If you’re serious about investing toward your retirement, you might find yourself in a unique situation: you max out investments through normal channels like a 401(k) or an IRA. Then what? Are you stuck in neutral until the next tax year? What are your options? Fortunately, you can invest for retirement even if you’re in a higher income bracket. Here are a few smart ways to do just that.
Backdoor Roth IRA
If you make $132,000 or more as an individual or $194,000 as a couple, you can’t open or contribute to a Roth IRA. There’s a way around this, though, and it’s absolutely legal. You can convert a traditional IRA into a Roth IRA regardless of your income. You start by contributing up to $5,500 (or $6,500 if you’re 50 or older) into a traditional IRA. As soon as that amount posts to your account, ask your financial advisor to convert that IRA into a Roth IRA. When you take money out in retirement, you’re not taxed on that money because you used after-tax dollars to invest.
After-Tax 401(k) Contributions
Some employers will allow after-tax contributions to their 401(k) plans in addition to the maximum pre-tax amount you can contribute ($18,000, plus $6,000 for those 50 and older). You can contribute a maximum of $53,000 of both pre-tax and after-tax dollars. For example, if you contributed your maximum of $18,000 and your employer matched $5,000 (for a total of $23,000), then you could contribute an additional $30,000. That extra money has already been taxed, so it grows tax-deferred until you withdraw it at retirement. At that point, the earnings are taxed like regular income.
You can invest in mutual funds without going through your company’s retirement program. You can open an account with fund companies directly, and you can even set up a monthly automatic withdrawal from your bank into that fund.
Just like a 401(k) program, you want to spread your investments across different kinds of funds—stocks, bonds, mid-size companies, U.S. companies, overseas companies. This minimizes risk. And just like other investing options, think long-term. Don’t chase after “hot” performers. Slow and steady growth wins the race every time.
Another investment option many people choose is real estate. These investments are probably the most hands-on, time-consuming of all. I wouldn’t recommend this option unless you have a real passion for it. Before you opt for real estate, do your homework. Talk to people who’ve done it. Talk to an insurance agent about any liabilities you might have, especially if you invest in rental property. Do the math to see how much money you’d actually make after expenses, including taxes, utilities and other costs. And never, ever borrow money to buy real estate. Only purchase it if you have the cash on hand. A loan is a risk you don’t want.
Always talk with your investment professional before you choose any of these investing options. They will help you determine the best options based on your income bracket and retirement goals. They know the IRS rules for income restrictions, contribution limits, and catch-up options for investing in the market. They also know the risks associated with investing in real estate. Regardless of how you invest, you need to go in with eyes wide open. It’s your money, so you want to play it smart.