Top Alternatives To A 401(k)

Those looking to save for their retirement may not have access to every retirement plan on the market.


The popular 401(k) employee-sponsored plans are not available to self-employed participants and are not always offered by an employer. Even when they are offered, the specifics of each plan can differ between companies. Some employers may provide a 401(k) plan with immediate vesting and detailed control over its investment, while others offer simple mutual funds and vesting requirements. If you are dissatisfied with the 401(k) plan your company offers, or simply looking for a plan that offers similar benefits, there are a few competitive alternatives to consider.

Individual Retirement Accounts

Individual retirement accounts (IRAs) are a popular option for those who are attracted to the tax-free benefits offered by a 401(k) plan. Both self-employed individuals and those who are employed by a company can operate IRAs. An IRA operates in a similar way to a 401(k) plan. Participants contribute a portion of their paycheck to an investment fund and then withdraw the balance when they retire. These contributions are made before tax and can be used as a deduction on an employee’s income.

Roth IRAs are available for those wanting to contribute taxed portions of their paycheck to an investment fund. These contributions are tax-free when withdrawn during retirement. Employees who are already enrolled in a 401(k) plan can use both a traditional IRA and a Roth IRA.

While they do not offer the same benefits of a 401(k), IRAs do offer a greater variety in investments. The annual contribution limit that an individual can pay into his or her IRA is $5,500, as of 2018. This might appear considerably lower than that of a 401(k), which typically allows up to $55,000 of total contributions per year. However, IRA investments can be made over vast cross sections of the market, including specific stocks and bonds. 401(k) plans are generally not as flexible, offering only a small list of mutual funds for its participants to choose from. IRAs are restricted from investing in only a few areas, such as life insurance and collectibles. Aside from these items, the list of eligible investments is markedly longer than that of a 401(k). Fees under an IRA plan are considered lower than that of a 401(k), but these may vary depending on the investments you choose and the IRA plan you are enrolled in.

Investment Accounts

Unlike the pensions of the past, employees are gaining more access to their retirement investment accounts, and thus, more control. Standard investment accounts, or brokerage accounts, are fairly similar to 401(k) plans in how they operate. An individual invests in a variety of stocks, bonds or mutual funds over a long period of time, and then withdraws the balance when they retire. While you do not have the added bonus of an employee’s contribution, you can enjoy almost limitless investment opportunities. Even an IRA has some restrictions on investment possibilities, whereas a standard investment account grants you wider access to the stock market.

Another benefit of going it alone is the absence of contribution limits. You can contribute as much of your paycheck as you would like to a personal investment account. Of course, there are risks to this type of retirement strategy. You cannot contribute tax-free portions of your paycheck, which means all contributions are taxed at normal rates. With this being said, the tax benefits when you retire might be worth it. If you invest for the long-term, those profits will be subject to long-term capital gains tax when you make a withdrawal. In some cases, long-term capital gains tax rates can be lower than other tax rates, such as income tax, helping you get the most out of your retirement.

It is important to note that the Employee Retirement Income Security Act (ERISA) protects those enrolled in a qualified retirement plan. Investment accounts are not protected by ERISA as they are not primarily used for retirement. If you choose to use an investment account for your retirement you are fully responsible for the fund’s operation. Be mindful of these responsibilities and make sure you are fully aware of the risks before opening an account.


Health Savings Account

A health savings account might not be the most obvious choice when considering an alternative to a 401(k) plan, but they can offer similar investment benefits. A health savings account is typically used for medical expenses and can be obtained through your insurance provider. In this plan, the participant makes pre-tax contributions into the account, which can then be invested in larger mutual funds that help grow it in value. Unlike a 401(k) plan, the contributions made to a heath savings account are not subject to Social Security or Medicare taxes. Those enrolled in a 401(k) plan may enjoy the benefits of deferring their federal and state taxes, but Social Security and Medicare are still subtracted. Participants enrolled in a health savings account experience the opposite.

In 2018, you can contribute up to $3,450 per year into your health savings account. You must stop all contributions over the age of 65 if you are enrolled in Medicare. Although these accounts are primarily used for health expenses, you can access your funds after the age of 65 for non-medical related expenses. If used for non-medical purposes, income tax rates will apply to the balance withdrawn. This is not too dissimilar to a standard 401(k) account, which takes pre-taxed money during your employment and then subjects these funds to income tax when they are released for retirement.

Unlike some other retirement plans, the funds in a health savings account can be accesses at any time for medical related expenses. There are some restrictions on who can open a health savings account based on his or her health insurance plan. Those with a High Deductible Health Plan (HDHP) can be eligible to open a health savings account, although the availability of the savings account depends on the provider. However, even if your HDHP does not come with an HAS, you may be able to open this account through your bank or another financial institution.


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