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

A 401(k) can be a great home for your retirement savings, especially if you get a match from your employer. But these accounts have their drawbacks, too. That’s why you should weigh all your options before deciding where to stash your cash. Here are four others worth a closer look.

1. Individual Retirement Account (IRA)

IRAs are most people’s go-to account if they don’t have access to a workplace retirement plan, but they can be a good choice for any worker looking to save extra cash. These accounts give you complete control over what you invest in and, by extension, how much you’re paying in fees. This can help you build a portfolio that’s specifically designed for your goals.

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Most people can also choose when they want to pay taxes with an IRA. Traditional IRAs are tax-deferred, which means you pay taxes on your withdrawals in exchange for tax breaks in the years you make contributions. Roth IRAs give you tax-free withdrawals since you pay taxes on your contributions up front.

Traditional IRAs are a great fit for those who believe they’re in a higher tax bracket now than they’ll be once they retire. By delaying taxes until retirement, you’ll pay a smaller percentage of your income to the government.

But Roth IRAs are better for those who believe they’re in the same or a lower tax bracket now than they’ll be during retirement. However, Roth IRAs have income limits that prevent high earners from contributing to them directly. If this applies to you, you’ll have to save in a traditional IRA and then do a Roth IRA conversion.

2. Health savings account (HSA)

Health savings account (HSA) contributions also give you a tax break this year, and if you spend the money on medical expenses at any age, it’s tax-free. But if you plan to use this account for retirement savings, you should avoid early withdrawals whenever possible, especially non-medical withdrawals, until you’re at least 65. That’s when the 20% penalty on these withdrawals disappears, though you’ll still owe taxes on them.

You need an individual health insurance plan with a deductible of $1,400 or more or a family plan with a deductible of $2,800 or more to be eligible to make HSA contributions this year. If you qualify, you can set aside up to $3,650 if you have an individual health insurance plan or $7,300 if you have a family plan. Adults 55 and older can add an extra $1,000 to these limits.

Many institutions offer HSAs, but not all enable you to invest your funds. Investing is crucial if you want to use an HSA as a retirement account, so look for a provider that allows this.

3. Taxable brokerage account

Taxable brokerage accounts don’t offer the tax savings of traditional retirement accounts, but they make up for it with unmatched flexibility. You can invest as much as you want in anything that you want with a taxable brokerage account, and you can withdraw the money at any time.

It’s a great choice for those who plan to retire early. Most retirement accounts penalize you for withdrawing money before you turn 59 1/2 unless you have a qualifying reason. So, if you want to retire in your 50s, it makes sense to keep some of your funds in a taxable brokerage account.

4. Self-employed retirement accounts

Self-employed retirement accounts are available to freelancers and business owners. There are several types of self-employed retirement accounts, so the exact rules and contribution limits vary, but most enable you to contribute up to the lesser of 25% of your net self-employment income or $61,000 in 2022.

You can open one of these if you have your own business or even a side hustle. But if you do, make sure you understand all the rules first and don’t exceed the contribution limit, or you could face penalties.

Or try a combination of these

There’s no rule saying you can only have one retirement account. A combination of the accounts discussed above might work best for you. Or you might pair one of them with a 401(k) if you have access to one. Think about what makes the most sense for you, and don’t be afraid to switch up your retirement savings strategy over time.

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