Where do I invest after I've maxed out my IRA? 3 ways to grow your money and boost your retirement savings
For many Americans, an IRA can be an essential part of your retirement plan.
This account offers tax-deductible contributions and taxed withdrawals during retirement, thus offering upfront tax benefits.
An IRA can contain both annual contributions and money brought over from other investments. There, it will grow tax-free until you withdraw from it after exiting the workforce.
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Anyone with an earned income can open a traditional IRA account, and there’s no age limit.
However, because it’s such a formidable savings tool, the government has strict limitations on how much you can contribute each year.
In 2024, a traditional IRA maxes out at $7,000 annually for savers under the age of 50. For those over the age of 50, they can add an additional $1,000 catch-up. In addition, a Roth IRA has the same contribution limitations.
The difference between an IRA and a Roth IRA is that the latter is funded with after-tax dollars. This means you pay regular income taxes on contributions, but you can later withdraw from the account tax-free.
At the end of the day, you can’t expect that your Social Security benefits will be enough to carry you through your golden years. If you want to maintain a certain lifestyle, you’ll need additional funds stashed away — which is where an IRA can come into play.
But what happens if you’ve already hit your contribution limit for the year and you still have spare money to invest? Here are a few viable options.
Put money toward your 401(k)
If you have an employer-sponsored 401(k), you can add additional funds once you’ve maxed out your IRA for the year.
The current limits for 401(k)s are $23,000 for savers under 50, or $30,500 for those 50 and over — thanks to a $7,500 catch-up contribution option.
It also pays to contribute enough to your company’s 401(k) to claim your match in full. Vanguard reports that, in 2023, the average value of a “promised match” was 4.6% of pay.
That said, you need to be careful when you’re contributing to an IRA and 401(k) simultaneously. Although this is generally allowed, there are some rules to know about.
For example, if you have a 401(k), you're able to contribute to a traditional IRA regardless. However, whether your traditional IRA contribution is tax-deductible hinges on your income.
If your modified adjusted gross income (MAGI) is $77,000 or less as a single tax-filer or $123,000 or less as a married couple filing jointly, you can take a full deduction up to your contribution limit. Beyond these limits, that deduction phases out.
Now, you may be wondering why you'd make a non-deductible contribution to a traditional IRA when you could instead fund a Roth IRA. The answer is that Roth IRA eligibility hinges on your income. If your earned income is too high, direct contributions are off the table.
In 2024, you can make a full Roth IRA contribution if you're single with a MAGI of less than $146,000, or a joint filer with a MAGI of under $230,000. From there, your Roth IRA contributions start to phase out.
If you earn too much for a Roth IRA and have an employer-sponsored 401(k), you can contribute to a traditional IRA and convert it to a Roth. If it’s a non-deductible contribution, you won’t face taxes on the amount you move over since you never got a tax break in the first place.
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A taxable brokerage account
Another option for that additional money are taxable brokerage accounts.
Unlike retirement-specific accounts, they don’t offer tax advantages on contributions or withdrawals, however, they offer a variety of investment options.
Bonus: they give you the freedom to withdraw your money whenever you want.
With an IRA, an early withdrawal prior to age 59 ½ can result in a 10% tax penalty and is subject to being included in gross income.
Taxable brokerage accounts also don’t have contribution limits or required minimum distributions.
Therefore, if you’re using one for retirement and are holding onto your investments over a prolonged period, one tax-efficient method is to hold your investment for more than a year to avoid short-term capital gains tax rates.
An HSA
A health savings account, or HSA, is a great place to save for retirement, even though these accounts are meant to be used for medical expenses.
But if used strategically, it can benefit those saving for their retirement years. The major benefit of an HSA is that they’re triple tax-advantaged — contributions are tax-deductible, the money grows tax-free, and withdrawals for qualified medical expenses are tax-free.
Another retirement-friendly consideration is that an HSA can be used to pay for medical care at any age and the funds don’t expire. This means you can carry a balance into retirement and use it during your golden years.
For 2024, the contribution limit is $4,150 for individuals and $8,300 for families. There’s the option for an additional $1,000 catch-up contributions for those aged 55 and older.
Fidelity estimates that, as of 2023, the average 65-year-old is looking at spending $157,500 on healthcare costs in retirement. Having a large HSA balance at that stage of life is incredibly helpful.
Plus, once you turn 65, you can take out a penalty-free HSA withdrawal even if you’re not using the money for healthcare costs (whereas prior to age 65, non-medical withdrawals do incur a hefty 20% penalty).
By that point, non-medical HSA withdrawals are taxed as regular income, but that’s no different than a traditional IRA or 401(k) anyway.
It should be noted that the ability to participate in an HSA depends on your health coverage. In 2024, you’re eligible if your health plan has a minimum $1,600 deductible for self-only coverage, or $3,200 for family coverage.
Your plan must also have a maximum out-of-pocket limit of $8,050 for self-only coverage or $16,100 for family coverage. These limits can change from year to year, so always make a point to review your eligibility, especially if you get new health insurance.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.