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Maxing out your 401(k)? What to consider next.

Key takeaways

  • Aggressive savers may want to save more toward retirement, over and above annual contribution limits to 401(k)s.
  • Some of the potential strategies to look into might be HSAs, backdoor Roth IRAs, mega backdoor Roths, and tax-deferred annuities.
  • Although brokerage accounts do not come with any built-in tax advantages, some investment vehicles and asset location strategies might help reduce the annual taxes investors generate in these accounts.
  • It may take research to determine what strategies you're eligible for and what are suitable for your situation.

Already maxing out your 401(k)? Earn too much to contribute to a Roth IRA? To be sure, these are good problems to have.

If you're an aggressive saver and your finances are in strong shape, you might be looking for additional ways you can save for retirement in a tax-advantaged way—beyond the basics of maxing out your 401(k) or other workplace retirement plan.

Read on for 5 strategies supersavers and high earners may be able to use to potentially sock away even more for retirement.

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1. HSAs

You may be familiar with how health savings accounts (HSAs) can help cover health care costs with pre-tax dollars. But this tax-efficient savings vehicle can also be used as a powerful tool for retirement savings. One key to being able to use an HSA is that you must be enrolled in an HSA-eligible health plan at work or in the private and public marketplaces.

An HSA offers triple tax savings,1 where you can contribute pre-tax dollars, pay no taxes on earnings, and withdraw the money tax-free now or in retirement to pay for qualified medical expenses. That means if you pay qualified medical costs out of an HSA, the money you take out is tax-free.2 You can even use the money you save for nonmedical expenses after age 65 without any penalties. But note, you are taxed at ordinary income rates on nonqualified withdrawals, just as you would be with a traditional IRA or 401(k). (If you are under age 65, you pay a 20% penalty on nonmedical withdrawals, and you pay ordinary income tax in addition to the penalty.)

Because an HSA is one of the most tax-efficient savings options currently available, you may want to consider contributing the maximum allowed and paying for current health care expenses from other sources of personal savings. If you really want the power of HSA compounding to work for you, don't tap into it unless necessary, and consider investing it for long-term growth potential.

Learn more about HSA annual contribution limits and eligibility rules, and about 5 ways HSAs can help with retirement.

2. Backdoor Roth IRAs

A backdoor Roth IRA isn't a different kind of IRA. It can be a way for higher earners to access the benefits of Roth accounts. The strategy is accomplished by making nondeductible contributions—or contributions on which you do not take a tax deduction—to a traditional IRA and then converting those funds into a Roth IRA. The strategy could be useful to high earners as they may not be able to fully deduct IRA contributions, and they may not be able to contribute directly to a Roth IRA—i.e., via the "front door"—due to income limits on contributing.

The process behind a backdoor Roth strategy can be fairly simple. Set up a new traditional IRA and make a nondeductible contribution to it, and then go through the process of converting the contribution to a Roth IRA. There are no income or age requirements when making a conversion.

You can also contribute nondeductible funds to an existing traditional IRA and convert the funds to a Roth IRA. That said, if you have an existing IRA or you have more than one IRA, be aware that IRA aggregation rules will apply, meaning the IRS considers all your traditional IRAs a single tax entity. This means that any conversion will be taken on the aggregate of your accounts, and if you have deductible contributions in any of your accounts, you won't be able to only transfer the nondeductible portion.

Figuring out the taxes you may owe on a conversion can be complicated. Taxes resulting from a backdoor Roth IRA conversion can be significant, and they can also be complex. That's especially true if you have more than one traditional IRA, due to those IRA aggregation rules mentioned above.

If you're intrigued by the strategy and want to learn more, take a deep dive into the ins and outs of the backdoor Roth IRA strategy, and in particular the tax implications. Also be aware that future legislation could one day eliminate the strategy. If you're considering using a Roth conversion or the backdoor Roth as part of your retirement savings strategy, be sure to closely follow rules on conversions and speak with a tax advisor about the impact a conversion could have on your financial situation.

3. Mega backdoor Roths

A mega backdoor Roth refers to a strategy that can potentially allow some people who would be ineligible to contribute to a Roth account, based on their income or contribution limits, to transfer certain types of 401(k) contributions into a Roth—including a Roth IRA and/or Roth 401(k).

