3 Retirement Accounts That Run Circles Around a 401(k)

If you work for a company that offers a 401(k), you may be inclined to sign up. And if you’re offered an employer match, it definitely pays to put enough money into that plan to claim that free money in full.

But you may want to think twice about making a 401(k) plan your sole retirement account. In fact, these three accounts offer their share of benefits — without some of the drawbacks associated with 401(k)s.

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1. Traditional IRAs

With a traditional IRA, you get a tax break on your contributions — just as you would with a traditional 401(k). But one big difference is that IRAs offer far more investment choices.

With a 401(k), you’re limited to a dozen or so funds. If you’re lucky, your plan will have a nice selection of low-cost index funds to choose from, which are massively managed and therefore don’t impose the same hefty fees as actively managed mutual funds. But you can forget about hand-picking stocks in a 401(k).

With an IRA, you can invest in whatever companies you like. And if you’re a knowledgeable investor whose goal is to outperform the broad stock market, then that alone is reason enough to house some of your retirement dollars in a traditional IRA.

2. Roth IRAs

Roth IRAs, like traditional ones, allow you to choose individual stocks to invest in, and they often allow you to avoid the expensive fees 401(k)s tend to charge. With a Roth IRA, you won’t get an immediate tax break on your contributions. What you will get, however, is tax-free growth in your retirement plan and tax-free withdrawals during your senior years.

Roth IRAs also offer another benefit — they’re the only tax-advantaged retirement account to not impose required minimum distributions. This gives you a lot more flexibility with your money later in life.

3. HSAs

Technically, a health savings account is not a retirement plan. But it can function as one.

An HSA lets you set aside money for healthcare expenses. You can use your funds immediately, or invest the money you’re not using so it grows into a larger sum and carry it into retirement.

HSAs actually offer more tax benefits than any of the aforementioned plans. That’s because contributions are tax-free, investment gains are tax-free, and withdrawals are tax-free, provided they’re used to pay for qualified healthcare expenses.

If you take a non-medical withdrawal from an HSA, you’ll be hit with a steep penalty — an even larger penalty than what you’d face for taking an early withdrawal from an IRA or 401(k). But once you turn 65, you can withdraw HSA funds for any purpose and avoid penalties. The only catch in that scenario is that you’ll pay taxes on your withdrawal, but those are the same taxes that apply to withdrawals from a traditional IRA or 401(k).

Putting money into a 401(k) is by no means a silly move — especially if there are employer-matching dollars in play. But you may want to branch out beyond your 401(k) in the course of building retirement wealth. And a traditional IRA, Roth IRA, and HSA are all good options to look at for your money.

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