A 401(k) is a great way to save for retirement, especially if your employer matches your contributions. As you know, however, the federal government limits people to $18,000 per year (or $24,000 per year for the 50+ crowd). For most Americans, saving that amount of money every year quickly establishes a nice retirement nest egg.
But what do you do if you have more money to save? Luckily, there are other options.
If you qualify, the best option is to add money to a Roth IRA after you max out your employer’s 401(k) contribution. With a Roth IRA, the contributions are made after taxes, but you don’t have to pay taxes in the future. Conversely, while you don’t pay taxes on the income placed in a 401(k), you will have to pay taxes when you cash in. This benefit takes priority after the free money of an employer contribution.
A traditional IRA is a type of tax-deferred retirement savings account that allows you to save on taxes in 3 ways: the money you deposit isn’t taxed, the earnings you make aren’t taxed, and you can subtract the contribution amount from your income and pay lower federal taxes.
Health Savings Accounts
These are only available if you have a high deductible health insurance plan and are technically intended to pay medical expenses, but they can become a source of retirement income. Contributions are tax-deductible, and the distributions for qualified health expenses may be tax-free. With an HSA, you can save another $3,400 a year (or $6,750 for family coverage).
Taxable Investment Accounts
A standard brokerage account doesn’t have the tax benefits of IRAs, 401(k)s, or HSAs, and you may have to pay capital gains tax. Regardless, the potential growth of this type of investment account can quickly overshadow the benefits of the others. Moreover, you have a wider selection of options and much more freedom with a brokerage investment account.
But BEWARE Nondeductible IRAs
With a nondeductible IRA, you can’t deduct your contribution from your income taxes – that is, the money you contribute doesn’t lower your taxable income and offers zero income tax breaks. Our advice is to avoid this type of IRA, especially with so many better options available.
If you have more questions about saving for retirement or questions about other money-related topics, feel free to contact us.