Beyond the 401(k)
How to invest after you’ve maxed out your employer plan:
Will my 401(k) be enough to retire on?
Since the 1980s, when they were introduced as a way to take advantage of changes to the tax code, 401(k)s have become many Americans’ primary form of saving for retirement, especially as pension plans have become rarer. Part of your salary is automatically deducted from your paycheck, pretax, and invested; in many cases, an employer will match some of your contribution. But 401(k) contributions have drawbacks, including annual contribution limits (currently, $19,000, or $25,000 for employees 50 and older). It may take more to meet your retirement needs, especially if you’ve reached a high income in your prime earning years and want to maintain your standard of living in retirement. Luckily, there are other investment options that you may want to consider after—or even before—you’ve maxed out.
Should I open a Roth IRA?
These retirement investment vehicles, established in 1997, have become immensely popular, both as an alternative to 401(k)s and as a supplement to existing retirement funds. You put money into the account (up to $6,000 a year, or $7,000 if you’re 50 or older) and invest it yourself. Unlike those for 401(k)s, Roth contributions are after-tax, but you won’t be taxed at all on your eventual earnings—which could be substantial, especially if you open your Roth early enough—so long as you don’t make withdrawals until you’ve reached the age of 59½. There are limits on who can contribute to a Roth, however: Your yearly modified adjusted gross income must be less than $137,000, if you’re single, or $203,000, if you’re married, for you to be eligible.
What should I do with my 401(k) if I switch jobs?
Few people stay in the same job for the majority of their career; indeed, most of us will have multiple employers, and likely several 401(k) plans, during our working lives. Cashing out will incur a major tax burden and additional penalties. So consider rolling your 401(k) over into a traditional IRA. These plans work much like 401(k)s: You make tax-free contributions, and pay taxes when you withdraw later in retirement, most likely at a lower rate. But IRAs come with significant advantages: You get more investment choices, often with lower fees. You also get more flexibility in terms of how and when to sell; most 401(k)s will limit the number of times you can rebalance your portfolio in a year. Once you open an IRA, you can roll over a 401(k) into it whenever you switch jobs.
Can I save for medical costs?
Yes. Health Savings Accounts let you put pre-tax money into an account that can be used to pay medical costs. To be eligible, you need to be enrolled in a high-deductible health care plan. HDHPs have deductibles of at least $1,350 for an individual or $2,700 for a family; that now covers about half of Americans, and the number is rising. Although HSAs are not typically thought of as retirement investment vehicles, they absolutely can be. Contributions to an HSA—up to $7,000 a year for a family—carry over year to year and can be invested in mutual funds or exchange-traded funds. Withdrawals for medical expenses are tax-free, a big benefit in retirement, when many of your costs will be medical-related. Less well known: After age 65, you can treat an HSA like any other retirement account, withdrawing money as you would with an IRA or a 401(k).
What if I’ve maxed out all my traditional accounts?
You can always invest in a taxable account, which you can open through just about any brokerage firm. This comes with a lot of flexibility: You can put in as much as you want, invest it just about wherever you want, and take the money out whenever you want. That’s nothing to scoff at: If you’re planning on retiring early, or simply withdrawing your assets early, you’ll want to have the money somewhere that you won’t get penalized for doing so. Many brokerages now offer low-cost electronic financial advice—so-called robo-advisers—to help your planning. One key area of investment to consider for your taxable accounts: index ETFs (exchange traded funds). These track common market benchmarks like the S&P 500 or the Russell 3000, which tend to grow over time. ETFs often have very low fees, and provide diversification and tax efficiency, important considerations for retirement.
Should I consider fixed income?
Fixed-income instruments, such as government or high-grade corporate bonds and certificates of deposit (CDs), allow you to grow your money modestly without risking losing what you’ve already put in. This can be a source of steady income that also works to counter the volatility of equity markets. One way to approach fixed income is to ladder bonds and CDs, which means you invest in a variety of them with different maturity dates; one can end after one year, another can end after two years, and so on and so forth. Then, as an investment matures, you can use it to meet your income needs or reinvest it. That way, you maintain regular income while avoiding some of the vagaries of changing interest rates. ■