If you’re asking how to invest beyond your workplace retirement plan, then you’re making huge strides in building wealth for your future! You’re laser focused, you’ve set your goals, and you’re working toward them—and that’s a great accomplishment!
Once you’ve contributed the allowable amounts to your workplace investing program, you don’t have to stop there. You still have options. Here are three investing vehicles to consider:
1. Invest in a Traditional or Roth IRA
Yep, you may be able to put money into a traditional or Roth IRA even if you have a workplace 401(k). You can invest $5,500 a year ($6,500 if you’re 50 or older). If you go with a traditional IRA, You might be able to deduct the full amount of the contributions if you or your spouse participated in a retirement plan at work. If that’s the case, and you want to contribute to an IRA, you can opt for a Roth IRA instead.
A Roth IRA is funded with money that’s already been taxed, so you’re not limited by the contributions you’ve made in other funds. However, not everybody can go the Roth IRA route. If your modified adjusted gross income doesn’t exceed IRS limits (generally below $186,000 if you’re married and paying taxes jointly; below $118,000 if you’re single or filing separately), you can contribute to a Roth IRA. That’s good for you, since that money grows tax-free and it won’t be taxed when you take it out in retirement!
2. Convert Old 401(k)s to Roth IRAs
Let’s pretend that you’ve changed jobs at least once in your career, and you still have a 401(k) from a former employer. If you have enough cash on hand, you can convert that 401(k) into a Roth IRA. Since the money in that 401(k) wasn’t taxed when you first put it into the account, you’ll pay taxes on that money when you convert it to a Roth IRA. Doing that rollover is not complicated. You’ll have to make some phone calls and fill out some paperwork.
Why would you want to convert that old 401(k) into a Roth IRA? There are a couple of reasons.
- The money in a Roth IRA grows tax-free, remember? And it’s not taxed when you take it out in retirement. Win/win for you.
- With a Roth IRA, you get to choose where your money is invested. A workplace 401(k) has limited options.
Remember this: converting that this conversion is an option only if you have the cash on hand to pay the taxes. If you don’t have enough, try Door #3.
3. Put Money Into Taxable Investments
Lots of people think that they can’t invest in mutual funds if they participate in their company’s retirement plan. That’s not true. You can open a taxable account with an investment management company or brokerage firm. You’re investing after tax dollars, so you’re not getting any sort of break with the IRS. That’s why it’s not the first and best option. But it’s better than putting your money under the mattress!
What are the advantages of taxable investments? Good question. Here’s the answer:
- You don’t have to worry about taking out the required minimum distributions when you hit 70 and a half. You’ll have to do that with a 401(k) or traditional IRA.
- You can invest even if you make a lot of money. No IRS limitations here.
- You can invest as much as you want.
- You’ll have more options for where you want to invest your money. A workplace 401(k) has limited choices.
The disadvantage of a taxable account is, well, the taxes. You’ll pay the IRS on the growth of those investments, because the government is, well, the government. Uncle Sam wants his share.
In addition to investing in the stock market, some people choose to invest in real estate. This is an option, but only if you have cash to pay for it. Don’t ever go into debt to invest! Also, make sure you have an emergency fund specifically for your real estate so you can cash flow any taxes, repairs or other emergencies.
Now listen, people: These investing options only apply to you if you’ve already paid off your debt and have fully funded your emergency fund. If you’re trying to invest while you’re still in debt, then you’re putting water into a leaky bucket. That debt will erode your retirement savings. First get out of debt and get your emergency fund in place. Then you can get back to super-charging your investing.
If you choose one of these post-401(k) options, I’d recommend talking with a tax professional and an investing professional as you’re making these decisions. They’ll help you navigate the muddy tax waters and they can help you achieve your goals. Think of them as power tools to help you build your financial future!
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