Six Best 401(k) Alternatives: Save For Retirement Without a 401(k)

A 401(k) is a popular retirement savings plan that allows you to set aside a portion of your salary, often with matched contributions from your employer, for long-term investment and tax-deferred growth.

However, not everyone can take advantage of a 401(k), like those who are self-employed. Some individuals may also want to diversify their retirement investments beyond their 401(k) plan.

Fortunately, there are plenty of alternatives that can help you build a nest egg for your golden years without a 401(k). Below, we’ve listed some of these options to help you save for retirement without a 401(k).

Key Takeaways

• Not everyone has access to a 401(k), making alternatives important for retirement planning
• Diversifying your retirement portfolio goes beyond just a 401(k) by exploring various investment options
• Alternative retirement savings options can provide flexibility and tailored solutions for individual financial goals

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Considerations When Choosing A Non-401(k)

When presented with a 401(k) through your employer, the choice to opt-in is fairly simple. Making sure you’re contributing enough to receive your full-employer match is straightforward.

But in the absence of an employer plan, you should take these factors into consideration:

• Investing Goals: Do you have non-retirement goals (such as a downpayment for a house) that should take priority?
• Sources of Income: If you have self-employment income, you have many more options than if your income is all from W-2.
• Contribution Goals: How much do you want to sock away for retirement?
• Access to Funds: Do you think you might need to access some of your retirement funds prior to retirement?
• Tax rates: What are your current and expected future tax rates? This will help you choose between pre-tax and post-tax options.

Now that we have these considerations in mind, let’s look at the alternatives to a 401(k).

1. Traditional IRA

Traditional IRAs are individual retirement accounts that, similar to traditional 401(k)s, allow you to contribute pre-tax money to a lot of different types of investments. The difference is that these accounts are not employer-sponsored and individuals can establish an account at any time.

With these accounts, you can invest in a self-directed manner – meaning that an investor has many investment options including whatever stocks, bonds, mutual funds, and ETFs they are interested in.

IRA investors are not limited to the defined set of investment options available to them through an employer-sponsored plan such as a 401(k).  Note that there are self-directed IRAs that allow alternative investments such as real estate, partnership interest, or precious metals.

With a traditional IRA (as opposed to a Roth IRA discussed below), investments are contributed on a pre-tax basis and the money grows tax deferred until it is withdrawn in retirement, where withdrawals are taxed as ordinary income.

Compared with a 401(k), IRAs are quite limited in terms of the total dollars that can be contributed to them on an annual basis. For example, as of 2023, investors can contribute a maximum of $6,500 per year to their traditional IRA accounts or $7,500 if the investor is over 50. However, the tax deductibility of your contributions will be determined by whether or not you or your spouse is covered by a workplace retirement plan and your income.

Ultimately, the decision on using a traditional IRA vs a Roth IRA (discussed later) is similar to the decision on whether to use a traditional or a Roth 401(k) – the reality of your current tax bracket and your expectations about your future tax bracket at retirement should drive your decision.

If you expect to be in a higher tax bracket in retirement than you are currently, you should consider investing in a Roth IRA. However, if the opposite is true (you expect to be in a lower tax bracket during retirement than you are currently in), then you should consider investing in a traditional IRA.

You can open traditional IRAs at most banks, brokerages, or online platforms, and you can choose from a wide range of investment options. Many investors also utilize IRAs to roll over 401(k) balances when they leave their jobs or retire. Rolling over is effectively used as a method of moving your 401(k) balances into an IRA which can give more flexibility and lower fees. If you are interested in learning more about these types of accounts, check out our previous article on the subject here.

2. Roth IRA

A Roth IRA is another type of individual retirement account that allows investors to similarly contribute to investment on a self-directed basis (meaning that they have more investment options). In this case, the deposits are not tax-deductible; however, the money grows tax-free and is therefore not subject to taxation upon withdrawal. In this way, a Roth IRA is comparable to a Roth 401(k).

As with a traditional IRA, there are limits to the amount of money that an investor can contribute to a Roth IRA per year – contributions are allowed of up to $6,500 per year or $7,500 if the individual is 50 or older, which is significantly less than the 401(k) contributions limits. Then, contributions may be limited or phased out depending on income level.

