Is there ever a “good” financial problem? As a CERTIFIED FINANCIAL PLANNER™ professional, I’ve learned that every financial situation is complex, and “good” and “bad” labels are far too simple. That said, maxing out your 401(k) — contributing $18,500, the government-contribution limit in 2018 — would often be described as a good problem to have. After all, the contribution is pre-tax, and the limit only applies to the amount you put in, not any employer matches. If you’re able to take advantage of an employer 401(k) match, it can make a big difference in helping you reach your retirement goals if you do decide to contribute the maximum amount to your account.
To be clear, there are many ways to reach both your financial goals and your retirement goals without maxing out a 401(k) — but if you do find yourself reaching the 401(k) maximum contribution limit, here are some other retirement and savings strategies to consider.
Financial moves to consider when you feel your 401(k) is on track
If the option to max out your 401(k) is financially available to you, you may wonder, “what next.” At that point, it can be a good idea to look at your short-term and long-term financial goals to figure out other possible options to allocate the money. For example:
- Establish or boost your emergency fund savings to a year of expenses
- Save for a down payment on a new house
- Start a 529 college savings plan for your newborn
- Fix up the house
- Get your estate planning documents in order – like a will, living trust and advanced health care directive
Those are just a few items on a financial to-do list that may not necessarily be investment-related but still require some TLC.
On the other hand, if you’ve got your eye fixed on alternatives to a 401(k), there are a few places you might look to put your cash.
Alternatives to a 401(k)
Roth IRA account options
A Roth IRA can be an alternative retirement savings choice if you meet the parameters. Just a quick reminder that, unlike your 401(k), contributions to a Roth are not tax deductible – you pay tax on the money before you contribute. In addition, many people who max out their 401(k) may find that they make too much money to qualify to a Roth.
In 2018, Roth contributions are phased out for a single filer with MAGI (modified adjusted gross income) over $135,000 and $199,000 for married filing jointly couples. But if your income is under the limit, then it might make sense to investigate Roth IRA options, since this money can grow tax-free and can be withdrawn tax-free after age 59 1/2.
Non-qualified investment account
If you’ve already invested in a traditional retirement plan, you may also be curious about opening a non-qualified investment account. These are individual accounts that don’t qualify for preferential tax treatment. It’s an investment account that allows you to select investment options and manage your portfolio. Just be aware that your account may give rise to some tax liability, such as capital gains and income taxes.
Health Savings Account
If you have a high deductible health plan and you meet other eligibility requirements, you can contribute to a health savings account to help pay for medical expenses today or in the future. An HSA offers a triple benefit: tax-deductible contributions, tax-free growth, and tax-free distributions to pay for qualified out-of-pocket health care expenses such as co-pays, medical equipment including prescription eyeglasses or contacts, or dental treatments. The funds in this account can roll over from year to year, meaning that it’s also possible for the account to be used for medical expenses in your retirement. Depending upon your plan, you may also be able to choose to invest your HSA contributions in mutual funds or other investment options. You can withdraw the funds tax-free for qualified medical expenses at any age. After age 65, withdrawals may be taken for expenses other than medical reimbursements, subject to income tax.
In 2018, an individual can contribute up to $3,450 and $6,900 for a family under 55. Talk to your Human Resources department to see if your health plan is HSA compliant before you set up an account.
Explore your options
As with any financial situation, the best path for you may be different than the best path for someone else, even if that person has the same salary and financial obligations as you do. A financial advisor can help you explore how certain financial moves may play out for your specific situation, but at the end of the day, it’s important to be proactive in looking at your financial obligations, considering financial goals for the future, and making moves based on those insights. A 401(k) can be a great anchor for your retirement savings, but it’s important to remember there are other options available for maximizing your retirement savings for the future.
Shannah Compton Game is a CERTIFIED FINANCIAL PLANNER® professional with an MBA and is the host of the award-winning podcast, Millennial Money, where she shares totally relatable and easy to understand financial advice that will actually make you want to talk about money. Opinions expressed by the author are their own.
Haven Life doesn’t provide tax, legal or investment advice. This discussion is intended as general education only. We encourage you to work with your own personal tax or legal professionals and your financial advisor. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.