What should I do after maxing out my Roth IRA? Are there any alternatives that I can look into or do I have to wait until the next year to resume making my contributions to the IRA? Well, you are about to find out about this and more in today’s comprehensive article, so read on to the end to find out more.
Saving using a Roth IRA is often perceived as a financially sound move and for a good reason. By opening a Roth IRA, you can use your after-tax dollars to invest in paper assets such as stocks and bonds, with the hope that you will take home some significant gains at the end of the IRA term. As you approach your annual contribution limit, however, it is time for you to start thinking about other avenues you can park some of the extra cash.
**Also read: What is a backdoor Roth Ira
Roth IRAs, like other types of IRAs, have their contribution limits capped at$6000 per year or $7000 for those aged over 50 years. Any additional funds that you need to invest in that tax year will have to find another home, such as the options described below:
The first option to consider is a 401(k), 403(b), or 457 retirement plan. If your employer offers any of these plans, then they are worth looking into, moreso due to the attractive contribution limits. In 2022, for instance, these plans allow you to contribute up to $ 20,500 if you are younger than 50 years, or $27,000 for those aged over 50. As you can see, there’s more room to stash away extra cash for your retirement years.
Beyond that, you stand a good chance to have your employer match your contributions. This, however, means that you have to first contribute all the money you can to your defined-contribution plan before putting a single coin into your Roth IRA.
The contributions made to these retirement plans are tax-deductible, to mean that your savings will grow tax-deferred, so that you can pay your taxes upon retiring or when you are ready to take withdrawals.
You can, however, choose the Roth Versions of these plans, but that means that you will not get any tax breaks in the year you make the contributions, but you will have the opportunity to enjoy tax-free withdrawals in your retirement years, just as is the case with a Roth IRA.
**Also read: What is a 401(k) to gold IRA rollover
Simplified Employee Pension (SEP) IRA
A SEP IRA is a retirement plan that gives small business owners tax breaks as they save for their golden years. If you are self-employed and earn your income through a full-time job or through part-time gigs, then you are allowed to contribute up to 25% of your annual income, or $61,000 to a SEP IRA, whichever is less. Self-employed people are considered to be employers and employees, hence this generous maximum contribution limit.
If you have other employees, you can contribute on their behalf, though this has to be a set percentage of the compensation that you also contribute to your own account as well. Say you have decided to stash away 10% of your annual income to your SEP IRA, then you have to contribute 10% on behalf of your employees as well.
For you to contribute on behalf of your employees, then they have to meet the qualifications highlighted below:
- Be 21 years or older
- Must have worked for your business for not less than 3 of the last 5 years, and
- You must have paid them not less than $650 during the year you start making the contributions on their behalf.
The contributions made to SEP IRAs are tax-deductible for the year in which they are made, hence the withdrawals in retirement are taxed as ordinary income.
Savings Incentives Match Plan for Employees (SIMPLE) IRA
This is a plan structured like a 401(k) meant to serve small businesses that have less than 100 employees. The participants in this plan can contribute $16,500 if they are aged below 50 years, or $17,000 if they are over 50 years. Self-employed participants in this plan are considered both the employer and employee.
Business owners who would like to contribute on behalf of their employees can pick any of the options listed below:
- They can make a dollar-for-dollar match -this is capped at 3% of the employee’s total pay, or
- Make a contribution of 2% of the employee’s income, regardless of whether the employee contributes or not.
All contributions under this plan are tax-deductible in the year they are made, hence the withdrawals are later taxed as ordinary income.
Annuities are popular investment products, for which investors receive periodic payouts during their retirement years. A significant number of investors have criticized annuities, citing higher fees and unprofitable investment options as the two main downsides of this option.
There is, however, an upcoming class of annuities that go by the name investment-only annuities, which have been heralded for their lower costs. These annuities are quite different, in that they are created for tax-deferral, and not insurance benefits.
If you decide to use annuities as your go-to option after maxing out your Roth IRA, then it is advisable that you look out for any extra features, as you also verify that the annuity offers any value to you, so that you end up paying extra fees for nothing.
The contributions made to annuity plans are not tax-deductible, but they grow tax-deferred. Also, there’s no set limit on the maximum after-tax amount you can contribute to your plan. You will be required to pay taxes on the investment gains at the time you are making withdrawals, but you won’t be charged any taxes on the principal contribution.
Frequently Asked Questions on “maxing out a Roth IRA?”
1. What does it mean to “max out” your Roth IRA?
Maxing out means that you have hit the set contribution limits for your Roth IRA for the current tax year. The contribution limits vary from year to year, so you should be sure to check whether you have actually maxed out your Roth IRA. If you have maxed out your account and you still need to invest more of your money into a retirement plan, then you can do your due diligence to establish which plan will help you meet your retirement investment needs best.
2. Can I open a Health Savings Plan after maxing out my Roth IRA?
Yes, you can. A Health Savings Plan, also popularly abbreviated as HSA, was designed to help people save for their medical care, but is also a suitable source of retirement income. The funds you contribute to this plan are tax-deductible, and the withdrawals are tax-free. If you are lucky enough, your employer may volunteer to match a certain percentage of your contributions. You are allowed to use the funds in your HSA to meet your healthcare needs as well as any other emergencies, provided you do not withdraw the funds before hitting 65 years. Anyone who makes an early withdrawal from their HSA is required to pay a 20% penalty.
3. Which account should I max out first, my 401(k) or my Roth IRA?
If you own a 401(k) and a Roth IRA, then it is advisable that you first max out your 401(k) before proceeding to fund your Roth IRA. Doing this will ensure that you access the full employer match, which can be quite a significant amount of money, depending on the terms and conditions of the contribution agreement.
4. Which is the best option for self-employed people who have maxed out their Roth IRA?
If you currently have any form of self-employment income, then you should check out what a SEP or SIMPLE IRA has to offer. SEP IRAs have higher contribution limits, which is something worth noting if you are hunting for an option that will allow you to contribute a higher amount of money.
That will be all for today’s post in which we have addressed the question “What should I do after maxing out my Roth IRA?” I hope you found it helpful, and that you now know the options to consider if you hit the maximum contribution limits for your Roth IRA. Let me know if you have any questions regarding today’s topic- drop them in the comments section and I will get back to you ASAP.
I wish you well,
Eric, Investor and Team Member at Gold Retired!