Congratulations are in order! You’ve maxed out your Roth Individual Retirement Account (IRA) for the year, which means you’re taking proactive steps towards securing your financial future. However, now that you’ve reached the annual contribution limit, you’re probably wondering where to invest your hard-earned money next.
Understanding the Roth IRA Contribution Limits
Before we dive into the best investment options, let’s quickly review the Roth IRA contribution limits. In 2022, the annual contribution limit for Roth IRAs is $6,000, or $7,000 if you are 50 or older, due to the $1,000 catch-up contribution allowance. These limits apply to all of your Roth IRAs, not each individual account.
Keep in mind that Roth IRA contributions are subject to income limits, which vary based on your filing status and modified adjusted gross income (MAGI). For the 2022 tax year, you can contribute to a Roth IRA if your income is below $137,500 for single filers or $208,500 for joint filers.
Where to Invest After Maxing Out Your Roth IRA
Now that you’ve maxed out your Roth IRA, it’s essential to explore other investment options to continue growing your wealth. Here are some top picks to consider:
Taxable Brokerage Account
A taxable brokerage account is a regular investment account that doesn’t offer tax benefits like a Roth IRA or 401(k). However, it provides flexibility and accessibility to your funds. You can invest in a wide range of assets, including:
- Stocks
- Bonds
- Exchange-traded funds (ETFs)
- Mutual funds
- Real estate investment trusts (REITs)
One of the main advantages of a taxable brokerage account is that you can withdraw your money at any time without penalties or restrictions. However, keep in mind that you’ll need to pay capital gains taxes on any profits you earn.
High-Yield Savings Account
If you’re risk-averse or need easy access to your funds, consider a high-yield savings account. These accounts typically offer higher interest rates than traditional savings accounts and are FDIC-insured, which means your deposits are insured up to $250,000.
Some popular high-yield savings account options include:
- Ally Bank
- Discover Bank
- CIT Bank
While the returns might not be as high as other investment options, high-yield savings accounts are a low-risk way to earn some interest on your money.
Municipal Bonds
Municipal bonds, also known as “muni bonds,” are debt securities issued by local governments, cities, or states to fund public projects. They offer a relatively stable source of income and are often exempt from federal income tax.
Municipal bonds can provide a steady stream of income, and the interest earned is typically tax-free at the federal level. However, you may still be subject to state or local taxes, depending on where you live.
Health Savings Account (HSA)
If you have a high-deductible health plan, consider contributing to a Health Savings Account (HSA). An HSA allows you to set aside pre-tax dollars for medical expenses, which can help reduce your taxable income.
HSAs offer triple tax benefits:
- Contributions are tax-deductible
- Earnings grow tax-free
- Distributions for qualified medical expenses are tax-free
529 College Savings Plan
A 529 college savings plan is a tax-advantaged savings plan designed to help families save for higher education expenses. Contributions grow tax-free, and distributions for qualified education expenses are tax-free at the federal level.
Some benefits of 529 plans include:
- High contribution limits (varies by state)
- Wide range of investment options
- Professional management options
Keep in mind that 529 plans have some restrictions, and non-qualified withdrawals may be subject to income tax and penalties.
Other Investment Options to Consider
In addition to the options mentioned above, you may also want to explore:
Robo-Advisors
Robo-advisors are automated investment platforms that offer diversified investment portfolios, professional management, and often lower fees than traditional financial advisors. Popular robo-advisor options include:
- Wealthfront
- Betterment
- Vanguard Personal Advisor Services
Real Estate Crowdfunding
Real estate crowdfunding platforms allow you to invest in real estate development projects or existing properties through online platforms. This option provides diversification and potential for higher returns, but it’s essential to understand the risks involved.
Some popular real estate crowdfunding platforms include:
- Fundrise
- Rich Uncles
- PeerStreet
Investing Strategies to Keep in Mind
As you explore the above options, remember to:
Diversify Your Portfolio
Spread your investments across different asset classes to minimize risk. This can include stocks, bonds, ETFs, mutual funds, and alternative investments.
Set Clear Financial Goals
Define your investment goals, risk tolerance, and time horizon to make informed decisions.
Automate Your Investments
Set up a systematic investment plan to transfer funds regularly, reducing the impact of market volatility.
Monitor and Adjust
Periodically review your investments and rebalance your portfolio as needed to ensure it remains aligned with your goals and risk tolerance.
Conclusion
Maxing out your Roth IRA is a significant achievement, but it’s essential to continue investing to achieve your long-term financial goals. By considering the options mentioned above and implementing a well-diversified investment strategy, you’ll be well on your way to securing your financial future.
Remember to always do your research, consult with a financial advisor if needed, and prioritize your financial goals. Happy investing!
What is the annual contribution limit for a Roth IRA?
