If you don't have access to a 401(k) plan through your employer, then the obvious way to save for retirement is to use an IRA. IRAs are a great option, but they have one rather serious drawback compared to 401(k)s: the annual contribution limit is much lower.

IRA vs. 401(k) contribution limits

In 2017 you can contribute up to $18,000 to a 401(k) account, plus a $6,000 catch-up contribution if you're 50 or older. But with IRAs, the contribution limit for 2017 is a mere $5,500 with an additional $1,000 catch-up contribution permitted if you're 50 or older. Thus, if you're contributing 10% of your income (the lowest recommended percentage) you'll butt up against the base contribution limit as soon as your annual income exceeds $55,000. Fortunately, there are other options for your hard-earned retirement savings.

Open bank vault

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Health savings account (HSA)

An HSA can be an even better tax deal than the traditional IRA. Not only are your contributions tax-deductible, but you get to skip the tax bill on your distributions too, as long as you use them to pay for qualified medical expenses. The annual contribution limit for HSAs for 2017 is $3,400; the various versions of healthcare reform that have been floating through Congress substantially increase this limit, so should one of the bills pass, HSAs will become an even more enticing option. However, to have an HSA you must first have an HSA-qualified health insurance plan.

Spousal IRA

The IRA contribution limit has another restriction: you have to make at least as much in earned income as you contribute to your IRA. If you only make $3,000 this year, then your contribution limit is $3,000, not $5,500. In that case, you can get around the reduced contribution limit by using a spousal IRA. If your spouse earns enough, she or he can contribute the remaining $2,500 into your IRA for you, and this contribution won't count against her or his own $5,500 IRA limit.

Deferred annuity

Unlike an immediate annuity, with a deferred annuity, you put money in now but don't receive any payments until a future date. The longer you wait to start getting payments, the bigger the payments will be. If you go this route, a deferred income annuity is probably a better choice than a deferred variable annuity -- income annuities pay you a set guaranteed amount for life, while variable annuities are, well, variable. Plus, variable annuities tend to suffer from excessively high fees. The interest rates that annuities offer are based on the interest rate environment at the time you purchase the annuity, so dumping a little money into annuities each year will help even out your returns compared to putting a one-time investment into a single annuity.

Standard brokerage account

If none of the above options appeal to you or you have yet more money to save, pick up some good long-term investments in your standard brokerage account. This is a great time to buy tax-advantaged investments, such as municipal bonds and treasury securities (the latter incur federal taxes but not state taxes, a major plus if you live in a high-income-tax state) -- such investments don't make sense inside a tax-deferred retirement account, since you're already getting tax benefits on everything you have in those accounts, but they can make a lot of sense in a standard brokerage account. Also consider picking up some solid high-dividend stocks that you can hold forever; these will provide a little extra income, which is something you'll particularly want once you retire. And don't forget to congratulate yourself on being such an extraordinarily responsible saver -- you'll appreciate your own dedication once you retire!

 

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