Investing has taken on increasing complexity in recent years. The wide range of options can make it difficult to determine which investment accounts are right for you. Contributing to a 401k through your employer is a smart way to begin saving for retirement. While there are minor drawbacks to investing in your workplace 401k, like limited control over investment options, administrators, or investment fees, it’s still a great place to start if the option is available to you.
With the tax deferment benefits and employer-matched contributions, 401ks can be especially advantageous. It is important to start saving for retirement as early in your career as possible, because the longer you save, the more you can potentially benefit from compound interest. But once you’ve reached the max 401k contribution, your next consideration should be where to invest besides your 401k. There are a number of viable options, depending on your overall financial strategy and goals. Let’s dive in.
What Is the Max 401k Contribution?
The current limit on 401k contributions is $18,500 (age 50 and older can contribute an additional $6,000 as a catch-up contribution). The limit for your 401k contribution and your employer match is $55,000. The $6,000 catch-up amount for age 50 and older would be in addition to the $55,000 limit.
While 401k plans are sponsored by your employer, an IRA (Individual Retirement Account) enables you to save for retirement on your own. You can absolutely have both. The IRA limit is currently at $5,500—and those age 50 and older can contribute an additional $1,000 annually.
A traditional IRA is tax-deferred, which means you don’t pay tax until you withdraw your funds, hopefully in retirement. When investing in a Roth IRA, on the other hand, you pay tax on your income before you make contributions to your Roth IRA. While there are no initial tax benefits, this allows your investment to grow tax-free, and you do not have to pay income tax when you withdraw funds in retirement. To qualify, there are limits on your adjusted gross income. If your adjusted gross income increases beyond $120,000 ($189,000 for married couples filing jointly), this will trigger limitations on contributions to your Roth IRA.
If you are single or married and filing separately, and you earn more than $135,000, you’ll no longer be allowed to contribute to a Roth IRA. If you are married and filing jointly, The Roth IRA income limit is $199,000. Additional rules and requirements exist depending on your specific situation. There are no income limits for traditional IRAs, though there are income limits on the tax deductions traditional IRAs entitle you to.
As you can see, it can become challenging to keep up with the complex array of qualifications, limits and other requirements related to IRA contributions. Limits can vary depending on your income status and career shifts, and potentially on new federal tax rules. You may find it beneficial to enlist the help of a tax attorney along with your financial advisor to help guide you toward an investment strategy that makes sense for you.
Beyond the 401k and IRA
A 401k and IRA aren’t your only options. If you’d like to use your invested savings sooner than retirement, an after-tax investment account might be right for you. When searching for an investment account, you’ll generally want to look for an account that offers low fees, a low minimum balance requirement, and flexibility as you consider new places to invest. Ideally, your account will be easy to use and give you access to a financial advisor.
You’ll also want to look for an account that helps you diversify your investments. While investing can be risky, spreading your investments over many different asset classes, sectors, companies, or countries is a way to help reduce some overall portfolio risk.
It’s also important to rebalance your investments regularly to ensure your portfolio is aligned with your risk tolerance. Your individual risk tolerance can inform your investment strategy, and regular rebalancing can help keep that investment strategy on track.
Wealth Management at SoFi
At SoFi, we offer automated wealth management accounts that come with personalized advice from human advisors at no extra charge, too. We can work with you to help establish your baseline retirement goals and to map out a plan. By curating diverse portfolios and rebalancing your investments automatically, a SoFi account can be a helpful part of your overall investment approach.
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