Retirement Planning: How To Invest After Maxing Your 401K Contributions

Money left after maxing out your 401k? Put the dollars to work in these alternative investments!

So, you've done what all the experts recommend; you've maxed out on your 401k plan. Nice job, three cheers for you! But wait, what about the extra wad of dollar bills still in your pocket? You could buy yourself something nice, or you could sock it away to further boost your retirement nest egg. The latter is probably the smartest option, especially if you only have a few years left to retirement.

But what type of investments should you place your hard-earned moolah in? One big part of that decision depends on your tax situation. If you're expecting to do a traditional retirement, where you stop working altogether and split your time between the golf course and the fishing hole, you will likely make less money. That means you'll be in a lower tax bracket. Then a traditional Individual Retirement Account (IRA) makes sense.

An IRA works very similarly to a 401k in that it is fully tax deductible now, it grows tax-free until withdrawn, and only then do you owe any taxes. If you're in a 28% or above tax bracket now but will be down to 15% after retirement, it's easy to see why it's beneficial to pay taxes then (15%) instead of now (28%).

You'll have to set up your IRA yourself, but most mutual fund companies and brokers are more than happy to get you started. Take note, however, that you have contribution limits that vary by age (older folks can contribute more) and that your spouse's income may affect how much you can save tax-free. Be sure to study the IRS rules carefully to make sure you're getting the full benefit of an IRA. Don't hesitate to get your accountant involved if things get complicated.

But what about those planning to stay active as a consultant or a part-timer in their former job? Or perhaps you're dreaming of setting up your own business to stay busy and stimulated? 401k plans force you to start withdrawing funds shortly after your 70th birthday, so you'll be tapping your regular retirement savings along with social security while still earning a salary. In other words, you may end up in a higher tax bracket than you do now!

That's where a Roth IRA comes into the picture. The Roth is the opposite of a traditional IRA in that you get no tax break whatsoever today. Zippo. However, once you've invested your taxed dollars into the Roth, it grows tax-free until you withdraw it - at which point you don't owe a dime in tax for the gains you've made.

Another option that is sure to beat stuffing your money in the mattress is a variable annuity. These products are typically offered through insurance companies and have two nice benefits: they are tax-deferred, and they provide income for the rest of your life. That should ease any fears you may have about outliving your savings.

However, as the "variable" part of the name implies, you don't get a set-in-stone sum per month. Depending on the market, you could make out like a bandit, or you could be really, really happy that you maxed out on your 401k.

Fixed annuities provide peace of mind in that you know what you'll get. Unfortunately, it may also give you a good heartburn when you compare how much less return on your investment you typically get compared to variable annuities. With a variable annuity, you take the market risk. With a fixed annuity, the insurer takes the risk - and guess who'll be paying for that?

Lastly, you may want to spend a few minutes thinking about the big picture. Do you have large outstanding loans? One thing you want to avoid like the plague during retirement is debt so be sure to pay down any consumer debt you have well before retirement. Car loans, credit card debt, and second mortgages ... The more you can pay off today, the less drain you will have tomorrow.

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