An employee-sponsored 401(k) is one of the most popular retirement planning options for American workers. Eighty percent of full-time workers have access to an employer-sponsored 401(k), or similar contribution plan, and 80% of those eligible workers participate in a plan. As of 2012, 52 million American workers have an active 401(k).
But what if you wanted to grow your retirement funds even further? What other types of retirement options are available to you? We’ve put together a list of four savings options you might consider to round out your retirement plan. Some you may already be familiar with and some may be a little more surprising.
Individual Retirement Account (IRA)
Beyond a 401(k), an IRA is probably the next most popular option for retirement savings. The maximum annual contribution limit for a 401(k) is $18,000 and when workers max out that contribution limit, they turn to Individual Retirement Accounts.
Favored because of their tax benefits, an IRA is a personal account that you can open through your credit union or bank. Whether you open a Traditional IRA or Roth IRA, you can contribute up to $5,500 to an IRA account annually ($6,500 if you’re 50 years or older)
But which IRA to choose? Both have tax benefits, so it depends on how you’d like your income to be taxed. Traditional IRA contributions are tax-deductible and your earnings grow tax-free, but you will be taxed when you withdraw your savings from the account. With a Roth IRA, you are taxed on the funds you contribute, but withdrawals and earnings are tax-free if you meet all withdrawal criteria.
If you’re one of the 44 million Americans that are self-employed or have been hired by a self-employed boss, then a 401(k) may not be a type of retirement option that’s available to you. There are other options that you can take advantage of to grow your retirement savings in the absence of an employer-sponsored program.
If you are a business owner with one or more employees or if you earn freelance income, then you can open a SEP IRA which is a type of Traditional IRA. The annual contribution limit is 25% of your net income, with a current cap of $49,000.
If you are a small business owner with 100 or fewer employees, each making more than $5,000 each, you can participate in a Simple IRA plan. Employees can contribute up to $11,500, with workers over 50 years old being able to contribute an additional $2,500. A Simple IRA requires the business owner to make contributions on the employees’ behalf, either dollar-for-dollar up to 3% of their salary or a ﬂat contribution of 2% of their salary.
You may not necessarily consider your mortgage as a retirement planning tool, but it can be. When you enter your retirement years mortgage-free, you are eliminating one of your biggest expenses each month and freeing up money that you can put towards your living expenses or add to your savings or investments accounts.
Home-related expenses are a larger spending category for older Americans than even health expenses. But when retirees carry no mortgage, their monthly housing expenses are less than a third of those who are still paying mortgage bills.
There is some debate about whether it’s best to pay off your mortgage or keep your mortgage in retirement age. Even though interest rates have remained low over recent years, there are still many benefits to not carrying mortgage debt into your older years.
- You can easily control your cash flow and adjust what you spend each month
- When the market fluctuates you won’t necessarily need to withdraw from your retirement accounts
It’s important to note, however, that paying off your mortgage prior to retirement should not be done if it pulls money out of your retirement savings plans, like your 401(k) or IRA.
Health Savings Account
Here’s another retirement option that you may not initially consider. Once you’ve maxed out your contributions to your 401(k) and IRA, consider using a Health Savings Account to grow your savings tax-deferred. Here’s how it works.
Health Savings Accounts are available to anyone whose health insurance plan has a high deductible and the money in your HSA is typically used to help offset the cost of medical expenses. You can withdraw funds, tax-free, at any time, to pay for qualified medical expenses.
With a HSA, you can contribute $3,250 per year or $6,450 as a family. These contributions roll over year after year, so your money is not lost if it’s not used. Where HSA’s come into play as a retirement option is due to the fact that after the age of 65 you can withdraw money from your account for any use, medical expenses or otherwise. The money you withdraw, however, will be taxed similar to your Traditional IRA.
For more background on using a HSA as a retirement option, check out this article from Betterment.
Remember, it is recommended that you consult your tax advisor for the plan that best fits your unique situation.