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You’ve Maxed Your 401(k), 5 Easy Ways To Keep Saving for Retirement

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Jason Spicer

Jason Spicer

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Taking advantage of your employer’s 401(k) offering is an effective first step in planning for retirement. But motivated savers and high earners will likely need to leverage opportunities outside a 401(k) to set aside enough retirement savings.

Maxing out your 401(k) contributions may be on your retirement strategy to-do list, but your options don’t end there. Here’s a reminder about the benefits and limitations of your 401(k) plan, plus 5 essential savings strategies and vehicles to consider when preparing for retirement.

401(k) Overview & Benefits

Your 401(k) provides several advantages:

  • Pre-tax salary deferrals, which lower your taxable income
  • Company match opportunities (adjust deferrals to maximize company match year-round).
  • High contribution limits
  • Potential after-tax contributions
  • Rollover avenues
  • Consistent and simple savings tool

But, there are crucial rules to consider. 

Required Minimum Distributions

The money in your 401(k) can’t remain tax-sheltered forever. As you near retirement, you’ll need to make a plan for your IRS-mandated withdrawals or required minimum distributions (RMDs), which are taxed as ordinary income. 

According to the IRS, you have to withdraw from your account beginning the year in which you turn 72 (or 70 ½ for those born before July 1, 1949). If your plan allows, you may be able to hold off on making withdrawals until you retire from your place of employment.

401(k) Annual Limitations

The IRS does limit the amount in which you can contribute to your 401(k). This limit is divided into two categories: salary deferrals and overall contributions.

2021 Deferral Limits

According to the IRS, the 2021 deferral limit for employees is $19,500 with an additional $6,500 in catch-up contributions for those 50 and older. If you are using a SIMPLE 401(k), your elective deferral limit is $13,500 with a catch-up contribution limit of $3,000.

Overall Contribution Limits

The IRS has established a limit on additional contributions to your 401(k) including:

  • Elective deferrals
  • Employer matching contributions
  • Employer nonelective contributions
  • Allocations of forfeitures

Overall contributions may not exceed one of two criteria, whichever is less: 100% of the employee’s annual compensation or $58,000 ($64,500 for those eligible for catch-up contributions).

5 Additional Retirement Savings Strategies

Utilizing a 401(k) is a popular option, but it’s not the only savings strategy you can use to prepare for retirement. Whether you’ve maxed out your 401(k) contributions or you’re looking to diversify your retirement savings strategy, here are a few alternatives to consider.

Turn To Your IRAs

For those who have maxed out their 401(k) contributions, an individual retirement account (IRA) is a natural next step. Now, the follow-up question: should you contribute to a traditional or a Roth IRA?

There are pros and cons to each option. Let’s look at an IRA overview first.

The total annual contribution limit to all of your IRAs (including traditional and Roth) is $6,000 or $7,000 if you’re 50 and over. There is no age limit on contributing to your IRA, and married couples may each contribute to an IRA.

For example, say John is 52 and his wife, Kathryn, is 48. In 2021, John may contribute up to $7,000 to his IRA account and Kathryn can contribute up to $6,000 to hers. Individuals can have multiple IRAs, often with the option to establish automatic transfers from a checking or savings account.

If you’re maxing out your 401(k), you’ll come across some limits when it comes to your IRA. Generally, contributions to a traditional IRA are pre-tax. Still, if you’re covered by a plan at work and earn over $76,000 filing single or $125,000 married filing jointly, you can no longer make a deduction. 

While non-deductible contributions may play a role in a future conversion strategy, it’s essential to understand your limitations and make a plan to maximize returns and minimize taxes. 

Additionally, traditional IRA accounts are subject to RMDs once the account holder turns 72 (or 70 ½ if born before July 1, 1949).

Roth IRA

A Roth IRA is funded with post-tax dollars. While you won’t lower your taxable income, qualified withdrawals in retirement will be tax-free. Unlike traditional 401(k)s and IRAs, Roth IRAs are not subject to RMDs.

The contribution limit remains the same for Roth IRAs, $6,000 or $7,000 if you’re 50 and older. There is, however, an income ceiling limit that can affect your eligibility to directly contribute to a Roth IRA account.

