Not everyone has access to a 401(k), but if you work for a company that offers a 401(k) and a matching contribution, it’s worth contributing. That way, you can get free cash for retirement.
But if you don’t have a 401(k) to contribute, don’t worry. While 401(k) plans are a useful savings tool, they do have some drawbacks, including high fees and limited investment options. In fact, even if you make If you have a 401(k), once you’ve contributed enough to hook your employer match in full, you may want to put the remaining money into one of these accounts.
1. Roth IRAs
Roth IRAs don’t offer an immediate tax break on the money you deposit. make The offer, however, is tax-free growth in your account and tax-free withdrawals in retirement.
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Plus, Roth IRAs are the only tax-advantaged retirement plan that doesn’t impose required minimum distributions (RMDs). Currently, RMDs are activated from the age of 72 and, in fact, force you to spend a large part of your savings throughout your life. 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 a problem.
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
Technically, an HSA is not a retirement account. Rather, it’s a hybrid savings and investment account that allows you to set aside money for both short-term and long-term health care costs.
But the HSA can work like a retirement savings plan for two reasons. First, medical care could end up being a major expense for you in your old age. And having dedicated funds set aside for it could ease that burden later in life.
Second, once you turn 65, HSAs effectively become a traditional retirement savings plan. What this means is that you will not be penalized for making withdrawals for non-medical purposes. Instead, you’ll simply pay taxes on the funds you dispose of that aren’t related to health care.
Meanwhile, the appeal of the HSA is that it has a triple tax advantage. Contributions come in with pre-tax dollars, and the funds invested grow tax-free. Withdrawals are also tax-free when used to cover qualified health care costs.
3. Regular brokerage accounts
Just as an HSA is not technically a retirement account, a regular brokerage account also falls into that category. But that doesn’t mean you can’t use a regular brokerage account for retirement savings purposes. And there’s a huge benefit to doing so: flexibility.
With a regular brokerage account, you will not enjoy any tax benefits. But you will not be subject to any restrictions either.
If you want to retire at age 50 and make withdrawals from that account to cover your expenses, that’s your prerogative. With an IRA or 401(k), you’re obligated to leave your money where it is until age 59½ (unless you’re willing to take on expensive penalties, which you shouldn’t).
Funding a 401(k) could leave you with a great deal of wealth for retirement. But if you don’t have access to one or aren’t happy with your employer’s plan, then it’s definitely worth exploring other options.
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