You Maxed Out Your Roth IRA: Now What?

Suppose that you’ve contributed the allowable maximum to your Roth individual retirement account (IRA) for the year but still have money left over to stash away for retirement. That’s a problem that a lot of people probably wish they had. And never fear—there are plenty of other good places to put your money.

While it’s hard to top the tax-deferred growth and tax-free withdrawals that a Roth IRA offers, you’re limited to contributions of $6,000 if you’re under age 50 or $7,000 if you’re 50 or older in 2022. For 2023, these numbers rise to $6,500 and $7,500, respectively. Any additional money that you want to save will have to find another home, ideally one with at least some of a Roth IRA’s tax benefits.

We’ve listed a few of the benefits that you may be eligible for below.

401(k)s and Other Defined-Contribution Plans

The first option to explore is a 401(k), 403(b), or 457 retirement plan at work. If your employer offers one of these plans, you can contribute up to $20,500 ($27,000 if you’re age 50 or older) for 2022 and $22,500 ($30,000 if you’re age 50 or older) for 2023.

Many employers provide matching contributions, which is one of the best perks around. It’s important to contribute at least enough money to your account to receive the full match even before you put a penny into your Roth IRA.

Contributions to these accounts are generally tax deductible for the year when you make them. This means that your money will grow tax deferred and you’ll pay tax only when you take withdrawals during retirement. If you choose the Roth version of one of these plans, you won’t get any up-front tax break, but your withdrawals in retirement will be tax-free, much like a Roth IRA.

SEP IRAs

A Simplified Employee Pension (SEP) IRA is a retirement account that offers tax breaks for small business owners, including those who are self-employed. If you have self-employment income, whether it’s from a full-time job or a part-time gig, you can contribute up to 25% of your compensation or $61,000 in 2022 ($66,000 for 2023), whichever is less. If you’re self-employed, you’re considered to be both employer and employee.

Keep in mind that if you have other employees, you generally have to contribute on their behalf, too. And it has to be the same percentage of compensation that you contribute to your own account. So, if you contribute 15% of your compensation, then you also have to contribute 15% on behalf of any employees who:

• Are age 21 or older,
• Have worked for you for at least three of the last five years, and
• You’ve paid at least $650 during the year in 2022 and $750 in 2023.

Similar to a traditional IRA, SEP IRA contributions are tax deductible for the year when you make them, but you’ll have to pay tax when you withdraw the money in retirement.

SIMPLE IRAs

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is like a 401(k) plan geared for small businesses with 100 or fewer employees. Employees can contribute up to $14,000 in 2022 and $15,500 in 2023 ($17,000 and $19,000, respectively, if 50 or older). As with a SEP IRA, if you are self-employed, you’re considered to be both employer and employee.

If you have other employees, you have to contribute for them, too, using one of two options:

• Make a dollar-for-dollar match of up to 3% of an employee’s pay, or
• Contribute a flat 2% of compensation, whether or not the employee contributes.

As with SEP IRAs, your contributions are tax-deductible for the year when you make them, and your withdrawals in retirement will be taxed as ordinary income.

Setting Up Every Community for Retirement Enhancement (SECURE) Act

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law in late 2019, making broad changes to retirement legislation. Under the act, if you have employees, then as a small business owner, you receive some benefits for establishing retirement plans for your employees. This applies to 401(k)s, 403(b)s, SIMPLE IRAs, and SEP IRAs, as mentioned above.

Small businesses receive an increase in tax credits from $500 to $5,000 for establishing a retirement plan. For adopting an automatic enrollment process, they receive a tax credit of $500. These credits apply for up to three years.

Under the act, a small business is a business that has no more than 100 employees receiving at least $5,000 in total compensation. The bill also broadens access to multiple employer plans.

Annuities

If you’ve exhausted all of the tax-deferred and tax-exempt retirement accounts for which you qualify, you might want to look into annuities. These are insurance products that make periodic payments of income during retirement.

Annuities have a justly deserved bad reputation for high fees and poor investment options. However, a newer class of annuities, called investment-only annuities, have lower costs. These annuities are created for tax-deferral purposes rather than insurance benefits. It’s essential to pay close attention to any additional features and ensure that the annuity provides enough value to justify the extra fees.

Your contributions to an annuity aren’t tax deductible, but they will grow tax-deferred, and there’s no limit on the amount of after-tax money that you can contribute. You’ll have to pay tax on the gains when you make withdrawals, but you won’t owe tax on the principal.

Health Savings Accounts

Health Savings Accounts (HSAs) are designed for healthcare costs, and withdrawals are tax-free only if they go toward approved medical expenses. Still, most of us have those, particularly as the years roll by. You contribute after-tax money to the HSA, and it grows tax-free while in the account.

For 2022, you can contribute up to $3,650 to an HSA ($7,300 for a family), and anyone age 55 or older can contribute an extra $1,000. In 2023, the contribution limit is $3,850 for individuals and $7,750 for families.

If you have a high-deductible health plan (HDHP), you may be eligible to contribute to an HSA. According to the Internal Revenue Service (IRS), for 2022, an HDHP has a minimum annual deductible of $1,400 ($1,500 in 2023) for self-only coverage or $2,800 ($3,000 in 2023) for family coverage.

For 2022, the HDHP must have maximum annual out-of-pocket expenses that do not exceed $7,050 for self-only coverage ($7,500 in 2023) or $14,100 for family coverage ($15,000 in 2023). Out-of-pocket expenses include deductibles and co-payments, but not premiums.

The Bottom Line

You have many options to choose from after you’ve maxed out your Roth IRA. But how much you can save may be limited by the amount and type of income you have earned and your contributions to other accounts. To be safe, it’s often worth checking with a tax professional.