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

IRAs are an account that most people go to if they don’t have access to a workplace retirement plan, but they can be a good option for any worker looking to save extra cash. These accounts give you complete control over what you invest in and, therefore, the amount of fees you pay. This can help you build a portfolio tailored to your goals.

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

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

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

HSA contributions also give you a tax break this year, and if you spend the money on medical expenses at any age, it will be tax-deductible. But if you plan to use this account for retirement savings, you should avoid early withdrawals whenever possible, especially non-medical withdrawals, until you are at least 65 years old. The 20% penalty on those withdrawals will then disappear, although you will still owe taxes on them.

You need an individual health insurance plan at $1,400 or more or a family plan at $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 additional $1,000 to these limits.

Many institutions offer HSA, but not all of them enable you to invest your money. Investing is critical if you want to use an HSA as a retirement account, so find a provider that allows it.

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

It is a great option for those who plan to retire early. Most retirement accounts penalize you for withdrawing money before you turn 59 and a half unless you have a qualifying reason. Therefore, if you want to retire in your 50s, it makes sense to keep some of your money in a taxable brokerage account.

Retirement accounts are available to self-employed and self-employed people. There are several types of self-employed retirement accounts, so the specific rules and contribution limits vary, but most of them enable you to contribute less than 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 go over the contribution limit, or else you may face penalties.

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

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