In addition to your 401k, you can open up a separate Individual Retirement Account — more commonly known as an IRA. It's another tax advantaged account that you can setup outside of your employer.
They come in two flavors: Traditional or Roth. As a Software Engineer, however, you'll probably be restricted due to income limits. As an individual:
- if you made over $75k in a year, you cannot make a deductible contribution to a Traditional IRA
- if you made over $124k in a year (but less than $139k), you can make a partial contribution to a Roth IRA
- if you made over $139k in a year, you cannot make a contribution to a Roth IRA (directly)
To get around this, you'll have to make a backdoor Roth IRA contribution. It's a tax loophole that will let you max out your Roth IRA every year. It basically involves:
- making an after-tax, non-deductible contribution to a Traditional IRA
- converting the contribution to a Roth IRA
- paying taxes on the contribution and any taxes on gains while it was in your Traditional account
As of 2020, the maximum contribution you can make per calendar year to a Roth IRA is $6,000.
For more information, read How to Set Up a Backdoor Roth IRA.
← Prev / Home / Next →
Use Low Cost Index Funds Save on fees and diversify your nest egg
Automate Investments Setup a system to pay yourself first
Mega-Backdoor Your Roth IRA Some employers offer a benefit that allows more IRA contributions
Use a Taxable Investment Account Don't lose your money to inflation
Max Out Your 401k Take advantage of employer match and tax savings