Congratulations! You’re on track to reach your 401(k)-contribution limit for the year. But your commitment to funding your retirement shouldn’t stop at your 401(k). Once you’ve maxed out those contributions, you should take another step to preparing for your post-career lifestyle. Here are some smart ways to stash more for retirement if you’re looking to save more than what an employer-sponsored retirement plan allows:
The IRS has separate limitations for annual IRA contributions than it sets for 401(k) contributions. That allows you to continue adding funds to an IRA fund after you’ve reached your 401(k) limit for the year. It’s actually quite common to have both a 401(k) and an IRA. Why? It allows you to further diversify your retirement holdings. “These accounts typically have a broader assortment of investments, such as exchange-traded funds,” according to Anna-Louise Jackson and Alieza Durana of NerdWallet. This gives you added stability as you save for the future. Plus, an IRA isn’t tied to your employer, so you can keep contributing to it even after you leave your job.
Many people don’t fully utilize the benefits of their Health Savings Account (HSA). If your healthcare plan includes a health savings account, you should be maxing it out also. An HSA rolls over annually; you won’t forfeit funds you don’t use. That makes it a safe place to amass funds for future medical expenses where they can rest tax-free.
Did you know that you can also use your HSA funds for investing? Keith Speights of The Motley Fool asserts this account can serve as an investment vehicle with a triple tax advantage: skipping taxation on contributions, taxation on earnings, and taxation on withdrawals for qualifying medical expenses.
You can even use money in your HSA for purposes other than healthcare. But you’ll have to pay taxes on them upon withdrawal. Avoid an additional penalty fee by waiting until after age 65 to do so.
You have many investment options available to you for compounding your savings in anticipation of retirement. You can start with low-risk options if you favor stability over growth. These can help ensure that your retirement funds don’t take a major hit if the market takes a severe turn close to your target retirement age. Consider Series I Savings Bonds or municipal bonds. If you can survive higher risks, consider fixed index annuities or mutual funds.
If you’re a high-income earner, life insurance can supplement your retirement savings in addition to providing a potential death benefit. Financial security professional Michael Hanna of Forbes explains your life insurance contributions are insulated from taxes, so this provides a feasible destination to route your surplus savings. “Life insurance can work not only for financial protection but also as an effective investment vehicle,” explains Hanna, though he points out that’s only, “if the fees in the policy are less than the fees and taxes that would otherwise be in an alternative taxable investment.”
Keep in mind the IRS typically adjusts 401(k) contribution limits every year to account for inflation. So, even if you’ve reached your limit this year, make sure you increase your contributions annually as the IRS raises the ceiling. Plus, you have the option of a catch-up contribution if you’re over 50 years old.
Make sure your current financial situation is under control, too: you’ve paid off all high-interest debts, have adequate insurance, and have an emergency fund. Don’t jeopardize your financial security now in order to ensure financial security during retirement.