Strategizing Your Excess Savings Post-Roth IRA Contribution
When you have maximized your contributions to your Roth IRA and still have extra savings, the next step can feel overwhelming. Where should your money go next? While the ultimate decision depends on your specific financial situation, this article will explore various options. We'll discuss the significance of diversification, the benefits of contributing to a company 401(k), and potential alternative investment avenues.
Where Should You Put Your Money After Maxing Out Your Roth IRA?
Every financial situation is unique, and the best course of action varies from person to person. Here are some suggestions to consider:
1. Contribute to a Company 401(k)
If your employer offers a 401(k) with a company match, it's one of the most advantageous options available. By contributing at least enough to receive the match, you are essentially getting free money from your employer. Depending on your age and tax bracket, place some of your contributions in a Roth 401(k) if your employer offers that option.
Even if your company does not offer a match, the tax-deferred nature of a 401(k) or Roth 401(k) can be beneficial. These accounts offer tax advantages that reduce your current taxable income, allowing your funds to grow tax-free until retirement. If you have not contributed to a 401(k), this should be a priority at least for that match.
2. Explore Stock, Bond, and EFT Investments
After exhausting traditional retirement savings options, you might consider allocating your excess savings to stocks, bonds, and exchange-traded funds (ETFs). While these investments offer the potential for higher returns, they also come with a higher level of risk. Additionally, any dividends or trades will be subject to taxes, but the potential for growth is significant.
3. Consider Alternative Investments
Depending on your risk tolerance and comfort level, you might consider alternative investments such as gold, real estate, or art. These assets can provide diversification and potentially hedge against inflation. However, they also require careful consideration of maintenance and rental expenses, or the need to actively manage them.
4. Save in High-Interest Accounts
Some individuals prefer to keep a portion of their savings in high-interest savings accounts or money market funds. These accounts offer more liquidity and a lower level of risk compared to stock markets. Most financial advisors recommend having 3 to 6 months, or even 12 months, of your current income in an accessible savings account. This amount can cover 3 to 6 months of your expenses, and it is essential for unexpected emergencies or unexpected expenses.
5. Additional Considerations
Since the Roth IRA limits for 2024 are $7,000 for individuals under 50, and $8,000 for those 50 or older, you may still be able to contribute to your Roth IRA even if you turn 50 in December. Contributions can be made any time during the year, even up to just before tax day in 2025. It's also worth noting that Roth IRA and traditional IRA limits are the same.
Federal contribution limits for a 401(k) are $23,000 for individuals under 50, and $30,500 for those 50 or older. For married couples, the combined limit would be $54,000. Given the median household income of $74,000 and individual incomes of $58,000, many individuals find it possible to max out their Roth IRA and 401(k) contributions.
Conclusion
Maxing out your Roth IRA and 401(k) is a significant financial achievement. If you have extra savings after these contributions, it's essential to explore additional options. Whether through alternative investments, high-interest savings accounts, or exploring additional tax-deferred savings opportunities, diversification is key to building a robust financial portfolio. Always consult with a financial advisor to tailor these strategies to your unique financial situation.