Many employers offer 401k plans to help their employees save toward retirement.
While this plan tends to be the go-to option for many people, a significant number of full-time and part-time employees don’t have access to this retirement savings plan.
But there is no need to worry if your employer does not offer a traditional 401k retirement plan. You can choose from several other alternatives, which may even offer more suitable benefits for your specific situation.
This article covers 10 different options and shows you the key benefits of these 401k alternatives. Keep these key benefits in mind, as they will help you to determine the option that best suits your financial situation.
401k Plan: A Quick Overview
First, what’s a 401k plan, and what are its benefits?
Here’s a short and snappy way to put it:
A 401k plan is an employer-sponsored retirement savings plan. It allows employees to stash away a portion of their salary in a 401k account, which is a tax-advantaged account.
Contributions to a 410k account are made pre-tax, which means they reduce your taxable income for the year.
Here’s a typical example to drive the point home. If you contribute $10,000 to a 410k account per year from your $50,000 annual salary, your taxable income would be $40,000.
In a 401k plan, contributions are deducted directly from your paycheck before it gets to you. This makes saving an effortless process and you won’t miss the amount deducted.
In some cases, employers offer contribution-matching programs. That means your employer matches a portion of your contribution to help your retirement funds grow even faster.
401k plans are protected from creditors. That means no creditor can take money from your 401k if you want to refinance a loan or you have a debt.
All of these benefits combine to make the 401k a widely popular choice. However, it is not the only option when it comes to planning for your retirement.
Let’s look at other options that could fit your situation better.
10 Great 401k Alternatives to Consider
1. Traditional IRA
A traditional Individual Retirement Account (IRA) is one of the most widely popular 401k alternatives for retirement investing, thanks to its tax-advantaged benefits.
This plan allows you to stash away your money in an account where it grows tax-free until you retire. You only pay taxes when you take money out of the account during retirement, and withdrawals are taxed at the ordinary income tax rate.
The money you contribute to this account is tax-deductible. That means your taxable income decreases by the amount you contribute to a traditional IRA. In other words, you will avoid paying taxes in the present for the amount you contribute.
A traditional IRA works well for small business owners, freelancers, and people who don’t have a 401k plan at work. Plus, you can combine it with any other retirement plan, including an employer-sponsored savings plan like the 401k.
The traditional IRA offers greater flexibility and provides plenty of choices in terms of investment opportunities.
But perhaps its most significant benefits include tax breaks on your contributions and tax-deferred growth of your savings.
2. Roth IRA
A Roth IRA is similar to a traditional IRA but with two main differences. With this option, you pay taxes on whatever amount you contribute to the account because it is not tax-deductible. However, your money will grow tax-free. That means you don’t pay taxes when you make withdrawals.
A Roth IRA is better suited to savers who expect to be in a higher tax bracket when they retire. This is because of the tax-free withdrawal feature available with the Roth IRA. The best way to be sure about your future tax bracket is to check with your financial advisor.
While most investment companies, banks, and brokerage firms offer a Roth IRA, the plan is not open to all savers, especially those who earn above a certain amount. In 2021, married couples who earn more than $208,000 and individuals with more than $140,000 income can’t contribute to a Roth IRA.
One of the reasons to consider a Roth IRA is the flexibility to withdraw part of your contributions for qualified expenses before retirement.
For example, you can fund college expenses without any penalty. Also, it offers plenty of investment options and you can leave your Roth IRA to your children or heirs, providing them with tax-free income.
3. SEP IRA
SEP IRA (Simplified Employee Pension IRA) is specially designed for self-employed people with up to 10 employees. It works pretty much like a traditional IRA but has a different maximum annual contribution limit.
Participants in this plan can contribute up to $58,000 or 25% of their business earnings, which is higher than traditional IRA. This means you can have potentially bigger savings with compound interest rates.
This is one of the most ideal 401k alternatives for small business owners or self-employed individuals.
It allows a higher contribution limit compared to a traditional IRA, lets you vary the amount you contribute yearly, and offers tax-deferred contribution growth. Plus, there are lots of investment options with the SEP-IRA retirement savings plan.
4. One-Participant 401k
The One-Participant 401k plan goes by a few different names, including Solo 401k, Solo-k, and Uni-k.
The option is a simplified 401k plan and a fantastic savings vehicle for business owners, freelancers, and independent contractors who have no employees other than their spouses.
This savings plan allows you to maximize the total amount you save yearly by saving 100% of your side gig-generated income up to the maximum annual contribution limit. This is particularly applicable if you have enough additional income from your main job.
The Solo-k plan recognizes that business owners wear two hats; employer and employee. For this reason, it allows contribution in both capacities up to a total of $58,000 (for 2021) broken down to $36,500 as the employer and $19,500 as the employee.
The One-Participant 401k offers higher contribution limits than many other retirement plans.
For example, SEP-IRA allows only 25% contributions of your income while Solo-k lets you save up to 100%. It also offers the flexibility of choosing the tax advantage that suits you best between a traditional and Roth plan.
