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Maxed Out Your 401(k) in 2025? Here's Your Next Course of Action

For those who have maxed out their 401(k) contributions but still aim to save for retirement, here are seven strategies for profiting as a diligent saver.

Maxed Out Your 401(k) in 2025? What's the Plan B?
Maxed Out Your 401(k) in 2025? What's the Plan B?

Maxed Out Your 401(k) in 2025? Here's Your Next Course of Action

In the pursuit of a secure financial future, high earners have a unique set of opportunities to maximise their retirement savings. Here's a comprehensive guide on how to make the most of these opportunities, as explained by financial experts Dalton Richards and David Dickman.

Firstly, it's essential to capitalise on your company's deferred compensation plan, according to Dalton Richards, CPFA® and Financial Planner at Balefire. This could include 401(k) plans, 403(b), most 457 plans, and the federal government's Thrift Savings Plan.

After maxing out your 401(k) contributions, David Dickman, CFP®, Vice President and Partner at Rothschild Wealth Partners, recommends exploring less obvious investment options. One such strategy is the mega backdoor Roth, which can be leveraged if your employer's 401(k) plan allows after-tax contributions above the standard limit, and in-plan Roth conversions or in-service rollovers.

The backdoor Roth IRA strategy involves contributing after-tax dollars to a traditional IRA, then converting those funds to a Roth IRA. This strategy is especially effective if you expect to be in a lower tax bracket in retirement, or you are working toward early retirement and want to spread out your income across multiple years. However, it's crucial to consider the pro-rata rule during the conversion process, as it could result in unexpected taxes.

Another less conventional option is non-qualified deferred compensation (NQDC) plans, which are available to many executives, partners, and senior professionals. With an NQDC plan, you can defer a portion of your salary and/or bonus into a tax-deferred account.

In addition to these strategies, it's recommended to retain, on average, six months of living expenses in cash or equivalents. However, carrying high-interest liabilities or aspirations for near-term life events could dictate your decision beyond standard advice.

High earners may also benefit from tax-advantaged accounts to reduce current taxable income and secure tax-free growth. This includes Health Savings Accounts (HSAs), which offer triple tax savings - tax-deductible contributions, tax-deferred growth, and tax-free withdrawals for medical expenses.

Catch-up contributions, for those age 50 and older, amount to $7,500, while super catch-up contributions (for those age 60-63, per SECURE 2.0 Act) are $11,250. These catch-up contributions can help high earners save additional funds, even if they exceed the Roth IRA contribution limits.

It's important to note that total contributions cannot exceed 100% of the employee's compensation. For 2025, the 401(k) contribution limits are as follows:

  • Employee elective deferral limit: $23,500 (an increase of $500 from 2024).
  • Standard catch-up contribution for employees aged 50 and older: $7,500 (unchanged from prior years).
  • "Super catch-up" or enhanced catch-up contributions for employees aged 60 to 63 under the SECURE 2.0 Act: up to $11,250.
  • Total combined employee and employer contributions (including deferrals and catch-ups): $70,000 (or $77,500 for those 50 and older, $81,250 for those 60-63).

Lastly, donor-advised funds (DAF) are dedicated giving and investment accounts that offer tax deductions, tax-free growth, and shield assets from estate taxes. These funds can be a valuable tool for high earners looking to manage their tax liabilities.

In conclusion, managing the "life cycle" of your finances requires considering the liquidity and tax benefits or ramifications of certain contributions and withdrawals. It's always advisable to consult a financial advisor to tailor these strategies to individual goals, tax situation, and risk tolerance.

  1. In the realm of personal-finance, high earners can invest in less obvious options after maxing out their 401(k) contributions, such as the mega backdoor Roth, which provides liquidity through tax-deferred growth and offers tax-free withdrawals for specific circumstances.
  2. High-earners seeking to secure their financial future can benefit from tax-advantaged accounts that can reduce current taxable income and provide a means of liquidity, like Health Savings Accounts (HSAs), which offer triple tax savings and can be an effective strategy in managing tax liabilities.

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