Reader Question: I’m Maxing Out My IRA, Now What?

Non Deductible IRAThank you everyone for continuing to send me great questions to answer each week!  This question comes from Suzanne, who is in an awesome financial situation!  I hope to be in her shoes very soon, and it’s something that I think everyone should aspire to be in!

The Question

Robert, I was hoping that you could help me figure out what to do next.  I’ve been taking full advantage of my employer 401k at work, and I’ve also maxed out my Roth IRA this year.  I’m expecting to get a bonus next month in December, and want to continue to invest it, but I’m not quite sure where the best place to put my money is now…  What should I do with my investments now?

The Answer

First off, awesome job Suzanne on maxing out your IRA while still taking advantage of your 401k at work.  That is a great achievement.  When it comes to what to do next, you have three basic options, which you can do individually or combine as well.

Option 1 – Max Your 401k Past the Match

The first option that you may want to consider is putting more into your 401k, regardless of whether your employer matches your contribution.  In your email, you weren’t clear if you were just contributing to get the employer match, or if you were contributing and were going to hit the current year limit of $17,000.

If you’re just contributing to get the max, AND you are happy with the investment choices that your company offers and fees they charge, consider contributing more to your 401k to get closer to the max.  A 401k is a great way to save, even if you don’t get a match, because your contributions are tax deferred and your account will grow tax deferred until your withdraw the funds in retirement.

Option 2 – Open a Non-Deductible IRA

The next option is to open a Non-Deductible Individual Retirement Account (IRA).  The non-deductible IRA, just like a Roth IRA, allows you to contribute up to $5,000 per year.  The account is similar to a Traditional IRA in that your growth and gains aren’t taxed until retirement.  The difference between a Non-Deductible IRA and Traditional IRA is the tax deduction you take on your taxes – you just can’t do it with a non-deductible IRA.

The benefit of using a non-deductible IRA is that you still get the tax benefits of your investments growing a tax-deferred vehicle.  Depending on the investments you select, this could be very helpful.

Option 3 – Open a Standard Brokerage Account

Finally, you have the option of investing in a standard brokerage or investment account.  These accounts are fully taxable, and there is no limit to the amount you can invest, or the types of investments you can hold in these accounts.   The biggest concern is that you will pay taxes on all gains and income derived from these investments each year.  This means it is very important that you select tax-efficient investments for standard brokerage accounts.

Which option do you think Suzanne should take?

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  1. says

    Because she’ll have far more investment options, I’d recommend your Option #2 as the first course of action for Suzanne. If this account is with a brokerage firm, she should be able to invest in just about anything. Her investment options with her 401k may be quite limited–many are, unfortunately.

    Though this option isn’t for everybody, she may also want to research and consider a self-directed IRA.

    • says

      Yes, I’d only recommending doing more to the 401k if she was happy with the investment choices and fees. For example, my work 401k is terrible, and I’d never put more than the company match in. However, my wife has a great plan at Vanguard and they have good options with low fees. Hers would be one in which I’d consider investing more in.

    • says

      Good point Kurt. Limited options often means a lower long-term return. With retirement savings, investments are held long enough for compound interest to play a big part. A few percentage points on your annual return over 25 years could make a significant difference in the eventual size of your portfolio.

  2. says

    The article has good advice and Suzanne is doing well. If you are starting out and want to save and invest the workplace is a good place to start because it provides an easy and structured environment.

    The only thing I would add is to recommend that the reader take a more holistic approach to saving and investment. This takes more effort and skill to pull off particularly when you venture into the world of taxable accounts. The article seems to focus on taxes when considering how to invest. The primary focus should be on savings level in taxable and deferred accounts. Don’t worry about taxes. If you have to pay taxes over time, this shows that you are succeeding.

    The downside to 401Ks is that you typically don’t access the money before retirement and you still own all the taxes on it in the future (there is no free lunch here). If you want to achieve any kind of financial security you will need a whole bunch of savings and investment in taxable accounts to grow and use over time (my own split is 2/3rds taxable, 1/3rd deferred).
    I have a site that covers investing. But I would be the first person to tell you that your success is based upon your ability to save.

    I would recommend that Suzanne use the money to starting building taxable accounts. Open an account at the U.S. Treasury to periodically buy short term Treasury notes. Open up a few shorter term CDs (1-3 years) at a bank. Keep adding money to them over time as they rollover. Then, if you so desire consider putting some money into a brokerage account.

    • says

      Good point on taking a holistic approach to both savings and investing. One of the drawbacks of email questions is the lack of having a full financial picture. I hope Suzanne does have a good amount of savings if she is considering investing more.

  3. says

    A standard brokerage account gives you flexibility in that you can earmark it for retirement, but say you want to retire early, you can tap into that before some of the limits that are in place for 401(k) withdrawls and the such. Yes, there are taxes that you have to pay but if you’re paying taxes, it means you’re making money along the way that you otherwise wouldn’t have. A good problem to have if you ask me :)

  4. says

    I would recommend Suzanne take the time to invest that money in a sound education in investing and open up a standard brokerage account. I’m not sure of her age but none the less she should learn how to invest on her own if she has the time. Also depending on what her goals are she should look into real estate investing as well.

  5. Jeff Diercks says

    I would recommend a 4th option. After maxing out the 401k and Roth IRA, consider a low cost variable annuity. We use one from Jefferson National that costs just $20 per month and has a ton of investment options. In our sister company (InTrust Advisors), we use our trend following models to get clients better returns on a tax deferred basis in strategies that are usually tax inefficient.

    Using the VA instead of maxing out your 401k beyond the employer match also diversifies your risk of any one investment account being ravaged by some as yet unknown risk (i.e. government regulation on the IRA whereby you can only invest in treasuries). It has happened in other countries!

    • says

      My concern with annuities are the expenses and fees. Do you consider an annuity a good low-cost option? What if you want to change down the road? Suzanne may be maxing out her IRA today, but her life situation could change in a few years…

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