“Explore Better Retirement Savings Options Beyond the 401(k)”
Relying solely on a 401(k) plan for retirement savings may not be enough for a secure financial future. It’s important to diversify your accounts to protect against financial uncertainties.
Lon Welsh, founder of Ironton Capital, recommends considering alternative accounts such as IRAs, SEP IRAs, and real estate investments for better tax advantages and long-term returns. Your ideal mix of accounts will depend on factors like income, risk tolerance, and retirement goals.
Traditional IRAs allow for tax deductions on contributions but are taxed upon withdrawal in retirement. On the other hand, Roth IRAs tax contributions upfront but offer tax-free withdrawals in retirement, making them ideal for those expecting higher future tax rates.
For small business owners and self-employed individuals, SEP IRAs offer higher contribution limits and lower fees compared to traditional employer-matched plans like a 401(k). Health savings accounts (HSAs) can also be used as a tax-advantaged retirement savings option for qualified medical expenses.
HSAs are commonly paired with high-deductible health plans (HDHPs). “HSAs provide a unique, triple tax advantage,” Welch explained. “You can make tax-deductible contributions, benefit from tax-free growth, and make tax-free withdrawals for qualified medical expenses. Moreover, once you turn 65, you can use the funds for any purpose.”
Despite the attractiveness of HSAs for those with chronic illnesses or future health concerns during retirement, there are associated risks. Early non-medical withdrawals before age 65 incur penalties. Individuals aged 65 and older do not face penalties, but withdrawals for non-medical expenses are taxed as regular income. Additionally, HSAs are linked to health plans with higher deductibles, resulting in higher out-of-pocket expenses for medical costs before insurance coverage kicks in.
The choice between options depends on your tax strategy and income level, according to Stroup. It may not be feasible if you anticipate significant medical expenses.
Taxable Brokerage Accounts are investment accounts where earnings are taxed annually, unlike tax-advantaged accounts such as IRAs. Individuals can trade various securities like stocks, bonds, mutual funds, and ETFs. While providing flexibility without contribution limits for high-income earners, taxable brokerage accounts are subject to capital gains taxes.
“Taxable accounts are beneficial for those who have maximized tax-advantaged accounts and prefer unrestricted withdrawals in the future,” Stroup noted. Capital gains from withdrawals held for at least a year can be taxed at a lower rate.
For further insights on retirement account options beyond a 401(k), visit GOBankingRates.com.
