Where to Save for Retirement After Maxing Out Your 401(k)
Aggressive savers can turn to taxable accounts, SEP IRAs and variable annuities after hitting the limit in tax-advantaged retirement plans.
You have several options if you’re already saving the maximum in your retirement accounts, or if you earn too much to contribute the maximum. In 2014, most employees can stash up to $17,500 in their 401(k), 403(b), federal Thrift Savings and most 457 plans. You can also contribute up to $5,500 to a traditional or Roth IRA. If you’re 50 or older, you can make “catch up” contributions of up to $5,500 to an employer retirement plan and $1,000
to an IRA.
But employers are required to limit contributions by highly compensated employees if an insufficient number of lower-paid employees participate in the plan. (For 2014, you’re a highly compensated employee if you earn $115,000 or more.) And you can’t contribute to a Roth IRA if you earn more than $129,000 in 2014 ($191,000 for married couples filing jointly), although there’s no income limit if you make after-tax contributions to a traditional IRA and convert it to a Roth.
![https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png](https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-320-80.png)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Taxable accounts. Investing some of your savings in a taxable account is an especially good idea if you’re saving for both retirement and college. If you come up short while your child is in college, you can tap your taxable account without paying income taxes and early-withdrawal penalties.
Taxes on these accounts aren’t deferred, but most investors pay just 15% on long-term capital gains and qualified dividends; investors in the 10% and 15% tax brackets pay 0%. Meanwhile, withdrawals from your tax-deferred accounts will be taxed at your ordinary income rate, which currently ranges from 10% to 39.6%.
To keep taxes in check, select tax-efficient investments for this account, such as tax-free municipal bonds, as well as stock index funds and other investments that qualify for long-term capital-gains rates, says Michael Kitces, a certified financial planner for Pinnacle Advisory Group, in Columbia, Md.
SEP IRAs. If you have self-employment income from your own business or from freelancing, consulting or similar part-time work, these IRAs offer a way to put a lot of money away for retirement and cut your taxes, too. You can contribute up to 20% of your self-employment income (your business income minus half of your self-employment tax), up to a maximum of $52,000 in 2014. Contributions are tax-deductible and grow tax-deferred until retirement.
Variable annuities. Contributions to these accounts usually aren’t deductible, but investment gains grow tax-deferred until you take withdrawals.
In the past, the products were often encumbered by high fees that crippled investment returns. Now, though, a new generation of variable annuities features low fees and modest or no surrender charges. Investors can purchase annuities directly from Vanguard Group and Fidelity Investments without paying a commission.
Still, for most people, says Kitces, the expenses of variable annuities, even the low-cost versions, usually outweigh the benefits of tax deferral. Variable annuities are most appropriate for high-bracket taxpayers with income of at least $250,000 because they stand to benefit the most from compounded tax-deferred earnings.
Variable annuities also look more attractive now that high-income investors are nicked by a new 3.8% surtax on investment income, and those in the top tax bracket will pay a higher rate on capital gains and dividends, too.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Block joined Kiplinger in June 2012 from USA Today, where she was a reporter and personal finance columnist for more than 15 years. Prior to that, she worked for the Akron Beacon-Journal and Dow Jones Newswires. In 1993, she was a Knight-Bagehot fellow in economics and business journalism at the Columbia University Graduate School of Journalism. She has a BA in communications from Bethany College in Bethany, W.Va.
-
Visa Is the Worst Dow Stock Wednesday. Here's Why
Visa stock is down sharply Wednesday after the credit card company came up short of revenue expectations for its fiscal Q3.
By Joey Solitro Published
-
Another Analyst Moves to the Sidelines on Tesla Stock After Earnings
Tesla stock is spiraling Wednesday after the EV maker's big earnings miss and Wall Street has been quick to weigh in. Here's what you need to know.
By Joey Solitro Published
-
Medicare Basics: 11 Things You Need to Know
Medicare There's Medicare Part A, Part B, Part D, Medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare — and much more.
By Catherine Siskos Last updated
-
Six of the Worst Assets to Inherit
inheritance Leaving these assets to your loved ones may be more trouble than it’s worth. Here's how to avoid adding to their grief after you're gone.
By David Rodeck Published
-
403(b) Contribution Limits for 2024
retirement plans Teachers and nonprofit workers can contribute more to a 403(b) retirement plan in 2024 than they could in 2023.
By Jackie Stewart Published
-
SEP IRA Contribution Limits for 2024
SEP IRA A good option for small business owners, SEP IRAs allow individual annual contributions of as much as $69,000 a year.
By Jackie Stewart Last updated
-
Roth IRA Contribution Limits for 2024
Roth IRAs Roth IRA contribution limits have gone up for 2024. Here's what you need to know.
By Jackie Stewart Last updated
-
SIMPLE IRA Contribution Limits for 2024
simple IRA The SIMPLE IRA contribution limit increased by $500 for 2024 and workers at small businesses can contribute up to $16,000 or $19,500 if 50 or over.
By Jackie Stewart Last updated
-
457 Contribution Limits for 2024
retirement plans State and local government workers can contribute more to their 457 plans in 2024 than in 2023.
By Jackie Stewart Published
-
Roth 401(k) Contribution Limits for 2024
retirement plans The Roth 401(k) contribution limit for 2024 is increasing, and workers who are 50 and older can save even more.
By Jackie Stewart Last updated