If you get employer correspondence for contributing, save enough money in your 401 (k) to maximize your correspondence should be your first investment priority. Once you get past that point, however, many 401 (k) plans have limited choices and high fees that make them less than ideal places to invest your money.
If you don’t have a 401 (k) or are stuck with a plan like this and maximizing your match isn’t enough to ensure you have a financially comfortable retirement in the time frame you want, you can invest money elsewhere. These three approaches are better ways to save for retirement than putting too much money into an expensive, limited-choice 401 (k).
# 1: A Roth IRA
If you are eligible to put money into a Roth IRA either directly or through a backdoor contribution, they are an extremely powerful place to invest for your retirement. Once you put your money in your Roth IRA, it can grow tax free in the account for the rest of your life. Plus, you can make withdrawals completely tax-free in retirement, making it one of the most tax-efficient places to build retirement wealth available to most Americans.
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Additionally, many brokerages offer Roth IRA accounts with $ 0 maintenance fees and $ 0 stock trading commissions, making them incredibly effective ways to build wealth over time. Indeed, for those who are eligible, working to maximize a Roth IRA is the best bet after maximizing a 401 (k) match for retirement savings money.
There are a few things to watch out for, however, when making your plan. In 2021 and 2022, contributions are limited to $ 6,000 per year ($ 7,000 if you are 50 or over). Additionally, if you are considered high income or if you are married and file your taxes separately from your spouse, you may be prevented from contributing directly to a Roth IRA. In addition, you could pay taxes and penalties on any growth in your plan if you withdraw it before the age of 59 and a half.
N Â° 2: An ordinary brokerage account
If you manage your money carefully, a regular brokerage account can be a wonderful place to save money for your retirement. There is absolutely no limit or restriction on the amount of money you can invest in a regular brokerage account, and you are not penalized for withdrawing your money early. This makes regular brokerage accounts great places for investors who want to follow the FIRE (Financial Independence / Retire Early) approach to quit the mad rush sooner.
Recognize, however, that regular brokerage accounts need to be carefully managed to be a good source of retirement money. First, because there is no penalty for early withdrawals, it is tempting to withdraw money from these accounts earlier when “life is happening”. If the money does not stay in your account and accumulate on your behalf, then that money and its potential growth will not be there when you retire.
Second, because they are not tax advantageous, you will be subject to taxes on the capital gains, interest, and dividends you receive on your investments in regular brokerage accounts. Therefore, following a âbuy with intent to holdâ strategy to keep the portfolio churn rate low can help your money accumulate more efficiently for you in a regular brokerage account.
N Â° 3: A health savings account
The primary purpose of a health savings account is to enable people to cover health costs. They allow people to make tax-deductible contributions to the account, let the money in the account grow tax-free, and then allow completely tax-free withdrawals to cover healthcare expenses. . This triple tax advantage makes health savings accounts an incredibly powerful and focused way to save for your future.
This is especially true when you recognize that health care costs are one of the the main costs facing older people which tend to increase over time – both because of their growing age and inflation. If you come into retirement with more money than you need to cover your health expenses, you can withdraw money from your health savings account. without penalty once you reach the age of 65. This makes HSAs similar to traditional IRAs which also offer forced withdrawals, but without a retirement penalty.
Note, however, that to contribute to a health savings account, you must be affiliated with a health insurance plan eligible for a high deductible. As a result, you will need to cover the first part of your actual health costs, either from this health savings account or from another source of money. Note also that annual contributions to the health savings account are limited in 2022 to $ 3,650 for individuals and $ 7,300 for families, with a potential catch-up contribution of $ 1,000 for people aged 55 and over.
Start now to build a plan that will get you from here to retirement
Between a Roth IRA, a regular investment account, and a health savings account, you’ll likely be able to fill the void by not having a 401 (k) or having only expensive choices in your plan. Just remember that saving for retirement is best done during a career. So get started now and give yourself the longest trail possible to build your retirement nest egg.
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