If you have a match available to you, investing enough in your 401(k) to maximize that match is generally the first investment you should make. For any money you're investing beyond that, however, there are often very good reasons to invest for your retirement outside of your 401(k). That's especially true if your 401(k) has high fees or poor investing choices that can hamper your long run returns.
In addition to those costs, there are often great reasons from a flexibility perspective to want to invest outside of your 401(k). With that bigger picture in mind, these better ways to save for retirement than a 401(k) just might be worth your consideration.
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No. 1: A Roth IRA
A Roth IRA provides a superb balance of flexibility and tax treatment when it comes to saving for your retirement. Money inside your Roth IRA grows tax deferred as long as it remains in the plan. In addition, you can make withdrawals from your Roth IRA in retirement completely tax free, once you've reached age 59 1/2 and have had the account open at least five years. You do make contributions with after-tax dollars, but that's a small price to play for that long-term tax-free growth potential.
In addition to the tax treatment, Roth IRAs offer great flexibility as well. If you need it, you can withdraw any money you directly contributed to your Roth IRA completely tax and penalty free at any time for any reason. You can also withdraw any money you contributed to your Roth IRA via a rollover after five years with no additional taxes or penalties.
On top of that, Roth IRAs are not subject to Required Minimum Distributions for the original account owner. That means that money you've contributed to such a plan can stay in that plan for the rest of your life.
Put all these factors together, and a Roth IRA should hold a very high priority spot in your retirement savings plan. Do note, however, that you need taxable compensation to contribute to your Roth IRA and that there are income limits to your ability to directly contribute to a Roth IRA. If your income is too high to directly contribute, you might still be able to get money into a Roth IRA via a backdoor contribution.
No. 2: A Health Savings Account
If you have a qualifying high deductible health insurance plan, you can contribute money into a Health Savings Account. These accounts are ideally suited to cover healthcare costs, but they can also do double-duty as retirement savings as well. Money gets saved in Health Savings Accounts pre-tax, grows tax-deferred while in those accounts, and can be withdrawn completely tax-free to cover qualifying healthcare costs.
In addition, once you reach age 65, that money can also be withdrawn for any other reason, and those non-healthcare-related withdrawals will be taxed as ordinary income, with no penalties. That makes a Health Savings Account similar to a Traditional IRA, albeit one with no Required Minimum Distributions attached.
Note that even after age 65, you can still withdraw money from your Health Savings Account to pay for qualifying medical expenses without facing taxes on those withdrawals. Given that healthcare costs tend to be a significant expense for seniors, that's a very valuable benefit that can help keep those net costs much more in check.
No. 3: A standard brokerage account that you tell yourself is for retirement
Although standard brokerage accounts don't get the tax-deferred compounding advantages of qualified accounts, they can be a powerful tool when it comes to saving for your retirement. Unlike all qualified retirement accounts, there are no limits when it comes to the amount you can invest in a standard brokerage account. That makes standard brokerage accounts a tremendously powerful tool if you didn't start saving early in your career and thus need to make up for lost time by investing larger amounts.
In addition, there are no restrictions in terms of age or purpose when it comes to withdrawing money from standard brokerage accounts. That makes them useful if you would like to try to retire earlier than age 55, which is the earliest age many people can easily tap their 401(k) plans penalty free. On the flip side, if you don't need the money, there are no tax rules that force you to sell stock or make withdrawals from a standard brokerage account, no matter what your age.
Plus, while standard brokerage accounts aren't considered tax advantaged, you can frequently manage your account to keep the tax burden down. For instance, you only pay capital gains taxes when you close out an investment, and capital gains are taxed at a lower rate than ordinary income if you've held the asset for over a year.
On top of that, once you pass away, your heirs get a step-up in basis on your investments to their value around the date of your death. In addition, once your estate is settled and any estate taxes paid, your heirs never need to sell the assets in those accounts if they don't need the money. That combination makes a standard brokerage account a decent tool for estate planning and managing the final end of your retirement as well.
Plan early and save often
While these three tools are great ways to save for your retirement, they -- and your 401(k) -- all can help you the most if you start early and save often for your retirement. The sooner you get started and the more you sock away in a decent investment strategy, the better your chances are of retiring with a sufficient nest egg. So get started now, and give yourself your best opportunity to have a financially comfortable retirement.