5. Cash-Balance Defined-Benefit Plan
Sometimes, self-employed individuals may find it quite challenging to plan for retirement early on in their working life. Perhaps they were too low on cash or too busy to plan for retirement. If this is you, it is not too late to do something about your financial future.
You can make up for all the lost time using the cash-balance defined-benefit plan. This plan provides you with a percentage of your annual compensation plus interest charges. You can contribute more than $200,000 annually if you are above 60 years.
This is one of the best 401k alternatives for self-employed people with a considerable income in the latter part of their lives.
One of the main benefits of this retirement savings plan is the significantly higher contribution limits, especially compared to traditional 401k. It also offers tax deductions for businesses.
6. Real Estate
Real estate ranks among the most highly desirable assets anyone can have. Unlike other 401k alternatives with penalties for early withdrawals, you can invest in real estate for the short-term if you want cash flow or for the long-term if you are looking for appreciation benefits.
You can choose to sell your property (land or building) for profits or earn rental income to cover your financial needs in retirement.
While real estate has a lot of growth potential, it comes with a considerable amount of risk. For this reason, it is important to carefully consider the nitty-gritty that will help you to make sound purchase decisions.
Real estate provides cash flow that covers your daily living expenses in retirement, especially with rental properties. It also offers tax advantages, including rental property depreciation.
7. Health Savings Account (HSA)
Many people assume that HSA accounts are strictly for healthcare, but the savings account offers way more benefits for those who can stash away money in the account until retirement.
Families can contribute up to $7,200 and individuals can save up to $3,600 toward this plan. Savers who are 55 years or older can contribute an additional $1,000. One of the good things about the HSA plan is that you can set one up on your own if your employer doesn’t offer it.
Interest on your HSA account is tax-free and you will get tax deductions from your contributions. Those who are 65 years and older will benefit from using up to 20% of their funds for non-medical expenses without a penalty. However, withdrawals for non-medical use are taxable income.
You can you the contributions to pay for dependent and spousal medical expenses, and it offers tax-free distributions as long as the money is used for qualified medical expenses. In case of critical medical needs, you can rollover IRAs into HSA.
8. Startup Investments
Investing in startups is another excellent option that is worth considering. Although this is not limited to planning for retirement, it is a powerful investment vehicle that could potentially result in sizable financial gains.
While you don’t need to be super-rich to invest in startups, you need disposable income and a clear insight into the industry that you want to invest your money. Plus, you should know where to find reliable startups. Some of the best places to find promising and vetted startups are Crowdfunding investment platforms.
However, like real estate, investing in a startup carries a considerable amount of risk. First, take your time to research different businesses that might interest you and do your due diligence before investing your hard-earned money into any startup.
Typically, the investment threshold for startups is low. If you choose the right business, it could grow very quickly and potentially yield substantial financial gains when a corporate buyout happens.
9. 403(b) Plan
Also known as a tax-sheltered annuity, a 403(b) plan works just like a 401k. However, it is usually available to certain employees in tax-exempt or nonprofit organizations, public schools, and other government organizations.
In addition to allowing you to contribute pre-tax, some employers also offer matching contributions. These contributions can be invested in mutual funds or annuities. Unlike 401k plans, this alternative is exempt from nondiscrimination testing.
Plus, 403b plans can vest funds immediately or over a shorter period compared to 401k plans.
Contributions are made using pre-tax dollars. Also, your contributions grow tax-free until they are distributed from the plan.
10. Taxable Brokerage Account
A taxable brokerage account doesn’t provide employer match benefits, but it might be the ideal 401k alternative for you if the other retirement savings options on this list don’t apply to you.
With this option, you can choose your preferred broker and also pick your investment vehicle. This allows you to look for low-cost brokers that suit your financial situation instead of relying on one provided by your employer.
Besides not having a limit on how much you can contribute, this type of account has no penalty for early withdrawals. Also, you can access relatively low-cost options, especially when compared to 401k plans. Setting up is a breeze and you can have multiple accounts.
An employer-sponsored 401k retirement plan is great and works for many people, but it doesn’t suit everyone and it’s definitely not the only retirement savings and investment option available. Depending on your financial situation, it may be necessary to evaluate other 401k alternatives.
The Solo 401k plan is a great option for freelancers, and the different IRAs are best suited to savers who don’t have access to employer matching plans.
Regardless of the plan that works for you, it is usually a good idea to periodically review your option with a financial advisor who can help you to smash your retirement goals.
John E Chambers is an experienced financial advice expert. Born in Chicago, he has a master's in Industrial Finance, but he has spent decades offering investment advice to businesses and individuals alike. He is the founder of RetireeWorkforce.com and wants the website to be valuable for retirement advice. In addition, he writes articles that help users jump-start their retirement plans and choose the best investment options. If not pondering over stock market statistics or reading some magazines, you can find John spending time with his family. As an early retiree, John also offers unique insights into what post-retirement life is like.