While employer-sponsored plans like 401(k)s will continue to be the primary means of saving for retirement for most Americans, they are by no means the only way to save for your golden years. In fact, many different types of accounts can work very well in conjunction with your 401(k) to provide additional investments for your retirement as well as increased flexibility and tax efficiency.

Traditional IRA

Much like a 401(k), a traditional IRA is a pre-tax account that can be opened with a bank, credit union or investment company. Therefore, virtually any type of vehicle – be it cash, certificate of deposit, mutual fund, stock, bond or nearly anything else – can be used within a traditional IRA.

However, although a traditional IRA can certainly be useful, eligibility is subject to a number of factors, including income. Also, if your 401(k) features an employer match, it makes more financial sense to concentrate on your 401(k) rather than contributing to another pre-tax account like a traditional IRA.

Roth IRA

Unlike a traditional IRA, a Roth IRA does not offer any tax benefits on your contributions, but, unlike a pre-tax account, neither those contributions nor the subsequent growth is taxed on normal distributions. Like their pre-tax cousins, however, Roth IRAs are also subject to eligibility requirements. If you meet those requirements, though, a Roth IRA can be a powerful companion piece to your 401(k) as an after-tax source of retirement income.

Non-Qualified Investment Accounts

Whether titled as an individual account, joint with rights of survivorship, community property or under a trust, non-qualified accounts do not have the same eligibility restrictions as IRAs. However, non-qualified accounts also lack the tax efficiencies of IRAs and employer-sponsored plans. Therefore, these types of accounts are often used once maximum contribution limits are met on 401(k)s or IRAs.

Another benefit of using a non-qualified account for supplemental retirement savings is their lack of restrictions. Since these accounts are not specifically designed for retirement purposes, they can be used before retirement age without the early distribution penalties incurred with IRAs.

Also, depending on the type of investments used within these accounts, you can make them more tax efficient by using instruments like municipal bonds or non-dividend yielding stocks. Always keep in mind, however, that non-qualified accounts can not only be subject to income tax on interest and dividend yields but capital gains as well.

As always, consult with your financial advisor for further information on the types of accounts that are most suitable for your particular needs and retirement goals.

 

4/3/2019