For longer-term goals like financial independence and retirement, you’ve got to be all in on tax-advantaged accounts like 401(k)s, 403(b)s, 401(a)s, 457s, and other employer-sponsored retirement plans. Unless you’ve got a dog plan, these accounts are hands-down the best places to save and invest.
Higher Contribution Limits
401(k)-type plans allow you to contribute considerably more tax-advantaged dollars per year than other accounts. If you’re trying to reach financial independence sooner rather than later, or you’re approaching retirement and are a bit behind, the higher 401k contribution limits are a godsend. They’re over three times the IRA contributions limits.
The tax advantages of these accounts guarantee you a higher after-tax rate of return, everything else being equal. The longer you save and invest the bigger your advantage. Some employers offer a company match which is the greatest wealth-builder of all. If you’re offered one, do whatever is necessary to get all of it.
Traditional vs Roth
Most employer plans offer both traditional and Roth options. Don’t overlook Roth contributions. What’s not to like about tax-free earnings for life? Traditional vs Roth will help you come up with your perfect contribution: All Roth, all traditional, or a double dip, which is my personal favorite, especially for higher wage earners.
Investment Options
What about your investment options in 401(k)-type plans? I’ve found some employers go to great lengths to offer only the best plan for their employees. Others, not so much. Find out whether you’ve got what I call a dog plan and meet my 17-year-old mutt, Rosie.
After-Tax Contributions
Some 401(k)-type plans offer after-tax contributions, which are different than Roth contributions. They allow you to invest almost ten times the IRA contribution limits through skivvy-sounding maneuvers called mega-back door conversions and backdoor Iras.
When I heard about them over a decade ago, I thought it was too good to be true; however, both are perfectly legal and cool with the IRS and your Uncle Sam (at least for now). They’ll help you reach your financial goals faster than you ever thought possible. See how in my after-tax contribution example.
If your 401(k)-type plan doesn’t offer those options, or your employer doesn’t offer any plan at all, don’t fret. You’ve got lots of alternatives:
- If you’re under the Roth IRA income limits, you can invest in a Roth IRA.
- If you or your spouse are covered by an employer retirement plan, another set of income limits applies for traditional IRA contributions.
- If you check all the boxes, you can use a Health Savings Account to become an HSA (Health Savings Account) millionaire!
Becoming Financially Independent
These strategies are not the next new get-rich-quick scheme, app, or gimmick. They will, however, build your wealth faster regardless of your accepted amount of risk, be that super-aggressive, super-conservative, or somewhere in between. And they’re designed to maximize your returns no matter what your stage in life: Just getting started, mid-career, approaching retirement, or already retired.
A Beginners Guide to Roth IRAs and 401(k)-Type Plans is book 2 in my 3-book series Becoming Financially Independent. Purchase an e-book or paperback.