401(k) Alternatives To Save for Your Retirement

A 401(k) savings account is one of the most popular retirement options for Americans. In 2023, 68% of private industry workers have access to employer-provided retirement plans, which often offer contribution matching to maximize your investment.

The 32% of workers not receiving employer retirement benefits and those who are self-employed should consider 401(k) alternatives as their primary savings strategy.

Of course, 401(k)s have limitations on how much you can contribute and may require fees and early withdrawal penalties. So, even if you’re investing in a 401(k), it’s worth exploring other opportunities.

Common 401(k) Alternatives:

• Traditional and Roth IRAs each have tax advantages and good investment options, but low contribution limits at $7,000 (or $8,000 if you’re 50 or older) annually, as of 2024.
• Investment brokerage accounts allow you to totally control your investments, though they don’t offer an upfront tax deduction.
• Real estate and business investments may offer big payouts if you can navigate the risk.
• Annuities provide protection against outliving your retirement savings with a fixed monthly income stream.

Which Retirement Savings Account Is Right For You?

Not everyone has access to a 401(k) retirement savings plan, especially solopreneurs and small business employees. Not to worry. There are many other avenues to build wealth as a substitute for, or in addition to, a 401(k). In fact, the more sources of retirement income you have, the more comfortable your future lifestyle is likely to be.

Barbara O’Neill, Ph.D., CFP®, AFC®, CRPC®Owner and CEO of Money Talk

With an extensive 41-year tenure at Rutgers University, Barbara O’Neill has established herself as a highly knowledgeable personal finance expert. As a Certified Financial Planner™ and Accredited Financial Counselor™ professional, she possesses a wealth of expertise in the field. She currently serves as the owner and CEO of Money Talk, where she actively engages in writing, speaking and reviewing personal finance content. In 2020, she notably authored the book Flipping a Switch, delving into various aspects of personal finance.

Traditional IRA

Traditional individual retirement accounts (IRAs) offer more flexibility and tax benefits than 401(k) accounts, making them one of the most popular 401(k) alternatives. Individuals can contribute up to $7,000 a year and defer tax payments until the money is withdrawn in retirement.

IRAs offer a variety of investment opportunities, including stocks, mutual funds, exchange-traded funds (ETFs), real estate and even cryptocurrency. You can have a traditional IRA in addition to your 401(k) and other retirement accounts.

Benefits

• Diverse investment opportunities
• Tax-deferred growth
• Tax break on contributions (below certain income limits)

Considerations

• Low contribution limit
• Deferred taxes may be higher at retirement if income increases significantly

Annual contribution limit: $7,000 (2024)

IRA Tax Advantages

Traditional IRA

• Enjoy tax breaks on your contributions now
• Pay taxes when you withdraw based on retirement income

Roth IRA

• Choose a tax break now to pay income tax at withdrawal
• Pay your taxes now and withdraw without fees in retirement

Roth IRA

Roth IRAs are similar to traditional IRAs with a few key benefits. With a Roth IRA, individuals can choose to forgo their tax break on contributions in exchange for withdrawing their money tax-free at retirement if they are at least age 59 ½ and have held an account for at least five years.

If you’re expecting your income to steadily increase throughout your working years, this is a good opportunity to save on future taxes. If you’re currently a high earner and expect to make less by retirement, then taking the tax break now could be a better option.

Roth IRAs also allow you to include your account in your inheritance so you can build generational wealth for heirs because there are no required minimum distributions. Although investment brokerage accounts provide control over your investments, it’s important to note that they come with an annual contribution limit of $7,000, preventing substantial investment accumulations.

Benefits

• Exceptions for early withdrawal
• Tax-deferred growth
• Tax-free withdrawal of earnings after five years if you are age 59 ½ or above 

Considerations

• Low contribution limit
• Taxes today may be higher if tax rates change or income in retirement is lower

Annual contribution limit: $7,000 ($8,000 if age 50 or older) in 2024

SEP IRA

SEP IRAs cater to the self-employed, with SEP standing for “simplified employee pension.” You’re eligible to open a SEP IRA if you receive freelance income of any kind, even if you’re currently employed somewhere else.

