If your employer offers a 401(k), it can be a great tool for building up your retirement nest egg. You can easily set up automatic deferrals of your paychecks, and with the immediate tax advantages and (in many cases) the ability to tag a company match on your contributions, these accounts can make savings for the relatively painless retirement.
But a 401(k) isn’t always the best vehicle to invest your retirement funds. In particular, once you have contributed enough to receive your maximum business correspondence, many 401(k)s are becoming a less efficient way to save money. Here are three other types of retirement accounts to consider.
Individual retirement accounts
Individual Retirement Accounts, or IRA, have many similarities to 401(k), but the differences are important.
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The first concerns their annual contribution limits. In 2022, you can contribute up to $6,000 to an IRA, while you can contribute $20,500 to a 401(k). Workers age 50 and older can make an additional catch-up contribution of up to $1,000 to an IRA and an additional $6,500 to a 401(k) each year.
Another difference lies in the tax advantages offered by these accounts. IRA contributions are not always tax deductible. If you also have access to a 401(k) or other employer-sponsored retirement plan and your income exceeds a certain threshold, you will not be able to deduct your contributions to a traditional IRA.
You could open a Roth IRA. With these accounts, you normally pay tax on your contributions, but when you make withdrawals in retirement, the money (including the profits from your investments) comes out tax-free. But Roth IRAs also face income limits. If you win too much, you won’t be allowed to contribute to one. (For high earners, there is a technique called “Roth backdoor“It’s worth exploring.)
While IRAs’ lower contribution limits and income limits are big downsides, the other differences might make it a better option for you.
For one, you have complete control over your IRA. You can choose your broker and use the funds in your account to invest in almost any option you want: individual stocks, ETFs, mutual funds, etc. By contrast, your company’s 401(k) will typically be managed by the specific provider of its choice, and your options for investing within it will likely be limited to a small set of mutual funds and ETFs (and in many many cases, the actions of your employer).
Plus, you can usually find a broker with everything you want in a retirement savings account that won’t charge any fees for the service. Among the biggest disadvantages of 401(k)s are the annual fees associated with them.
Health savings account
Health savings accounts (HSA) aren’t available to everyone, but if you’ve chosen to use an eligible high-deductible health insurance plan, you can open one and put some money aside.
Now, HSAs are primarily designed to help people prepare for medical expenses, but if your medical bills are low, you can invest the money in these long-term accounts and use it to fund your retirement.
The great advantage of the HSA is its tax advantages. You get a tax deduction on your contribution, your investments in it grow tax-free, and if you use the funds to pay eligible medical expenses, you won’t pay tax on the distributions. Once you turn 65, distributions are tax-free no matter what you use them for. If you set it up to contribute directly from your paycheck, you won’t pay FICA taxes on your contributions either.
Above all, an HSA is completely under your control. Your employer can only work with one provider, but once the funds are in your account, you are free to transfer them to a service provider of your choice. You should be able to find a provider that offers a brokerage account with access to many investment options and low fees.
The biggest downside to the HSA is that annual dues are capped at $3,650 for individuals or $7,300 for families.
Small Business Retirement Accounts
If you have a small business of any kind, even a side hustle, it might be worth opening a small business retirement account like a SEP IRA. If you work for one person, a Solo 401(k) might be an even better option.
Small business retirement accounts have a few advantages over a regular workplace 401(k). What’s most important to most secondary scammers who also have a 401(k) through work is that they offer more freedom to choose your service provider and your investments, and the fees are usually lower. . You can usually set up a boilerplate SEP IRA or Solo 401(k) through a no-fee discount broker, and in these accounts you can invest in any stock, mutual fund, ETF or other security available through the broker.
If you make a significant income from your business, you may be able to contribute more to your own pension plan than your employer’s. The annual contribution limits on SEP IRAs and Solo 401(k)s are $61,000. The Solo 401(k) also offers an additional $6,500 catch-up contribution for workers over age 50.
The catch is that you are also limited by your net income, so you may not be allowed to make the maximum contribution. Also be aware that if you contribute to a workplace 401(k), it could reduce the amount you can contribute to your Solo 401(k).
Still, even if you’re limited in the amount you can contribute, the benefits of a SEP IRA or a Solo 401(k) can be extremely attractive.
Consider all your options
A 401(k) is a great retirement account, but when it comes to financially preparing for your golden years, be sure to consider all of the options available to you. The main disadvantages of most 401(k) plans are the fees they charge and the extremely limited investment choices they offer. If you can use other vehicles to save 1 percentage point per year in fees and invest your funds in stronger investments, it could add a lot of extra money to your portfolio by the time you’re ready to retire.
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