Assuming you are eligible to contribute to a Roth IRA, the decision to invest in a Roth IRA as opposed to perhaps a traditional IRA depends on the investor’s expectations regarding current vs future tax brackets. For example, if an investor expects to retire in a higher tax bracket in the future than the one that they are in now, they will want to utilize a Roth IRA as opposed to a traditional IRA.

Traditional IRAs require minimum distributions (RMDs) that start at age 72. Roth IRAs have no such required distributions. If you already have assets in a traditional IRA, one option to consider is utilizing a Roth conversion. With a Roth conversion, an investor pays immediate taxes on all of the assets in a converted account to avoid paying future taxes.

3. Health Savings Account (HSA)

Another great option for saving for retirement is a health savings account (HSA). While not a retirement account in the traditional sense of the word, an HSA is a powerful tax-advantaged savings account.

These accounts allow you to contribute pre-tax money to pay for qualified medical expenses, such as doctor visits, prescriptions, dental care, and vision care.

To open an HSA, you must have a qualifying medical plan. For 2023, this means that your plan must have a deductible of at least $1,500 (or $3,000 for a family) along with an out-of-pocket maximum of less than $7,500 (or $15,000 for a family).

An HSA account is often described as triple tax-free since your contributions are pre-tax (although taxable in some states, such as California), the contributions grow tax-free as long as they are in the account, and you can withdraw funds from the account tax-free at any time for eligible medical expenses.

Essentially, it acts like a supercharged IRA for healthcare costs. Money is tax-deductible like a traditional IRA on the way in, and it’s tax-free like a Roth IRA on the way out (as long as you pay for eligible healthcare expenses).

Most Health Savings Accounts do have a minimum balance that must be in cash, but it’s usually in the range of $1,000 to $2,000, or less than a year’s worth of contributions.

The rest can be invested much like a 401(k). Just like a 401(k), your investment options may be limited to a selection of mutual funds representing a wide variety of asset classes, and target date funds are often an option. You may have the option to choose your own stocks via a brokerage account option within the HSA.

There are also limits to the amounts that can be deposited in such HSA accounts. Specifically, you can contribute up to $3,850 as an individual ($7,750 as a family) in 2023, and an additional $1,000 per year if you are 55 or older.

You can withdraw money from your HSA at any time, however, you will pay income taxes and penalties if you do not use the funds for eligible medical expenses prior to age 65. You can withdraw money from an HSA account for non-qualifying expenses at age 65 and after (or if you become permanently disabled), but the withdrawals will be taxed just like a withdrawal from a traditional, tax-deferred IRA or 401(k) when not used to pay for healthcare.

If you go this route, the money will be double-tax advantaged like a 401(k) since you made tax-deductible contributions and benefit from tax-free growth, but not triple-tax advantaged as an HSA will be when used to pay for eligible expenses.

HSAs are great options either (1) you have high medical expenses now or (2) you want to save for future healthcare costs in retirement. You can get an HSA account at most banks, brokerages, or online platforms, and choose from a variety of investment options. You can also rollover your balance to another HSA if you change health plans or employers.

4. Solo 401(k)

If you do not have access to an employer 401(k) plan because you are self-employed, you can establish your own Solo 401(k).

Solo 401(k)s are great options for self-employed individuals or solo entrepreneurs with no employees other than themselves or their spouses. With these types of plans, the business owner can contribute both as an employee and employer, up to a combined limit of $66,000 in 2023 or $73,500 if 50 or older – quite a large balance in total.

As with standard 401(k), you can choose between a traditional or a Roth version of the solo 401(k), depending on your tax preferences. The money grows tax-deferred or tax-free until you withdraw it in retirement, when it is taxed as ordinary income (with a traditional) or tax-free (with a Roth).

A Solo 401(k) is a great option for self-employed individuals. The contribution limits are astounding in total compared to other retirement accounts. You can open solo 401(k) at most banks, brokerages, or online platforms and use a wide range of investment options. Similar to ordinary 401(k)s, you can also roll over a solo 401(k) balance into IRAs in order to avoid paying unnecessary fees on their balances.

