Your 401(k) Is Maxed Out – Now What?

A 401(k) plan is an attractive employee benefit, allowing you to set aside substantial savings for retirement on a tax-deferred basis. And if your employer offers matching contributions, the benefits are hard to ignore. But what if you’ve maxed out your 401(k) contributions?

In 2024, you can defer up to $23,000 per year in pretax salary to a 401(k) plan, plus $7,500 in “catch-up” contributions if you’re 50 or older. For many people, this amount is enough to enable them to achieve their retirement goals. But if you wish to invest even more in tax-advantaged savings vehicles, you have several options.

After-Tax Contributions

Some 401(k) plans allow you to make additional, after-tax contributions after you’ve maxed out your pretax contributions. In 2024, the total contribution limit — which includes both employee and employer contributions — is $69,000 ($76,500 if you’re 50 or older).

Let’s say you’re 40 years old and currently contributing the maximum — $23,000 — in pretax dollars to your 401(k) plan. If your plan permits it, you may be able to set aside after-tax contributions up to a certain limit. (Ask your CPA for details.) Although these additional amounts aren’t deductible, earnings on contributions grow tax-free and aren’t taxed until they’re withdrawn.

Also, many 401(k) plans allow participants to make Roth contributions. Limits for these contributions are the same as those for traditional 401(k)s.

Traditional and Roth IRAs

Another option for boosting your tax-advantaged retirement savings is a traditional or Roth IRA. In 2024, the combined maximum contribution to traditional or Roth IRAs is $7,000 ($8,000 if you’re 50 or older).

Depending on your income level, contributions to a traditional IRA may be only partially deductible or even nondeductible, but they still provide tax-deferred earnings. Some higher income earners are ineligible to contribute to Roth IRAs, but there may be ways to circumvent this restriction.

Backdoor Roth IRAs for High-Income Earners

If your 2024 modified adjusted gross income will be more than $176,000 ($250,000 for joint filers), you’re ineligible to contribute to a Roth IRA. However, you may be able to use a “backdoor” Roth. To take advantage of this technique, you make nondeductible contributions to a traditional IRA — assuming you’re eligible — and immediately convert it to a Roth account. There are no income limits for Roth IRA conversions and, because you’re converting after-tax dollars, there’s no tax.

Backdoor Roth IRA contributions are subject to the usual limits on IRA contributions — in 2024, $7,000 ($8,000 if you’re 50 or older). Also, this technique is less effective if you own any traditional IRAs funded with pretax dollars. That’s because a portion of the converted funds will be deemed to have been withdrawn from those accounts and subject to tax.

Another possible option is a “mega-backdoor” Roth IRA. This works like a backdoor Roth IRA. However, the converted amounts come from nondeductible contributions to a 401(k) plan, up to the maximum allowable amount less employer matches. But this option is available only if your 401(k) permits after-tax contributions and rollovers or withdrawals while you’re employed.

Annuity Contracts

An annuity is an investment contract, typically with an insurance company. Annuity holders invest a lump sum or make annual premium payments in exchange for a guaranteed income stream for life. This income stream either begins right away (under an “immediate” annuity) or at a later date (under a “deferred” annuity).

Annuities don’t offer current tax deductions. But their earnings grow on a tax-deferred basis, so they can be an attractive supplement to your 401(k) and other savings vehicles. Rates of return on annuities typically are modest, but the benefit of guaranteed income can make them valuable. There are several types of annuities — including fixed, variable and equity-indexed — so be sure you understand the terms before investing in one.

Health Savings Accounts

A Health Savings Account (HSA) can be an effective way to fund medical expenses while supplementing other retirement savings vehicles. Like a traditional IRA or 401(k), an HSA — which must be coupled with a high-deductible health plan as defined by IRS limits — is funded with pretax dollars. In 2024, the maximum annual contribution is $4,150 (for self-only coverage) and $8,300 (for family coverage), plus an additional $1,000 if you’re 55 or older.

HSA earnings grow tax-free. And you can withdraw funds tax-free at any time to pay for a range of qualified medical expenses. Withdrawals used for other purposes are taxable, but there are no penalties for those age 65 or older.

An HSA can boost your retirement savings by funding medical expenses with pre-tax dollars, freeing up other funds that can be invested. Also, if you don’t use your HSA for medical expenses, it acts much like an additional IRA or 401(k) account.

Cover All Your Bases

These are just a few examples of the many retirement saving tools available to supplement your 401(k) plan. Even if you haven’t maxed out your employer-sponsored account, you may want to consider one or more of them. However, it’s usually best to first invest enough in your 401(k) to secure the maximum employer matching contribution.

Be sure to work with your CPA and other professional advisors to develop a plan that considers your risk tolerance, retirement income needs, short-term financial goals and a reasonable amount of emergency funds.

Copyright 2024

This article appeared in Walz Group’s June 10, 2024 issue of The Bottom Line e-newsletter, produced by TopLine Content Marketing. This content is for informational purposes only.