If you have a 401(k) at work and your employer matches the contributions, you need to contribute enough to earn those matching funds — don’t pass up the free money.
But once you’ve won your match, keep putting Additional money in your 401(k) may not be the right decision. Here are three reasons why you should consider alternatives to this popular retirement account.
1. HSAs can offer better tax relief
After winning your employer, you can focus on a Health Savings Account (HSA) instead of a 401(k). You are eligible for this type of account if you have an eligible high-deductible health plan.
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Putting money into your HSA can be a much better option than adding to a 401(k), because an HSA offers better tax breaks. With a traditional 401(k), you can contribute pre-tax dollars to your account. But as a senior, you have to pay taxes on your withdrawals. With an HSA, contributions are tax-free and withdrawals are also tax-free as long as you use the money for eligible medical care.
Since health care is probably one of your biggest expenses as a senior, saving in an HSA allows you to cover relevant bills with money for which you got tax relief from both. sides. And even if you don’t use your HSA money for health care, you can withdraw from that account for any purpose after age 65 and only pay taxes at your ordinary rate – just like you would with a 401(k). (k).
If you’re eligible for an HSA, contributing to it before putting extra money into your 401(k) is a no-brainer for maximizing your tax breaks. Just know that the maximum HSA contribution in 2022 is $3,650 if you have personal coverage and $7,300 for family coverage, well within the limits of a 401(k). You can invest up to $20,500 in a 401(k), with an even higher cap of $27,000 for those 50 and older who are eligible for catch-up contributions. So if you save aggressively, you may hit the HSA cap and need to plan accordingly.
2. IRAs May Offer Better Investment Options
After maxing out your employer (and potentially your HSA), you should also seriously think about investing in an IRA. That’s because IRAs can be opened with any financial institution, and you can decide for yourself instead of being stuck with the 401(k) plan your employer chose.
Typically, a 401(k) has a limited pool of investment options. But since you have the freedom to decide where to open your IRA, there are few limits to what you can invest in. If you want to buy individual stocks or even cryptocurrencies in your IRA, you can. So why not put money in an account that gives you the same tax breaks as a 401(k) but offers much more control over what you do with your investment dollars?
Again, an IRA faces lower contribution limits with a maximum of $6,000 in 2022, plus an additional $1,000 for qualifying catch-up contributions.
3. 401(k) accounts can have high fees
Finally, the final reason to consider limiting your 401(k) contributions is that these accounts can often be expensive. Your 401(k) administrator most likely charges fees, and some or more of your 401(k) investment options may have higher expense ratios than other alternatives you might access through an IRA.
This isn’t the case in all scenarios, but if you can access cheaper investments outside of your 401(k) in another type of tax-advantaged retirement account, you should do so to reduce your retirement costs. ‘investment.
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