Retirement

Maxed Out Your 401(k), But Still Want to Save More? Try This…

By Charles Sizemore  |  September 17, 2019

If you’re on track to max out your 401(k) this year, congratulations! You’re building your next egg while sticking it to the tax man. Give yourself a pat on the back.

Before I go any further, let’s make sure we’re on the same page…

I’ve chatted with dozens of people who told me they were maxing out their 401(k) every year, except they weren’t. In fact, they weren’t even close.

They weren’t lying, of course. They legitimately thought they were maxing out their retirement plans.

But there’s a lot of competing terms here. It’s easy to get them confused.

So, today, we’re going to sort this out. You’ll want to pay attention because this can potentially save you thousands of dollars a year in taxes, and hundreds of thousands over the course of your investing life.

Employer Contributions

Your employer might match your 401(k) contributions anywhere from 3% to 5% of your salary. You should always contribute at least enough to take advantage of the matching, though “matching” and “maxing” are not the same thing.

You can contribute up to $19,000 to your 401(k) this year — $25,000 if you’re 50 or older. This is the maximum you can put in, excluding your employer matching or any profit sharing.

Let’s play with the numbers.

Say you earn an even $100,000 per year and make it your goal to max out your 401(k) plan for the year. Let’s also say that your employer offers 5% matching.

This is how that would shake out:

You contribute:                                 $19,000

Your company contributes:          $5,000 ($100,000 X 5%)

Total going into your plan:            $24,000

An “Extra” Retirement Plan

Now, let’s say you’re as fanatical as I am about saving and managed to max out the full $19,000, but now you’ve caught the saver’s bug and you want to save even more.

If your health insurance plan includes them, you can consider using a Health Savings Account (HSA) as an “extra” retirement plan.

This requires a little explaining…

HSAs are not designed to be retirement plans. They’re designed to help you save for health expenses by giving you a tax break.

As with IRAs or 401(k) plans, any money you put into an HSA is an immediate tax deduction. A dollar invested in an HSA lowers your taxable income by a dollar. And you can take cash out of an HSA at any time tax, penalty free, if you use it to pay for qualifying medical expenses.

Here’s where it gets fun: no one says you have to spend the money. You can leave the cash in the HSA account and invest it in stocks, bonds, and other investments. Once you turn 65, you can take the funds out for non-medical purposes, penalty free.

You’d still owe taxes on that money. But the same would be true of any cash taken out of an IRA or 401(k) plan.

So, you can effectively use an HSA as a “spillover” IRA for extra cash you want to invest tax deferred.

Here’s the Best Part 

And here’s another fun little kicker: unlike IRAs and 401(k) plans, HSAs don’t have required minimum distributions (RMDs).

In normal retirement accounts, the IRS forces you to pull a certain amount out of your account every year after you hit the age of 70 ½. HSAs don’t have that requirement, meaning you can let your funds grow and compound tax-free well into your golden years.

In order to use an HSA, you have to also have a high-deductible health plan. Those with individual plans can contribute up to $3,500 per year (or $4,500 if you’re 55 or older). Those with family plans can contribute up to $7,000 per year (or $8,000 if you’re 55 or older).

If you’re already over the age of 65 and on Medicare, you generally can’t add new money to an HSA plan.

But if you’re under the age of 65 and are looking to lower your tax bill and turbocharge your retirement savings, the HSA can be a great way to do both.

Your Peak Nest Egg

Incidentally, I’m always looking for creative ways to save on taxes and boost retirement income. It’s what I cover in my income letter, Peak Income.

If maxing out your 401(k), building a comfortable nest egg, and earning steady, cold-hard cash is up your alley, then you’re in luck. To give Peak Income a test run, all you have to do is click here.

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Charles Sizemore

Income and Retirement Strategist, Charles Sizemore, CFA specializes on dividend-focused portfolios and building alternative allocations by finding value opportunities outside of the mainstream stock market.

Charles is the executive editor and portfolio manager for Dent Research's premium newsletters, Peak Income and Peak Profits.

He is also a frequent guest on CNBC, Bloomberg TV, Fox Business News and Straight Talk Money Radio, and has been quoted in Barron’s Magazine, The Wall Street Journal, and The Washington Post. He is a frequent contributor to Forbes, GuruFocus, MarketWatch and InvestorPlace.com.

Charles holds a master’s degree in Finance and Accounting from the London School of Economics in the United Kingdom and a Bachelor of Business Administration in Finance with an International Emphasis from Texas Christian University in Fort Worth, Texas, where he graduated Magna Cum Laude and as a Phi Beta Kappa scholar. MORE FROM AUTHOR