500 if you’re 50 or older. For a 401k, the limits are higher: $23,000 if you’re under 50, or $30,500 if you’re 50 or older. With a Roth IRA, you pay taxes on the money before you put it in, but with a 401k, you usually pay taxes later.

Where can you invest next after maxing Out a Roth IRA and 401k?

Once you’ve maxed out both your Roth IRA and 401k, there are still more retirement accounts to explore. Here are some of them:

  1. Taxable Brokerage Accounts: These accounts offer flexibility with no contribution limits. While you use after-tax dollars for contributions, you can benefit from lower long-term capital gains taxes if you hold investments for over a year. They’re great for growing your wealth beyond retirement savings.
  2. Health Savings Accounts (HSAs): HSAs come with triple tax benefits. Contributions are tax-deductible, investment growth is tax-free, and withdrawals for medical expenses are tax-free too. After age 65, you can withdraw from HSAs penalty-free for non-medical expenses, but you’ll still need to pay income tax.
  3. Real Estate Investments: Investing in real estate can diversify your portfolio and offer rental income or property appreciation. However, it requires thorough research, management, and upfront capital. Location, property type, and market trends should be carefully considered for informed decisions.
  4. Annuities: Annuities provide a guaranteed income stream in retirement, giving financial security. They offer regular payouts for a set period or even for life. But be cautious of high fees and limited access to your money. Despite the drawbacks, annuities can bring stability to your retirement finances.

Is it a good idea to max out Roth IRA and 401k?

Maxing out both your Roth IRA and 401k can be a savvy money move, bringing several perks to your retirement savings game. Here’s why it’s often seen as a smart idea:

Mixing up your taxes

One cool thing about maxing out both a Roth IRA and a 401k is that it gives you a mix of tax flavors. With a Roth IRA, you pay taxes before you put the money in, but when you take it out in retirement, it’s all tax-free—including any money you made from investing. For a regular 401k, you put in money before taxes, so it lowers what you owe on this year’s taxes.

In retirement, when you take out money from a regular 401k, you’ll owe taxes on it like regular income. But because it’s based on your income at the time, you might pay less in taxes overall. Having both kinds of accounts lets you decide where to take money from in retirement, which could lower your tax bill.

Employer matching contributions

Lots of companies match what you put into your 401k, which is basically free money for your retirement savings. By maxing out your 401k and grabbing that full match, you’re boosting your retirement savings big time without putting in any extra work.

Flexible retirement cash flow

Maxing out both a Roth IRA and a 401k gives you more choices for how you get money in retirement. With a Roth IRA, you can take out what you put in whenever you need it without any penalties, giving you tax-free cash if things get tight. Plus, you don’t have to start taking money out at a certain age, so you’re more in control.

But with a regular 401k, you have to start taking money out once you hit a certain age, which limits your options for managing your retirement cash. Having both types of accounts lets you decide when and how much to withdraw, giving you more flexibility while keeping your taxes in check.

Calling the shots on your investments

Roth IRAs usually offer more investment options than 401k plans, which means you have more say in where your money goes. With a Roth IRA, you can pick from lots of different things to invest in, like stocks, bonds, or mutual funds. This gives you the power to build a mix of investments that matches what you’re comfortable with and what you’re saving for. Having this flexibility can be super helpful if you like to be hands-on with your investments or if you want to invest in specific things that aren’t available in your 401k plan.

Know what to do next after maxing Roth IRA

Once you’ve topped up your Roth IRA, it’s time to keep your money working smartly for you. Explore various investment options, chat with a financial advisor, and stay up-to-date on what’s happening in the market.

Maxing out your Roth IRA is awesome, but it’s just one piece of your financial puzzle. To keep building wealth and securing your future, check out different ways to invest like taxable brokerage accounts, health savings accounts, real estate, and annuities. Before diving in, make sure you understand your goals, how much risk you’re comfortable with, and where you stand financially. By planning carefully and making smart investment choices, you can boost your financial situation and reach your long-term dreams.

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