The annual contribution limit for a Roth Individual Retirement Account (IRA) is set by the Internal Revenue Service (IRS) and is adjusted annually for inflation. For the 2022 tax year, the contribution limit is $6,000, or $7,000 if you are 50 or older. This limit applies to all of your IRA contributions, including traditional IRAs, not just Roth IRAs. It’s essential to stay within this limit to avoid penalties and potential taxes.
It’s also important to note that there are income limits on who can contribute to a Roth IRA. For the 2022 tax year, you can contribute to a Roth IRA if your income is below $137,500 for single filers or $208,500 for joint filers. The contribution limit is phased out as your income approaches these levels, and you cannot contribute to a Roth IRA at all if your income exceeds these limits.
Can I contribute to a traditional IRA if I’ve maxed out my Roth IRA?
Yes, you can contribute to a traditional IRA even if you’ve maxed out your Roth IRA. However, the deductibility of your traditional IRA contributions may be limited or phased out depending on your income and whether you or your spouse are covered by a retirement plan at work. For the 2022 tax year, the deductibility of traditional IRA contributions is phased out for single filers with modified adjusted gross incomes (MAGI) between $68,000 and $78,000, and for joint filers with MAGI between $109,000 and $129,000.
Keep in mind that contributions to a traditional IRA are made with pre-tax dollars, which means you’ll pay taxes on the withdrawals in retirement. In contrast, Roth IRA contributions are made with after-tax dollars, so you won’t pay taxes on the withdrawals in retirement. If you’re unsure which type of IRA is best for your situation, it’s a good idea to consult with a financial advisor or tax professional.
What about a health savings account (HSA)?
If you have a high-deductible health plan, you may be eligible to contribute to a health savings account (HSA). An HSA allows you to set aside pre-tax dollars for medical expenses, and the funds grow tax-free. You can use the funds to pay for qualified medical expenses, including copays, prescriptions, and even some over-the-counter medications. In 2022, you can contribute up to $3,650 to an HSA if you have single coverage or up to $7,300 if you have family coverage.
One advantage of HSAs is that they’re portable, meaning you can take the funds with you if you change jobs or retire. You can also use the funds in retirement to pay for medical expenses, including Medicare premiums and long-term care expenses. An HSA can be a valuable addition to your retirement savings strategy, especially if you expect to have significant medical expenses in retirement.
Can I contribute to a 529 college savings plan?
Yes, you can contribute to a 529 college savings plan even if you’ve maxed out your Roth IRA. A 529 plan is a tax-advantaged savings plan designed to help families save for higher education expenses. Contributions to a 529 plan are made with after-tax dollars, but the funds grow tax-free and withdrawals are tax-free if used for qualified education expenses.
In addition to the tax benefits, 529 plans often offer other advantages, such as flexibility in investment options and high contribution limits. You can contribute up to $15,000 per year per beneficiary without incurring gift taxes, and many plans have aggregate limits of $300,000 or more per beneficiary. If you’re saving for education expenses, a 529 plan can be a valuable addition to your overall savings strategy.
What about a taxable brokerage account?
If you’ve maxed out your Roth IRA and other tax-advantaged accounts, you can consider contributing to a taxable brokerage account. A taxable brokerage account is a non-retirement investment account that allows you to buy and sell securities, such as stocks, bonds, and mutual funds. While you won’t get the tax benefits of a Roth IRA or other tax-advantaged accounts, you can still invest for long-term growth and income.
One advantage of a taxable brokerage account is that you have more flexibility in your investments, and you can withdraw the funds at any time without penalty. However, keep in mind that you’ll pay taxes on the capital gains and dividends earned in the account. It’s essential to consider your overall tax strategy and investment goals before investing in a taxable brokerage account.
Should I consider a backdoor Roth IRA?
If you’ve maxed out your Roth IRA and you’re ineligible to contribute to a Roth IRA due to income limits, you may be able to use a “backdoor” Roth IRA strategy. This involves making a non-deductible contribution to a traditional IRA and then converting the funds to a Roth IRA. This strategy can be complex, and it’s essential to consult with a tax professional or financial advisor to ensure you’re following the rules correctly.
Keep in mind that the backdoor Roth IRA strategy may not be available to everyone, especially those with existing traditional IRA balances. The Tax Cuts and Jobs Act of 2017 eliminated the ability to recharacterize Roth IRA conversions, which makes the backdoor Roth IRA strategy more complicated. It’s essential to carefully evaluate your situation and consider consulting with a professional before attempting a backdoor Roth IRA.
What’s the best strategy for me?
The best strategy for you will depend on your individual circumstances, financial goals, and investment objectives. If you’ve maxed out your Roth IRA, you may want to consider contributing to a traditional IRA, HSA, 529 plan, or taxable brokerage account, depending on your goals and eligibility. It’s essential to evaluate your overall financial situation, including your income, expenses, debt, and existing investments, to determine the best approach for you.
You may want to consider consulting with a financial advisor or tax professional who can help you evaluate your options and create a personalized investment strategy. They can help you consider factors such as your risk tolerance, time horizon, and tax situation to recommend the best investment vehicles for your situation.