With SEP IRAs, you have the opportunity to contribute significantly more compared to other types of IRAs. Instead of a fixed dollar amount, your contribution is limited to 25% of your business earnings, up to $69,000. If this exceeds $7,000 per year, you can contribute more to a SEP than you would be allowed to with a regular Traditional or Roth IRA, thereby capitalizing on the compound interest of a significant sum of money.

SEP IRAs provide the same contribution to all employees of an individual business. If you have other employees working for you, consider contributions to employee SEP IRAs in your budget.

Benefits

• Potential for larger annual contributions
• Tax-deferred growth
• Diverse investment opportunities

Considerations

• A business owner is responsible for all employee contributions
• Contribution limit dependent on annual earnings

Annual contribution limit: 25% of business earnings up to $69,000

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Cash Balance Defined Benefit Plan

A cash balance pension plan is an opportunity for large employers or certain self-employed individuals to catch up on retirement savings. Participants can contribute a defined percentage of their annual earnings, along with interest. Additionally, contribution limits tend to increase with age. However, these plans can be complex to set up due to administrative and actuarial requirements that dictate the contribution and reporting.  

Otherwise, these investments work similarly to 401(k)s and may be a good addition to your retirement portfolio, if they are available to you. Many large employers offer a pension benefit in addition to a 401(k) for executive or highly compensated employees. For business owners creating a plan for themselves, they can choose a fixed or variable annual interest rate in the form of a credit. Participants have the option of withdrawing their money as an annuity or a lump sum at retirement.

Benefits

• Increased contribution limits with age
• Opportunity to turn account balance into an annuity
• Professionally managed investments
• Benefits are ensured by a government agency, the Pension Benefit Guaranty Corporation; Guarantees are limited by law

Considerations

• Complex and expensive to administer
• Returns are relatively conservative and best with large investments
• Participants can’t choose how their money is invested

Annual contribution limit: Varies by age and income

Investment Brokerage Accounts

Few accounts are as flexible as a brokerage account, which gives you freedom to invest in and withdraw from a variety of investments. There are no age restrictions or limits on the amount you can save, and you can shop for the opportunity with the highest yield for your investment.

The downside of opting out of formal retirement accounts is that you lose the tax benefits they can provide. You’ll be taxed annually for any profit on your investments in brokerage accounts and again when you make withdrawals from these accounts.

While you have the responsibility of managing your account, consulting with a financial advisor is an option to optimize your investments. However, it’s essential to be aware of the additional risks associated with self-management, and it’s worth noting that brokerage accounts don’t guarantee a payout.

Benefits

• No contribution limit
• No withdrawal restrictions

Considerations

• No tax benefits
• Individual is responsible for management

Annual contribution limit: None

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Business Investment

Individuals with business savvy and disposable income can invest in a startup business in exchange for partial ownership or profit shares. There’s no guarantee that a business investment will succeed. However, success in a business investment is not guaranteed, so this option comes with risk. Do your due diligence to study the business, industry and market before investing.

Making direct business investments, especially to young or unestablished businesses, requires significant experience to get it right.  If you are new to starting or investing in businesses, consider working with an experienced partner or spending time learning how to run a business before putting your cash to work. 

Individuals with less disposable income may be interested in sites like Wefunder and SeedInvest. These platforms vet businesses to mitigate risk, although it’s important to note that no investment is entirely risk-free. They function as crowdfunding platforms, allowing you to invest with a lower dollar amount.

Benefits

• Potential for significant profits

Considerations

• Higher risk than investment accounts
• Requires significant sums of disposable income

Annual contribution limit: None

Health Savings Account (HSA)

Health savings accounts are designed to help individuals with high-deductible insurance plans cover health care costs, but there are additional investment benefits. Individuals can contribute $4,150 to a solo plan, or $8,300 to a family plan in 2024. Employers may also contribute.

