Usually, experts will tell you that the best way to save for retirement is by putting money into a 401(k) plan, an IRA, or another well-known retirement saving vehicle. And they're usually right. But you may not have access to a 401(k), and the contribution limits for IRAs are relatively low. Or those options may not appeal to you for other reasons.
That doesn't mean you can't save for retirement. Here are five other possibilities you might consider:
1. Brokerage accounts: Unlike when you sell a holding from inside a tax-deferred retirement plan, the sale of stocks, bonds, or mutual funds in a brokerage account may result in current taxes. But the maximum tax bite for assets held longer than one year is only 15% or 20% for investors in the top ordinary income tax bracket. That's much better than the taxes you'll rack up when you eventually withdraw money from your retirement plans. Those distributions will be taxed at rates as high as 39.6%.
2. Annuities: An annuity is a contract with a financial institution that provides you with income for a term of years or for your lifetime. There are many kinds of annuities, and the amount you receive may be fixed or variable, perhaps depending on the performance of investments. You'll be taxed only when payments are made, but annuity income is taxed at ordinary income rates.
3. Real estate: There are no guarantees, but real estate investments may appreciate in value and provide steady income. If you own investment real estate (for example, a commercial building or an apartment complex), you can rent it to tenants and receive regular income. You also may be able to deduct certain expenses, including depreciation, to offset the tax due on that rental income. When you finally sell the property, any appreciation will be taxed at the rates for capital gains.
4. Small businesses: You might start a business and run the company yourself, or you could invest in someone else's enterprise. The tax law provides a special exclusion for investments in "qualified small business stock" (QSBS) if you meet certain requirements. Such investments bring the chance of a big payoff, but they also can be risky. Many small businesses fail within their first years of operation.
5. Life insurance: Although life insurance technically isn't an investment for retirement, it could provide benefits that help fund your retirement. Typically, a policy offers protection for your spouse in retirement if you should die, and you can borrow against the cash value of some kinds of insurance. An added benefit is that life insurance proceeds are completely exempt from income tax. You may also be able to take withdrawals or arrange a tax-free exchange to an annuity or a long-term care insurance policy.
These are a few ways to think outside the box in deciding how to fund your retirement. Talk with your advisor about the ideas that will work best for you.
Annuities and real estate investments are income-generating investments that may offer attractive yields and distribution growth rates, but they are complex investments with unique tax characteristics and significant risks. As a result, annuities and real estate investments may not be suitable for all clients. It is important to understand all the features, characteristics and risks of any particular investment offering under consideration. Consult with a tax advisor before investing in annuities and real estate.