According to the IRS, Those who are married filing jointly may contribute up to the full limit if their modified adjusted gross income (AGI) is less than $198,000. For single filers, the income limit is $125,000. Those who earn above the ceiling cap may still be eligible to contribute a reduced amount, depending on their modified AGI.

There are additional opportunities for high-earners to fund their Roth IRAs, just not directly. 

Roth Conversion

Roth conversions present a critical opportunity for people to grow retirement savings tax-free and prioritize tax-free withdrawals while avoiding RMDs.

With a Roth conversion, you transfer funds from a traditional IRA into a Roth IRA and is an excellent avenue for highly compensated employees to bypass the Roth IRA income ceiling.

If you are considering a Roth conversion, keep in mind that you will be required to pay taxes at the time of conversion. Doing so may require a significant amount of cash on hand, depending on how much you convert.

Mega Backdoor Roth IRA

A mega backdoor Roth IRA is a fairly sophisticated strategy that can allow high earners - with eligible 401(k) plans - to contribute up to $38,500 to a Roth IRA or Roth 401(k) account. This amount would be in addition to regular contribution limits.

This strategy is for those whose 401(k) plan providers allow voluntary after-tax contributions. These contributions don’t count toward your annual contribution limit, and they’re held separately from your regular 401(k) account contributions.

If you’re considering this strategy, work closely with your trust officer, CPA, and/or human resources department. Not all 401(k) plan providers allow for a mega backdoor Roth IRA, and you may be accountable for a sizable tax bill once the transfer is complete.

However, this may be an important option for those who have found themselves maxed out on other retirement savings strategies.

HSA

A Health view Services study found that a healthy 65-year-old couple can expect around $387,644 in remaining lifetime health costs (not accounting for inflation).

Knowing that you’re likely to face significant health costs in retirement, a health savings account (HSA) can be a vital long-term savings vehicle.

An HSA is a tax-advantaged account that offers three essential tax benefits:

  1. Contributions are made with pre-tax dollars, meaning they lower your AGI.
  2. Funds in the account grow tax-free.
  3. Qualified distributions are tax-free.

You are eligible to enroll in an HSA if you have a high-deductible health plan and are under the age of 65. Unlike Roth IRAs, there is no income limit, which means high earners can contribute to an HSA. This savings vehicle is an important one for retirement because funds roll over year after year if unused.

The total contribution limit for 2021 (including employer and employee) is $3,600 for individuals or $7,200 for families. If you are 55 or older, your catch-up contribution limit is $1,000.

Taxable Investment Accounts

Depending on your retirement timeline, you may find it advantageous to increase contributions to brokerage and taxable investment accounts. Doing so can be especially important if you’ve maxed out other retirement savings vehicles and find yourself with extra cash left in savings.

Work with your trust officer to determine what investment options may be appropriate for your situation, keeping potential tax implications in mind.

Alternative Investments

Depending on your interests and comfort level, you may consider alternative investment strategies when preparing for retirement. The stock market aside, there are plenty of options for investors looking to step outside of the box when funding their retirement.

Real estate investment trusts (REITs), for example, are a common type of alternative investment used to help diversify a pre-retiree’s portfolio. REITs provide individual investors the opportunity to invest in large-scale real estate designed to produce income. Property types may include warehouses, apartment complexes, hotels, or shopping centers. In some cases, REITs may invest in the mortgage or loan itself rather than the physical building.

Other types of alternative investments could include:

  • Annuities
  • Commodities (gold, natural gas, solar energy, etc.)
  • Collectible items (Artwork, jewelry, vintage cars, etc.)
  • Hedge funds

Your Retirement, Your Strategies

Above all else, remember that your journey toward retirement will be unique to you. What you’ll need to enjoy financial independence will entirely depend on your own time horizon, risk tolerance, and goals.

Consider working with First Dakota National Bank to discuss your goals, concerns, and strategy as you continue preparing for retirement. Contact us today to get started.

Disclaimer

First Dakota Wealth & Trust is the fiduciary investment department of First Dakota National Bank with trustee powers to serve clients during their lifetime, during incapacity, and after death. We help clients develop a financial roadmap to help simplify their financial future.

Please note that neither First Dakota National Bank nor First Dakota Wealth & Trust Department, or its employees provide tax or legal advice. This is intended for informational purposes and is not intended to constitute legal or tax advice. Please consult your attorney and/or tax professional for advice related to your specific situation.