Are you a diligent saver, maximizing your contributions to retirement accounts like your 401(k) or IRAs? If so, you might be pondering the next step for any surplus funds. Should you continue investing? And if yes, how? Or perhaps consider other avenues like acquiring art or supporting your family?
After hitting the limit on retirement contributions, there’s a range of options to explore:
Taxable brokerage accounts: While retirement accounts offer tax advantages, taxable brokerage accounts offer flexibility. Invest without contribution limits and access funds without penalties. Dividends from these investments can serve as additional income.
- Real estate investment
Consider diversifying into real estate. Properties can appreciate and generate rental income. Though it requires upfront costs and management, many have built wealth through real estate investments, despite changes in tax laws affecting deductions.
- Peer-to-peer lending
Explore earning through peer-to-peer lending platforms. By purchasing portions of others’ loans, you earn interest based on the borrowers’ creditworthiness. While there’s risk of default, spreading investments across diverse loans can mitigate it.
- Education savings accounts
Support future generations by investing in education savings accounts like 529 plans. These offer tax benefits, allowing tax-free gains withdrawal for qualified education expenses. Recent changes expanded eligible expenses beyond college to include private high school.
These alternatives provide avenues for further financial growth and diversification once retirement accounts are maximized.
- The Bank
Stashing cash in a basic savings account might not seem like the most lucrative move with today’s low interest rates. However, amid your efforts to maximize retirement savings, it’s easy to overlook the importance of building up cash reserves. Having a solid cash buffer can offer security during emergencies and prevent dipping into retirement funds. If you haven’t saved at least three months’ worth of expenses, consider beefing up your savings. Aim for six months once you hit that mark.
Even individuals with substantial net worth can face cash flow challenges, often due to an intense focus on investment. If you’re diligently maxing out retirement contributions, you’re on the right track. Having surplus cash isn’t a drawback—it can provide peace of mind.
- Collectibles
While I’m personally not sold on collectibles as primary investments, they can complement a diversified portfolio. Knowledgeable collectors can profit from art, antiques, trading cards, or classic cars, all while enjoying the hobby. However, collectibles typically yield lower returns compared to the stock market.
- Charitable Donations
After reaching the max in retirement contributions, you might assume there are no further tax advantages. Yet, donating to most charities can still earn you a tax deduction, allowing you to support causes while benefiting financially. However, with the new tax law favoring the standard deduction, the tax benefits of charitable donations may be reduced.
- Family Gifting
For wealthy individuals planning to pass on their wealth, initiating wealth transfers early can mitigate taxes. With the current tax law, the gift and estate tax exemption stands at $11.2 million per individual, or $22.4 million for married couples. Additionally, annual gifts of up to $15,000 per person ($30,000 for married couples) can be made tax-free.
