If your employer offers a 401(k), it can be a great tool for building your retirement nest egg. You can easily set up automatic deferrals from your paychecks, and thanks to the immediate tax advantages and (in many cases) the opportunity to score a company match on your contributions, these accounts can make saving for retirement relatively painless.
But a 401(k) isn’t always the best vehicle for investing your retirement funds. In particular, once you’ve contributed enough to receive your maximum company match, many 401(k)s become a less effective way to save money. Here are three other types of retirement accounts to consider.
Individual retirement accounts
Individual Retirement Accounts, or IRAs, have many similarities to 401(k)s, but the differences are important.
The first is in their annual contribution limits. In 2022, you can contribute up to $6,000 to an IRA, whereas you can contribute $20,500 to a 401(k). Workers 50 and older can make an additional catch-up contribution each year of up to $1,000 to an IRA and $6,500 more to a 401(k).
Another difference is in the tax advantages offered by these accounts. IRA contributions are not always tax deductible. If you also have access to a 401(k) or other employer-sponsored retirement plan and your income exceeds a certain threshold, you won’t be able to deduct your contributions to a Traditional IRA.
You could open a Roth IRA. With these accounts, you pay taxes as normal on your contributions, but when you make withdrawals in retirement, the money (including the profits on your investments) comes out tax free. But Roth IRAs also face income limitations. If you earn too much, you won’t be allowed to contribute to one. (For high earners, there’s a technique called a “backdoor Roth” that’s worth exploring.)
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