Maxing out a 401(k) is a great financial goal. With the 2021 limits of $19,500 a year for those under 50, those maxing out the 401(k) are looking at around $750 per biweekly paycheck pre-tax. But what should you do if you still have money to invest? If you’re currently maxing out your 401(k) and are looking for the next financial step, here are 4 options to consider.
Finish Your Emergency Fund
If you don’t have a fully-funded emergency fund, now is the time to put your excess funds to work. An emergency fund is used to protect you from needing to take on debt in the case of an emergency.
And having one that’s fully complete, meaning you have your desired 3-6 months of living expenses in cash, means you’re also protecting other investments. By paying for an emergency in cash, you won’t run the risk of needing to decrease your 401(k) contributions to do so.
Invest in an Individual Retirement Account (IRA)
Individuals can open an IRA in conjunction with an employer-sponsored retirement account like a 401(k). And the best part is there are two options, pre-tax and post-tax (Roth). While the traditional pre-tax IRA will be taxed similarly to your pre-tax 401(k), the Roth IRA option uses an investment of after-tax money which grows tax-free for life. For a ROTH IRA, you can contribute an annual maximum of $6,000 (or $7,000 if you are 50 years or older), the amount you can contribute is reduced starting when your income reaches $125,000 (for single filers and $198,000 (if you’re married filing jointly). You can no longer contribute to a Roth IRA after you make more than $140,000 for single filers and $208,000 for married couples filing jointly.
Since IRAs have lower limits than a 401(k) at only $6,000 per year if you’re under 50, some people may be able to max out contributions to both accounts. Keep in mind that if you’re covered by a 401(k) at work, you may not be able to deduct your IRA contributions.
Consider Getting Life Insurance
After you max out your 401(k), you want to be sure you’re putting your money to work. Getting a permanent life insurance plan can allow your beneficiaries to receive a death benefit from the insurer if you pass away unexpectedly. This type of policy also allows you to accumulate cash value throughout your lifetime that you can use in a variety of ways, including taking out a loan and supplementing your retirement income. And a permanent life insurance plan with the right company may pay dividends.
If you’re wondering how dividends work on life insurance, it’s actually pretty simple. A dividend is paid out to the policyholders when the company performs better than assumed. It’s vital to thoroughly assess the company and premium payments before committing.
Open a Taxable Brokerage Account
You can open a taxable brokerage account with any number of financial firms. The major benefits of investing your after-tax money into these accounts are that there are no income limits, no required minimum distributions, no contribution caps, and you’re in the driver’s seat when it comes to managing your investment. And with these accounts, there is no penalty for early withdrawal.
But on the potential downside, you’re going to pay more in taxes since these the realized gain in these accounts is subject to short or long-term capital gains taxes, depending on how long you hold the investment. If you have other specific financial goals such as saving for a dependent’s college fund, you may have more tax-advantaged options.
The Bottom Line
After you pat yourself on the back for maxing out your 401(k), it’s time to look at other places to stash your cash. Once you’ve built up emergency reserves, it’s wise to consider tax-advantaged options like IRAs or permanent life insurance policies. But if you’d rather have more flexibility in choosing your investments and you’re not too worried about taxes, a taxable brokerage account might be the right option.
