What to Do After Maxing Out Your 401k

Successfully reaching the maximum contribution limit for your 401(k) is a significant financial achievement. This milestone reflects a diligent approach to saving for retirement and demonstrates a strong commitment to your financial future. This accomplishment, however, often leads to a common question: what are the next steps for your savings and investment strategies? Maximizing your 401(k) does not mean the end of your retirement planning efforts; instead, it opens doors to other avenues for building wealth and securing your post-career years.

Defining 401(k) Contribution Limits

“Maxing out” a 401(k) refers to contributing the highest amount allowed by IRS regulations for a given tax year. For 2024, the annual employee elective deferral limit for a 401(k) is $23,000. This amount can be contributed from your paycheck, either pre-tax or to a Roth 401(k), or a combination.

Individuals aged 50 and over can make additional “catch-up” contributions. For 2024, this catch-up contribution is $7,500, increasing the total employee contribution limit to $30,500 for this age group. These limits apply across all 401(k) accounts an individual may have, meaning the total contributed as an employee cannot exceed these amounts regardless of the number of plans.

Beyond employee deferrals, employer contributions, such as matching or profit-sharing, are part of the overall 401(k) plan limit. For 2024, total contributions to a 401(k) account, including both employee and employer contributions, cannot exceed $69,000. If catch-up contributions are made, this overall limit increases to $76,500. Reaching your personal employee deferral limit does not necessarily mean the overall plan limit has been met, as there may still be room for employer contributions.

Alternative Retirement Savings Paths

Once your 401(k) employee deferrals are maximized, several other tax-advantaged and general investment accounts can further bolster your retirement savings. These options provide different benefits and flexibilities, allowing for a diversified approach to wealth building.

Individual Retirement Accounts (IRAs)

Individual Retirement Accounts (IRAs) are a common next step, offering distinct tax treatments. A Traditional IRA allows for tax-deductible contributions in many cases, with funds growing tax-deferred until withdrawal in retirement. For 2024, the contribution limit for a Traditional IRA is $7,000, with an additional $1,000 catch-up contribution for those aged 50 and over.

Alternatively, a Roth IRA offers tax-free withdrawals in retirement, provided certain conditions are met. Contributions are made with after-tax dollars. The 2024 contribution limits for a Roth IRA mirror those of a Traditional IRA. Eligibility to contribute directly to a Roth IRA is subject to income limitations, with contribution ability phasing out for higher earners. However, high-income earners can explore a “backdoor Roth IRA” strategy by converting non-deductible Traditional IRA funds to a Roth IRA.

Health Savings Accounts (HSAs)

Health Savings Accounts (HSAs) offer a “triple tax advantage” for eligible individuals: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. To be eligible for an HSA, you must be enrolled in a high-deductible health plan (HDHP), which has specific minimum deductible and maximum out-of-pocket limits set by the IRS annually.

The 2024 contribution limits for HSAs are $4,150 for self-only coverage and $8,300 for family coverage, with an additional $1,000 catch-up contribution for those aged 55 and over. HSAs can serve as a long-term retirement savings vehicle; funds not used for medical expenses can be withdrawn after age 65 for any purpose, subject only to income tax, similar to a Traditional IRA.

Taxable Brokerage Accounts

Beyond tax-advantaged accounts, taxable brokerage accounts provide unlimited contribution potential and flexibility. These accounts do not offer upfront tax deductions, and investment gains are subject to taxation when realized. Despite the lack of immediate tax benefits, taxable brokerage accounts offer liquidity, allowing access to funds before retirement age without penalties. They can hold a variety of investments, providing a versatile platform for growth after exhausting other retirement savings options.

Advanced 401(k) Strategies for Additional Savings

For individuals with substantial savings capacity, advanced strategies involving the 401(k) framework can provide additional avenues for retirement savings. These approaches leverage specific plan features and IRS regulations to maximize total contributions.

Mega Backdoor Roth

One strategy is making after-tax 401(k) contributions, often part of a “Mega Backdoor Roth” conversion. Some 401(k) plans permit participants to contribute after-tax dollars beyond their pre-tax or Roth elective deferral limits, up to the overall plan limit. These after-tax contributions can then be converted into a Roth IRA, allowing funds to grow and be withdrawn tax-free in retirement. This strategy bypasses the income limitations associated with direct Roth IRA contributions.

Implementing the Mega Backdoor Roth strategy depends on your employer’s specific 401(k) plan. The plan must allow after-tax contributions and facilitate in-service distributions or conversions to a Roth IRA. Given the complexity, consult your plan administrator or a financial advisor to determine if this option is available and suitable.

Maximizing Employer Contributions

Maximizing all available employer contributions to your 401(k) plan is another important consideration. Even if you have reached your personal employee deferral limit, your employer may still contribute matching funds or profit-sharing contributions. These employer contributions count towards the overall 401(k) plan limit.

Ensuring you receive all available employer contributions is a straightforward way to increase your total retirement savings without additional personal outlay. Many employers offer matching contributions as an incentive for employees to save, which can significantly boost your retirement nest egg. Understanding your employer’s contribution structure helps optimize your overall 401(k) savings, even after your personal contributions have reached their maximum.