In addition to a 401(k) and other employer-sponsored retirement plans, you can contribute at least $6,000 annually to an individual retirement account. And IRA owners age 50 and older can make a catchup contribution of up to $1,000, for a total maximum contribution of $7,000 per year.2 Many investors don’t invest the maximum, and over a 30-year savings horizon, this potentially can mean lost savings in the tens of thousands of dollars.
It’s also important to decide which type of IRA—Roth or traditional—is best. For many young investors in particular, a Roth account is superior. Although Roth investors don’t get a tax deduction on their contributions, the many years of tax-free compounded growth will likely far outweigh the initial tax break that comes with traditional IRA contributions. But for older investors in their peak earning years, a traditional IRA might be a better option.
One also might consider a Health Savings Account (HSA) as an “off-label” retirement account. HSAs offer a triple tax advantage: Contributions may be 100% percent tax-deductible, all interest earned is tax-deferred, and withdrawals are tax-free for eligible medical expenses (i.e., deductibles, copays, prescriptions, vision care, and dental care). So if you are in a high-deductible medical plan with an HSA, make full use of it. Ideally, if you can pay for current medical expenses out of pocket, your account can compound tax-free.