What to Do After Maxing Out Your Roth IRA

Suppose you’ve contributed the allowable maximum to your Roth IRA for the year but still have money left over to stash away for retirement. That’s a problem a lot of people probably wish they had. And never fear—there are plenty of other good places to put your money.

While it’s hard to top the tax-deferred growth and tax-free withdrawals that a Roth IRA offers, you’re currently limited to contributions of $6,000 a year if you’re under 50, or $7,000 if you’re 50 or older. Any additional money that you want to save will have to find another home, ideally one with at least some of the tax benefits of a Roth.

Here are some that you might be eligible for:

401(k)s and Other Defined-Contribution Plans

The first option to explore is a 401(k), 403(b), or 457 retirement plan at work. If your employer offers one of these plans, you can contribute up to $19,500 ($26,000 if you’re age 50 or older) for 2021.

Many employers provide matching contributions, which is one of the best perks around. In fact, it’s smart to contribute at least enough money to your account to get the full match—even before you put a penny into your Roth IRA.

In general, contributions to these accounts are tax-deductible for the year you make them, your money will grow tax-deferred, and you’ll pay tax only when you take withdrawals during retirement. If you choose the Roth version of one of these plans, you won’t get any upfront tax break, but your withdrawals in retirement will be tax-free, much like a Roth IRA.

SEP IRAs

A Simplified Employee Pension (SEP) IRA is a retirement account that offers tax breaks for small business owners, including the self-employed. If you have self-employment income, whether it’s from a full-time job or a part-time gig, you can contribute up to 25% of your compensation or $58,000, whichever is less (for 2021). If you’re self-employed, you’re considered to be both employer and employee.

Keep in mind that if you have other employees, you generally have to contribute on their behalf, too. And it has to be the same percentage of compensation that you contribute to your own account. So, if you contribute 15% of your compensation, you have to also contribute 15% on behalf of any employees who:

• Are age 21 or older,
• Have worked for you for at least three of the last five years, and
• You’ve paid at least $600 in the last year.

Similar to a traditional IRA, SEP IRA contributions are tax-deductible for the year you make them, but you’ll have to pay tax when you withdraw the money in retirement.

SIMPLE IRAs

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is like a 401(k) plan that’s geared for small businesses with 100 or fewer employees. For 2020, employees can contribute up to $13,500 or $16,500 if they are 50 or older. As with a SEP IRA, if you are self-employed, you’re considered to be both employer and employee.

If you have other employees, you have to contribute for them, too, using one of two options:

• Make a dollar-for-dollar match of up to 3% of an employee’s pay, or
• Contribute a flat 2% of compensation, whether or not the employee contributes.

As with SEP IRAs, your contributions are tax-deductible for the year you make them, and your withdrawals in retirement will be taxed as ordinary income.

Setting Up Every Community for Retirement Enhancement Act of 2019 (SECURE)

The SECURE act was signed in late 2019, making broad changes to retirement legislation. Under the act, if you have employees, then as a small business owner, you receive some benefits for establishing retirement plans for your employees. This applies to 401(k)s, 403(b)s, SIMPLE IRAs, and SEP IRAs, as mentioned above.

Small businesses will receive an increase in tax credits from $500 to up to $5,000 for establishing a retirement plan. For adopting an auto-enrollment process, they receive a tax credit of $500. These credits apply for up to three years. Under the act, a small business is a business that has no more than 100 employees receiving at least $5,000 in total compensation. The bill also broadens access to multiple employer plans.

Annuities

If you’ve exhausted all the tax-deferred and tax-exempt retirement accounts that you qualify for, you might want to look into annuities. These are insurance products that pay out a fixed stream of income during retirement.

Annuities have a justly deserved bad reputation for high fees and poor investment options. Still, there’s a newer class of them, sometimes called “investment-only” annuities, that have lower costs. These annuities are created for tax-deferral purposes, not for insurance benefits. Pay attention to any additional features and ensure that they are providing enough value for the extra fees that come with them.

Your contributions to an annuity aren’t tax-deductible, but they will grow tax-deferred, and there’s no limit on the amount of after-tax money you can contribute. You’ll have to pay tax on the gains when you make withdrawals, but you won’t owe tax on the principal.

Health Savings Accounts

If you have a high-deductible health plan, you may be eligible to contribute to a health savings account (HSA). These accounts are, of course, intended to be used for healthcare costs, and your withdrawals are tax-free only if they go toward approved medical expenses. Still, most of us have those, particularly as the years roll by. You contribute after-tax money to the HSA, and it grows tax-free while in the account.

For 2021, you can contribute up to $3,600 to an HSA ($7,200 for a family), and anyone aged 55 or older can contribute an extra $1,000. Note that you can’t contribute to an HSA once you enroll in Medicare, but you can continue to use the funds in the account.

The Bottom Line

You have many options to choose from after you’ve maxed out your Roth IRA. But how much you can save may be limited by the amount and type of income you have earned and your contributions to other accounts. To be safe, it’s often worth checking with a tax professional.

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