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Today’s Saturday Selection comes courtesy of The White Coat Investor. A reader faces a first-world “dilemma” that is not at all uncommon among financially savvy physicians.
This article first appeared on The White Coat Investor. Dollar amounts have been updated for 2018.
I Maxed My Retirement Accounts. Now What?
Question:
I’m an employee and have already maxed out a 401K ($18.5K), a back-door Roth IRA ($5.5K), and an HSA ($3,450). I’d like to save more for retirement. What are my other options?
A.
The amount of “space” in available retirement accounts rarely lines up exactly with what an investor would like to save for retirement. Some people have far more space available than money they can actually save while others don’t have enough. There are so many different options, there’s no reason one has to stop saving for retirement if they wish to save more in any given year. Let’s consider each of them one by one.
Spousal Retirement Accounts
If you’re married, you can save money in your spouse’s retirement accounts. Remember that money is fungible and a dollar doesn’t care if it was made by you or your husband. There’s no reason you can’t take all your savings from your income and have most or all of your spouse’s paycheck go into his 401K. If you have a stay-at-home spouse, or one with very little earnings, you can do a backdoor Roth IRA for your spouse with your own income, creating another $5500 in retirement “space” each year. Being married also allows you to put $6,900 into a Stealth IRA (i.e. HSA) instead of just $3,450.
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Paying Down Debt
Many of us, especially in our thirties, carry around a large amount of debt, some of which may be at a relatively high interest rate. If you have maxed out your retirement accounts and have debt at 6-7% or even more, it’s a no-brainer to use your additional income to pay that down. It’s the equivalent of purchasing an investment with a guaranteed 6-7% return. Even paying down a 3-4% mortgage may be an attractive option for additional savings for some people.
Lobby Employer For Additional Retirement Accounts
Self-employed physicians can use a Solo 401K or SEP-IRA with a $55K limit. Many partnerships have 401K/Profit-sharing plans in place with the same limit. These physicians may also have a defined benefit plan allowing them to save another $10-50K. While an employed doctor can’t just walk out and open these types of accounts on her own, she can lobby her employer to add them to the mix. You may find your employer is more than willing to change the retirement options available, but just doesn’t happen to understand his options and how important this is to his employees.
Catch-Up Contributions
Once you hit age 50, you can actually contribute more to your retirement accounts. The 401K employee contribution limit goes up from $18.5K to $24.5K. Profit-sharing plans go from $55K to $61K. Your personal and spousal Backdoor Roth IRA contribution limits also go up from $5.5K to $6.5K and even the Stealth IRA limit goes up by $1,000 to $4,450 (single) or $7,900 (married). If you have a 403B and a 457 as many academic docs do, the limit for each of them goes up from $18.5K to $24.5K, providing another $13K in retirement savings space.
Annuities
While I’m generally not a big fan of annuities due to their additional costs and the fact that they turn income that would be taxed at a lower capital gains tax rate into income taxed at your higher regular rate, there are situations when they can make sense, especially if costs are very low, the asset classes invested in are particularly tax-inefficient like bonds, REITS, or high-turnover stock funds, and if you hold it for a very long time.
They may also provide some additional state-specific asset protection benefits. However, in exchange for some tax benefits and possibly some asset protection benefits, you give up many of the unique benefits and flexibility of investing in a taxable account.
Cash-Value Life Insurance
I’m also not a big fan of cash-value life insurance, whether it be whole life, universal life, or variable universal life. It is often marketed to high-income people as an additional retirement account and has been discussed on the blog ad nauseum. Returns tend to be low and you must hold the policy for the rest of your life to get any kind of reasonable return.
Withdrawals must be taken as “loans” from the policy, on which you must pay interest until your death (or pay back the loan.) You must also be insurable at a reasonable rate, so it really isn’t an option for those with relatively poor health or dangerous hobbies.
A life insurance policy may provide you some estate planning and asset protection benefits depending on your individual situation and state of residence. Some people may also highly value the permanent death benefit a cash-value life insurance policy is designed for.
There are a few steps you can take to make a life insurance policy work out a little better as an investment, but as a general rule, the lack of flexibility and low returns make these an inferior option. You certainly shouldn’t be buying one if you haven’t maxed out all of more traditional retirement accounts.
