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Tackle my finances

I Maxed Out My 401(k) Contribution – Now What?

A senior couple drink coffee and talk about saving for retirement after they maxed out their 401k

Building up your retirement savings could mean spending more time with your grandkids or being able to take those trips you’ve been dreaming of in retirement! However, while saving is important, did you know that there’s a limit to the amount of money you can put in your 401(k) every year? For example, the 2019 yearly limit for contributions to an employer-based 401(k) is $19,000.1 So, what happens when you hit the yearly contribution amount for your 401(k)? How can you continue to save without losing valuable time? Here are a few ideas to help you continue to save for your dream retirement.

Idea 1: Open an Individual Retirement Account (IRA)

Individual Retirement Accounts (IRAs) are separate from any employer-sponsored retirement accounts. There are several benefits to opening this type of account.

  • These accounts have different contribution limits than a 401(k). That means if you max out your 401(k) contributions for the year, you can stash extra money into your IRA accounts. The yearly limit for 2019 IRA contributions is $6,000. That’s a lot of extra money you can save!
  • You’re allowed to make “catch-up” contributions if you’re 50 and older. If this applies to you, your yearly IRA limit is pushed up to $7,000 for 2019.2

Which IRA account may be right for you?

There are two main types of IRAs, which are:

Traditional IRA

With this type of IRA account, the money you contribute to it builds tax-free. You’re taxed when you start to make withdrawals in retirement, similar to what happens with a 401(k). You may even be able to deduct your contributions to this account from your yearly taxes depending on your annual income.

Roth IRA

With this type of IRA account, the money you put into it is taxed upfront. You make a deposit now, and you pay taxes now. This means that your withdrawals in retirement can be tax-free, as long as:

  • You’ve had the account for at least five years
  • You’re at least 59 1⁄2 years old
  • The withdrawal amounts don’t exceed your total contributions to the account

If you make withdrawals before the age of 59 1⁄2, you won’t be taxed as long as you’ve had the account for at least five years. But, you may have to pay a 10% penalty fee. Regardless of age, you may have to pay taxes and/or penalties on earnings in your Roth IRA. You also have to be within a certain income level to qualify for a Roth IRA.3

Idea 2: Buy an annuity

What is an annuity? The concept is actually pretty simple. You invest a lump sum into a reliable insurance company and schedule a set date for when you want your monthly payouts to start. Or, you can start receiving payouts right away. When your payouts begin depends on the type of annuity you choose. You’ll receive consistent payouts for the life of the annuity.

There are two main types of annuities— income and deferred. The type you choose depends on your retirement and financial goals.

Income vs. Deferred Annuities

Income Annuity Deferred Annuity
The payouts from this type of annuity start immediately. The payouts for this type of annuity begin at a future date set by you and your insurance company.
You typically pay a lump sum upfront to finance this annuity. You can even rollover some of your 401(k) savings to help pay for this. You can make monthly payments to pay off this annuity overtime before your payouts begin.
Some income annuities offer joint-life annuities. This means that your spouse will continue to receive monthly payments even in the event of your death. Deferred annuities sometimes offer death benefits. In the event of your death, your designated loved ones can receive the remaining balance in the annuity.
Because you can rollover some of your 401(k) savings, this type of annuity can be great for someone nearing retirement. Since you can make monthly payments to finance this overtime, this type of annuity can be a good fit for someone several years away from retirement.

 

There’s more to learn about annuities, including some of the drawbacks of this type of investment. To make sure you make the right decision for your circumstances, it’s best to discuss this with a financial advisor. All guarantees are based upon the financial strength and claims-paying ability of the issuing company, which is solely responsible for all obligations under its contract. Additional features and benefits such as contract guarantees, death benefits and the ability to receive a lifetime income are contained within the annuity for a cost. Please be sure the features and costs of the annuity are right for you when considering the purchase of the annuity.

Idea 3: Purchase a Whole Life Insurance Policy

The main purpose of a life insurance policy is to provide some financial support for your beneficiaries in the event of your death. However, there are also ways to use a life insurance policy to help save for retirement if you’ve already maxed out your 401(k) contributions. One such way is by purchasing a Whole Life Insurance policy. Whole life is a type of permanent life insurance. This means that your life insurance policy has no set expiration date and will stay in effect as long as you continue to pay your premium.

Whole Life Insurance policies differ from other policies because there’s a tax-deferred savings component. A part of the premium you pay for your policy goes toward a savings account that grows over time through interest rates. Although it’s a modest yearly growth,4 you can use this account to help boost your retirement savings while ensuring your loved ones are financially supported in the event of your death. But, keep in mind that accessing your policy’s cash value will reduce your policy’s benefits. And, depending on your policy and premiums, fees can add up.

