A 401(k) is many people's go-to account for retirement savings, especially if their employer matches some of their contributions. The high annual contribution limits are another big plus for those who want to build their nest egg quickly.
Despite all these positives, 401(k)s aren't the best choice for everyone. Some have high fees and poor investment options, which can hamper the growth of your savings. If you don't like your 401(k) or you don't have access to one, consider saving in one of these three accounts instead.
Image source: Getty Images.
1. Traditional IRA
Anyone who's earned income during the year is eligible to contribute to a traditional IRA. Contributions to this account reduce your taxable income for the year, just like 401(k) contributions. But in exchange for this upfront tax break, you have to pay taxes on your withdrawals later.
While 401(k)s often restrict you to a handful of investment funds, traditional IRAs enable you to invest in virtually anything and change up your investments as often as you'd like. You can also create your own contribution schedule or even make a lump-sum deposit, rather than withholding money from each paycheck.
The biggest drawback to a traditional IRA is that you can only contribute up to $6,500 in 2023, or $7,500 if you're 50 or older. This is well below the $22,500 and $30,000, respectively, that workers can contribute to 401(k)s. But this should only be a problem for you if you plan to save a lot for retirement in 2023.
2. Roth IRA
Roth IRAs are similar to traditional IRAs, but they're taxed differently. You pay taxes on your contributions, but then you don't owe any taxes on your withdrawals in retirement. Those who believe they'll be in the same or a lower tax bracket once they retire typically prefer Roth IRAs over traditional IRAs because it can save them money in the long run.
Not everyone can contribute to a Roth IRA, though. You must earn some income during the year, but you can't earn too much. Income limits vary depending on your tax-filing status, so it's a good idea to check these before you put any money here in 2023.
Another thing worth noting is that the contribution limits listed in the link above apply to all your traditional and Roth IRAs, not to each individually. If you choose to use both types of IRAs, your total annual contributions cannot exceed $6,500, or $7,500 if you're 50 or older.
3. Health savings account (HSA)
Health savings accounts (HSAs) enable you to defer taxes on your contributions in the same way as 401(k)s and traditional IRAs. But there's the added bonus that if you use the money for medical expenses at any age, you won't owe taxes on it at all. This can be a great place to stash funds for retirement healthcare expenses. But you can also use the money for non-medical expenses. You'll just have to pay taxes on these, plus a 20% penalty if you're under 65.
You need a high-deductible health insurance plan to contribute to an HSA. This is one with a deductible of $1,500 or more for an individual plan or $3,000 or more for a family plan. If you meet these requirements, you can save up to $3,850 in an HSA in 2023 if you have a qualifying individual health plan or $7,750 if you have a qualifying family plan. Adults 55 and older may add an extra $1,000 to these limits.
Feel free to mix and match
There's no rule saying you have to stick to just one retirement account, either. You could combine a couple of the accounts above or pair one with a 401(k). Just make sure you understand the rules and contribution limits of all of the accounts you're using, and come up with a strategy so you know when and how much you'll contribute to each account.