Real Estate Investing
Investing in real estate allows you to take advantage of relatively safe leverage (when compared to buying stocks on margin) and many significant tax advantages such as depreciation, the ability to write off travel to the location of the property, 1031 exchanges, and the step-up in basis at death.
Investment Accounts For Your Kids
Some doctors prefer putting extra money toward 529 accounts for their children or into their children’s UGMA accounts. While this does have the benefit of lowering your tax bill, it really isn’t a great place for your retirement savings due to restrictions on these accounts.
Money taken out of a 529 and not spent on education is subject to a 10% penalty. Money put into a UGMA account can only be spent for the child’s benefit. Besides, when the child turns 18-21, he can blow the money on dope and strippers and there’s nothing you can do about it.
Taxable Investing Account
The much-maligned taxable investing account isn’t nearly as bad as most physicians, and certainly most annuity and life insurance salesmen, think. Sure, it is exposed to your creditors, but the truth is that few of us will ever have to deal with a judgment that isn’t covered by our malpractice or umbrella policies. Retirement accounts, annuities, and life insurance aren’t really protected from the judgment most commonly faced by doctors, a divorce settlement, anyway.
It is also taxed as it grows, unlike many of the other accounts listed above. However, it has many advantages that the other accounts do not. First, it is immensely flexible. You can invest in pretty much anything and you don’t have to deal with age 59 1/2 related restrictions. Second, you can get a step-up in basis at death, passing money to your heirs income tax-free. Third, you can get significant tax benefits during your life by donating shares to charity or tax-loss-harvesting. Fourth, you can minimize taxable income by choosing tax-efficient investments such as total market stock index funds and municipal bonds. If not completely tax-free or at least deferred, income will generally only be taxed at the lower capital gains and dividend rates rather than your regular marginal tax rate.
As you can see, there are lots of options for retirement investing even after you’ve filled your retirement accounts. As with most things in life, knowledge and creativity are rewarded financially.
What do you think? Which types of accounts do you use for your retirement savings?
21 thoughts on “I Maxed My Retirement Accounts. Now What?”
A lot of doctors start out focusing on tax-advantaged plans. They don’t realize that most of the money will be outside of retirement plans since the investment caps prevent them from putting most of their money in tax-advantaged accounts.
There is no doubt that many folks carry around a large amount of debt, some of which may be at a relatively high interest rate. If you have maxed out your retirement accounts and have debt at 6 plus % or more, it’s a no-brainer to get it paid off.
Someone who wants to really super charge the retirement could do a cash balance pension plan or other retirement vehicle to get more in retirement, especially in a good financial year.
+1 on taxable accounts ETF’s (like SPY DIA QQQ VTI) tend to be very tax efficient and easy to buy and sell. Good fodder for a taxable account, but some ETF’s are designed to throw off income so understand what you’re buying. Also learn how to tax loss harvest, you’ll be glad you did.
I’m not sure why taxable accounts were at the bottom of the list? I think taxable accounts get a bad rap because of wall street boiler plate advertising 30 years ago re mutual funds. They were more costly to maintain and re-balance then than today, and there were no ETF’s so you had to stock pick. Not that hard though GE, Ford or GM, IBM, Goldman, or JPM, BA would get you by. Keep your dividend payers and bonds in pretax and your tax efficient equities in post tax and whatever blows your skirt up in the Roths.
I had already heard that the cost of electricity makes it unprofitable for most people, but he is currently living out of a RV going to a different city each week. The cost of electricity is included in the RV park rent.
No kidding? I guess that’s one way to pass the cost on to someone else. We plan on picking up an RV (travel trailer) within the next year or two.
Cheers!
-PoF
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Thanks, this was helpful. I was just talking to a couple of my higher earning friends about what else they can do with their money and they were already maxing their 401ks, doing the backdoor Roth’s, and doing the HSAs. I told them to just put it in a taxable brokerage account, and this article reassures me that is the right choice.
Unfortunately, one has decided to also start investing in servers for mining cryptocurrencies. Hopefully it works out for him.
The amount of electricity being used in these “mining” endeavors is frightening. Makes a hydroponic farmer’s bills look miniscule.
More than half of my investments are a in a plain ol’ taxable brokerage account. Nothing wrong with putting money there.
