You might be one of the few Americans who plan to max out your 401(k) retirement contributions, which means you’ll hit the annual IRS limit allowed for pretax contributions. Does this mean you have to stop saving for retirement? Or that you can only put cash in a traditional savings account? Nope. You actually have several tax-advantaged options after you’ve maxed out your 401(k) contributions, and we’ll explain them here.
What Does “Maxed Out” Mean?
In many cases, “maxed out” in the context of your employer-sponsored 401(k) retirement plan means you’ve contributed the maximum amount of money allowed in a year’s time.
For 2021, the IRS established an annual contribution limit of $19,500. The 2020 limit was the same. The 2019 limit was $19,000.
If you’re 50 or over, you can chip in an additional $6,500 as a “catch-up” contribution for the 2021 tax year. The catch-up amount was the same in 2020 and $6,000 in 2019.
For a 401(k), another type of maxing out involves the matching money contributed by your employer. If you’ve maxed out your match, that means you’ve put in enough money to get the full 401(k) match provided by your employer. For instance, your employer may match 100% of the initial 3% of your 401(k) contributions. If you’ve contributed the initial 3%, then you’ve maxed out your employer’s 100% match.
Options When You’ve Maxed Out Your 401(k) Contributions
Have you maxed out your 401(k) contributions for the year? If so, there’s no reason to stop putting money away for retirement. You’ve got other options for maximizing contributions to your retirement portfolio. Here are three of them.
1. Health Savings Account
A health savings account (HSA) can do more than help you cover out-of-pocket healthcare expenses.
You can open an HSA if you have a high-deductible health insurance plan through your employer—or on your own. Since you aren’t required to spend every penny in your HSA before the end of each year, leftover money can serve as a sort of health-aware retirement plan.
According to RegisteredNursing.org, “The rate of senior citizens declaring bankruptcy has more than doubled since 1999, and the leading cause is high healthcare costs. Despite the existence of Medicare insurance for seniors, it doesn’t cover all costs, and healthcare can be extremely expensive, especially as you age.”
An HSA balance grows tax-free, and withdrawals for qualified medical expenses are tax-free. Furthermore, the balance rolls over from one year to the next. And unlike an actual retirement account, you don’t need to withdraw money from an HSA at a certain age.
2. Brokerage Account
Aside from an HSA, you might look into setting up a brokerage account if you don’t already have one or look at boosting how much money you deposit into an existing brokerage account.
Keep in mind that only after-tax dollars go into a brokerage account, so you aren’t eligible for a tax deduction on money that goes into this kind of account. Furthermore, you may be hit with capital gains taxes on brokerage assets that you wind up selling. However, you may be able to write off capital losses, which can offer a tax benefit.
3. IRA
Another alternative once you’ve maxed out your 401(k) contribution is an IRA.
For 2021, the total amount you can contribute to all of your traditional and Roth IRAs is $6,000. It bumps up to $7,000 if you’re 50 or older. The IRS left the contribution limit unchanged in 2021.
Also for 2021, the IRS raised the income range for making tax-deductible contributions to traditional IRAs. Contributions to a traditional IRA qualify for a tax deduction right away, and you only pay taxes on money you eventually withdraw. Contributions to a Roth IRA work the opposite way: You pay taxes on contributions now and can make tax-free withdrawals later.
One of the IRA options you can explore is a self-directed precious metals IRA. This type of IRA lets you purchase physical gold, silver, platinum, and palladium for your retirement portfolio. Among other things, precious metals can help diversify your portfolio, and as an asset class, precious metals can serve as a hedge against inflation.
Take a big step today toward saving for retirement. Learn how to set up and fund a self-directed precious metals IRA with help from U.S. Money Reserve!
