Not everyone has access to a 401 (k) plan, but if you work for a company that offers a 401 (k) and a match, it pays to contribute. That way, you can snag free cash for retirement.
But if you don’t have a 401 (k) to contribute to, worry not. While 401 (k) plans are useful savings tool, they have certain drawbacks – namely, high fees and limited investment choices. In fact, even if you do have a 401 (k), once you’ve contributed enough to snag your employer match in full, you may want to put your remaining money into one of these accounts instead.
1. Roth IRAs
Roth IRAs don’t offer an immediate tax break on the money you put in. What they do offer, however, is tax-free growth in your account and tax-free withdrawals during retirement.
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Furthermore, Roth IRAs are the only tax-advantaged retirement plan to not impose required minimum distributions (RMDs). RMDs currently kick in starting at age 72, and they effectively force you to spend down a large chunk of your savings in your lifetime. That may not be a problem if you need your savings to live on. But if your hope is to leave a lot of money to your heirs, that’s an issue.
With a Roth IRA, you can avoid RMDs. And that gives you more flexibility with what you do with your hard-earned savings.
2. Health savings accounts
An HSA technically isn’t a retirement account. Rather, it’s a hybrid savings and investment account that lets you set aside money for near-term and far-off healthcare costs.
But HSA can function as a retirement savings plan for two reasons. First, healthcare could end up being a major expense for you during your senior years. And having dedicated funds set aside for it might ease that burden later in life.
Secondly, once you turn 65, HSAs effectively convert to a traditional retirement savings plan. What this means is that you won’t be penalized for taking withdrawals for non-medical purposes. Instead, you’ll simply be taxed on funds you remove that aren’t healthcare-related.
Meanwhile, the appeal of the HSA is that it’s triple tax-advantaged. Contributions go in with pre-tax dollars, and funds that are invested get to grow tax-free. Withdrawals are also tax-free when used to cover qualified healthcare costs.
3. Regular brokerage accounts
Just like an HSA technically isn’t a retirement account, so too does a regular brokerage account fall into that category. But that doesn’t mean you can’t use a regular brokerage account for retirement savings purposes. And there’s one major benefit to doing so – flexibility.
With a regular brokerage account, you won’t enjoy any tax benefits. But you also won’t be subject to any restrictions.
If you want to retire at age 50 and take withdrawals from that account to cover your expenses, that’s your prerogative. With an IRA or 401 (k), you’re stuck leaving your money where it is until age 59 1/2 (unless you’re willing to get hit with costly penalties, which you shouldn’t be).
Funding a 401 (k) could leave you with a lot of retirement wealth. But if you don’t have access to one or aren’t thrilled with your employer’s plan, then it certainly pays to explore other options.
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