If your company offers you the chance to save for retirement in a 401(k) plan, it pays to take it -- to a point. See, many companies that sponsor these plans also match worker contributions to different degrees. If your employer offers a matching incentive, it pays to contribute the amount that's needed to claim your free money in full.
But once you've snagged your free retirement cash, it could actually pay to look outside a 401(k) plan for building retirement wealth. Though 401(k)s are a neat savings tool in their own right, they have certain drawbacks. And so it may be worth exploring these account options instead.
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1. An IRA
IRAs have lower annual contribution limits than 401(k)s. In spite of that, they offer one distinct advantage -- a wider range of investment choices.
With a 401(k) plan, you generally can't choose individual stocks to invest in. Rather, you're limited to a group of funds. Within that mix, you'll ideally have some index funds to pick from, which are helpful because they commonly charge very low fees (much lower fees than actively managed mutual funds).
But even index funds have their limitations. They won't help you beat the market and you don't get a say in the actual companies you're investing in. If you want more control over your retirement savings, an IRA is a good way to go.
2. A health savings account
One benefit of saving in a traditional 401(k) is getting to enjoy tax-free contributions. And with a Roth 401(k), you get tax-free growth on your investments and tax-free withdrawals once you reach retirement. But health savings accounts (HSAs) offer a combination of those tax benefits, and that alone makes them a solid choice.
With an HSA, you can contribute money for healthcare expenses and carry those funds forward indefinitely. (Unlike flexible spending accounts, they don't expire year after year.) HSA contributions are made with pre-tax dollars, so that gives you an immediate tax break. You'll then enjoy tax-free investment gains in your account, as well as tax-free withdrawals, provided that money is used for qualified healthcare expenses.
Chances are, you'll have plenty of those in retirement, so using up your HSA is unlikely to be a problem. But in the unlikely event that it is, once you turn 65, your HSA effectively converts to a regular retirement savings plan, and there's no penalty for non-medical withdrawals. You'll pay taxes on money you remove for non-healthcare purposes, but in that case, you're not any worse off than you would be with a traditional IRA or 401(k).
3. A regular brokerage account
The own downside to funding a regular brokerage account is missing out on tax breaks -- you'll get none of those, unfortunately. The upside, however, is flexibility.
IRAs and HSAs can be somewhat restrictive. With a regular brokerage account, you can invest your money any way you like, and you can cash out your money whenever you want. This means that if you decide to retire at age 50, you won't have to worry about early withdrawal penalties like you would in an IRA. And you don't have to worry about using your money for a specific purpose, as is the case with an HSA, at least until you turn 65.
Explore your options
While it could pay to fund a 401(k) to some degree, it also pays to look at other places to put your cash. Either way, the key is to sock money away consistently for retirement, whether you opt to do so in an IRA, HSA, brokerage account, or combination of accounts.
