The 401(k) is a staple in the U.S. retirement system, with these employer-sponsored plans offering workers the opportunity to save for retirement in a tax-advantaged way.
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Contributions to traditional 401(k)s can be tax deductible and grow tax-free until withdrawal, which typically can start at age 59 ½. Roth 401(k)s require post-tax contributions, but those can eventually be withdrawn tax-free after meeting requirements such as being 59 ½ or older.
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Plus, many employers match employees’ 401(k) contributions, often up to around 3% to 6% of an employee’s salary. However, not everyone can contribute to a 401(k). Almost a third of private-company workers do not have access to an employer-provided retirement plan at all, according to the U.S. Bureau of Labor Statistics.
Some also aren’t big fans of their company’s 401(k) plan, such as if there are limited investment options and high fees. That said, it’s important not to abandon ship too quickly.
“If your company is providing a 401(k) match, I would go with that, otherwise, you are missing out on ‘free money.’ If you want to put away large amounts and can afford to put more than $7,000 a year (the annual limit for Individual Retirement Accounts), then the 401(k) would be the option you go for since the limit is $23,000,” said Gloria Garcia Cisneros, wealth manager at LourdMurray.
Still, some people are looking for alternatives, such as those who are self-employed or those without a workplace retirement plan. If that’s the case, some alternatives to keep in mind include:
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IRA
An individual retirement account (IRA) can be a good option for those who want to set up their own retirement plan with the brokerage of their choice. While the standard limit is $7,000 in annual contributions, there are also some other potential restrictions to qualify for tax-deductible contributions, such as whether you or your spouse has access to a workplace retirement plan, as well as your income. Still, there can be times when it makes sense to choose an IRA over a 401(k).
“If your company isn’t providing a match, you are contributing less than $7,000, or the company plan has limited investments with expensive fees, then it may make sense to use an IRA,” Garcia Cisneros said.
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Roth IRA
A Roth IRA can be used for similar reasons why someone would choose a traditional IRA over a 401(k). And some people prefer a Roth IRA due to the potential tax savings in retirement, as contributions are made with post-tax dollars but can later be withdrawn without incurring income taxes.
However, it’s important to note that Roth IRAs have income limits in order to be eligible to make contributions, Garcia Cisneros said.
For married couples filing jointly, for instance, Roth IRA eligibility starts to phase out at $230,000 in annual modified adjusted gross income.
Taxable Brokerage Account
Not all investments have to be put into a designated retirement account. You might contribute enough to get the match for your 401(k), for example, while putting extra money into a regular brokerage account.
“If you are looking to put money away for shorter-term goals before retirement, you invest into a taxable brokerage account. These don’t have tax-deferred growth-like retirement accounts, but it does allow you the flexibility to tap into the funds without penalties at any point,” Garcia Cisneros said.
Solo 401(k)
While a solo 401(k) is still technically a 401(k) plan, it’s worth noting that self-employed individuals and their spouses can open these plans, as long as they don’t have any other full-time employees.
“This allows you to max out contributions since you can put money away as the ’employer’ and the ’employee,’” Garcia Cisneros said.
Total contributions can go up to $69,000 in 2024, though there are some nuances to look into.
SEP IRA
Another option for self-employed individuals or small business owners with employees is to open a SEP IRA. Compared to a SIMPLE IRA, another type of self-employed retirement account for those with employees, “a SEP is the easiest and least expensive to set up; there are no employee count limits and there is a higher contribution limit. The con is that only employers can contribute to the plan,” Garcia Cisneros said.
The maximum contribution for 2024 is the lesser of 25% of an employee’s compensation or $69,000.
SIMPLE IRA
Lastly, as mentioned, small business owners might turn to what’s known as a SIMPLE IRA. This could be particularly useful for those with employees who want to give staff the ability to contribute to their accounts.
“A SIMPLE is more restrictive than a SEP with lower limits of $16,000 and you have to have less than 100 employees; however, it allows both an employer and employee match,” Garcia Cisneros said.
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This article originally appeared on GOBankingRates.com: I’m a Financial Advisor: 6 Best Alternatives to a 401(k) Retirement Plan
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