You have several options if you're already saving the maximum in
your retirement accounts, or if you earn too much to contribute the
maximum. In 2014, most employees can stash up to $17,500 in their
401(k), 403(b), federal Thrift Savings and most 457 plans. You can
also contribute up to $5,500 to a traditional or Roth IRA. 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.
But employers are required to limit contributions by highly
compensated employees if an insufficient number of lower-paid
employees participate in the plan. (For 2014, you're a highly
compensated employee if you earn $115,000 or more.) And you can't
contribute to a Roth IRA if you earn more than $129,000 in 2014
($191,000 for married couples filing jointly), although there's no
income limit if you make after-tax contributions to a traditional
IRA and convert it to a Roth.
Taxable accounts. Investing some of your savings in a taxable
account is an especially good idea if you're saving for both
retirement and college. If you come up short while your child is in
college, you can tap your taxable account without paying income
taxes and early-withdrawal penalties.
Taxes on these accounts aren't deferred, but most investors pay
just 15% on long-term capital gains and qualified dividends;
investors in the 10% and 15% tax brackets pay 0%. Meanwhile,
withdrawals from your tax-deferred accounts will be taxed at your
ordinary income rate, which currently ranges from 10% to 39.6%.
To keep taxes in check, select tax-efficient investments for
this account, such as tax-free municipal bonds, as well as stock
index funds and other investments that qualify for long-term
capital-gains rates, says Michael Kitces, a certified financial
planner for Pinnacle Advisory Group, in Columbia, Md.
SEP IRAs. If you have self-employment income from your own
business or from freelancing, consulting or similar part-time work,
these IRAs offer a way to put a lot of money away for retirement
and cut your taxes, too. You can contribute up to 20% 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 and grow tax-deferred until
Variable annuities. Contributions to these accounts usually
aren't deductible, but investment gains grow tax-deferred until you
In the past, the products were often encumbered by high fees
that crippled investment returns. Now, though, a new generation of
variable annuities features low fees and modest or no surrender
charges. Investors can purchase annuities directly from Vanguard
Group and Fidelity Investments without paying a commission.
Still, for most people, says Kitces, the expenses of variable
annuities, even the low-cost versions, usually outweigh the
benefits of tax deferral. 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
Variable annuities also look more attractive now that
high-income investors are nicked by a new 3.8% surtax on investment
income, and those in the top tax bracket will pay a higher rate on
capital gains and dividends, too.