Maxed Out Your Work Retirement Plan? We Can Help!

Maxed Out Your Work Retirement Plan? We Can Help!

November 19, 2020

If you have already reached your retirement plan contributions limit for the year (or will soon), congratulations, that is a great problem to have!

Let’s First Look at IRAs

Contributing to an IRA, in addition to your retirement plan, is one potential option. You might also still be able to contribute to a Roth IRA, if within earning limits. Your contribution will not be tax-deductible but when you start taking distributions at retirement, all the money will be tax-free.

Note:  If you withdraw money from a traditional IRA before age 59½, your deductible contributions and earnings will be taxed as ordinary income. You may take nontaxable withdrawals before age 59½ if the Roth IRA is held for at least five years and you meet certain distribution guidelines.  Otherwise, an early withdrawal before age 59 ½ may be subject to taxes. You may also be subject to a 10% penalty on early withdrawals. Please discuss with your tax advisor prior to making financial decisions.

Now Let’s Look at Strategic Investments

Let’s say you have already maxed out your IRA options as well – or you have decided that you would rather invest your extra savings a different way.

Brokerage Accounts with:

  • Individual Holdings: Another strategy is to buy individual holdings – such as stocks or bonds. As you hold those investments, you do not have to pay tax on the gains until you liquidate or sell those holdings.
  • Municipal Bonds: a municipal bond is a security sold by a town, city, state, county or other local authority to finance projects for the good of the public. The purchaser essentially lends the purchase price to the government entity in return for a specified opportunity to sell them or to hold them to maturity and collect your principal back. One nice thing about a municipal bond is that the interest income earned along the way is exempt from federal taxes and in some instances from state and local taxes.

Note:  There is always a risk when investing in stocks, including the potential to lose principal. Generally, the greater the risk, the greater the potential reward. You should determine your risk tolerance and financial goals before deciding to invest. Municipal bonds may be subject to alternative minimum tax and state and local taxes. Investing in tax-free bonds may not be appropriate for investors in all tax brackets.

Other Options:

  • Variable Annuities: A variable annuity is a contract between the purchaser and an insurance company. The purchaser makes either a single payment or a series of payments, and the insurer agrees to make periodic payments to the purchaser. Those payments can start immediately or in the future. A variable annuity allows the investor to allocate portions of the funds to different asset options, such as stocks, bonds and mutual funds. While a minimum return is usually guaranteed, the payments fluctuate, depending on the portfolio’s performance. All guarantees are based on the financial strength and claims paying ability of the issuing insurance company.

Note:  Variable annuities are sold by prospectus. Variable annuities contain fees including, but not limited to, mortality and expense risk charges, sales and surrender (early withdrawal) charges, administrative fees and charges for optional benefits and riders. You should consider the investment objectives, risk, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity and the underlying investment choices, can be obtained from the insurance company issuing the variable annuity or from your financial professional. You should read the prospectus carefully before you invest. 

  • HSAs: For those willing to risk a high-deductible health plan, another option is to fund a health savings account. If you qualify, there are potentially more tax benefits for those contributions than a 401(k) might have. There is also no earned-income phase out for contributions. HSAs have many benefits including income deferral, tax-free distributions & deductibility

  • FSAs: A FSA, also known as a flexible spending accounts, is a special account you put money into that you can later use for qualified expenses. You do not pay taxes on this money. This means you can save an amount equal to the taxes you would have paid on the money you set aside.

There are two types of FSAs:

  • A Health Care FSA can cover medical, dental or vision expenses that you would otherwise pay for out of pocket.
  • A Dependent Care FSA— also known as a Dependent Care Assistance Program (DCAP) — covers employment-related expenses for childcare.

At the End of the Day

All these investment options come with varying degrees of complexity, liquidity/illiquidity and risk. But they illustrate that there are many tax-advantage ways to save for retirement after the 401(k). As you can see, there are many ways to max out your savings! We would love to chat with you about all the options to pursue your goals! Give us a call anytime.

This is meant for educational purposes only.  It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with the appropriate financial professionals regarding your personal situation prior to making any financial related decisions.  (11/20)