A 401(k) is the go-to retirement account for most workers who have access to one, but it's not the best choice in every situation. There are other places you can stash your savings that offer greater flexibility and control over your investments. Here are three you should consider adding to your retirement plan.
1. IRA
IRAs are open to anyone who has earned income during the year or who is married to someone who has earned income during the year. This makes them a popular choice for those who don't have access to a 401(k) through their job.
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Contribution limits for IRAs are lower than 401(k)s -- just $6,000 for adults under 50 in 2021 and $7,000 for adults 50 and older -- but this drawback is offset by the IRA's variety of investment options. You're free to invest in individual stocks and bonds, mutual funds, exchange-traded funds (ETFs), and more. This enables you to tailor your portfolio to your retirement plan rather than being limited to a few pre-selected mutual funds with a 401(k), and it could help you reach your savings goals faster.
You can also decide when you'd like to pay taxes with an IRA. Traditional IRAs are tax-deferred, which means your contributions reduce your tax bill this year, but you pay taxes on your withdrawals later. Roth IRAs work the other way: You pay taxes on your contributions now, but you get tax-free withdrawals in retirement. Traditional IRAs are usually better if you believe you're in a higher tax bracket today than you'll be in once you retire, while Roth IRAs are better for those who believe they're in the same or a lower tax bracket than they'll be in during retirement.
You're able to open and contribute to either type of IRA, so you can choose the one that makes the most sense for you right now or even contribute some to both. However, the contribution limits discussed above apply to your contributions to all IRAs, not to each account individually.
2. Health savings account (HSA)
Health savings accounts (HSAs) aren't technically retirement accounts, but they make great homes for retirement savings nonetheless. Money you put in an HSA reduces your taxable income for the year, just like traditional IRA contributions. Plus, you get tax-free medical withdrawals at any age. It's also possible to make non-medical withdrawals, though you will pay taxes on those, plus a 20% penalty if you're under 65.
You need a high-deductible health insurance plan to contribute to an HSA. That's one with a deductible of $1,400 or more for an individual or $2,800 or more for a family in 2021. If you're eligible, you can open an HSA with any provider you like. Some keep your money in cash while others enable you to invest your savings to help it grow more quickly.
You're allowed to contribute up to $3,600 to an HSA in 2021 if you have an individual plan or $7,200 if you have a family plan. But just like traditional retirement accounts, these limits can change from year to year.
3. Self-employed retirement accounts
Self-employed retirement accounts, like SEP IRAs and solo 401(k)s, are available to anyone who earns income from a business of their own. This includes side hustles. These accounts offer much higher contribution limits than traditional 401(k)s and IRAs, and they give you complete control over what you want to invest in.
Each has its own rules and limitations. Do some research into the different types of accounts available and decide which makes the most sense to you right now. Think about when you want to pay taxes on your funds, investment options, and contribution limits. If you have employees, check into whether you'd have to make mandatory contributions to their retirement accounts as well.
Remember, while self-employed retirement accounts can have contribution limits of up to $58,000 in 2021, you're also limited by how much you earn in a year. Some self-employed retirement accounts cap your contributions at the lesser of $58,000 or 25% of your compensation for the year.
You don't have to limit yourself to just one of the retirement accounts discussed above. You can contribute to several, or combine one of them with the 401(k) you have access to through your job. Just make sure you explore all of your options and contribute to the accounts that will make saving for retirement as easy as possible for you.
