Maximizing Your 401(k) and What to Do Next

A 401(k) is a powerful retirement savings tool. If you have access to such a program through your work, it’s smart to take advantage of an employer match. If you have money left over, there are other ways to save for retirement.

Retirement planning allows individuals to comfortably spend their golden years, so understanding the ins and outs of this practice is vital. This article outlines some of the other options available to you to get the most out of your retirement savings strategy and help you lower your tax liability.

Key learning points

  • Each year, try to max out your 401(k) and take advantage of any match your employer offers.
  • Contributions are tax deductible in the year you make them, leaving you with more money to save or invest.
  • Once you’ve maxed out your 401(k), consider putting your remaining money into an IRA, HSA, annuity, or a taxable account.

401(k) Employer Agreement

Many employers offer their employees 401(k) plans. And they can even match contributions to sweeten the pot. This means that for every dollar you contribute to your employer-sponsored plan, the company matches a certain percentage. This increases the amount of money saved in your account. Some match as much as 50% of your contribution, while others do a dollar-for-dollar match up to a certain limit.

Employers typically match Roth 401(k) plans at the same rate as traditional 401(k) plans. However, some employers do not offer Roth 401(k) plans. A notable difference between traditional and Roth 401(k) contributions is that the employer contribution is placed in a traditional 401(k) plan – taxable at withdrawal. The employee portion of the premium is placed in a Roth 401(k).

Some financial planners encourage investors to max out their 401(k) savings. On average, individuals earn about $0.50 per dollar, for a maximum of 6% of their salary. That’s the equivalent of an employer writing a check for $1,800 to an employee who earns $60,000 each year. In addition, the $1,800 is essentially free money and can grow over time by investing in the financial markets.

You don’t have to be an investor

While 401(k) offerings can be challenging for non-professionals to understand, most programs offer low-cost index funds, which are ideal for new investors. As individuals approach retirement age, it makes sense to adjust their asset allocation by shifting some of their retirement wealth from stocks or shares to bond funds. Many adhere to the following age-based allocation model:

  • At age 30, invest 30% of retirement money in bond funds.
  • At age 45, invest 45% of retirement money in bond funds.
  • At age 60, invest 60% of retirement money in bond funds.

Those opposed to the age-based approach may instead choose to invest in target date funds, which provide investment diversification without choosing each individual investment.

“Target date funds also tend to be more conservative closer to the selected date. The combination of these benefits can make this a one-stop shop for 401(k) participants,” explains David S. Hunter, CFP and President of Horizons . Asset management.

Investing After Maxing Out Your 401(k)

Those who contribute the maximum dollars to their 401(k) plans can increase their retirement savings with a number of different investment vehicles. We have listed a few below.

Individual Retirement Accounts (IRAs)

You can contribute up to $6,000 to an individual retirement account (IRA) in 2022 and $6,500 in 2023, provided your earned income is at least that much. If you’re 50 or older, you can add another $1,000 in either year, though some IRA options have certain income limits.

If you make too much money, you can’t contribute to a Roth IRA. If you earn more than a certain amount and are under a workplace plan, you cannot deduct contributions to a traditional IRA.

Traditional IRA income limits

Deducting a traditional IRA contribution is subject to income caps if you are covered by a retirement plan at work.

For single taxpayers, the phase-out of the deduction begins at an adjusted adjusted gross income (MAGI) of $68,000 and disappears completely if your MAGI is $78,000 or more, for 2022. This range increases to $73,000 to $83,000 in 2023. For those who are married and filing jointly, where the spouse making the IRA contribution has a workplace retirement plan, the phase-out starts at $109,000 and goes out at $129,000 ($116,000 and $136,000 in 2023) .

If you don’t qualify to deduct all or part of your traditional IRA contribution, you can still contribute up to the contribution limit. Your investment will still grow on a tax-deferred basis.

Roth IRA Income Limits

Contributing to a Roth IRA also involves income restrictions and phase-outs. But unlike traditional IRAs, the limit determines your eligibility to contribute.

For single taxpayers in 2022, the income taper starts at a MAGI of $129,000 and disappears for incomes over $144,000 ($138,000 to $153,000 in 2023). For married taxpayers filing jointly, the phase-out begins at a $204,000 MAGI and ends entirely above a $214,000 MAGI ($218,000 and $228,000 in 2023).

Health savings accounts

Health savings accounts (HSAs) are available to people with high deductibles (HDHPs), whether they access them through their employers or purchase them independently. Contributions are paid before tax.

When used for qualified medical expenses, withdrawals from the account are tax-free. And since users aren’t required to withdraw the money at the end of each year, HSAs can function like another retirement plan, making them ideal vehicles for saving on healthcare costs during retirement.

For 2022, the Internal Revenue Service (IRS) defines a high-deductible health plan as one with a minimum annual deductible of $1,400 for coverage-only ($1,500 in 2023) or $2,800 for family coverage ($3,000 in 2023) .

Also, under a high-deductible plan, annual out-of-pocket expenses (such as deductibles, co-payments, but not premiums) do not exceed $7,050 for coverage-only or $14,100 for family coverage for 2022, but for 2023, not exceed $7,500 for single coverage or $15,000 for family coverage.

Contribution limits for 2022 are $3,650 for an individual and $7,300 for a family; however the 2023 contribution limit is $3,850 for individuals and $7,750 for families. The over-55s catch-up contribution for both 2022 and 2023 is an additional $1,000.

Taxable investments

Taxable investments are a viable way to build retirement savings. While dividends and capital gains are subject to tax, long-term capital gains on investments held for at least one year are taxed at preferential rates.

If you’ve maxed out your 401(k), be aware of asset location to ensure investments are held in taxable versus tax-deferred accounts.

Variable annuities

Annuities often get a bad rap, sometimes rightly so. Still, a variable annuity can provide another vehicle for after-tax contributions to grow on a tax-deferred basis.

Variable annuities generally have sub-accounts similar to mutual funds. Later, the contract holder can annuity or redeem the contract in part or in full, with the gain taxed as ordinary income.

Keep in mind, however, that many contracts have onerous costs and significant surrender costs. If you’re considering a variable annuity, do thorough due diligence and seek help from a financial advisor beforehand.

How much should you save for your retirement?

The amount a person needs to save for retirement will differ for everyone depending on their current lifestyle, desired retirement lifestyle, expenses, health and dependents. One suggestion is to take the desired income you will need in retirement and divide that by 4%. So, for example, if you need $70,000 in annual income, you would need a retirement nest egg of 70,000 / 0.04 = $1.75 million.

What Are 4 Common Retirement Plans?

Common retirement plans include 401(k)s, traditional and Roth IRAs, SEP IRAs, SIMPLE IRAs, and Solo 401(k)s.

What is the best retirement plan?

One of the best retirement plans is a 401(k) retirement plan. Not everyone has access to a 401(k), as it must come from an employer and not all employers provide it; However, 401(k)s have high contribution limits, are tax-advantaged, and many employers match employee contributions.

It comes down to

When it comes to your future, investing money is always a good thing. Diligent savers who maximize their 401(k) contributions have other retirement savings options available to them.

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