Types of Investment Accounts You Can Use for Retirement

By Miranda Marquit

One way to save up a nest egg for your golden years is to invest. There are several types of investment accounts you can use to help save for retirement, depending on your goals and financial situation.

Let’s take a look at different types of investment accounts available for building wealth for retirement.

Two Main Types of Investment Accounts Aimed at Retirement: 401(k) and IRA

Let’s start with the “major” retirement accounts: 401(k) and IRA.

  • 401(k): Offered by an employer. Some employers offer to match your contributions up to a certain amount. If you’re self-employed, you can access a solo 401(k).
  • IRA: The individual retirement account is often one that you invest in on your own. However, there are other types of IRA, like the SEP and SIMPLE, that businesses can offer.

You can invest in both a 401(k) and an IRA. The traditional version of both of these accounts allows you to make tax-deductible contributions.

Both the 401(k) and the IRA have Roth versions that allow you to make after-tax contributions. Your money grows tax-free over time, though.

Deciding between a traditional and a Roth usually depends on when you want your tax benefit: now or when you’re ready for distributions. Some people start with a Roth version early in their careers and then switch to the traditional version when they start earning more, and it affects their taxes.

Use an HSA as Part of Your Retirement Planning

When many people think of types of investment accounts for retirement, they stop at 401(k) and IRA. However, that’s a mistake when you consider that a Health Savings Account (HSA) can be a good choice for retirement planning.

For the most part, an HSA is designed to help you pay for eligible medical expenses. This is definitely true. However, because the HSA (unlike some other tax-advantaged health accounts) rolls over year-to-year, you can potentially grow your wealth. Plus, it’s possible to invest a portion of your HSA.

There are three main ways you can use your HSA as part of retirement planning:

Use it as a healthcare account

Because you can withdraw money tax-free for qualified medical expenses, some people like the idea of using it for healthcare costs later. They let it build as much as possible with the help of investing. Then, they can simply cover their healthcare costs in retirement from the HSA.

Reimburse yourself down the road

There is no time limit on claiming reimbursements from your HSA. As a result, you could pay out of pocket, with after-tax dollars, for your medical costs now. Save all of your receipts. Later, during retirement, you can submit all of those receipts for reimbursement from your HSA, providing yourself with a tidy sum that you can then invest or use.

Use the HSA as a backup IRA

Finally, the HSA can act as a backup IRA. Once you reach age 65, you can withdraw money for non-qualified expenses without paying the 20% penalty. You still need to pay taxes on the money you withdraw for non-qualified expenses, though. But, basically, once you reach age 65, the HSA can be treated like a traditional IRA for expenses.

Don’t Forget the Taxable Investment Account

That’s right. Even though a lot of focus is on tax-advantaged accounts for retirement planning, it’s possible to use a taxable account to plan for retirement.

Some people planning for early retirement like the idea of a taxable investment account. That’s because most tax-advantaged accounts come with requirements, such as waiting until you’re 59.5 years old or paying an early withdrawal penalty. If you have a tax-advantaged investment account, you can invest and access that money whenever and pay appropriate capital gains taxes.

Combing Types of Investment Accounts for a Better Retirement

There’s no reason to limit yourself to one type of investment account when you’re planning for the future. In fact, it can make sense to combine different types of investment accounts over time.

Some people with a 401(k) match, for example, contribute to that account to get the maximum match. However, to potentially get access to a wider variety of investment choices and potentially lower fees, they might decide to also open an IRA.

Depending on your situation, you might end up with limited tax deductions for your IRA, but you can still benefit.

Others like to have an HSA plus “regular” retirement accounts. The HSA can help you pay for current healthcare costs while planning for the future. Plus, you’re getting more tax benefits for your investments.

Finally, a taxable investment account allows for flexibility in accessing your retirement funds.

Carefully consider what makes sense for you and then create a plan designed to help you make the most of each retirement dollar.