What to Invest in After Maxing Out 401k?

Maximizing your 401(k) contributions is a significant financial milestone, signaling an opportune moment to broaden your investment horizons. Continuing to invest diligently is fundamental for achieving long-term financial goals, such as retirement, major purchases, or wealth building. This guide explores various investment avenues available once your 401(k) limit has been reached, helping you strategically allocate additional savings for continued growth.

Maximizing Other Tax-Advantaged Accounts

After fully funding your 401(k), exploring other tax-advantaged accounts is a logical next step, offering distinct benefits like tax deferral or tax-free growth, similar to your 401(k). Understanding each account type allows for a comprehensive approach to wealth accumulation.

Individual Retirement Accounts (IRAs) represent a common choice for additional retirement savings, with both Traditional and Roth versions available. For 2025, the contribution limit for either a Traditional or Roth IRA is $7,000, with an additional $1,000 catch-up contribution permitted for those age 50 and older, bringing their total to $8,000. These limits apply across all IRAs you own, meaning you cannot contribute the maximum to both a Traditional and a Roth IRA in the same year.

A Traditional IRA allows for tax-deductible contributions, which can reduce your taxable income in the year of contribution. Investments grow on a tax-deferred basis, meaning you do not pay taxes on earnings until withdrawal in retirement. However, contribution deductibility may be limited if you or your spouse are covered by a workplace retirement plan and your modified adjusted gross income (MAGI) exceeds certain thresholds. Withdrawals in retirement are taxed as ordinary income, and withdrawals before age 59½ may incur a 10% penalty, along with income taxes, unless an exception applies.

In contrast, a Roth IRA accepts after-tax contributions, meaning your contributions are not tax-deductible. The advantage of a Roth IRA lies in its tax-free growth and tax-free qualified withdrawals in retirement. This means that when you take distributions in retirement, both your contributions and earnings are generally free from federal income tax, provided certain conditions, such as a five-year holding period and reaching age 59½, are met. Eligibility to contribute directly to a Roth IRA is subject to income limitations, with contributions entirely phased out for higher incomes.

Health Savings Accounts (HSAs) offer a triple tax advantage for those eligible. Contributions are tax-deductible, earnings grow tax-free, and qualified withdrawals for medical expenses are also tax-free. For 2025, the HSA contribution limit is $4,300 for self-only coverage and $8,550 for family coverage. An additional $1,000 catch-up contribution is allowed for individuals age 55 and older.

To be eligible for an HSA, you must be enrolled in a High-Deductible Health Plan (HDHP). For 2025, an HDHP is defined by specific minimum annual deductibles and maximum out-of-pocket expenses. HSA funds, unlike Flexible Spending Accounts (FSAs), roll over year to year and remain yours even if you change employers or health plans. After age 65, funds can be withdrawn for any purpose without penalty, though non-medical withdrawals will be subject to income tax.

Utilizing Taxable Brokerage Accounts

Once tax-advantaged retirement and health savings accounts have been fully funded, taxable brokerage accounts become a primary avenue for additional investment. These accounts, unlike their tax-advantaged counterparts, do not offer upfront tax deductions or tax-deferred growth on all earnings. However, they provide flexibility and unlimited contribution potential, making them a suitable choice for accumulating wealth beyond specific retirement or healthcare needs.

A taxable brokerage account is a general investment account where you can hold a wide array of investments, such as stocks, bonds, mutual funds, and exchange-traded funds. There are no annual contribution limits imposed by the IRS on these accounts, allowing you to invest as much as you wish. This unlimited capacity is an advantage for individuals with substantial savings who have already maximized other tax-advantaged options.

The primary tax implication of a taxable brokerage account is that investment earnings, such as dividends, interest, and capital gains from the sale of assets, are subject to taxation in the year they are realized. Dividends are taxed as either qualified or non-qualified (ordinary) dividends. Qualified dividends are taxed at preferential long-term capital gains rates, which for 2025 can be 0%, 15%, or 20% depending on your taxable income. Non-qualified dividends are taxed as ordinary income, at your regular income tax rate. Interest income is also taxed at ordinary income rates.

Capital gains arise when you sell an investment for more than its purchase price. The tax rate applied to these gains depends on how long you held the asset. Short-term capital gains, from assets held for one year or less, are taxed at your ordinary income tax rate, which for 2025 can range from 10% to 37%. Long-term capital gains, from assets held for more than one year, receive more favorable tax treatment, taxed at 0%, 15%, or 20% depending on your income level.

A benefit of taxable brokerage accounts is the liquidity and flexibility they offer. Unlike retirement accounts, which impose penalties for withdrawals before a certain age, funds in a taxable brokerage account can be accessed at any time without age restrictions or penalties. This makes them suitable for saving for shorter-term goals or for having readily available funds. These accounts also provide extensive diversification potential, allowing you to invest in a broad range of assets and sectors that might not be available within employer-sponsored plans.

Exploring Additional Investment Avenues

Beyond traditional market-based accounts, other avenues exist for deploying surplus funds. These alternative investment strategies can complement a diversified portfolio and align with various financial objectives. They often involve direct investments or address financial liabilities, providing returns in different forms.

Investing in real estate offers a tangible asset that can generate income and appreciate over time. This can involve purchasing rental properties to earn passive income from tenants and benefit from potential property value increases. Real estate investment trusts (REITs) offer an alternative way to invest in real estate without direct property ownership, as they are companies that own, operate, or finance income-producing real estate. REITs trade like stocks on major exchanges, providing liquidity and diversification across various property types.

Paying down high-interest debt can be considered an effective form of investment. Accelerating payments on debts such as credit card balances or personal loans, which carry interest rates ranging from 15% to 30% or more, provides a guaranteed return equal to the interest rate avoided. This strategy effectively frees up future cash flow and reduces the overall cost of borrowing, directly enhancing your financial position. The financial benefit of eliminating high-interest debt surpasses the potential returns from many traditional investments, particularly in a low-return environment.

Another avenue involves investing in a small business or a side hustle. This could mean allocating capital to launch or expand an entrepreneurial endeavor. The return on this investment is not in the form of dividends or capital gains from publicly traded securities, but rather through increased business profits or the growth in value of the enterprise itself. This approach requires a direct commitment of time and effort in addition to financial resources, offering the potential for substantial returns directly tied to your entrepreneurial success.