Maxing Out Your 401(k)? Alternatives to Consider

Key Takeaways

• IRAs (Individual Retirement Accounts) can serve as an alternative to a 401(k) and offer similar tax benefits, such as tax-deferred growth or tax-free withdrawals, depending on whether you choose a Traditional or Roth IRA.
• Health Savings Accounts (HSAs) provide another option to consider, especially for covering medical expenses. HSAs offer tax-deductible contributions, tax-deferred earnings, and tax-free withdrawals for qualified medical expenses.
• If you've maxed out your 401(k) contributions and want further investment options, brokerage accounts can be a viable choice. Although they lack tax-deductible contributions, brokerage accounts offer a wide range of investment options, which can help minimize taxable gains and management fees.

Even if you receive matching funds from your employer and enjoy the tax advantages of your 401(k), there's still one caveat to know when using your company's plan. In 2024, you can max out your 401(k) contributions annually at $23,000 or $30,500 for those age 50 and over.¹

If you're wondering what to do after maxing out your 401(k), here are some options you might consider.

IRAs

Individual retirement accounts (IRAs) offer tax features that are similar to a 401(k).

Traditional IRAs

With a traditional IRA, like a 401(k), you can deduct contributions on your tax return and enjoy tax-deferred growth while your money remains in the account. Deductions may be limited if you (or your spouse, if you're married) are covered by a retirement plan at work and your income exceeds certain levels. Withdrawals, which take penalty-free after age 59 1/2, are then subject to your ordinary income tax rate.

Roth IRAs

You pay taxes when you contribute to a Roth IRA, so qualified distributions are taken tax-free in retirement as long as you are at least age 59 1/2 and have had the account for at least five years.

Other Things to Consider about IRAs

• IRAs can sometimes offer more flexibility than a 401(k). Many providers allow you to choose among a wide array of vehicles, such as mutual funds, exchange-traded funds (ETFs), certificates of deposit (CDs) and individual stocks and bonds.
• IRAs have contribution limits. In 2024, you can contribute up to $7,000 a year, or $8,000 if you're over the age of 50.² Those who go over may be subject to a penalty every year the excess contribution remains in their account.

Health Savings Accounts

You could also put your money into a health savings account (HSA) to help cover medical expenses. If so, consider boosting your contributions once you max out your 401(k). In addition to interest-bearing accounts, some HSA providers let you invest in mutual funds and ETFs that have the potential for greater long-term growth. Both mutual funds and ETFs are investment vehicles, can't guarantee growth, and may even lose value over time.

Not only are HSA contributions tax-deductible and earnings tax-deferred as they accumulate in your account, but you don't pay any tax when you withdraw the money for qualified expenses. HSAs aren't open to everyone — you need to have a high-deductible health plan in order to fund an account through your health insurance.

Please keep in mind that these accounts are available to those individuals with a high deductible health plan. If you're eligible, you're allowed to contribute up to $4,150 a year for individual health plans and $8,300 for family plans in 2024.³

Brokerage Accounts

If you're pondering what to do after maxing out your 401(k), an IRA or HSA might be useful to you. Since they both have contribution limits, you might consider putting additional money in an account with a brokerage house or another firm that sells financial products. You may not be able to enjoy tax-deductible contributions, but you may have access to a wide range of investment options.

You might still be able to reduce your tax bill by looking for funds with low turnover rates, like index funds and ETFs. Because these funds tend to sell securities less often, they may pass on fewer taxable gains to the investor. In addition, funds like these might have lower annual fees since they don't require active management by the fund provider.

There are many options available to you to save or invest your money once you've maxed out your 401(k) contributions for the year. The choice you make will depend on your personal financial road map and which products best fit your goals. Consider speaking with a financial representative to find out what those are and how to proceed.

Keep in mind that an investment in securities is subject to market risk, including the potential to lose some or all of the principal amount invested.

Sources

1. Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits.
2. 401(k) limit increases to $23,000 for 2024, IRA limit rises to $7,000. https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000.
3. Tax forms and instructions. https://www.irs.gov/pub/irs-drop/rp-23-23.pdf.