Put very simply, the mega backdoor Roth strategy entails 2 steps: (1) making after-tax contributions to your 401(k) or other workplace retirement plan, and (2) then doing a conversion either to a Roth IRA or Roth 401(k). Note that not all workplace retirement plans allow these steps, which means that not everyone will be eligible for the strategy. Here's what plans generally must permit in order to use the strategy:

Infographic shows the features that a workplace retirement plan must generally include in order to implement a

If your plan permits it and you're considering using the strategy, you'll also want to be sure to understand the potential tax implications. Whether you convert to a Roth IRA or Roth 401(k), you will need to pay taxes on any earnings included in the conversion (you will not generally need to pay taxes on contributions you convert, as those amounts have already been taxed). A tax professional can advise you on the potential tax impacts of the strategy on your situation.

Similarly to the backdoor Roth strategy, future legislation could one day eliminate the mega backdoor Roth approach. So if you're considering using the strategy, you may need to stay on top of any rule changes—in addition to following your plan's rules and the strategy's tax implications.

Learn more about the ins and outs of the mega backdoor Roth strategy.

4. Tax-deferred annuities

Many savers may not realize that annuities can offer a tax-deferred way to help save for retirement.

Deferred annuities can help you grow retirement savings, once you've maxed out contributions for the year to qualified plans such as 401(k)s and IRAs, and they aren't subject to annual IRS contribution limits.3 Similar to retirement plans, any investment growth is tax-deferred and you won't owe taxes on an annual basis. Tax-deferred annuity assets can be converted into an income annuity upon retirement, which allows you to spread out the tax liability over the income stream. You may also take withdrawals from your tax-deferred annuity without converting it to an income annuity, but your gains would be taxed at ordinary income tax rates.4

There are 2 key types of tax-deferred annuities: tax-deferred fixed annuities and tax-deferred variable annuities. Tax-deferred fixed annuities have a fixed rate of return that is guaranteed for a set period of time by the issuing insurance company. In contrast, with tax-deferred variable annuities, the rate of return—and therefore the value of your investment—will go up or down depending on the underlying investment option(s) that you select, allowing you to potentially benefit from any market growth.

A tax-deferred variable annuity has underlying investment options, typically referred to as subaccounts, that are like mutual funds. There are no IRS annual limits to contributions and you choose how you'd like to allocate money among different investments to potentially benefit from market growth. You can reallocate assets or trade among subaccounts within the annuity tax-free. Additionally, you don't pay taxes until you receive an income payment or make a withdrawal, at which point earnings, as well as any pre-tax contributions, are taxed as ordinary income.

Learn more about understanding annuities and the roles they may play before and in retirement.

5. Tax-efficient strategies in a brokerage account

While brokerage accounts don't offer any built-in tax advantages, their flexibility can be compelling. You can contribute as much as you want to your account and choose from a wide variety of investment options. Plus there are no complex eligibility or withdrawal rules to navigate.

Even though brokerage accounts are not tax-deferred accounts, choosing tax-efficient investing options can potentially help reduce the taxes you owe during your saving and working years—allowing for more compounding potential.

If you're investing additional money toward retirement in a brokerage account, here are some potentially tax-efficient investing strategies to consider:

Investing with ETFs

ETFs—and in particular ETFs that track an index (aka passive ETFs)—can be relatively tax-efficient. In part, that's because index ETFs tend to have low portfolio turnover (meaning they don't make frequent changes to the portfolio of investments they hold). It's also in part due to the unique mechanics of how ETFs create and redeem shares. Read more about key features of ETFs.

Investing with tax-efficient mutual funds

Like passive ETFs, passive mutual funds may have lower portfolio turnover, and so may generate less taxable income than actively managed mutual funds. Additionally, some active mutual fund managers trade less frequently as part of their investing approach, so these funds may be more tax-efficient than many of their peers.

