There are still plenty of options available to you to help you reach your retirement dreams.
A 401(k) can be a great retirement savings vehicle if you have access to one. They offer high contribution limits and the possibility of employer-matched funds. But many companies don’t have them while others have lackluster plans with no match and high fees.
Fortunately, there are other retirement accounts you can open independently if you don’t have a 401(k) or don’t like yours. Here are three accounts for you to consider.
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1. Traditional IRA
A traditional IRA is a retirement account you can open on your own with any broker. It’s taxed like a traditional 401(k), so your contributions reduce your taxable income. Then, when you withdraw the money later, you pay taxes on your contributions and earnings.
Traditional IRA contribution limits are much lower than 401(k) limits — $7,000 in 2024 for IRAs compared to $23,000 for 401(k)s if you’re under 50, or $8,000 and $30,500 for those 50 and older. But IRAs give you more options for how you’d like to invest your money. You can choose from a variety of funds as well as individual stocks if you prefer. This freedom can also help you keep your costs down.
Most IRA providers enable you to set up automatic contributions from a linked bank account if you’d like to set up regular transfers. You can also make lump-sum contributions as long as you’re careful not to exceed the above limits.
2. Roth IRA
A Roth IRA is similar to a traditional IRA in most ways, except taxation. Rather than paying taxes on your funds in retirement, you pay taxes on your Roth IRA contributions in the year you make them. But then you’re allowed tax-free withdrawals of contributions and earnings in retirement, provided you’re at least 59 1/2 and have had the account for at least five years.
Roth IRAs are often the go-to option for those who believe they’ll be in the same or a lower tax bracket in retirement. By paying taxes upfront now, they can save themselves a lot of money compared to paying taxes on contributions and earnings later.
But Roth IRAs aren’t directly accessible to certain high earners. While most people may contribute up to the IRA contribution limits listed above, high earners may have a lower limit or may not be able to put any money into a Roth IRA directly. However, they can still do a backdoor Roth IRA where they first contribute funds to a traditional IRA and then do a Roth IRA rollover.
3. Health savings account (HSA)
Health savings accounts (HSAs) are designed to hold medical savings and can double as retirement accounts. They’re not available to everyone, though. You’re not eligible to make contributions in 2024 unless you have a high deductible health insurance plan, which requires a minimum deductible of $1,600 for an individual or $3,200 for a family.
If you qualify, you can set aside up to $4,150 if you have an individual health insurance plan or $8,300 if you have a family plan in 2024. Those 55 and older may save an additional $1,000. These contributions reduce your taxable income for the year and, if you use the money for medical expenses at any age, it’s tax-free.
You can also make non-medical expenses from this account, but it’s best to avoid this while you’re under 65. You’ll pay a 20% penalty in addition to the ordinary income taxes everyone pays on non-medical HSA withdrawals.
You’re free to use a combination of the above accounts as well, if you prefer. Just remember that the IRA contribution limits apply to all your IRAs together, not each individually. Be careful not to exceed them if you hope to avoid tax penalties.