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Best Ways to Invest After Maxing Out Retirement Accounts

These committed savers ask how best to invest after they've fully funded their tax-deferred accounts.

OUR READERS Scott and Amber Rowson, 33 and 34 Columbia, Mo.We've maxed out our retirement contributions. Now what?

Scott and Amber are such ardent savers that they're faced with an enviable problem. They contribute the maximum amounts to their tax-deferred retirement accounts, and they stash additional savings in 529 college-savings plans for Beckett, 5, and Ayla, 2. Now they're stumped about how and where to invest still more without incurring tax headaches or excessive risk.

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The Rowsons are proof that you don't have to be the fattest of cats to bump up against the contribution limits for standard retirement plans. Scott, a Missouri state employee, intends to put the maximum $16,500 in his 457 plan this year, just as he did in 2009. Amber, a consultant, takes advantage of higher savings limits available to the self-employed. She deferred the maximum 20% of net earnings into her SEP IRA last year and plans a repeat for 2010.

Scott and Amber invest in stock and bond mutual funds. With the recovery in the markets, they appear well prepared for eventual retirement even if they need to let up a little on how much they set aside. But they can make a few other moves to limit their tax bill and spread money among a wider range of assets.

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CONVERT TO A ROTH IRA The Rowsons earn too much to contribute directly to a Roth IRA, from which withdrawals are tax-free in retirement. Individuals with incomes up to $120,000 and married couples who make up to $177,000 can feed a Roth in 2010. But starting this year, everyone, regardless of income, can convert a traditional IRA to a Roth. The price is steep because you must pay ordinary income taxes on the entire amount you convert. But if the Rowsons convert in 2010, they can choose between paying the entire tax bill on their 2010 return or splitting it between 2011 and 2012. It's better if you use money from outside your IRA to pay the tax, which seems manageable for the Rowsons.

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OPEN A TAXABLE ACCOUNT Tax-deferred investments are attractive, but taxable accounts have one upside: There are no restrictions on tapping them, says Ken Eaton, a financial planner in Overland Park, Kan. That could be beneficial to Amber if her business were to slow and she needed easy access to her money. Plus, when you sell a winner you are taxed on the profits at the maximum 15% capital-gains rate. Traditional-retirement-account distributions, however, are fully taxed at ordinary rates as high as 35%. A taxable account is also a good place to park assets, such as exchange-traded funds that invest in commodities, that generate few capital gains.

CONSIDER ALTERNATIVE INVESTMENTS Scott and Amber's retirement portfolios are overloaded with standard stock and bond funds, so they could use extra cash to go in a different direction. One option: cash-value life insurance, which would provide tax-deferred earnings as well as liquidity and flexibility. Amber is interested in income-producing real estate, which might make sense but requires time and expertise. There are good deals now -- that much is true.

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