The perks from 401(k)’s are widely recognized. The nearly 60 million American workers benefit from tax-deferred earnings growth and free employer-matching contributions, but there’s also the disadvantage of restrictions to withdrawals. There are at least four alternatives to 401(k)’s with some trade-offs. If you need minimal taxes in retirement, you can put regular contributions into a Health Savings Account (HSA) and a Roth IRA. Both accounts offer tax-free income in retirement.
The main characteristic of the HSA is that it is the only retirement account tax-deductible contributions, tax-deferred earnings, and tax-free withdrawals. By comparison, the Roth IRA brings tax benefits on withdrawals and earnings with contributions that are not tax-deductible. The disadvantage of having a Roth IRA and HSA in your nest egg is a cap on annual contributions. The limits in 2021 for HSA are $ 3,600 for individual coverage and $ 7,200 for family coverage. The Roth IRA contribution limit is $ 6,000, or $ 7,000 if you are older than 50 years.
If you are seeking withdrawal flexibility, you can get your savings to a taxable brokerage account. There are no withdrawal limitations. You are allowed to save and get taxes at the withdrawals, being also taxed on dividends, interest, and realized gains. You can complement this type of investment with a Roth IRA. It offers tax-deductible contributions and tax-deferred earnings. In addition, you’ll be able to deduct the contributions. Your tax bill would be low and keep the flexibility.
If you are eager to get some passive income, real estate would be the right investment for you. You can earn from both price appreciation and rent. That also allows you to get cash flow and retire earlier. The flip side is that it requires knowledge of the market and significantly initial spending for a down payment.
Now, if your income and savings are very limited, you can try to find an additional source of income and create a SEP IRA account, where you can contribute. In that account, the contributions can be up to 20% of your net self-employment earnings. Also, you can invest the rest of your extra income in a taxable brokerage account.
SEP IRAs grow faster because they have higher contribution limits. The new cap for 2022 will be $ 61,000.
Adapted from The Motley Fool