Best,
-PoF
Nice review. After my work accounts are maxed each year we then give 10K per kid into 529, backdoor Roth x 2, keep wife giving almost all of her part-time PA Check to retirement which maxes around May. After that all goes to taxable and charity.
However, now I will start adding to our Donor Advised Fund since opening a few days ago! Ballin
Agree with Dr Fawcett’s comment about not being Scrooge. Timely comment for Christmas. Use that money while you can for what you want! We are loosening the pursestrings starting 2018. I cant wait.
I don’t feel so behind now for starting 6 months after residency. Wanted to focus on paying debt first but just went ahead and did the 401k. Maxed out. Still paid off all debt (woo hoo) and then tackled the 457. It’s maxed too. Just did the backdoor roth IRA and was asking myself what to do next. Great article. Thanks for sharing!!!
How about enjoy your life more? If you are filling up all those options and still have left over money, live a little better now. Take more time off. Have nicer vacations. Give more to charity. Donate to your hospital. Take a day off during the week. Come home an hour earlier every day. Don’t turn into Ebenezer Scrooge and make life about stockpiling money. Life should be lived all along the way.
A great additional option, Cory. Good job thinking outside the box.
It wasn’t until I had gone well beyond investing outside my retirement accounts that I realized I could start enjoying life outside of medicine more. Understanding what constitues Enough is key.
Cheers!
-PoF
I think having the discipline in saving money makes it difficult for us to spend money. I still like @Dr. Cory’s statement above. I just feel nauseated when I spend a lot of money 🙂
I wish there is a LIKE button in your website Dr. POF!
Thanks!!!
Your comment is worth more to me than a press of a “LIKE” button.
Merry Christmas!
-PoF
I know this post is a few years old but you all fail to point out that you don’t need to spend money to enjoy life. I have a ton in savings and cash, however my free time is spent going for bike rides, climbing, hiking, reading and learning, gardening, socializing, etc, none of this cost much. You can enjoy an $8 meal at a hole in the wall dinner just as much as a $40 meal at an upscale place. Or a new 14k ford focus as much as a tesla. 99% of it is in peoples heads and a status symbol. Once you get over that, and posting your “glamorous” life on social media you will be ahead 10’s of thousands every year, and be happier less stressed out over trying to 1 up the Jones.
Yes, a lot of doctors start out focusing on tax-advantaged plans. They don’t realize that most of their money will be outside of retirement plans since the investment caps prevent them from putting most of their money in tax-advantaged accounts. That was certainly true for me. I focused on learning about IRA, pension plans, 401K. For sure, we should. However, for high-income professionals, we need to be schooled in investing in taxable accounts. Tax-free accounts are necessary, but not sufficient.
Looking at this list – I did all of it except insurance and annuity options. I’m not sure if avoiding them was the right call. They seemed too complicated and costly to me. Things ended up great for me without them.
I don’t think WCI presented so many options with the idea that one should check all the boxes. In fact, I know there are several that we both know are less than ideal for most (i.e. cash-value life insurance).
I’m with you on the taxable account. I didn’t start funding it until 2010 and now I’ve got more money there than all other accounts combined.
Cheers!
-PoF
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Thanks for sharing , POF!
I max out my 401(k), HSA, and Roth IRA. My wife stays home with our little girl and we max out her Roth IRA.
Finally, we contribute about $15k/year to our taxable account and $4k/year to our daughters UTMA…
Cheers and Happy Holidays!
You’re ahead of the game, TGE. Interesting that you’ve chosen the UTMA over the 529 unless you just left that part out.
Either way, Happy Holidays to you, too!
-PoF
You know, I found it odd that the taxable account was so low on the page, since that’s where the bulk of my money has gone in recent years.
However, I realized that I didn’t even start investing in a taxable account until the summer of 2010, a full four years after I finished residency. Before that, I had invested in a spousal IRA, started a 529 Plan, and was paying down debt.
Best,
-PoF
I have to admit in 2012 that I felt a little lost. My wife and I had just paid off our house. We both were maxing out my 401k, our IRAs, and FSAs through work. She was/is a stay at home mom taking care of her older sister with special needs so not too much we could do to contribute much more. Once we had maxed everything out it was like what’s next. We went with the brokerage account and then maxing out our 529 plans once we had children. But not having goals for awhile really stunk.