How To Save For Retirement Beyond The 401(k)

If you’re fortunate enough to work for a company that offers to match contributions that you put into the retirement plan that they sponsor, like a 401(k) or 403(b), it’s kind of a no-brainer to put at least that much money into the account in order to access the free money available – doing less is basically like turning down a raise.

Once you’re doing that though (or if you don’t have a match or even a 401(k) available), there are reasons that you may want to save additional funds outside the 401(k). The most common reason is investment selection (although a lot of financial advisors may try to tell you that you’ll pay lower fees with them, which is not always true – generally speaking, if you work for a large company with many retirement plan participants, chances are the fees you’re paying are the lowest out there), but there are other reasons too. Here are the most common options out there.

IRA: If you’re self-employed, there are actually a lot of different tax-advantaged retirement accounts you can set up and contribute to. If you work for a company that doesn’t offer a retirement plan, you can at least contribute up to $6,000 (or $7,000 if you’re over 50) to an IRA. If you’re not covered by an employer’s retirement plan, you can deduct the contributions to a traditional IRA no matter what your income is – there are income limitations on being able to deduct contributions when you already have a 401(k) or 403(b) available.

A popular choice these days is the Roth IRA, partially because of the tax benefits, but also because there is more flexibility when it comes to accessing Roth IRA money early versus traditional or even Roth 401(k)s. For example, you can always withdraw your Roth IRA contributions without taxes or penalty and you can even withdraw up to $10k in growth for a first-time home purchase if you need. You don’t have that option with a 401(k), at least not without tax consequences.

HSA: If you have access to a high-deductible health insurance plan, you can contribute up to $3,600 per person or $7,200 per family (plus an extra $1,000 if you’re age 55 or older) to an HSA (health savings account) this year. The contributions are tax-deductible and the money can be used tax-free for qualified health care expenses. If you use the money for non-medical expenses, it’s subject to taxes plus a 20% penalty but the penalty goes away once you reach age 65, turning it into a tax-deferred retirement account that’s still tax-free for health care expenses (including most Medicare and qualified long term care insurance premiums). You might even want to try to avoid using the HSA even for medical expenses and invest it to grow for retirement.

US Government Savings Bonds: Each person can purchase up to $10k per year in Series EE US Government Savings Bonds and up to $10k (plus another $5k from tax refunds) in Series I Savings Bonds. These bonds can be good conservative options for retirement savings since they are guaranteed by the federal government, do not fluctuate in value, and are tax-deferred. However, you can’t cash them in the first 12 months and you lose the last 3 months of interest if you cash them in the first 5 years. Interest rates may remain low, but the I Bonds are based on inflation, which is slowly creeping up.

Regular account: If you’ve maxed out your other options, you can always invest for retirement in a regular taxable account. You can minimize taxes by investing in tax-free municipal bonds if you’re in a high tax bracket and keeping capital gains taxes low by holding individual securities for at least a year or choosing low turnover funds like index funds and ETFs. You can also use losses to offset other taxes, including up to $3k per year from regular income taxes (with the excess carried forward indefinitely). Just be aware that if you repurchase an identical investment within 30 days, you won’t be able to take the loss off your taxes.

Regardless of how you choose to save for retirement, the most important thing is that you save enough. That means running a retirement calculator to see how much you need to save and then increasing contributions through payroll or direct deposit. If you can’t save enough now, try gradually increasing your savings rate each year. Like it or not, your ability to retire depends on you.

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