I’ve Maxed Out My Roth IRA and 401k Now What? Here’s What’s Next

Maxing out your Roth IRA and 401k is a significant achievement in your financial journey. These accounts are excellent tools for building a robust retirement fund, thanks to their tax advantages and the potential for long-term growth. However, once you’ve reached the contribution limits, you might wonder, “What do I do next?” The good news is that several options are available to continue growing your wealth and securing your financial future.

The benefits of maxing out your retirement accounts

Before diving into your next steps, it’s worth recognizing why maxing out your Roth IRA and 401k is so beneficial. These retirement accounts offer a powerful combination of tax advantages. The Roth IRA offers tax-free growth and tax-free withdrawals during retirement, while a 401k allows for tax-deferred growth and potential matching contributions from your employer. Together, these accounts form an essential part of a well-rounded retirement plan.

However, once you’ve hit the maximum contributions—$22,500 for a 401k and $6,500 for a Roth IRA (as of 2024)—you may feel uncertain about where to invest next. Exploring your choices enables you to make decisions that best align with your financial objectives.

Investing beyond the Roth IRA and 401k

When considering what to do after maxing out your Roth IRA and 401k, several investment options can help you continue growing your wealth. These options offer varying degrees of risk, tax implications, and potential returns.

1. Open a taxable investment account

One of the simplest responses to the question, “I maxed out my Roth IRA; now what?” is to open a taxable investment account. Unlike retirement accounts, taxable accounts come with no contribution limits or withdrawal restrictions. You have the flexibility to invest in a wide range of assets, such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs).

The key benefit of a taxable account is flexibility. You can access your money at any time without penalties, making it ideal for goals other than retirement, such as buying a home or funding your child’s education. However, keep in mind that you’ll owe taxes on dividends, interest, and capital gains.

2. Consider Health Savings Accounts (HSAS)

For those seeking more tax-advantaged savings opportunities, a Health Savings Account (HSA) is a valuable option, particularly if you’re enrolled in a high-deductible health plan. HSAs provide a triple tax benefit: contributions are tax-deductible, the funds grow tax-free, and withdrawals used for eligible medical expenses are also tax-free.

HSAs can also function as an investment account. You can allocate your HSA funds into various investments such as stocks, bonds, and mutual funds, enabling the account to increase in value over time. After reaching age 65, you can use HSA funds for any purpose without facing penalties, though you’ll need to pay taxes on withdrawals not used for medical expenses.

3. Explore real estate investments

Real estate is another avenue to consider when figuring out how to invest after maxing out your IRA and 401k. Investing in real estate can offer diversification, the possibility of property value growth, and a consistent income stream from rental properties.

You can engage in real estate investing either by directly buying properties or indirectly through Real Estate Investment Trusts (REITs). REITs offer a way to invest in real estate portfolios without the need to manage the properties yourself. Real estate can be a more hands-on investment, so it’s essential to understand the market and consider your risk tolerance.

4. Look into annuities for additional income

For those seeking a guaranteed income stream in retirement, annuities can be an attractive option. An annuity is an agreement with an insurance company where you make a lump-sum payment in exchange for regular income payments. Annuities are available in different types, such as fixed, variable, and indexed, each offering distinct levels of risk and potential returns.

While annuities can offer financial security, they also come with fees and potential downsides, such as limited liquidity. It’s crucial to evaluate whether an annuity fits into your overall retirement strategy and to consult with a financial advisor if you’re considering this option.

5. Maximize your contributions to other tax-advantaged accounts

In addition to your Roth IRA and 401k, other tax-advantaged accounts may be available to you. For example, if you’re a business owner or self-employed, consider contributing to a SEP IRA or a Solo 401k. These accounts feature higher contribution limits compared to traditional or Roth IRAs, enabling you to increase your retirement savings and lower your taxable income.

Furthermore, a 529 plan can provide tax benefits akin to those of a Roth IRA when saving for education costs, offering tax-free withdrawals for eligible educational expenses.

Diversifying your investments

Diversification is a fundamental principle of investing, and it’s especially important after maxing out your Roth IRA and 401k. Spreading your investments across various asset classes like stocks, bonds, real estate, and alternative investments can lower risk and enhance the performance of your overall portfolio.

1. Invest in Bonds and Fixed Income: Fixed-income securities, such as bonds, can add stability and generate income within your investment portfolio. While bonds typically offer lower returns than stocks, they are generally less volatile and can serve as a hedge against market downturns. Consider diversifying your bond investments across different sectors, durations, and credit qualities to balance risk and return.
2. Explore Alternative Investments: Including alternative investments like commodities, hedge funds, and private equity in your portfolio can enhance diversification. These assets typically have a low correlation with traditional investments, potentially lowering overall portfolio risk. However, due to their complexity and higher risk levels, it’s important to research thoroughly or seek advice from a financial professional before investing.

Continuing your financial education

The financial landscape is constantly evolving, and staying informed is key to making sound investment decisions. Whether you’re exploring new investment opportunities or reevaluating your retirement strategy, continuing your financial education can help you make informed choices.

1. Stay Updated on Tax Laws: Tax laws and contribution limits can change, impacting your retirement planning strategy. Keeping well-informed of these updates helps you maximize tax benefits and make necessary adjustments to your contributions.
2. Seek Professional Advice: While it’s possible to manage your investments independently, seeking advice from a financial advisor can provide valuable insights and help tailor your investment strategy to your specific goals and risk tolerance. An advisor can also help you navigate complex investment products, such as annuities and alternative investments.

Charting your financial future

Maxing out your Roth IRA and 401k is a significant milestone, but it’s not the end of your financial journey. With various investment avenues at your disposal, you can keep growing your wealth and safeguarding your financial future. Whether you opt for taxable accounts, delve into real estate, or diversify with bonds and alternative investments, the crucial factor is to tailor your approach to your long-term objectives. As you move forward in your financial journey, stay knowledgeable, plan carefully, and remember that achieving your financial goals is within your control.