What Are My Options If I Maxed Out My 401k?


I was posed this question the other day. If you consider the retirement saving crisis we have in America it may not ring true with most of us because most people are not maxing out their 401k. But if you are, or just want to know what other options you have for tax efficient savings read on…

When I say max out your 401k, I mean you are making contributions on a pre-tax basis, whether or not your employer is doing any matching or profit sharing. Both of those are great, but by doing your own 401k contributions you are avoiding being taxed in the year of your contributions. If that still doesn’t make sense, consider John,

John makes $100,000 but saves $18,000 into his company 401k. For tax purposes the IRS only considers $82,000 as taxable income. Not a bad tax savings especially if he is in the 25% bracket, he just saved $4,500 on federal taxes, not including state.

(Note the limit for 2016 is $18,000, although their is an additional $6,000 in catch up if you are over 50. So that would mean saving up to $24,000 pre-tax money.)

Other food for thought is the money grows tax deferred, so you don’t get taxed on interest or dividends now.

After that long explanation, what would be other tax effecient vehicles for savings?

Contributing into a company deferred compensation plan. This is company and employee specific, but if your able to contribute to a deferred compensation plan, you can avoid taxes on your income now. Deferred compensation plans work like this:

John makes $150,000 and can contribute to a deferred comp plan. So he decides he wants to set aside $20,000 for the year (he can’t change this until the following year). For tax purposes the IRS only sees $130,000 worth of income. When John gets to retirement he will then decide how he wants to receive the Deferred compensation or the $20,000. He could receive it lump sum or over a specified period. The income would be taxable to him at that time, but hopefully he has worked with a financial planner to engineer a more favorable tax bracket (see what I did there)

Deferred compensation plans can be rare, but they don’t have limits or restrictions like other qualified plans and can be for only a specific set of employees. Each plan is different so be sure to understand yours before contributing into it.

A more simple approach to setting aside money would be contributing to an IRA. Check or get help determining if you fall within the income limits to be able to take a deduction based on your income. The maximum contribution which includes catch up is $6,500 if you are over 50.

The third option would be to invest in municipal bonds or municipal bond mutual funds/ETFs. This would allow you to save any amount of money with no limits. By investing in municipal bond funds the interest from the bonds can be classified federally tax free. The reason this is a nice savings choice is that it provides an investment option for taxable money. There are no income limits or deduction limits. Talk with your advisor before investing in these types of investments to make sure you understand how they work.

Fun fact, investing in a state municipal bond will be Federally, and State tax free!

Even if you don’t use any of the strategies above, keep in mind doing financial planning can create options for every financial problem you face.

Want to strategize for your financial goals? Why not give me a call? 949-333-6394

Municipal bonds are federally tax-free but may be subject to state and local taxes, and interest income may be subject to federal alternative minimum tax (AMT). The purchase of bonds is subject to availability and market conditions. There is an inverse relationship between the price of bonds and the yield: when price goes up, yield goes down, and vice versa. Market risk is a consideration if sold or redeemed prior to maturity. Some bonds have call features that may affect income.

Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results.

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