Alternative accounts for retirement savings
Say you’re saving the maximum in your retirement accounts. For most employees, that means you can stash up to $17,500 in 2014 in your 401(k), 403(b), federal Thrift Savings Plan or 457 plan.
You can also contribute up to $5,500 to a traditional or Roth IRA. And if you’re 50 or older, you can make “catch up” contributions of up to $5,500 to an employer retirement plan and $1,000 to an IRA.
Or maybe you earn too much to contribute the maximum. Employers are required to limit contributions by highly compensated employees if an insufficient number of lower-paid employees participate in the plan.
And you can’t contribute to a Roth IRA if your adjusted gross income is more than $129,000 in 2014 ($191,000 for married couples filing jointly).
If any of these scenarios put up a roadblock to further savings, consider these alternatives:
Taxable accounts
Saving in a taxable account is an especially good idea if you’re putting aside cash for college as well as retirement. If you come up short when the bursar calls, you can tap a taxable account without paying income taxes and early-withdrawal penalties.
Taxes on these accounts aren’t deferred, but most investors pay just 15 percent on long-term capital gains and qualified dividends.
Withdrawals from your tax-deferred accounts, on the other hand, will be taxed at your ordinary income rate, which currently ranges from 10 percent to 39.6 percent. To keep taxes in check, select tax-efficient investments, such as tax-free municipal bonds or stock index funds and other investments that qualify for long-term capital-gains rates.
SEP IRAs
If you have self-employment income from your own business or freelancing, consulting or other part-time work, these SEP IRAs let you break free of the regular IRA limits.
You can contribute up to 20 percent of your self-employment income (your business income minus half of your self-employment tax), up to a maximum of $52,000 in 2014. Contributions are tax-deductible — regardless of how high your income — and grow tax-deferred until retirement.
Variable annuities
Contributions to these accounts aren’t deductible, but investment gains grow tax-deferred until you take withdrawals.
Variable annuities were once encumbered by high fees that crippled investment returns, but many now feature low fees and modest or no surrender charges. Investors can purchase annuities directly from Vanguard Group and Fidelity Investments, for example, without paying a commission.
Still, variable annuities are most appropriate for high-bracket taxpayers with income of at least $250,000 because they stand to benefit the most from compounded tax-deferred earnings.
Sandra Block is a senior associate editor at Kiplinger’s Personal Finance magazine.
© 2014 Kiplinger’s Personal Finance; Distributed by Tribune Content Agency, LLC.