401k Alternatives: An Overview of 9 Different Options

401k alternatives

The 401k is often heralded as an ideal retirement option. Generally, it comes with an employer match (aka "free" money), contributions lower your current tax burden, and you don't have to actively manage it. But there are many 401k alternatives when it comes to investing for retirement. Some of which may be a better fit or the perfect supplement. In this article, we cover 9 of them and the key things you should know about each.

9 Key 401k alternatives to consider

1. Traditional IRAs

IRAs (aka individual retirement accounts) are one of the most popular options for retirement investing. They are also the most popular of the alternatives to 401k. This is mostly because of their flexibility and tax benefits.

In a Traditional IRA, your money grows "tax-free." This means all the gains aren't taxed until you actually pull out your money once you're retired. Plus, anything you contribute now may actually lower your taxable income. This means you'll save on taxes while you're young and working. People like this if they're in a high tax bracket now and think they'll be in a lower tax bracket when they retire. However, if you're building wealth steadily, that plan might not pan out. Regardless, at least this method saves you some money in taxes now.

While you get to choose where your money is invested there are some limits to how much you can contribute each year. And once you do reach retirement age, there are some required minimum distributions (RMDs). Basically, the government forces you to withdraw money from your account even if you don't want or need it.

2. Roth IRAs

A Roth IRA is next up on the list of popular 401k alternatives. With a Roth IRA, your money still grows tax-free, but it's also tax-free when you withdraw it at retirement. To get this winning combo, you have to pay full tax on your income before you're able to make any contributions. So, you get tax savings years from now in exchange for no tax breaks today.

You might also be able to tap into your Roth before retirement (without penalties) for special exceptions. For instance for college expenses and buying your first home. In terms of building generational wealth, your account balance can be passed to your heirs. That said, like the Traditional IRA, you'll have annual contribution maximums and RMDs.

3. SEP IRAs

As one of the options for the self-employed, you might benefit from a Simplified Employee Pension (SEP) IRA. Whether you're a business owner or have income from a side hustle, that money qualifies you for a SEP. SEP IRAs follow the same rules as a Traditional IRA, but the annual contribution limits are way higher. That means (potentially) bigger savings for retirement as all your growth compounds. However, you're capped at 25 percent of business earnings. This means if that amount equals less than the dollar limit, you're actually held to a lower limit than other IRAs.

If you have employees other than yourself, it's important to note that all your employees have to receive the same contribution. As a result this could get very costly very quickly if you're aiming to max out your personal contributions.

4. Taxable brokerage accounts as 401k alternatives

Your retirement investments don't have to depend solely on a formal retirement fund. Other options may not offer the same tax benefits as IRAs or 401ks. They however also don't limit you by age, which gives you more flexibility to use your money how you see fit. There are often fewer (or no) contribution limits. So if you find yourself with a surplus of income, you can invest heavily in your future.

If you go with a standard taxable brokerage account, this is a great, highly flexible way to hit your retirement investment goals. Note that it doesn't come with any tax benefits. In fact, you'll be taxed on all your capital gains when you make withdrawals. This is basically the profits your investments earn.

5. Health savings account (HSA)

The intended use of a health savings account (HSA) is for people with high-deductible health insurance plans to have an alternative way to save for medical costs. However, HSAs have a retirement benefit. They offer a tax deduction today, and any growth inside the account (whether from interest or market earnings) is tax-free. After retirement age, the money in your HSA can be used penalty-free for anything, not just medical costs.

Be warned: If you end up needing to use your HSA funds to pay for medical bills pre-retirement, it may reduce the amount you'll have available as retirement income.

6. Real estate as a 401k alternative

Real estate is one of the most coveted assets people can own. It doesn't come without risks, but real estate offers owners plenty of growth potential, either by selling the land or building for profit or as rental income. Both are viable ways to supplement your financial needs in retirement.

7. Startup investments

Investing in startup businesses isn't just for venture capitalist firms and the ultra-wealthy. If you find yourself with the right mix of connections, industry insight, and disposable income, this might be a good option for you. You can invest in the company outright, or use crowdfunding platforms such as Republic or WeFunder. These sites give novices a head start because they're pre-vetted to an extent. They also allow you to invest in much smaller amounts than typical angel investors.

It's important to do plenty of research and due diligence before investing in a business. Also, understand that any startup investment is super high risk-but the reward can also be sizable.

8. 403(b) plans

While the 401k is the gold standard of employer offerings, your job might give you access to a different type of retirement account. If you work for a nonprofit or other tax-exempt organization, they may offer you a 403(b) plan. This plan allows you to contribute pre-tax, sometimes with an employer match, making it work very similarly to a 401(k).

9. 457(b) plans

The government offers notoriously good benefits packages. One retirement benefit for federal employees is the Thrift Savings Plan (TSP), while state and local government workers can access a 457(b) plan. These aren't too different from a tax-deferred 401k, but these plans might come with lower fees than a 401k.

Seeking out 401k alternatives

You may want to invest in alternatives to a 401k because of annual limits, tax reasons, or your investing goals. Regardless, aim for automatic deposits whenever possible. That way, you don't have to think about it and you won't convince yourself of a more immediate purchase instead of investing in your future.

If you don't feel confident making these big decisions alone, seek out a financial advisor you trust. They can help you open the best accounts for yourself and offer advice on the amounts that make sense for your current and future goals. Plus, they stay up to date with any legal changes and limits so that you don't have to. You'll thank yourself years from now!

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