What’s Better Than a 401(k)? 8 Top Alternatives for Retirement Savings

How to invest without a 401(k)

Thankfully, if your employer does not provide a 401(k) plan, you do have some excellent options. For instance, anyone with a source of income can open an IRA, and people who run their own company or even a side gig have other options.

Here are eight investing options to think about if your employer’s retirement plan falls short.

Regardless of any other retirement plans they may have, one of the most common ways for people to save for retirement is through a traditional IRA. With a traditional IRA, an employee can save money in an account where it grows tax-deferred. Taxes are only due when you take money out in retirement. Additionally, you might be able to deduct account contributions from your taxable income, which would allow you to avoid paying taxes on that income now.

The complete array of investment options, tax-deferred growth, and a current tax break on contributions are the main advantages.

Cons: As of 2023, the maximum annual contribution is $6,500 for individuals under 50 and $7,500 for those 50 and above. Required minimum distributions (RMDs) based on age must be taken into consideration. Depending on your income, the entire contribution—or any portion of it—might not be deductible from taxes. (Here’s everything you need to know about an IRA. ).

Another option for employees to save money for retirement is a Roth IRA, which differs from a traditional IRA in two important ways:

Your money can grow tax-free in a Roth IRA, and you can take any amount out completely tax-free when you retire. Your contributions are made after-tax in return for this benefit. Put differently, the Roth IRA does not save you money on taxes now.

You should consult a financial advisor to determine whether a Roth IRA would be a better option for you than a traditional IRA, as it will depend on how your current income and tax rate compare to what you anticipate having in retirement.

The ability to use contributions for qualified expenses (like college costs and first-time home purchases) without incurring penalties, the ability to withdraw contributions at any time without incurring penalties, the full range of investment options, the absence of capital gains on asset sales, and the ability to pass the account balance to heirs are some of the main advantages.

Cons: You forfeit a tax benefit now in exchange for the assurance of receiving tax-free withdrawals in retirement. The maximum annual contribution for 2023 is $6,500 ($7,500 for individuals 50 years of age and above). There are income restrictions that apply to eligibility for a Roth IRA, so if you earn too much, you won’t be able to use it. However, there is a way around this restriction. (Here’s how to open a Roth IRA. ).

An IRA for self-employed people, business owners, and those with income from side gigs or freelancing is known as a Simplified Employee Pension IRA, or SEP. The investment, distribution, and rollover guidelines for the SEP-IRA are the same as those for regular IRAs. Essentially, the contribution cap of $6,500 (for individuals under 50) in a traditional IRA has been replaced with a $66,000 cap in 2023, or 25 percent of eligible compensation, whichever is lower.

Key advantages include: greater maximum contributions, tax-deferred growth of contributions, a full range of investment options, a higher contribution limit than traditional IRAs, no income restrictions on the deductibility of contributions, and a larger maximum contribution amount.

Drawbacks: Contributions are limited to 25 percent of business earnings. RMDs are applicable, and all workers for the company must make the same contribution (but are not permitted to make any optional salary deferrals or catch-up contributions).

To benefit from the solo 401(k) and have no employees except your spouse, your business must be your own. However, if you have a side gig, this is a great way to save money. You may contribute up to $66,000 for 2023, but that total will be split between you as the employer ($43,500) and yourself as the employee ($22,500 for 2023) Your employee limit for 2023 is $30,000 if you are 50 years of age or older. This means that your potential total contribution could be as much as $73,500.

One of the best things about this kind of plan—especially if your primary source of income is sufficient—is that you can save all of the money that comes from your business, up to the $22,500 annual maximum contribution limit (or $30,000 if you’re 50 years or older). Following that, you may contribute up to the entire employer contribution cap of $43,500, or 25% of your business income. Compared to a SEP IRA, where your maximum contribution is limited to 25% of your business earnings, that could be a significant benefit. Your contributions may be made with pre- or post-tax money, based on the setup and location of the plan.

