Consumers shouldn’t make the mistake of assuming that a 401(k) account is the only option out there for having the funds to fuel retirement. In fact, there are a variety of options, and some of these alternatives might be the best choice for certain consumers.
In order to plan best for your retirement, you need to consider all of your retirement options. Learn as much as you can about the pros and cons of the following five different types of retirement savings accounts before you decide on a 401(k).
Traditional IRAs and Roth IRAs
Individual retirements accounts (IRAs) are a great alternative to 401(k) accounts. They offer certain tax advantages and options that anyone who is planning for their retirement should familiarize themselves with.
Anyone who is planning to use an IRA to save for retirement should know that traditional IRAs and Roth IRAs differ in terms of when the money that goes into them and comes out of them is taxed. In a traditional IRA, money that goes into the account is not taxed until it comes out of the account during retirement. On the other, money that goes into a Roth IRA is contributed after tax is paid on that money. On the other hand, no tax needs to be paid on withdrawals from a Roth IRA account.
If you’re planning for retirement, it’s important to learn about how annuities work. This is a special type of retirement account that allows for tax deferment and is typically provided by an insurance company. Money that’s put in an annuity fund will grow and accumulate interest over the years. Tax is deferred on any growth in the account and is paid when funds come out during retirement. Payments from annuity accounts are typically fixed payment amounts that are paid out over a predetermined number of years or for the rest of the account holder’s life. These and other factors contribute to the list of annuities pros and cons, so it’s important to weigh them against other options before making a final decision.
A reverse mortgage can be a convenient means of getting additional retirement funds. With a reverse mortgage, a homeowner uses the equity in their home to take out a loan that supplements other retirement income. The loan is paid back at the time that the homeowner dies or when the homeowner decides to move out of the property in question.
Health savings accounts
Health savings accounts (HSAs) are often part of an individual’s retirement savings plans because health care expenses are often one of the most significant expenses that retired individuals have to pay. Health savings accounts involve a combination of a savings account paired up with an insurance plan with a high deductible.
Consumers take advantage of health savings accounts because they offer tax breaks. Health savings accounts offer tax breaks for both contributions and distributions to and from the account. Also, there is no tax on interest, dividend, and capital gains transactions in a consumer’s HSA account.
It’s important to make note of the fact that HSA funds don’t necessarily have to be used for medical expenses. Before the account holder turns 65, funds must be spent on medical expenses. However, individuals can use HSA funds on whatever they want after they turn 65.
Cash value life insurance
With a cash value life insurance policy, the policyholder can earn investment profits, interest, and dividends over time. The policyholder can borrow against the life insurance policy to supplement his or her retirement income.
Lastly, yes, social security, Medicare, and similar entitlement programs technically count as a “seventh” source of retirement income. However, it’s important for readers to realize these entitlements are unlikely to cover the full cost of a comfortable retirement. With this in mind, it’s best to not think of them at all. That way, when your entitlement checks come in the mail, it’s icing on the cake rather than something which makes or breaks your retirement.