What to Do After Maxing Out Your 401(k) Contributions

Maxing out your 401(k) contributions is a significant milestone in securing your financial future. It demonstrates a commitment to retirement planning while highlighting the need for additional strategies to grow your wealth. Since 401(k)s have contribution limits, exploring other avenues can enhance diversification and financial security.

Contributing to Individual Retirement Accounts

After maximizing 401(k) contributions, Individual Retirement Accounts (IRAs) provide another way to build retirement savings with tax advantages and diversified investment options.

Traditional IRAs

Traditional IRAs help reduce taxable income through potentially tax-deductible contributions, depending on your income and participation in an employer-sponsored plan. For 2023, the contribution limit is $6,500, with an additional $1,000 for those aged 50 and above. Withdrawals in retirement are taxed as ordinary income, and required minimum distributions (RMDs) begin at age 73 under the SECURE Act 2.0. Consider your current tax situation and future income to weigh the benefits of tax-deferred growth versus immediate tax savings.

Roth IRAs

Roth IRAs prioritize future tax efficiency. Contributions, made with after-tax dollars, grow tax-free, and qualified withdrawals in retirement are also tax-free. Contribution limits mirror those of Traditional IRAs, but eligibility depends on modified adjusted gross income (MAGI). For 2023, single filers with a MAGI up to $138,000 can make full contributions, with a phase-out up to $153,000. Married couples filing jointly have thresholds starting at $218,000, with a phase-out up to $228,000. Unlike Traditional IRAs, Roth IRAs do not require RMDs during the account holder’s lifetime, offering flexibility in retirement and estate planning. Assess your current and projected tax positions to maximize the advantages of tax-free withdrawals.

Funding a Health Savings Account

Health Savings Accounts (HSAs) complement high-deductible health plans (HDHPs) and provide tax benefits: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. For 2024, contribution limits are $3,850 for individuals and $7,750 for families, with an extra $1,000 for those aged 55 and older. HSAs allow funds to roll over annually, unlike Flexible Spending Accounts (FSAs), enabling long-term savings.

HSAs are particularly valuable for managing healthcare expenses in retirement. After age 65, non-medical withdrawals are taxed as ordinary income, offering additional flexibility. This dual purpose—as a healthcare fund and supplementary retirement vehicle—makes HSAs a valuable part of a financial strategy.

Investing in a Taxable Brokerage Portfolio

Once tax-advantaged accounts are maxed out, taxable brokerage portfolios provide flexibility to invest in a variety of assets, such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs). These accounts have no contribution limits or withdrawal restrictions, making them versatile for tailoring investments to specific financial goals and risk preferences.

A key advantage is the favorable tax treatment of long-term capital gains and qualified dividends, with tax rates ranging from 0% to 20% in 2024, depending on income. Tax-loss harvesting can further reduce tax liabilities by offsetting capital gains with losses. Unlike retirement accounts, taxable portfolios offer liquidity, which is helpful for large purchases, emergencies, or other investment opportunities. However, frequent trading can lead to higher taxes, as short-term gains are taxed at ordinary income rates.

Evaluating Real Estate Opportunities

Real estate offers a tangible means to diversify your investments. Assess local market conditions, including supply and demand, price trends, and rental yields, to gauge potential returns. Evaluate individual property metrics like operating income, expenses, and net operating income (NOI). Metrics such as the capitalization rate (cap rate) can help compare investment opportunities.

Financing options also play a crucial role. Whether through conventional mortgages or real estate investment trusts (REITs), consider how these choices affect cash flow and overall profitability. Thoughtful analysis of market conditions and property performance is essential for maximizing returns in real estate investments.

Assessing Outstanding Debt

Evaluating outstanding debt is critical to financial health, as high-interest obligations can undermine wealth-building efforts. Prioritize repayment of high-interest debt, such as credit card balances, since eliminating these liabilities offers an immediate return equal to the avoided interest. Low-interest debt, like mortgages or federal student loans, may not require immediate focus if the rates are lower than potential investment returns.

Structured repayment strategies, such as the debt snowball or debt avalanche methods, can streamline debt reduction. The snowball method targets smaller balances first for quick wins, while the avalanche method focuses on the highest interest rates to minimize overall costs. Refinancing or consolidating loans can also lower interest rates and simplify repayment. Aligning debt management with your broader financial goals ensures a balanced approach to long-term wealth building.