What Is Better Than a 401(k) for Retirement?

Many individuals consider a 401(k) their primary retirement savings vehicle, often provided through their employer. While these plans offer valuable benefits, they are only one option within a broader landscape of retirement savings opportunities. Exploring alternatives and supplementary strategies can help individuals diversify their approach to long-term financial security. Various accounts and investment methods offer distinct advantages, depending on personal financial circumstances, employment status, and specific savings goals. Understanding these options allows for a more tailored and effective retirement plan beyond the traditional 401(k).

Individual Retirement Accounts (IRAs)

Individual Retirement Accounts (IRAs) offer a flexible alternative to employer-sponsored plans, allowing individuals to save for retirement independently. There are two primary types: Traditional IRAs and Roth IRAs, each with unique tax characteristics. For 2024 and 2025, the maximum contribution limit for both is $7,000, with an additional $1,000 catch-up contribution permitted for those aged 50 and older, bringing their limit to $8,000.

Traditional IRA contributions may be tax-deductible in the year they are made, which can reduce an individual’s current taxable income. Deductibility can be limited if an individual or their spouse is covered by a workplace plan and their Modified Adjusted Gross Income (MAGI) exceeds certain thresholds. For example, in 2025, a single filer covered by a workplace plan may have a full deduction if their MAGI is $79,000 or less, with a partial deduction up to $89,000. Contributions and earnings in a Traditional IRA grow tax-deferred, meaning taxes are only paid upon withdrawal in retirement.

Roth IRAs, conversely, are funded with after-tax dollars, meaning contributions are not tax-deductible. The significant advantage of a Roth IRA lies in its qualified withdrawals during retirement, which are entirely tax-free. Qualified withdrawals require the account to be open for at least five years, and the account holder must be age 59½ or older, permanently disabled, or the distribution is made to a beneficiary after the owner’s death. Individuals may also withdraw up to $10,000 for a first-time home purchase, subject to the five-year rule.

Eligibility to contribute to a Roth IRA is subject to income limitations. For 2025, single filers can make a full contribution if their MAGI is less than $150,000, and a partial contribution up to $165,000. For those married filing jointly, the MAGI for a full contribution must be less than $236,000, with a partial contribution allowed up to $246,000. IRAs generally offer a wider range of investment options compared to many employer-sponsored 401(k)s, providing greater control over portfolio construction. They can be particularly beneficial for individuals without access to a 401(k) or those seeking additional tax diversification in their retirement savings.

Health Savings Accounts (HSAs) as Retirement Vehicles

Health Savings Accounts (HSAs) are often recognized for their immediate use in covering medical expenses, but they also serve as a powerful, tax-advantaged retirement savings tool. To be eligible for an HSA, an individual must be covered by a high-deductible health plan (HDHP) and not be enrolled in Medicare or claimed as a dependent on someone else’s tax return. For 2025, an HDHP must have a minimum deductible of $1,650 for self-only coverage or $3,300 for family coverage, with annual out-of-pocket maximums not exceeding $8,300 and $16,600, respectively.

HSAs offer a distinctive “triple tax advantage.” First, contributions are tax-deductible, reducing taxable income for the year. If contributions are made through payroll deductions, they are also exempt from Social Security and Medicare taxes. Second, the funds within an HSA grow tax-free. This means any interest, dividends, or capital gains earned on investments within the account are not subject to taxes while the funds remain in the account.

The third advantage comes from tax-free withdrawals for qualified medical expenses. This includes a broad range of medical costs, from doctor visits and prescription medications to dental and vision care. After age 65, HSA withdrawals for any purpose are taxed as ordinary income, similar to a Traditional IRA, but without any additional penalties.

This flexibility allows individuals to use their HSA for current medical needs or to invest the funds for long-term growth, essentially creating an additional retirement savings account. HSAs are a versatile component of a comprehensive retirement strategy, especially for covering healthcare costs in later life.

Retirement Plans for Business Owners and Self-Employed

Business owners and self-employed individuals have specialized retirement plan options that allow for significantly higher contribution limits compared to individual IRAs. Two prominent choices are the Solo 401(k) and the Simplified Employee Pension (SEP) IRA. These plans enable substantial tax-advantaged savings.

A Solo 401(k), also known as an individual 401(k), is designed for self-employed individuals or business owners with no full-time employees, other than a spouse. As an employee, individuals can contribute up to the standard 401(k) elective deferral limit, which is $23,500 for 2025, or $31,000 if aged 50 or older due to a catch-up contribution. As the employer, the business can make a profit-sharing contribution, typically up to 25% of the owner’s compensation. The combined employee and employer contributions for a Solo 401(k) can reach up to $70,000 for 2025, or $77,500 for those aged 50 and older.

A SEP IRA is another option for self-employed individuals and small business owners, including those with employees. Contributions to a SEP IRA are made solely by the employer. For 2025, the maximum contribution to a SEP IRA is the lesser of 25% of an employee’s compensation or $70,000.

Both plans offer high contribution limits, but differ in employee contributions and administrative complexity. A SEP IRA is generally simpler to establish and administer than a Solo 401(k), which may require more paperwork. However, if a business owner has employees, a SEP IRA requires the same percentage of contributions to be made for all eligible employees as for the owner, which can be a significant cost. A Solo 401(k) is preferred for those without employees (other than a spouse) due to its higher contribution potential and the ability to make employee deferrals.

Supplemental Investment Strategies

After maximizing contributions to tax-advantaged retirement accounts like 401(k)s, IRAs, and HSAs, individuals may consider supplemental investment strategies to further build wealth. General brokerage accounts, also known as taxable investment accounts, serve as a flexible option for continued savings. Unlike dedicated retirement accounts, these accounts do not have contribution limits imposed by the IRS, allowing for unlimited investment.

Funds held in a general brokerage account offer full liquidity, meaning money can be accessed at any time without age restrictions or early withdrawal penalties. However, investments held in these accounts are subject to capital gains taxes upon sale. Short-term capital gains, from assets held for one year or less, are taxed at ordinary income tax rates, while long-term capital gains, from assets held for more than one year, receive preferential tax treatment at lower rates.

These accounts provide broad investment options, including individual stocks, bonds, mutual funds, and exchange-traded funds (ETFs), allowing for diverse portfolio construction tailored to individual risk tolerance and financial goals. While general brokerage accounts lack the immediate tax deductions or tax-free growth benefits of qualified retirement plans, their flexibility and accessibility make them a component of a comprehensive financial strategy. They enable ongoing wealth accumulation and provide a source of funds that can be utilized before retirement age or for expenses not covered by traditional retirement savings.