Most people think of 401(k)s as the best option for retirement savings, and they’re not necessarily wrong. 401(k)s have high contribution limits, plus the possibility of an employer match. But these accounts have significant drawbacks as well, including limited access. Fortunately, they’re not your only choice. Here are three other retirement accounts to consider instead of or in addition to a 401(k).
1. Individual retirement account (IRA)
IRAs are the most common 401(k) alternative because they’re open to everyone. As long as you’re earning income throughout the year or are married to someone who is, you can set aside up to $6,000 in an IRA in 2022 or $7,000 if you’re 50 or older. These limits are lower than 401(k) contribution limits, but the IRA’s flexibility helps make up for this.
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You’re free to invest in just about anything with an IRA. You can stick to the target-date funds many employers traditionally offer through 401(k)s, or you can build your own custom portfolio containing individual stocks, bonds, exchange-traded funds (ETFs), and even real estate.
You can also decide when you want to pay taxes on your money. Traditional IRA contributions reduce your taxable income for the year, but then you owe taxes on your withdrawals in retirement. This makes sense if you think you’re in a higher tax bracket now than you’ll be in once you retire. But if not, a Roth IRA is probably a better fit. These accounts don’t offer an upfront tax break, but you do get tax-free withdrawals in retirement.
2. Health savings account (HSA)
Health savings accounts (HSAs) were created to store medical savings, but the tax advantages they offer make them a great home for retirement savings too. Like traditional IRAs, HSA contributions give you an upfront tax break. But HSAs also allow for tax-free medical withdrawals at any age.
You can make non-medical withdrawals too, but you’ll pay taxes on these, plus a 20% penalty if you’re under 65. For this reason, it may not be the best home for all your retirement savings. But it’s a great place to stash retirement medical savings and money you plan to spend after 65.
You need a health insurance plan with a deductible of $1,400 or more for an individual or $2,800 or more for a family to open an HSA. If you qualify, you can open one with any provider. It’s best to look for one that enables you to invest your funds so they can grow more quickly.
Individuals may contribute up to $3,650 to an HSA in 2022, while families can contribute up to $7,300. Adults 55 and older can set aside an additional $1,000.
Do your best to leave your HSA funds alone if you plan to use the account for retirement savings. If you need to withdraw some for medical expenses, redo your retirement calculations to figure out how much more you need to save moving forward.
3. Self-employed retirement account
There are several retirement accounts for self-employed people, but they all have a few things in common. They give you considerable freedom to invest your money how you’d like, and they also have high contribution limits — in many cases, higher than even 401(k)s. That’s because you’re eligible to make contributions as both employee and employer.
But your maximum contribution is also limited by how much you make. Many self-employed retirement accounts limit you to the lesser of 25% of your net self-employment income or $61,000 in 2022. So while you can contribute a lot in theory, in practice, you may be better off with a different type of retirement account.
As long as you’re earning some self-employment income during the year, you can use a self-employed retirement account, but it’s important to familiarize yourself with their rules before you open one. Some require you to make mandatory contributions to any employees’ retirement accounts, which can reduce the amount you have left for your own retirement.
You don’t have to choose just one
All retirement accounts have their benefits and drawbacks, and sometimes just one isn’t enough. If you max out your IRA or HSA, for example, you might need a 401(k) or self-employed retirement account so you can set aside more money for retirement.
Think about how much you plan to set aside each year and which accounts best suit you. Then, open the accounts, if necessary, and start contributing.
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