Key advantages include the ability to make significant pre- or post-tax contributions to the plan, complete investment choice (including the option to invest in real estate and/or cryptocurrencies), and the ability to contribute large sums to the plan as previously mentioned.

Cons: This program has additional IRS regulations and reporting requirements. You must own a business to participate. The distinction between plan-based and person-based limits on elective deferrals is crucial for business owners who also work for another company and contribute to their 401(k). It can become complicated if you hire any employees.

Health savings account

Although they were designed to assist Americans with high-deductible health plans in covering their medical expenses, health savings accounts (HSAs) aren’t just for medical expenses.

For those who can build up a savings account until they retire and/or qualify for Medicare, HSAs provide a significant advantage. If your employer-sponsored health insurance plan is deemed a high deductible health plan, with a minimum deductible of $1,500 (for individual coverage, $3,000 for family coverage), and a maximum out-of-pocket maximum of $7,500 (for individual coverage, $15,000 for family coverage), you qualify for one. Individuals may contribute up to $3,850 and families may contribute up to $7,750 to an HSA in 2023 under the plan. As a catch-up provision, workers who are 55 years of age or older (by the end of the tax year) are eligible to contribute an extra $1,000.

You will receive a federal tax deduction today for your contributions to your HSA, and any interest or other earnings accrued on the account are tax-free. (However, some states tax contributions and earnings. If you use the account to cover eligible medical expenses, distributions are tax-free. But the real benefit occurs once you hit age 65. At that point, even though such withdrawals and expenses are regarded as taxable income, you can avoid the 20 percent penalty for using the plan for purposes other than medical. You have the option to establish an HSA plan on your own even if your employer does not offer one.

Key advantages of HSAs include flexible contribution use, employer contributions, the ability to roll over IRAs into an HSA in the event of a major medical need, the ability to use the funds for qualifying medical expenses for spouses and dependents even if your health plan does not cover them, and the ability to deduct the entire HSA contribution from your gross income on your federal tax return (although state tax laws may differ in this regard).

The HSA has no minimum required distribution. The majority of plans allow investors to make HSA contributions after a predetermined account balance is reached. You can use the money to pay for employer-sponsored health insurance if you continue to work after the age of 65. Money can be used to cover Medicare or Medicare Advantage plan premiums after retirement.

Cons: Since you’ll probably want to retain a sizable portion of your essential health care funds in safe, liquid assets, your investment options may be limited. If you have a significant medical need while you’re still working, you might also use up all the money. Even if you are still employed, you cannot contribute to an HSA after you enroll in Medicare. However, you may still use any accumulated funds.

Is A 401(k) Really A Good Retirement Plan?

FAQ

What is a better retirement option than 401k?

Is a Roth IRA better than a 401k?

Where is the safest place to put your retirement money?

Is a pension better than a 401k?

Are 401(k)s better than IRAS?

Some alternatives include IRAs and qualified investment accounts. IRAs, like 401 (k)s, offer tax advantages for retirement savers. If you qualify for the Roth option, consider your current and future tax situation to decide between a traditional IRA and a Roth. With a 401 (k), you contribute pretax money from your paycheck.

Which is better 401(k) or HSA?

HSAs have much lower contribution limits than 401 (k) accounts, and you’re eligible for them only if you have a qualifying high-deductible health savings plan. Still, once you’ve earned your employer match, this is generally a far better account to put additional retirement funds into than your 401 (k). 2. A Roth IRA

Are 401(k) plans a good investment?

A 401 (k) plan can be a great way to invest, giving employees the opportunity to grow their pre-tax contributions and earnings tax-deferred until they’re withdrawn in retirement. About 98 percent of employers with 401 (k) plans make contributions to the plans, such as through a matching contribution, according to Plan Sponsor Council of America.

Is a health savings account better than a 401(k)?

1. A health savings account Health savings accounts have a huge advantage over a 401 (k). You can potentially get double the tax break than a 401 (k) provides. A 401 (k) allows you to make pre-tax contributions, but when money is withdrawn, you pay taxes on the funds you take out. HSAs, on the other hand, offer pre-tax contributions.