Your 401(k) is a valuable part of your retirement plan, but it’s only one piece of the puzzle.
There are many benefits that come along with a 401(k,) including pretax or Roth 401(k) salary contributions (or both,) company matching, and tax-deferred accruals. And for many people, a 401(k) is where they focus most of their retirement savings.
That being said, there are some downsides to relying exclusively on a 401(k) for retirement savings. For one thing, there are limits to how much you can contribute to your 401(k) plan. The 2023 maximum contribution limit is $22,500 for those under 50, plus a $7,500 catch-up for employees 50 or older.
It’s also a good idea to have a variety of sources for retirement income. Diversification gives your investments a cushion in case of economic hardships or unexpected downturns.
Is Your 401(k) Enough?
So you’ve maxed out your 401(k) – is that enough? What else do you need?
Before you can answer that, it’s important to consider what kind of retirement you’re planning to have. Ask yourself how old you want to be when you retire, what kind of lifestyle you plan to have, and how much you think you’ll need per month.
Here is a retirement fund estimator guide that can help you get more clear on what you’ll need.
You can also see my post about preparing for an early retirement here.
What should you add?
Beyond a 401(k,) there are some other accounts that can boost your finances in retirement:
- Solo 401(k) – If you’re self-employed, a Solo 401(k) can get you many of the benefits of an employer’s 401(k) plan. A Solo 401(k) actually has more room to invest than your standard 401(k) if you’re a business owner. Like the 401(k,) you can contribute up to $22,500 in 2023, but you can also add an employer contribution of up to 25 percent of salary if set up as an S-Corp or 25% of company profits if taxed as a Sole Proprietor or Partnership (maxing out at a total of $66,000.)
- Traditional/Roth IRA – An IRA is a very common savings vehicle for boosting retirement savings. A traditional IRA allows you to contribute pre-tax or after-tax dollars. The limit for 2023 is $6,500. A Roth IRA has the same $6,500 limit for 2023, and you can make tax- and penalty-free withdrawals after age 59 ½.
Anyone under age 70 ½ who earns an income can make contributions to a traditional IRA, but whether it is tax deductible or not depends on your income. Roth IRA contributions are not deductible, but earnings and withdrawals are tax-free. You can open a Roth IRA if you meet the income requirements.
The Roth IRA income requirements for 2023 are:
- Less than $218,000 for married filing jointly
- Less than $138,000 for single filers
- A reduced contribution amount for married filing jointly earning $218,000 to under $228,000
- A reduced contribuiton amount for single filers earning $138,000 to under $153,000
- Brokerage account – If you earn too much money to qualify for an IRA, or if you’ve maxed out your 401(k) and your IRA, you can look into opening a brokerage account. You can open this account with a brokerage firm, and then you can buy and sell investments like mutual funds and ETFs. These are taxable accounts, meaning you will have to pay taxes on your earnings.
Brokerage accounts offer liquidity, meaning you can pull the money out and spend it on whatever you want without meeting any age requirements first.
Generally speaking, if you’ve maxed out your 401(k) but are still saving less than 10 percent of your income, you should look into supplemental retirement savings. For more tips about creating a prosperous retirement, check out my post on the personal finance habits of successful retirees.
About Your Richest Life
At Your Richest Life, Katie Brewer, CFP®, believes you too should have access to financial resources and fee-only financial planning. For more information on the services offered, contact Katie today.
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