Related Read: Should You Invest in a SEP IRA or Solo 401(k)? Everything You Need to Know

5. SEP IRA

Simplified Employee Pension IRAs (SEP IRAs) are designed for small-business owners with few or no employees and self-employed individuals. There is no limit on the number of employees you can have.

SEP IRAs allow you to contribute as an employer on behalf of yourself and your employees. With a SEP, an employer can contribute up to 25% of his self-employment income up to $66,000 per year. In the case of a traditional SEP, contributions are made on a tax-deductible basis and the money grows tax deferred until it is withdrawn in retirement, in which case, withdraws are taxed in full as ordinary income.

Any small business is eligible to create a SEP IRA.

SEP IRA must apply consistent eligibility standards to employees. Each company can adjust employee eligibility requirements to fit their needs. Some standard employee eligibility requirements are listed below.

• The employee must be at least 21 years of age
• The employee must have worked with the business for three of the past five years
• Part-time employees can qualify if they have worked for the company for any time (even a few months) in three of the last five years
• Earn at least $750 in 2023

One downside of SEP IRAs compared to 401(k) is that, there are no matching or profit-sharing contributions like other common retirement plans for employees. For SEP IRA accounts, the employer has full control over all contributions. For business owners, the drawback is that employees are fully-vested in all contributions immediately. 

Unlike 401(k) accounts there are also no catch-up contributions for SEP IRAs. While 401(k) accounts offer catch-up contributions for people above 50, SEP IRAs don’t offer any increased maximum contribution amounts based on your age. This is primarily because employers make contributions, and SEP IRA accounts aim to ensure that all requirements and contributions are equal for all employees.  

Finally, while many 401(k) accounts offer participant loans on the account’s value, but SEP IRA accounts don’t allow loans.

6. SIMPLE IRA

SIMPLE IRAs are retirement plans for employees that allow business owners to contribute both as an employer and to employee accounts as well. They are only available to businesses with 100 or fewer employees.

As of 2023, employee contributions are limited to $15,500 per year, or $19,000 if the employee is over the age of 50. Employers must match contributions for 3% of employee compensation or make non-elective contributions of 2% for all eligible employees, regardless of whether or not the employee contributes. For SIMPLE IRAs, money is typically deposited in a tax-deductible fashion, grows tax-deferred, and then is withdrawn fully subject to ordinary income tax.

Should You Have More Than One Retirement Account?

If you have multiple employers that offer matches, you should maximize your employer contributions. Note that it will be your responsibility to ensure that you’re not exceeding your contribution limits. Any over contributions are required to be withdrawn before tax day of the following year to avoid penalties.

In the absence of employer plans, you should consider your current and future financial projections when determining how much you should put in your retirement account versus other investment options.

Having a mix of pre- and post-tax retirement savings will give you maximum flexibility when it comes to funding your retirement and minimizing the tax implications.

Conclusion

401(k)s are undeniably a great option for employees who have access to them. However, many self-employed individuals and employees of small businesses may simply not have access.

For these individuals, thankfully there are many excellent alternatives such as IRAs, SEP IRAs, solo 401(k)s, SIMPLE IRAs and HSAs all of which have unique benefits and drawbacks in terms of contribution limits, access to different investment types, and tax deferral and/or tax-free withdrawals.

Whichever method you choose, savings early, often, a lot, and in a disciplined manner are going to probably be the most important factors in an individual’s ability to meet his retirement goals.

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FAQs

Q: What are the benefits of saving for retirement without a 401(k) plan?

A: Individuals considering saving for retirement without a 401(k) plan are generally offered more investment options and more control over their investments. As well, fees in standard brokerage accounts are generally less than those within 401(k) plans. However, unless done so in another tax-advantaged manner such as the plans referenced above, choosing to invest outside of your 401(k) will generally come with tax disadvantages.

Q: How do I choose the best alternative to a 401(k) plan for me?

A: The best alternative to a 401(k) plan is often going to be the one that is available to you at the time. For example, If the only form of retirement plan that you have access to at the present is an IRA, then this will likely be your best option. However, other variables will also come into play including income, tax situation, employment status, age, and retirement goals. You should speak with a financial planner to determine what is right for you.