Good alternatives to a 401 (k) plan are traditional and Roth IRAs and health savings accounts (HSAs). An investment account other than retirement may offer higher returns, but your risk may also be higher. Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions achieve financial freedom through our website, podcasts, books, newspaper columns, radio programs and premium investment services. If your employer has a 401 (k) plan, it's usually a good option to use it to save for your retirement.
This is especially true if your work includes an equivalent contribution from your employer. However, if you've already reached your employer's maximum contribution limit or your employer doesn't offer one, there are several better options than investing more in your 401 (k) plan. Here are five possible options that might be better for you. If you have an eligible high-deductible health insurance plan, you can contribute to a health savings account, or HSA.
Although an HSA is designed as a tax-advantaged account for medical expenses, you can pay for them out of pocket and reimburse yourself later, years later. That can turn the HSA into a stealth retirement account. A traditional IRA confers the same tax benefits as a traditional 401 (k), but it has a couple of important advantages over your workers' retirement plan. First, an IRA will have much lower fees than a typical 401 (k) plan in your workplace.
In fact, it shouldn't cost you anything. Second, you'll have access to a much wider variety of investment options with an IRA than with your typical 401 (k) work plan. Most 401 (k) plans limit investment options to a few mutual funds or ETFs. An IRA will allow you to invest in all types of securities.
However, keep in mind that the IRS sets income limits for those who can claim a tax deduction for IRA contributions. If you're over the limit, you might want to avoid contributing to a traditional IRA. A Roth IRA is a type of retirement account where the highest tax benefits are obtained during retirement. Instead of taking a tax deduction now, as you would with a traditional IRA or 401 (k), you pay taxes on your contributions in the year they are made.
However, distributions are tax-free. There are income limits for contributing to a Roth IRA, but investors can get around them using the clandestine Roth strategy. A Roth IRA is ideal for someone who exceeds income limits to make tax-deductible contributions to an IRA, but who still wants more investment options than a 401 (k). It's also a great option for someone who pays very little taxes today because they can set that tax rate low forever.
It's important to note that to qualify for an individual 401 (k) plan, you must not have any other full-time employees besides you and your spouse. An SEP IRA requires equal contributions as a percentage of compensation for all employees. While you can technically invest in real estate in your 401 (k) plan, it's highly unlikely that your work plan will allow it. In addition, the best way to get the benefits of real estate investment is to invest outside of a retirement account.
Investing in real estate allows you to easily access leverage when applying for a mortgage. You'll also have the advantage of some large tax waivers, such as mortgage interest and depreciation, which can offset much of your earnings. That makes investing in real estate extremely tax-efficient, negating the benefits of investing in a tax-advantaged account. In addition, if you are going to sell your property, you will pay capital gains tax, which is probably preferred to paying income tax on distributions from retirement accounts.
Investing in a good real estate deal when you're young can make you own a property that's paid-up with thousands of dollars in cash flow each year when you retire. You won't have access to all of the above options or be interested in using them, but you may be missing out if you blindly invest money in your employer's 401 (k) plan. Health savings accounts have a huge advantage over a 401 (k). You can potentially get twice the tax break offered by a 401 (k) plan.
Cramer's recommendation is to contribute as much money to your 401 (k) plan as needed to get the company's full contribution and then leave. At that point, all other retirement savings should go to an IRA until it reaches its maximum. You can open a Roth IRA with the financial firm of your choice and invest in any asset that allows you. If you want to choose from a wider range of investments than you could make in a 401 (k), including buying individual stocks, a traditional IRA might be the best account for you.
A Roth IRA is a good option if you don't qualify to deduct traditional IRA contributions, or if you don't mind giving up the immediate IRA tax deduction in exchange for increasing your investments without taxes and tax-free withdrawals when you retire. . .