3 Retirement Accounts I'd Choose Way Before a 401(k)

A 401(k) is a lot of people’s go-to place for retirement savings, thanks to their high contribution limits and the possibility of an employer match. But they’re not the right fit for everyone. A company match isn’t guaranteed, and some plans only offer high-cost investment options. And then, there are a lot of people who don’t have access to a 401(k) through their employer at all.

Fortunately, there are plenty of other options if you don’t think a 401(k) is right for you. Here are three that I like much better.

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1. Roth IRA

Roth IRAs are great, because they allow for tax-free withdrawals in retirement. This can take some of the guesswork out of financial planning in retirement since you know all of the money in the account is yours to spend as you choose.

Traditional IRAs and 401(k)s, on the other hand, give you a tax break in the year you make your contributions, so not all of the money in those accounts belongs to you — you’ll owe the government a cut eventually.

After paying taxes on your contributions to your Roth IRA in the year you make them, you won’t owe a dime on your returns as long as you wait until you’re at least 59 1/2 (and have had your account at least five years) before withdrawing any earnings. You can also withdraw your original contributions whenever you want.

The biggest drawback to a Roth IRA is its annual contribution limit. It sits at $6,500 in 2023 for adults under 50 and $7,500 for adults 50 and older. That’s well below the 401(k) annual contribution limits, and even some high earners may not be able to set aside that much.

Roth IRAs have income limits that prohibit those with large incomes from putting money directly into one of these accounts. Even if you don’t run into this problem, you may have to pair a Roth IRA with another account if you plan to save a large sum in 2023.

2. Health savings account (HSA)

Health savings accounts (HSAs) are a great place to hold money you plan to use for medical expenses, but they can double as a retirement account with the right strategy. Contributions to these accounts reduce your taxable income for the year, just like contributions to 401(k)s. But unlike 401(k)s, HSAs allow for tax-free medical withdrawals at any age. They also don’t have required minimum distributions (RMDs) when you turn 73, so you can leave your savings in the account for as long as you want.

You must have a high-deductible health insurance plan to contribute to an HSA. That’s one with a deductible of $1,500 or more for an individual plan and $3,000 or more for a family plan. As long as you check this box, you can set aside up to $3,850 annually with a qualifying individual plan in 2023, or $7,750 with a qualifying family plan. Adults 55 and older may contribute an additional $1,000.

Make sure you choose an HSA provider that will enable you to invest your funds if you plan to use the account for retirement savings. If you don’t, you won’t earn much of a return on your funds. You should also avoid early withdrawals from this account whenever possible so you can save it for your future.

3. Self-employed retirement accounts

Self-employed retirement accounts, like SEP IRAs and Solo 401(k)s, give those who own their own business or operate side hustles an opportunity to set aside even more money for retirement. These accounts enable you to make contributions as both employee and employer, and they may allow you to set aside as much as $66,000 in 2023 if you want to.

Investing in one of these accounts also gives you complete freedom over the broker you want to work with and what you want to invest in. That kind of flexibility could help you grow your money more quickly than you could with a traditional 401(k).

But it’s crucial to understand all the rules associated with your self-employed retirement account before you put any money here. Failure to do so could result in major headaches for you at tax time.

You don’t have to ditch your 401(k) forever

The above retirement accounts are definitely worth keeping on your radar, but you don’t have to dump your 401(k) if you’re happy with what your plan offers. You could continue saving in your 401(k) or use multiple accounts. For example, you could max out your Roth IRA first and then return to your 401(k). Figure out what works best for you and then set up automatic contributions so you don’t have to think about them for the rest of the year.