Financial experts agree that everyone should save for retirement – Social Security and pension plans probably won’t provide enough money for you to sustain your current standard of living during your retirement years, so it is up to you to provide the difference. The two most popular retirement investing tools are the 401k (and similar employee sponsored retirement plans such as the 403b and Thrift Savings Plan), and the Individual Retirement Arrangement, or IRA.
Maxing Out Your 401k and IRA
The tax incentives offered by 401k plans and IRAs allow investors to defer or avoid paying taxes on their retirement income, making these powerful retirement planning tools. These tax breaks are also the reason why most financial experts advise people to use tax advantaged retirement programs such as a Roth IRA, 401k, 403b, SEP IRA, etc. when investing for retirement.
Create a plan to max out your retirement investments. If your employer offers matching contributions to your 401k plan, then it is usually best to contribute enough to your 401k plan to get the matching employer contribution. Then work toward maxing out your Roth IRA. (Compare Roth and Traditional IRAs to see which is best for your needs). If you still have enough money left after maxing out your Roth IRA, then contribute toward your 401k plan until you can max it out.
But where do you invest once you max out both your 401k and your IRA?
Retirement Investing After Maxing Out 401k and IRA
Maxing out your 401k plan and IRA is a great achievement, and will provide most people with a sizable nest egg for retirement. But some people may wish to continue their retirement investing after maxing out these plans. Here are some tips if you find yourself in this position.
Reevaluate your financial plan. The first step is to reevaluate your investing and retirement needs. Do you have any other pressing financial needs? Do you have any non-mortgage debt? Are you saving for college, planning on buying a new home in the near future, or saving for any other long term goals? If the answer is yes to any of these questions then you may wish to use your additional funds elsewhere since it is usually a good idea to avoid taking on new debt.
Evaluate your retirement investment strategies. Next, determine if you actually need to save above and beyond a 401k and IRA. If you decide that maxing out your 401k and IRA should provide enough money for you in retirement, then you are done and can use your money for other needs. But if you determine you will need more money that your 401k and IRA investments will provide, then consider some of these options.
Invest in Taxable Investments
A taxable invest is simply an investment that isn’t sheltered in a retirement account or other vehicle that provides tax advantages. You can invest in the same types of investments, but you won’t enjoy the ability to defer or avoid paying taxes when you cash them in. On the flip side, you have more flexibility regarding when you can use the funds since you don’t have to worry about early withdrawal penalties.
What you do need to consider, however, is the tax implications of these types of investments since they don’t have the same tax advantages as 401k plans and IRAs. Because of this, you may wish to employ more of a buy and hold strategy (long term capital gains are currently set at 15%), or utilize index funds, ETFs, or tax efficient mutual funds. These investment strategies can help you grow your nest egg and minimize your taxes. Check out these online brokerage firms for some good places to invest outside of the traditional retirement plans.
Invest in Bond Funds or Tax Free Municipal Bonds
Bond funds can give your portfolio exposure to a different type of investment without taking on as much perceived risk as investing directly in the stock market. Many bond funds feature some tax advantages over stocks and similar investments. Tax free municipal bonds offer another way to invest in fixed securities with added tax advantages.
Invest in Real Estate
Real estate investments can provide a steady income stream and may be able to provide additional long term tax advantages, such as using a 1031 tax exchange when you buy and sell your properties. Real estate isn’t without it’s risks, but it also provides a different set of benefits as it generally brings in cash flow in addition to the equity in your property.
Do you have other recommendations for investing after maxing out retirement plans?
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