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Updated on Thursday, December 23, 2021
You have plenty of options, many of which we’ve listed below. Wherever you put your money, remember that each type of investment comes with drawbacks. You should understand your risk tolerance and be comfortable with the potential pitfalls involved before getting started with a new investment. Asset diversification is a way to offset the potential risks — do not put all your eggs in one basket. If you are looking to diversify your assets, here are 10 ways to invest outside a 401(k). We’ve put them in order (roughly) of how complicated it is to get started with these investment strategies.
Upgrade your savings
Stashing your extra money in a certificate of deposit (CD), high-yield savings account, or money market account might be the least risky investment you can make.
Most accounts are insured by the Federal Deposit Insurance Corporation, a government agency, for up to $250,000. The risk with these accounts is you might not earn enough interest on your deposits to outpace inflation. If you choose a CD, you usually can’t access your money until the term ends without paying a hefty fee, so it’s probably not a good idea to lock all your savings into a five-year CD account.
Best for: Conservative investors who are not comfortable with investing in the market and those who need a place to save their emergency fund.
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Get an automated micro-investing app
Small savings add up quickly.
A wave of micro-investing apps have allowed users to invest spare money in small amounts in selected exchange-traded funds (ETFs), which are securities that track a basket of stocks, bonds, commodities, or indexes — like the S&P 500 index, for instance. You can often select a ready-made portfolio depending on your risk tolerance and invest as little as $5 each day.
Take Acorns as an example: It automatically invests a small amount of your money daily, weekly, or monthly. One of Acorns’ interesting features is rounding up your purchases to the nearest full dollar amount and makes the change available for you to invest.
Let’s say you used a credit card to buy a cup of coffee for $2.75. You can choose to invest the 25 cents on the app, or Acorns will invest the change for you if you elect automatic-roundup investments. It’s free to open an Acorns account. The app charges $1 per month if your balance is under $5,000, or 0.25 percent per year if your balance is $5,000 or more.
We’ve reviewed four micro-investing apps. Read more about their features here.
Best for: People with cash sitting idle in their checking account. And those who have the best intention to save but struggle to get over the emotional barrier. The automated apps help you save spare money and potentially grow it through investing.
Open a Roth IRA
Consider opening a Roth IRA if you have maxed out your 401(k) or you are simply not happy with the investment choices in your plan.
It’s a more flexible retirement investment vehicle, especially for early-career professionals, than a 401(k), according to financial planners. With a Roth, you save after-tax dollars. Money invested in a Roth grows tax-free, and you can withdraw your original contributions — but not the earnings — before retirement without tax consequences or penalty. Many parents also make it a piece of their college savings plan, thanks to its tax efficiency.
The total allowable amount contributed to a Roth is $6,000 for 2022 ($7,000 if you’re age 50 or older). The IRS does have income limitations for who is eligible for a Roth IRA.
Best for: Young professionals who expect their incomes to rise as their careers advance, or their tax bracket to stay the same in retirement as it is now. Parents saving for their children’s education.
Open a health savings account (HSA)
Experts say an HSA is one of the most tax-favored, yet underused, investment vehicles.
People with a high-deductible health plan (HDHP) are eligible for a tax-advantaged Health Savings Account. Pros highly recommend that those who have an HSA use it not just as a medical fund for unexpected emergencies, but also as a long-term retirement savings account.
HSA has a triple-tax benefit: The money you put into an HSA is tax-deductible; the balance grows tax-free and rolls over each year; and withdrawals from your HSA for qualified medical expenses are not taxed. There are a variety of HSA investment options, from regular savings accounts to mutual funds.
The annual maximum HSA contribution in 2022 is $3,700 for an individual and $7,300 for a family. If you are at least 55 years old, you can contribute an additional $1,000 annually. Experts suggest you max it out if you can, given its triple-tax benefits. While you must have a high-deductible health plan to contribute to an HSA, you get to keep and use the funds even after you’ve changed insurance coverage.
You can search for HSAs on DepositAccounts.com, which, like MagnifyMoney, is a subsidiary of LendingTree. This may help you navigate the hundreds of plan providers out there.
Best for: People who have a high-deductible health plan.
Get a 529 plan
A 529 savings plan is a tax-advantaged savings account designed to encourage saving for qualified future education costs, such as tuition, fees, and room and board. Much like a 401(k) or IRA, a 529 savings plan allows you to invest in mutual funds or similar investments.
You can use 529 savings for private K-12 schooling. Tax benefits are extended to eligible education expenses for an elementary or secondary public, private, or religious school. You are allowed to withdraw up to $10,000 a year per student (child) for education costs.
Edward Vargo, an Ohio-based financial planner, told MagnifyMoney that 529 plans are “excellent legacy planning tools” for one’s grandchildren or great-grandchildren.
One drawback of a 529 plan is that earnings withdrawn not used for qualified education expenses will be taxed, and an additional 10-percent penalty is applied. So parents should thoroughly evaluate the expenses that might be needed to fund education down the road.
