If you’re already maxing out your 401(k) and you earn too much to contribute to a Roth IRA, you’re likely an aggressive saver with finances in strong shape. In this position, it’s wise to look for additional ways to save for retirement in a tax-advantaged manner, going beyond the basics of simply maxing your 401(k) at the workplace retirement plan level.
There are targeted strategies designed for supersavers and high earners that can potentially sock away more retirement savings using specialized financial tools and planning methods.
Key Takeaways
- Aggressive savers may want to save more for retirement, especially when annual contribution limits to 401(k)s are reached.
- Various strategies like HSAs, backdoor Roth IRAs, mega backdoor Roths, and tax-deferred annuities can provide smart alternatives.
- Brokerage accounts may not have built-in tax advantages, but careful selection of investment vehicles and asset location strategies can help reduce annual taxes that investors might generate in such accounts.
- Doing proper research can help you determine which strategies you are eligible for and whether they are suitable for your situation.
1. HSAs
HSAs or health savings accounts, let you use pre-tax dollars in a tax-efficient retirement savings way. To open one, you need an HSA-eligible health plan through work or public marketplaces. An HSA offers triple tax savings: you contribute pre-tax dollars, pay no taxes on earnings, and withdraw tax-free for retirement-qualified medical expenses.
For nonmedical use after 65, you only pay ordinary income tax, just like a traditional IRA or 401(k). If you withdraw before 65, a penalty applies, along with taxed amounts.
Because they are so efficient, it makes sense to reach the maximum contribution limits if possible. Once you meet eligibility, consider investing for long-term growth and compounding potential.
Using annual rules and strategies, you can save medical costs separately and keep your personal savings intact while letting your HSA grow untouched. Avoid tapping the account unless necessary to allow investing growth potential compounding to strengthen your retirement nest egg.
2. Backdoor Roth IRAs
A Backdoor Roth IRA strategy can give higher earners the benefits of Roth accounts. By making nondeductible contributions to a traditional IRA and then converting to a Roth, high earners who cannot make deductible IRA contributions or contribute directly to a Roth IRA because of income limits may still gain access.
You simply set up a new traditional IRA, make a contribution, and then convert it to a Roth IRA. There are no income or age requirements for this type of conversion.
However, if you already have an existing IRA, aggregation rules apply because the IRS treats all your accounts as one tax entity. Any conversion will consider the aggregate accounts, meaning both deductible and nondeductible portions are included.
The taxes on a conversion can be complicated, significant, and complex, especially if you hold multiple traditional IRAs. Still, understanding the tax implications and potential changes in legislation is important. By working closely with a tax advisor, you can ensure that your conversions fit your financial situation.
3. Mega backdoor Roths
The Mega backdoor Roth strategy is another way to build retirement savings. A Roth account normally has income and contribution limits, but you can transfer 401(k) after-tax contributions from your workplace retirement plan.
You then do a conversion into a Roth IRA or Roth 401(k). However, not all workplace retirement plans are eligible or permit this process, so always check your plan’s rules.
There are important tax implications when doing this. You must pay taxes on any earnings included in the conversion, while the contributions are already taxed. A tax professional can help you understand the details.
Because future legislation may eliminate the mega backdoor Roth, it’s important to follow the rules and stay updated on any changes. Using this strategy effectively requires careful planning with your plan administrator and your tax advisor.
4. Tax-deferred annuities
Tax-deferred annuities give savers another way to build retirement savings once they’ve maxed out contributions to qualified plans like 401(k)s and IRAs. These products aren’t subject to annual IRS contribution limits, and investment growth is tax-deferred.
You won’t owe taxes annually, and your annuity assets can be converted into an income annuity in retirement, spreading out the tax liability across an income stream. You may also take withdrawals without converting to an income annuity, but any gains are taxed at ordinary income rates.
There are both fixed annuities and variable annuities. A fixed rate of return is guaranteed by the issuing insurance company, while a variable annuity depends on underlying options you select, which can follow market growth. These include subaccounts similar to mutual funds.
With IRS annual limits not applying, you can allocate to different investments, reallocate assets, or trade tax-free. But when you take income payments or a withdrawal, earnings and any pre-tax contributions are taxed as ordinary income. Different roles for annuities in retirement depend on your personal strategy.
5. Tax-efficient strategies in a brokerage account
Brokerage accounts may not offer built-in tax advantages, but their flexibility allows you to contribute freely and select from various investment options without strict eligibility, withdrawal, or rules to navigate.
Unlike tax-deferred plans, these rely on tax-efficient investing methods to reduce taxes over saving and working years, enhancing compounding potential for retirement. A brokerage account can host multiple tax-efficient strategies, depending on your goals and timeline.
ETFs and Mutual Funds
Using ETFs, especially index and passive ETFs, can be highly tax-efficient because of low portfolio turnover, minimal changes in investments, and unique mechanics of shares and features.
Mutual funds, especially passive mutual funds, may produce less taxable income compared to actively managed mutual funds, where active managers trade frequently. This investing approach helps manage tax liability efficiently.
SMAs and Personalized Strategies
SMAs are portfolios of securities owned directly by investors, acting as a complement to mutual funds and ETFs.
Managed asset classes like stocks and bonds can be structured using a personalized strategy, applying tax-smart techniques to improve after-tax returns.
Asset Location and Strategic Allocation
Asset location involves strategically choosing investments to lower the tax bill.
Placing taxable bonds or high-turnover stock funds inside tax-advantaged accounts like a 401(k) or IRA can boost tax efficiency.
Individual stocks held for the long term in a taxable brokerage account work in parallel with tax-advantaged accounts, ensuring a better mix to strategically reduce the impact of taxes over time.
Frequently Asked Questions
Where to save after maxing out a 401k?
After reaching your workplace retirement plan limit, you can still invest through a Traditional or Roth IRA. An individual retirement account (IRA) gives more flexibility, while a brokerage account allows open investing. Other choices include real estate, using an HSA, or even putting money into your kids’ college fund.
How long will $500,000 in a 401(k) last at retirement?
With $500,000 in retirement, you could plan an annual withdrawal of around $34,000 over a 25-year period between ages 60 and 85. If your lifestyle requires about $30,000 per year or $2,500 per month, this amount can be sufficient for a secure retirement.
Is maxing out a 401k enough for retirement?
While maxing out savings in a 401(k) plan is important, you may need to invest more for retirement. Options include Traditional Roth IRAs that save with additional tax benefits. Beyond this, you can look at other savings options like mutual funds, stocks, annuities, and even life insurance.
What is the 7% rule for retirement?
The 7% rule suggests retirees can withdraw 7% of their retirement savings annually without running out of money. However, long-term historical data shows this approach is aggressive and risky, especially if planning for a 20–30+ year retirement.
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