Investing with separately managed accounts (SMAs)

SMAs are portfolios of individual securities that investors own directly as a complement to their overall portfolios. Like mutual funds and many ETFs, they're managed by professional asset managers who focus on specific asset classes, such as stocks or bonds. Depending on the investment strategy of the SMA, investment managers can apply a range of personalized tax-smart investment techniques in an effort to increase after-tax returns.5 Learn more about tax-smart investing in SMAs.

Using asset location

Asset location is a way of strategically choosing which investments you hold in which accounts, in an effort to help lower your overall tax bill. For example, it can make sense to hold taxable bonds and high-turnover stock funds in a tax-advantaged account, like a 401(k) or IRA, because those tend to be less tax-efficient investments. Individual stocks that you plan to own for the long term could be held in a taxable brokerage account, as these tend to be more tax-efficient investments. In this way, you can save for retirement in a brokerage account in parallel with saving in tax-advantaged accounts—and use your mix of accounts strategically to help reduce the impact of taxes over time. Learn more about tax-smart asset location.

Finally, if you're interested in any of these strategies but you could use more support on your investing journey, consider how we can work together.

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We'll meet you where you are on your financial journey and help you get to where you want to be.

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ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses.

1. With respect to federal taxation only. Contributions, investment earnings, and distributions may or may not be subject to state taxation. Please consult with your tax professional regarding your specific situation. 2. With respect to federal taxation only. Contributions, investment earnings, and distributions may or may not be subject to state taxation. Please consult with your tax professional regarding your specific situation. 3. Issuing insurance company reserves the right to limit contributions. 4. Withdrawals of taxable amounts from an annuity are subject to ordinary income tax, and, if taken before age 59½, may be subject to a 10% IRS penalty. 5. Tax-smart (i.e., tax-sensitive) investing techniques (including tax-loss harvesting) are applied in managing certain taxable accounts on a limited basis, at the discretion of the portfolio manager primarily with respect to determining when assets in a client's account should be bought or sold. As the discretionary portfolio manager, Strategic Advisers LLC ("Strategic Advisers") may elect to sell assets in an account at any time. A client may have a gain or loss when assets are sold. There are no guarantees as to the effectiveness of the tax-smart investing techniques applied in serving to reduce or minimize a client's overall tax liabilities, or as to the tax results that may be generated by a given transaction. Strategic Advisers does not currently invest in tax-deferred products, such as variable insurance products, or in tax-managed funds, but may do so in the future if it deems such to be appropriate for a client. Strategic Advisers does not actively manage for alternative minimum taxes; state or local taxes; foreign taxes on non-U.S. investments; federal tax rules applicable to entities; or estate, gift, or generation-skipping transfer taxes. Strategic Advisers relies on information provided by clients in an effort to provide tax-sensitive investment management, and does not offer tax advice. Except where Fidelity Personal Trust Company (FPTC) is serving as trustee, clients are responsible for all tax liabilities arising from transactions in their accounts, for the adequacy and accuracy of any positions taken on tax returns, for the actual filing of tax returns, and for the remittance of tax payments to taxing authorities.

Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Investing involves risk, including risk of loss.

The information provided herein is general in nature. It is not intended, nor should it be construed, as legal or tax advice. Because the administration of an HSA is a taxpayer responsibility, you are strongly encouraged to consult your tax advisor before opening an HSA. You are also encouraged to review information available from the Internal Revenue Service (IRS) for taxpayers, which can be found on the IRS website at IRS.gov. You can find IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, and IRS Publication 502, Medical and Dental Expenses, online, or you can call the IRS to request a copy of each at 800-829-3676.

For a distribution to be considered qualified, the 5-year aging requirement has to be satisfied, and you must be age 59½ or older or meet one of several exemptions (disability, qualified first-time home purchase, or death among them).

Clients in Fidelity separately managed accounts are responsible for all tax liabilities arising from transactions in their accounts, for the adequacy and accuracy of any positions taken on tax returns, for the actual filing of tax returns, and for the remittance of tax payments to taxing authorities.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Indexes are unmanaged. It is not possible to invest directly in an index.

Annuity guarantees are subject to the claims-paying ability of the issuing insurance company.

Before investing, consider the investment objectives, risks, charges, and expenses of the annuity and its investment options. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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