Idea 4: Focus on paying down your debts before you retire

Retirement should be a fun, exciting time in your life! You shouldn’t have to worry about using your hard-earned money to pay down debts you acquired before you retired. So, how can you best prepare your finances?

Do you have a car payment? What about your mortgage? Are your credit cards paid down in full? If you’ve maxed out your 401(k) contributions for the year, invest in paying down these other expenses. Should you need help budgeting and paying down your debt, check out apps like Mint and Debt Payoff Planner.

Idea 5: Invest in real estate

Are you tempted to buy that cute bungalow down the block to re-vamp and rent out? While this isn’t a short-term retirement strategy, buying a home and renting it out can be a great way to invest your extra money. Or, if you’re looking for a project, you can consider renovating a house and selling it at a profit.

Make sure to do your research when investing in real estate, especially if you plan to sell the property at a future date. A few things to keep in mind include:

  • Do you know the neighborhood you’re investing in?
  • Are the property taxes reasonable?
  • Is there a good school system in the area?
  • Are you going to rent the property out? Or give it a makeover and sell it?
  • Are you willing to put time into interviewing your potential tenants?
  • Do you have the time to respond quickly to maintenance requests as a landlord?

You may also consider investing in your own home. Why not spruce up your dining room so it can accommodate Sunday night dinners? Or how about upgrading your TV or electronics to host Saturday movie nights with your grandkids? They won’t forget all the times spent eating popcorn and treats while watching their favorite movies with you!

Idea 6: Help your grandkids save for college

What better investment than your grandkids’ education? Investing your extra income into their futures can help set them up for success, while giving your kids some financial peace of mind. A popular investment account for this type of tactic is called a 529 plan.

What is a 529 plan?

A 529 plan is a type of savings plan that helps you prepare for future education expenses. Almost every state has a type of 529 plan— either as a college savings plan or a prepaid tuition plan. Once you open a 529 plan, the IRS has no set contribution limit that you have to stick to. Also, your money grows tax-free and you’re not taxed when you make withdrawals for appropriate education expenses.5

The 2 types of 529 plans

There are two main types of 529 plans. These are:

  • College savings plan. Similar to how Roth 401(k)s and Roth IRAs work, the contributions you make to a college savings plan are taxed upfront. Because of this, you aren’t taxed when you start making withdrawals for educational expenses. It’s worth noting that your savings in this account grow based on investments, so changes to the market could affect the performance of this type of account.6
  • Prepaid tuition plan: With this plan, you can pre-pay all or part of a specific in-state college’s tuition. You may also be able to pre-pay tuition toward private and out-of-state schools through a separate tuition plan called The Private College 529 Plan.7

Still need retirement advice and ideas for saving?

Are you day-dreaming about all the exciting adventures you’re going to take in retirement? Don’t let maxing out your 401(k) for the year interrupt your retirement savings plans! No matter when you’re aiming to retire, we’re here to help you reach your savings goals.


SOURCES:

1,2,3 Internal Service Revenue of the United States. Web page: 401(k) contribution limit increases to $19,000 for 2019; IRA limit increases to $6,000. Retrieved February 20, 2019, 2019, from https://www.irs.gov/newsroom/401k-contribution-limit-increases-to-19000-for-2019- ira-limit-increases-to-6000

4 NerdWallet. Web page: The Tax Consequences of Whole Life Insurance. Retrieved on July 26, 2018, from https://www.nerdwallet.com/blog/insurance/tax-consequences-whole-life- insurance/

5,6,7 Saving for College. Web page: What is a 529 Plan? Retrieved on July 26, 2018, from https://www.savingforcollege.com/intro-to-529s/what-is-a-529-plan

LINKS:

  • https://www.mutualofomaha.com/advice/tackle-my-finances/how-do-annuities-work
  • https://www.mutualofomaha.com/life-insurance/policies/whole-life-insurance
  • https://www.mint.com/
  • https://debt-payoff-planner.com/
  • https://www.mutualofomaha.com/advice/tackle-my-finances/why-its-never-too-early-to- start-planning-for-college-2
  • https://www.youtube.com/watch?v=N_5Z2ire-Q4&feature=youtu.be
  • https://www.mutualofomaha.com/advice/video/the-secret-to-making-college-more-
    affordable
  • https://www.mutualofomaha.com/advice/travel-the-world/20-senior-discounts-that-prove-
    retirement-may-be-a-great-time-to-travel
  • https://www.mutualofomaha.com/investments/contact

DISCLOSURES:

Registered Representatives offer securities through Mutual of Omaha Investor Services, Inc., Member FINRA / SIPC. Investment Advisor Representatives offer advisory services through Mutual of Omaha Investor Services, Inc. Mutual of Omaha Investor Services, Inc. and it’s representatives do not offer tax or legal advice. Always consult a qualified professional regarding your specific situation.

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