Surrounded by the beauty of Denver, with its majestic mountains and vibrant professional scene, you've carved a successful path for yourself. Amid the daily hustle, you've shown remarkable discipline, always ensuring that your 401K contributions aren't just an afterthought but a priority. Yet, as each year passes and your income grows, a nagging question lingers: "Where is the best place to invest outside my 401K to sustain the lifestyle I wish to have in retirement? Surely, my 401K won’t be enough savings to generate an income."
The reality is, even with the commendable task of maxing out your 401K, the vast landscape of tomorrow's dreams may need more. So, where should you invest next? Which avenues have the potential to generate returns, but also the potential for financial security and growth that align with your goals?
Of course, no single recommendation will work for everyone; that’s why you should always consult your financial advisor for specific recommendations, but this article can serve as a guidepost to help you start understanding your options beyond the 401K. Let’s dive in.
1. Build an Emergency Fund
Before delving into investing, ensure you have a solid emergency fund. Ideally, this fund should cover 3 to 6 months' worth of expenses. Park this money in a high-yield savings account or money market account for easy access. Colorado Wealth Group can help with this.
2. Take Advantage of an HSA or FSA (If Eligible)
A Health Savings Account (HSA) or Flexible Spending Account (FSA) can be a boon if you have high-deductible health plans. Contributions are pre-tax, and for HSAs, the withdrawals for qualified medical expenses are also tax-free. Over time, HSAs can also be invested, potentially offering tax-free growth.
3. Contribute to a Traditional or Roth IRA
There are two main types: the Roth IRA and the Traditional IRA. While the Roth IRA has income restrictions, its post-tax contributions and tax-free growth can be a great choice for those expecting to be in a higher tax bracket in retirement. Traditional IRAs offer tax deductions now but require you to pay taxes upon withdrawal in retirement.
4. Explore Taxable Investment Accounts
After exhausting tax-advantaged options, consider opening a taxable investment account. Although gains might be subject to capital gains tax, these accounts offer tremendous flexibility, with no restrictions on withdrawals or investment choices.
5. Invest in Real Estate
The Denver real estate market has seen significant appreciation over the years. Direct property investment or Real Estate Investment Trusts (REITs) can be a way to diversify your portfolio and possibly generate passive income.
6. Consider Tax-Efficient Funds
In taxable accounts, tax-efficient funds, like index funds and ETFs, can be beneficial. They generally have low turnover rates, potentially translating to fewer taxable events.
7. Education Savings: 529 Plans
If you have children and are considering helping them with their education costs, 529 plans offer tax-advantaged savings specifically for this purpose. In fact, check out our recent CWG article on 529 plans here.
8. Charitable Giving & Donor-Advised Funds
If philanthropy aligns with your values, explore setting up a donor-advised fund. These funds offer an immediate tax deduction for donations, while allowing you to recommend charitable grants over time.
Investing Beyond Your 401K
Investing beyond your 401K can be fun, with so many options available. As a Denver mid-career professional, often occupied with your bustling life, you deserve to have your hard-earned money working efficiently for you. By understanding the order of operations in investing, you're setting a strong foundation for a prosperous financial future. Always remember to align your investment choices with your goals, risk tolerance, and timeline, and never hesitate to seek the guidance of professionals like Colorado Wealth Group. We're here to help you feel secure and informed in every financial decision you make.