Saving for retirement is important for people of all ages, whether you’re just starting your career or have been working for decades. And in most cases, that savings responsibility rests squarely on your shoulders as many employers, especially in the private sector, no longer offer the pension plans that employees relied on in the past.
A key retirement savings vehicle for many is an employer-sponsored 401(k) plan. You contribute a portion of your salary to the plan and choose from the investment options offered. Some employers offer matching contributions as well. However, not all employers offer a 401(k) or similar type of retirement plan for their employees, which can make things a little more complicated if building a retirement nest egg is a priority for you. Luckily, you have other options.
Here are some 401(k) alternatives if your employer doesn’t offer a 401(k) plan.
One option to consider is a traditional individual retirement account. This type of IRA account can be opened at most brokers and some mutual fund companies. You can also open a traditional IRA account through a robo-advisor.
Traditional IRAs are subject to annual contribution limits. For 2023, these annual limits are $6,500 for anyone under 50 and $7,500 for those 50 or over. These limits are combined across contributions to all types of IRA accounts, including both traditional and Roth IRAs.
With an IRA, you can make pretax contributions, after-tax contributions, or a combination of the two. If you are not covered by a retirement plan at work, you can contribute up to the annual limits on a pretax basis. Those who are covered by an employer retirement plan are subject to limits on the amount they can contribute to an IRA on a pretax basis.
Traditional IRAs are subject to required minimum distributions once you reach age 72. At that point, the IRS mandates a minimum amount that must be taken from the account each year. RMDs are subject to annual income taxes, excluding any amounts contributed on an after-tax basis.
Although investment options will vary based on the account custodian, typical investments for traditional IRAs often include:
- Mutual funds
- Exchange-traded funds
- Individual stocks
- Individual bonds
- Money market funds or certificates of deposit
IRA accounts cannot offer life insurance policies or collectibles as investment options. Examples of collectibles include:
- Precious metals, with the exception of certain types of bullion
- Coins with certain exceptions
- Alcoholic beverages
Pros and cons of a traditional IRA
- Provides tax-deferred growth of your investments, if you choose to make pretax contributions.
- You typically have a wide range of investment options.
- Pretax contributions can give you an immediate tax break.
- These accounts are subject to RMDs.
- Distributions are taxable and potentially subject to a penalty.
- The annual contribution limit is relatively low.
Roth IRA contributions are made with after-tax dollars, which can give you a big tax advantage in retirement. If your contributions are held in a Roth account for at least five years and other conditions are met, you can enjoy penalty-free and tax-free withdrawals after age 59 1/2. Also, your own contributions to the account may always be withdrawn tax- and penalty-free, no matter your age.
Withdrawing the gains in the account are tax-free if you are 59 1/2 and have met the five-year test. If you are 59 1/2 but have not met the five-year test, then the portion of a withdrawal that constitutes earnings would be taxed. If you are under age 59 1/2, withdrawals of any gains would be both subject to taxes and a 10% early withdrawal penalty. However, there are exceptions to the taxes or penalties on withdrawals in some cases.
The annual contribution limits for a Roth IRA are the same as a traditional IRA. Those limits apply to all IRA contributions regardless of account type.
Unlike traditional IRA contributions, Roth IRA contributions are limited by your income. For 2023, the income limits are:
- If you’re married filing jointly, there are no contribution restrictions for an adjusted gross income (AGI) less than $218,000. Your ability to contribute the full amount phases out when you have an AGI between $218,000 and $228,000. No Roth contributions are allowed if your AGI exceeds $228,000.
- If you’re a single filer, there are no contribution restrictions for an AGI less than $138,000. Your ability to contribute the full amount phases out when you have an AGI between $138,000 and $153,000. No Roth contributions are allowed for an AGI above $153,000.
The investment options available in a Roth IRA will generally be the same as what you’d see with a traditional IRA account.
Pros and cons of a Roth IRA
- Provides tax-free growth of your investments.
- There are no RMDs if certain conditions are met.
- There are no taxes on withdrawals if certain conditions are met.
- You cannot contribute if your earnings are too high.
- The annual contribution limit is relatively low.
SEP stands for simplified employee pension plan. A SEP IRA is a special type of IRA in which only the business contributes to an employee account. SEPs are available to businesses established as sole proprietors or entities such as an S-Corp or LLC.
SEP IRA contributions are made by the employer and are limited to 25% of the employee’s compensation. In the case of a sole proprietor, this would be 25% of their business income. So the maximum contribution for SEP IRAs for 2023 is the lesser of 25% of the employee's compensation, or $66,000.
If you don’t have a 401(k) at work, but you do own a side business and generate income from that, you could contribute up to 25% of that income to a SEP IRA. This type of account can be opened through most custodians and brokers. The investment options will be similar to those listed above for an IRA.
Pros and cons of a SEP IRA
- A SEP IRA can be established and funded up to the date the business files its tax return, including extensions for the prior year.
