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3 Retirement Accounts That Run Circles Around a 401(k)

If you’re investing all of your retirement money in your 401(k), you may be making a big mistake.

A 401(k) is a good account to invest in if your employer provides matching funds, as you can get free money for contributing to it. But, once you’ve earned your full employer match (or if your company doesn’t provide one), you may not want to sink any more cash into this type of retirement plan.

That’s because there are three other options out there that could provide benefits a 401(k) simply cannot offer. Here’s what they are. 

1. A traditional IRA

A traditional IRA can be a much better choice for retirement funds because you have a lot more flexibility with regard to the investments you can make when you invest in one.

The tax benefits of a traditional IRA are similar to those of a 401(k) in that you aren’t taxed on contributed funds in the year you put money into your account (provided you’re eligible to make tax-deductible iRA contributions). The amount you can contribute to an IRA is much lower, but you get the same basic tax break as with a 401(k).

But unlike a 401(k), you can open an IRA with almost any brokerage firm or financial institution. You aren’t tied to investing in the account your employer has set up for you. And while the typical 401(k) offers a choice of a few funds to invest in (which can sometimes have high fees), your options are virtually unlimited with an IRA. You can invest in any asset your brokerage firm offers. 

2. A Roth IRA

A Roth IRA is also a great alternative to a 401(k) because it offers a different kind of tax break. You’ll contribute with after-tax funds so no savings will come in the year you invest in a Roth. But as a retiree, withdrawals can be made tax-free.

If you may be in a higher tax bracket in retirement or if you’re worried about your Social Security benefits potentially being taxed due to a high income, a Roth IRA is likely the best choice for you. And like a traditional IRA, you can open one with any brokerage firm of your choosing and you’ll have access to a wide array of different assets you can invest in. 

3. A Health Savings Account

Finally, HSAs are one of the single best investment accounts out there if you are eligible to contribute to one. Unlike a 401(k) which only provides a tax break in the year you make the contribution, HSAs allow you to contribute with pre-tax dollars and take money out to pay qualifying medical expenses without being taxed on your distribution. 

In other words, while a 401(k), IRA, and Roth IRA require you to choose when to get your tax break — upfront or as a senior — HSAs can provide tax savings both upon contributing to your account and when making withdrawals. Although the catch is that you have to spend the money on healthcare to get this double tax benefit, many retirees do end up spending a lot on medical services so this isn’t a big issue.

If you do need the money for other purposes, you’re also allowed to withdraw it penalty-free after age 65 but you would pay ordinary income taxes on the distribution under these circumstances. That just means the same rules would apply to your HSA and your 401(k). 

Before putting any extra money into your 401(k) after earning the employer match, be sure to consider whether one of these three other accounts could be a better bet for you. 

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