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There are other ways to save for retirement

Quick Summary

  • For 2019, you can contribute up to $6,000 to a Roth IRA, or $7,000 if you’re age 50 or older.
  • If you max out your Roth IRA contributions, there are other places to put your money.
  • Good choices are 401(k)s, health savings accounts, and SIMPLE and SEP IRAs.

Do you have a maxed-out Roth IRA and wonder where to go next? It’s a problem a lot of investors wish they had.

While it’s hard to top the tax-deferred growth and tax-free withdrawals that a Roth IRA offers, there are still plenty of other great options that can cut back on Uncle Sam’s tax bite.

For 2019, you can contribute up to $6,000 a year to a Roth IRA (or $7,000 if you’re age 50 or over). If you’ve hit the cap on your annual Roth IRA contributions, here are some other investments you’ll want to explore.

A 100 dollar bill with the word roth ira indicative a maxed out roth ira

A 401(k) or Other Defined-Contribution Plan

A 401(k), 403(b), or 457 plan is a great addition to your retirement savings strategy. If your employer offers one of these plans, you can contribute up to $19,000 per year (or $25,000 if you’re age 50 and older).

In general, if your employer offers a match, take advantage of it. This is one of the best retirement investments available since you get an automatic return on your money.

It’s a good idea to fund your 401(k) with enough money to max out your employer’s contribution. Then you can max out your other accounts, including your Roth IRA. After that, you can always go back and contribute up to the max for your 401(k).

Important: If your employer offers a 401(k) match, take advantage of it. It’s free money. 

With 401(k) and other defined-contribution plans, your investment choices are limited to the menu that your company offers. But the tax benefits will likely more than make up for it.

Your contributions are tax-deductible and grow on a tax-deferred basis until you make withdrawals in retirement. At that point, you’ll pay ordinary income taxes on any funds you pull out of the plan.

If you expect to reach a higher tax bracket in retirement, a Roth 401(k) may be an even better option. Your contributions aren’t tax-deductible, but you don’t have to worry about income taxes on qualified withdrawals that you make later in life.

Bulk Up Your Health Savings Account

Most investors who use health savings accounts (HSAs) only put in enough to take care of their short-term needs. What they forget is that HSAs are also an incredibly powerful investment tool.

Why? Because they’re unique in offering a triple tax benefit:

  • You contribute after-tax dollars
  • Your money grows tax-free
  • Withdrawals are tax-free when you use them to pay for medical expenses.

Some HSA providers only allow FDIC-insured accounts that offer skimpy interest rates. But others let you invest in mutual funds and index funds that open the door to long-term growth.

HSAs have limitations that other tax-friendly accounts don’t. In most cases, your withdrawals are only tax-free if you use them for certain medical expenses. Those include everything from prescription drugs and hospital stays to home care and smoking cessation programs. Of course, statistics show you’re likely to spend a lot on such things once you hit retirement.

For 2019, individuals can contribute up to $3,500 each year to an HSA. For families, that’s $7,000. The caveat is that you’ll need a high-deductible health plan in order to take advantage of the HSA’s considerable tax perks. If that’s the type of medical coverage you have anyway, funding an account can have huge long-term benefits.

Important: To count as an HDHP, a health plan must have an annual deductible that’s at least $1,350 for individuals or $2,700 for family coverage. 

Consider a SEP IRA

If you’re self-employed, a Simplified Employee Pension (SEP) IRA is a great investment vehicle because it can significantly increase the limit on your overall IRA contributions. As a business owner—and that includes freelancers—the 2019 contribution limit is 25% of compensation or $56,000, whichever is less.

As with other IRAs, contributions are tax-deductible and tax-deferred. What’s more, you can max out your Roth IRA and still contribute the full amount to your SEP.

The other cool thing about SEPs is that they’re relatively easy to set up online. There’s no special paperwork you have to file with the IRS, so it’s a hassle-free way to save a lot of money on your tax bill.

If you do have other employees, the SEP can become a trickier decision because you have to contribute the same proportion of wages to each person you hire. If you’re kicking in 10% of your compensation for your own account, that means you have to kick in 10% of your employees’ compensation, too.

Find Smarter Taxable Investments

There are still ways to keep your taxes in check, even when you’ve exhausted your tax-advantaged accounts. One example: stock index funds. Because they buy and sell securities less frequently than actively managed funds, they tend to generate fewer taxable gains. When they do, it’s generally at the favorable long-term capital gains rate.

By contrast, short-term capital gains—incurred if you hold an investment for less than a year—are taxed at your ordinary income tax rate. So if you’re in a higher tax bracket, less “churn” within the fund translates into a significantly smaller tax bill. Plus, index funds tend to have lower management fees that act as a drag on your returns.

On the fixed-income side, municipal bonds are worth a look since they’re not taxed at the federal level. If they’re issued by the state you live in, they’re likely tax-free there, too. When you’re investing outside of a tax-advantaged account, that feature can have a big impact on the actual yield you receive.

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