- There is little if any administrative paperwork.
- There is generally a wide range of available investment options.
- SEP IRAs do not offer a Roth option.
- SEP IRAs do not allow for any employee contributions, only contributions by the employer are permitted.
- If your income is low in a given year, the contribution is still based on 25% of compensation, which may limit the amount you can contribute.
A solo 401(k) is a plan that covers only a small business owner and their spouse if they are involved in the business. If your employer doesn’t offer a 401(k) plan, the solo 401(k) can offer a way to save for retirement using any self-employment income you might have from a side gig.
Solo 401(k) contributions are tax-deductible, and contribution limits are the same as what you’d see with a 401(k) plan through an employer: $22,500 if you’re under 50 or $30,000 if you’re 50 or older in 2023. You can also make an employer profit sharing contribution of 25% of compensation (or self-employment income) as well, bringing the maximum combined contribution to $66,000 if you’re under 50 or $73,500 for those 50 and older.
Unless there are restrictions from the custodian you choose, solo 401(k)s typically offer a similarly broad range of investment choices, including stocks, bonds, mutual funds, and ETFs, among others.
Pros and cons of a solo 401(k)
- There are relatively high contribution limits.
- Roth options are available.
- A broad range of investment options is typically offered.
- It must be established by December 31 to qualify for the current tax year.
- Statutory employees in a business cannot participate.
Taxable investment account
With a taxable investment account, you don’t get tax advantages for your contributions or any tax-deferred growth opportunities. Although you aren’t taxed on withdrawals from these accounts, any capital gains arising from the sale of an investment or from mutual fund distributions will be subject to taxes. To help offset this, investment losses can be deducted.
The investment options available in most taxable accounts run the full gamut. This type of account can be a good alternative for investing money if you don’t have a workplace 401(k), or you can use them in conjunction with any 401(k)s you do have.
Pros and cons of a taxable investment account
- There are few if any limitations on where you can invest.
- Withdrawals from the account are not taxed.
- Long-term capital gains are taxed at a preferential rate.
- Short-term capital gains are taxed as ordinary income.
- There is no tax deferral of gains.
- Dividends, capital gains, and interest are taxed in the year received.
Health savings account
A health savings account is a medical savings account that can be opened only in conjunction with a high-deductible health insurance plan. The deductible and out-of-pocket limits for these plans are set each year.
If you’re eligible, you can use an HSA whether or not you have a 401(k) plan through an employer. These accounts are sometimes referred to as another retirement plan because if you don’t use the money to cover eligible medical expenses, it can be carried over to subsequent years. You can opt to use it to cover healthcare expenses in retirement or treat the account as a traditional IRA and withdraw the money from your account once you reach age 65. In this case, the distributions would be taxable like a traditional IRA account.
Some company plans and outside custodians offer investment accounts for the money held in an HSA account. Some accounts offer only a small menu of investments; others offer a full range of options much like an IRA account.
Pros and cons of an HSA account
- Contributions are made on a pretax basis and grow tax-deferred until withdrawn. Withdrawals are tax-free if used for qualified medical expenses.
- The money can be invested in mutual funds and other types of investments in some cases.
- The money in the account can be carried over to subsequent years if not used and is portable if you leave your employer.
- HSAs can be used only in conjunction with a high-deductible health insurance plan.
- Contributions cannot be made once you are enrolled in Medicare.
- Withdrawals for non-eligible medical expenses may be subject to taxes.
Is an IRA better than a 401(k)?
Both plans have advantages, and the better option will depend on your individual situation. A 401(k) plan offers higher annual contribution limits than an IRA. However, most 401(k)s offer a limited number of investment options, whereas an IRA typically offers a wide range of investment types.
Some 401(k) plans offer an excellent menu of investment options at a low cost; others don’t. Ideally, you would fund both types of plans if you’re able.
Can you have a 401(k) without an employer?
You cannot have a 401(k) without an employer; however, if you have a side business and earn self-employment income, you have some options. For instance, you can choose to open a solo 401(k). Note that annual contribution limits apply to all 401(k)s you might be eligible for, not for each one individually.
What are some 401(k) alternatives?
There are a number of alternatives to a 401(k) plan for those who are not covered by one through their employer. These include an IRA (both Roth and traditional), a SEP IRA, and a solo 401(k) for those with self-employment income, a taxable investment account, and an HSA account if you are covered by a high deductible health insurance plan. Many of these accounts can be used in conjunction with other options on this list.
Not all employers offer a 401(k) for employees. If you are not covered by a 401(k) or similar retirement account at work, you still have options to save for retirement. IRAs and taxable investment accounts are widely available. Other types of accounts may be available to you if you are self-employed or covered by a high deductible health insurance plan.
If you find yourself in this situation, be sure to look at one or more of the options discussed above. Saving for retirement through other options besides a 401(k) could help you build a sizable nest egg over time. If you’re ready to open an account, check out our picks for the best brokerage accounts.
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