HSAs are one of the best savings vehicles available, offering triple tax savings: contributions are tax-deductible, earnings on HSA contributions are tax-free and your withdrawals for qualified medical expenses remain tax-free. You can also withdraw money for nonmedical use, but it will incur a 20% penalty on top of that money being considered taxable income.

Once you hit retirement age at 65, you can withdraw the money tax-free and without penalty to use as you’d like. There are no minimum contribution limits, so it’s a highly flexible account with significant tax benefits.

Benefits

• Tax deductible contributions
• Tax-free earnings
• Tax-free withdrawals on qualified medical expenses
• Employer contribution opportunities

Considerations

• Low contribution limits
• Withdrawals include a 20% penalty prior to age 65 for nonmedical expenses

Annual contribution limit: $4,150 for individuals; $8,300 for families

Annuities

Buying annuities allows you to make a lump sum contribution, or a series of contributions, to become a future income stream. There are several types of annuities available based on your investment needs.

Deferred annuities are often used for retirement planning to protect retirees if they outlive their savings. The annuity begins paying participants at an age of their choosing.

On the other hand, immediate annuities begin paying as soon as a lump sum investment is made. These are beneficial for individuals with sudden wealth, like lottery winners.

Investors can also choose between fixed and variable annuities. Fixed annuities have a set payment amount on a given schedule, while variable annuities may fluctuate depending on the investment’s success.

Benefits

• Tax-deferred growth
• Stable retirement income
• Longevity protection against outliving savings

Considerations

• Surrender period prevents free withdrawals for a set period of time

• Income rider sets a fixed income during the annuity’s payout

Annual contribution limit: None

Real Estate

Property investments are a popular choice for a variety of savings goals, but they come with risk. Anyone who owns property has the opportunity to sell the real estate for a profit.

Owners can choose to sell a home they’ve owned and built equity in, or purchase and sell a property they’ve improved. Owners can also choose to maintain and rent the property for additional income, while also building equity to sell at a later date.

Benefits

• Tax advantages on rental property
• Rental income cash flow
• Equity growth improves wealth

Considerations

• Market fluctuations or property’s area can create risk
• Owner is responsible for home’s maintenance, brokerage costs and potential legal fees

Annual contribution limit: None

Is a 401(k) Worth It Anymore?

A 401(k) account provided by an employer is a convenient retirement package for many Americans. The option for employers to match contributions and the professionally managed portfolio help make it a popular option.

However, 401(k) accounts aren’t without their drawbacks. There aren’t as many investment opportunities available as with other retirement plans. There are also fees and restrictions on when participants can access their funds.

If your employer offers 401(k) matching as a benefit, it’s worth taking advantage of those contributions at least up to the amount that will earn the maximum employer match. It’s also wise to explore other retirement options that can better serve your savings goals with increased investment opportunities, higher returns and unlimited contributions.

Is a Roth IRA Better Than a 401(k)?

Each account has its advantages, and ideally, you’re able to invest in multiple accounts, including a Roth IRA and a 401(k).

Roth IRAs have fewer fees than 401(k)s while offering more investment opportunities and increased access to your funds. Both accounts are tax-deferred, but you have the opportunity to make tax-free withdrawals in retirement and there is no requirement for mandatory distributions with a Roth IRA. 

A 401(k) account that includes employer-matching contributions can be a significant benefit to your savings goals. You’re able to collect free money and 401(k) accounts have higher contribution limits than IRAs. Taxes are deferred and you can enjoy tax breaks for your contributions, but 401(k) plans tend to have more fees than a Roth IRA account.  

In recent years, many large employers have begun offering Roth 401(k) options as a retirement benefit alongside the traditional 401(k) contribution options.  This provides tax-free withdrawals in retirement like a Roth IRA, but still allows the typical 401(k) contribution limits and convenience of salary deferrals. Connect with your benefits department or HR to find out if this is an option available to you.  

A 401(k) account is accessible and comes with great employer-sponsored benefits if you work a traditional nine-to-five. Freelancers, business owners and anyone looking to maximize their retirement planning can benefit from 401(k) alternatives. IRAs, individual investment accounts and even real estate can allow you to invest more money for greater returns and flexibility.