Where Should I Invest After Maxing My 401(k)?
As the saying goes, “It’s not how much you earn, but how much you save that counts.” Maxing out your 401(k) is a commendable financial goal and a strategic move towards building a secure retirement. In 2023, the maximum contribution limit for employees under 50 is $22,500, and for those 50 and older, it is $30,000, thanks to catch-up contributions. Once you’ve hit those limits, the question arises: where should you invest next? Here are some viable options to consider for your post-401(k) investment strategy.
1. Roth IRA
A Roth IRA is an attractive option for individuals looking to diversify their retirement savings. Contributions to a Roth IRA are made with after-tax dollars, which means your withdrawals in retirement are tax-free, provided certain conditions are met. The contribution limit for 2023 is $6,500 for those under 50 and $7,500 for those over 50.
Advantages:
- Tax-free growth and withdrawals.
- Flexibility in withdrawing contributions without penalties or taxes.
- No required minimum distributions (RMDs) during your lifetime.
Considerations:
- Income limits apply for eligibility, so check if your modified adjusted gross income (MAGI) falls within the permitted range.
2. Health Savings Account (HSA)
If you have a high-deductible health plan (HDHP), an HSA can be a powerful tool not only for health-related expenses but also as an additional retirement savings vehicle. Contributions are tax-deductible, the funds grow tax-free, and withdrawals for qualified medical expenses are also tax-free.
Advantages:
- Triple tax advantage: tax-deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses.
- Funds can be invested in various assets, similar to a 401(k).
Considerations:
- Funds must be used for qualified medical expenses to maintain the tax benefits.
- Unused funds can be rolled over from year to year, making it an excellent long-term savings option.
3. Taxable Brokerage Account
After maxing out tax-advantaged accounts, a taxable brokerage account can serve as a flexible investment vehicle. You can invest in stocks, bonds, mutual funds, and ETFs without contribution limits.
Advantages:
- No contribution limits or withdrawal restrictions.
- Greater flexibility in managing your investments and accessing your capital.
Considerations:
- You’ll owe taxes on any realized capital gains and dividends, so it’s essential to be mindful of your investment strategy.
4. Real Estate Investments
Investing in real estate can be a lucrative way to build wealth over time. Whether through rental properties, commercial real estate, or Real Estate Investment Trusts (REITs), real estate can provide both income and long-term appreciation.
Advantages:
- Potential for rental income.
- Diversification of your investment portfolio.
- Inflation hedge, as property values and rents often increase with inflation.
Considerations:
- Requires a significant capital outlay and comes with ongoing management responsibilities and risks.
- The real estate market can be volatile, making location and market research crucial.
5. Index Funds and ETFs
If you prefer a hands-off approach to investing, consider low-cost index funds or exchange-traded funds (ETFs). These funds track a specific index, such as the S&P 500, and provide broad market exposure with lower fees than actively managed funds.
Advantages:
- Diversification with a single investment.
- Lower fees compared to actively managed funds.
- Historically, index funds have outperformed actively managed funds over the long term.
Considerations:
- Market volatility affects the value of your investments, and there’s no guarantee of returns.
6. Certificates of Deposit (CDs) and High-Yield Savings Accounts
If you’re risk-averse and prefer to preserve your capital while earning some interest, consider CDs or high-yield savings accounts. These investment vehicles provide guaranteed returns over a fixed period and are typically FDIC-insured.
Advantages:
- Almost zero risk and guaranteed returns.
- Higher interest rates compared to regular savings accounts.
Considerations:
- Lower returns than other investment options, especially in a low-interest-rate environment.
- Early withdrawal penalties for CDs can limit access to your funds.
Conclusion
Investing after maxing out your 401(k) can significantly enhance your long-term financial strategy. Each option comes with its own set of advantages and considerations, making it crucial to assess your financial goals, risk tolerance, and investment horizon before proceeding. Diversification across different investment vehicles can help safeguard your portfolio against market fluctuations and create a solid foundation for future wealth. Always consider consulting with a financial advisor to tailor your investment strategy to meet your unique situation and objectives.
LEARN MORE ABOUT: IRA Accounts
INVESTING IN A GOLD IRA: Gold IRA Account
INVESTING IN A SILVER IRA: Silver IRA Account
REVEALED: Best Gold Backed IRA
You can also look into finding a job that offers a 457 plan where you can double your 401K contribution annually. I'm currently maxing out my 457b plan and looking for an easy second job that offers 401k to do just that.
Great job on that. Thanks!
When you say the after tax 401(k) contributions immediately go into the Roth 401(k) what do you mean by immediately?
HSA plans are gonna be destroyed by politics in the near future. Plus, it's useless if you absolutely know that you will retire outside the USA (i.e., Philippines, El Salvador, Canada)
Not enough people know this !!
8:00 so are you saying here that the $22500 limit is for pre-tax 401k contribution and there is no limit to how much one can contribute to 401 after tax?
Spending. A lot of folks forget that part and miss out on a lot. You don't have to go crazy all the time, but once in awhile have the 100 dollar steak. Have the good stuff instead of Jim Beam. Invest in a live human to copulate with. You worked hard to get where you are, might as well enjoy a few fruits of your labors along the way. Just don't go underwater.
I was surprised you didn’t mention an after tax contribution to an IRA, especially if you’re not eligible to contribute to a Roth IRA. Wouldn’t that be a good idea to take advantage of the tax free growth. Also, I understand it may be possible to roll it over to a 401k before retirement and then the after tax contributions could be rolled into a Roth IRA after retirement.
James you nailed it. This was the best most well thought out explanation with the most options to fit someone's specific situation. I listened to Dave Ramsey and The Money Guys and your explanation was better because it included their options (except for maybe Dave suggesting real estate) AND other options like HSA and good old fashioned spend the money and enjoy it if you're on track or ahead!
Question. What do I do, I am 75 years old get $4200 social security and a $600 monthly pension I have No 401K or Roth but have $750K in cash and $40K in Marcus emergency savings and $23K in my checking. Would like to make some money with mine now. At 75 its a little late to play and stock games which I know nothing about. I know just go buy Stuff at 75
Thanks for the video. Have you ever done a video on the cost/benefit of hiring a financial advisor? I have a hard time spending quarterly $1.8k to $2.5k or $7k to $10k annually for financial advice. I would rather put that money in some sort of investment. I understand you have to get paid but the cost seems exorbitant.
If you don't use your HSA to pay medical bills before retirement, keep reciepts of all the medical costs you have, and you can reimburse yourself at anytime. For example, you turn 65, you paid $30,000 in medical bills and have the reciepts, you can pull $30,000 from your HSA tax free and use it for anything.
I'm so happy I made productive decisions about my finances that changed my life forever,hoping to retire next year… Investment should always be on any creative man's heart for success in life.
For my 401k after tax (mega back door Roth), I had my plan administrator set an automatic sweep from the 401k traditional to 401k Roth to avoid any tax burden on growth without my having to remember to do anything each payday.
Many employee stock purchase plans (ESPPs) include a six-month lookback, where you get the lower of the stock price at time of purchase or the start of the six months, plus whatever percentage discount. That lookback feature has made a huge difference for me a couple times when the market was moving. I agree ESPP should be near the top of the list if someone has it available. The immediate ROI is a no brainer.
I would add “consider gifting money to others”.
What do you think about ibonds?
Don't we need to understand this income needs upon retirement, first?