Best for: Parents, grandparents, or couples planning on having children.
Invest in your education
If you want to advance your career, move up the ladder, or increase your earning potential, consider furthering your education.
To be sure, going back to school is a big time and financial commitment. Be prepared for a time period of uncertainty and income drop if you quit a full-time job to pursue a degree, which may require a lifestyle adjustment. But knowledge is invaluable, and there’s potential for an economic return, as well. A 2014 Georgetown University economic analysis of college majors found that obtaining a graduate degree leads to a wage bump.
Investing in your education doesn’t necessarily require dropping everything to go back to school, either. Pursuing an unfinished degree on a part-time basis, attending professional workshops, taking ongoing education courses, or learning a new language could also be worth your time and money, depending on your career.
Best for: Professionals in fields where an advanced degree is highly preferred or those looking to advance their career or switch careers.
Open a brokerage account
If you’ve paid off your credit card debt, established an emergency fund, and exhausted all your tax-advantaged accounts, you can open a regular old brokerage account to squirrel away some more money.
A brokerage account is much like an IRA. It’s more flexible in terms of investment choices and money withdrawal than 401(k)s, but you don’t get any tax breaks. It allows you to buy and sell a wide variety of securities, from stocks and bonds to mutual funds, currency, and futures and options contracts, through a brokerage firm.
You can open a brokerage account with any of the major investment firms like Vanguard,Charles Schwab, or Fidelity. Just like with other financial accounts, you deposit money and work with a broker to buy or sell securities. The broker will recommend investments depending on your personal financial situation and goals. But you have the final say on investment decisions. The brokerage firm takes a commission for executing your trades, and there are fees linked to the transactions, ranging from account maintenance fees and markups/markdowns to wire fees and account closing fees.
Be prepared for a steep learning curve as a market newbie. You will have to study how each financial instrument works and the companies you invest in, such as learning to read their quarterly financial reports. Holding a brokerage account is also a big-time commitment. Although a broker will help you make investment decisions, you will have to stay on top of the daily market movements and news that may impact the market to make sure you are making a profit.
Best for: Aggressive investors with high-risk tolerance and extra savings.
Invest in real estate
Real estate could be a good place to tap into if you are looking to diversify your portfolio. There are a couple options. If you want to get hands-on, you can buy a home and rent it out, flip houses, or rent out your existing home. Or if you don’t want to be quite so involved, investing in real estate investment trusts (REITs) is another option.
If you are buying a property, experts advise you put the down payment funds in a fairly liquid account, so that it’s immediately available when you need to make a purchase.
Whichever way you choose to invest in real estate, you want to keep up with the latest economic trends, especially the real estate market.
Unlike many other highly liquid investments, properties cannot be bought and sold for profit in a heartbeat. You want to set aside cash for other life expenses before jumping into real estate, because you are likely to hold the property for a long time.
Best for: Investors with a large sum of cash to cover a down payment and those who understand the real estate market.
Invest in a business
You may think it’s a type of venture only the super rich or venture capitalists can do. Well, not necessarily.
The U.S. Securities and Exchange Commission (SEC) in 2015 approved crowdfunding rules that allow startups or small businesses to seek investors through brokers or online crowdfunding platforms. This basically means, ordinary Joes can now buy into startups now.
A parade of online equity crowdfunding platforms allow non-accredited investors to put money in small businesses and startups. MicroVentures, DreamFunded, SeedInvest, StartEngine, and Wefunder are among those.
But tread carefully. Entrepreneurship gives hope and excitement, but investing in small businesses and startups is risky.
Make sure you do homework before starting a venture. Familiarize yourself with the process and understand the risks. You also want to research the company thoroughly, and understand its management structure and the product or service it offers. Basically, read up on anything you can to find about the company you buy into.
Because of the risks involved, the SEC put a cap on how much you can invest in those businesses through crowdfunding depending on your net worth and annual income.
Best for: Adventurous investors who are comfortable with the potential risks, passionate about entrepreneurship, and willing to spend time studying the businesses they invest in.
Wait, but what about Bitcoin?
Bitcoin has had a wild ride, often moving thousands of dollars a day. And it’s been in the news constantly. But, as with any high-risk financial move, you shouldn’t invest unless you are willing to lose it all. There are no consumer protections on Bitcoin. If Bitcoins are lost or stolen, they are gone forever.
That being said, if you are curious about it and want to learn how it works, you can throw in $20 or $100 to buy through a digital currency exchange or broker. You can read more about the cryptocurrency craze in our ultimate Bitcoin guide.
Best for: Curious investors willing to experiment — and potentially lose.
The “Find a Financial Advisor” links contained in this article will direct you to webpages devoted to MagnifyMoney Advisor (“MMA”). After completing a brief questionnaire, you will be matched with certain financial advisers who participate in MMA’s referral program, which may or may not include the investment advisers discussed.