Not everyone has the option of using a 401(k) plan to save for retirement, because many employers don’t offer these plans for their workers. Fortunately, there are several other options.
According to the U.S. Census Bureau, only 34.6% of working-age Americans had a 401(k) or equivalent employer-sponsored retirement account in 2020.So if your employer doesn’t provide a 401(k) or you’re self-employed, you’re not alone—but you do need to find another way to save for retirement.
The good news is: If you’re one of the many people in this country who doesn’t have access to a 401(k) plan, you can still squirrel away money for your golden years.
In fact, even if you have a 401(k) account, you still might want to use something else to increase your annual contribution limits, improve your investing flexibility, or earn more tax benefits. That’s why some people have a 401(k) account as well as other retirement savings—to maximize their tax advantages and the amount of money they’ll have when they retire.
So, if you don’t have access to a 401(k) plan, or you’re looking for ways to supplement your 401(k) savings, the alternatives to 401(k) plans listed below can help you reach your retirement savings goals. If you see any options you like, work with your financial advisor to come up with an overall retirement plan that works for you.
Related: Do You Qualify For the Retirement Saver’s Tax Credit?
What Is a 401(k) Plan?
A 401(k) plan is a tax-advantaged account offered by businesses to help eligible employees save money for retirement. Employees who choose to participate in the plan can contribute to their personal 401(k) account, up to the annual contribution limit.
For 2023, the annual limit for most people is $22,500. However, if you’re at least 50 years old, you can contribute an additional $7,500 in “catch-up” contributions, for a total of $30,000.
Investment options for 401(k) funds are typically limited. You’ll usually have a list of mutual funds (including target-date funds), and on rare occasions, a few exchange-traded funds (ETFs) to choose from. But don’t expect to invest in individual stocks, bonds, precious metals, and the like with a 401(k) plan.
There are two types of 401(k) plans: traditional 401(k) plans and Roth 401(k) plans. The main difference between the two is when you pay taxes on the money in the account.
YATI Tip: Many 401(k) plans include an employer match up to a predetermined percentage or dollar amount. It’s always worth contributing to a 401(k) up to the matching amount, since the match is effectively “free money.”
Traditional 401(k) Plans
With traditional 401(k) plans, contributions to your account aren’t included in taxable income (thanks to a tax deduction). Money in the account grows tax-free, but tax is eventually paid when you withdraw funds from the account.
In addition to any income tax due, money taken out of a traditional 401(k) before you turn 59½ years old is generally subject to a 10% early withdrawal penalty (although there are exceptions). Once you turn 59½, there’s no penalty, but distributions are still subject to income tax.
When you turn 73, you must begin taking a certain amount of money out of a traditional 401(k) each year. These withdrawals are called required minimum distributions (RMDs). Beginning in 2033, RMDs won’t be mandated until you turn 75.
Roth 401(k) Plans
There’s no tax deduction for contributions to a Roth 401(k) account, so you pay tax on the amount contributed in the year the contribution is made. However, once that money is in your Roth 401(k), it grows tax-free, and you don’t pay any tax when you withdraw the funds in retirement.
With a Roth 401(k), you can withdraw your contributions at any time without having to pay tax or the 10% early withdrawal penalty. However, income tax and the 10% penalty generally apply to earnings taken out of the account if you aren’t 59½ years old or the account isn’t at least five years old.
Currently, RMDs from a Roth 401(k) account are generally required when you turn 73 years old. However, starting in 2024, RMDs will no longer be required from Roth 401(k) accounts.
Related: Can I Retire at 60 with $500K? [YES! See Examples of How]
Alternatives To 401(k) Plans
Our list of the best alternatives to 401(k) plans can be divided into two groups.
The first group includes tax-advantaged investment accounts. With these alternatives, there are tax breaks when money is contributed to the account and/or when the money is withdrawn in retirement. In the meantime, money in the account grows on a tax-deferred or tax-free basis.
The investment options are much more varied with these accounts, too. Depending on the account, you can invest in individual stocks, bonds, money market funds, certificates of deposits (CDs), cryptocurrency, precious metals, art, real estate, and more.
The second group includes investment options that don’t necessarily offer a tax break (although they might), but they can still help you save enough money to spend when you reach retirement age. They’re particularly useful when paired with a traditional retirement savings plan.
And now, here’s our list—beginning with the tax-advantaged retirement accounts, where we include information on contribution limits and distributions from the account (including RMDs).
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1. Traditional Individual Retirement Arrangement (IRA)
A traditional IRA is a tax-deferred retirement account where you don’t pay taxes on the money in the account until you withdraw funds from it. Depending on your filing status and income, your contributions might be fully or partially deductible.
Contribution limits
For the 2023 tax year, the annual contribution limit for a traditional IRA is $6,500 ($7,500 if you’re 50 or older). This limit is for all IRAs you own (including Roth IRAs).
Distributions
You can take distributions from a traditional IRA at any time, but it will count as taxable income. If you’re under age 59½, distributions are also subject to a 10% early withdrawal penalty (exceptions apply).
RMDs are required once you reach age 73.
Related: What is an IRA and How Does it Work?
2. Roth Individual Retirement Account (IRA)
There’s no tax deduction for contributions to a Roth IRA. However, you’ll benefit from tax-free growth on your earnings, and you don’t have to pay any additional taxes when you make withdrawals during retirement.
To contribute to a Roth IRA, your income must be below a certain amount. For 2023, you can’t contribute anything to a Roth IRA if your modified adjusted gross income (AGI) for the tax year is:
- $228,000 or more if your filing status is married filing jointly or surviving spouse
- $153,000 or more if your filing status is single, head of household, or married filing separately and you didn’t live with your spouse at any time during the year
- $10,000 or more if your filing status is married filing separately and you lived with your spouse at any time during the year
Contribution limits
The 2023 annual contribution limit for a Roth IRA is $6,500 ($7,500 if you’re at least 50 years old) or your earned income for the year, whichever number is lower. Anyone who has both traditional and Roth IRAs is limited to $6,500 (or $7,500) for both accounts in total.
However, the maximum annual contribution for a Roth IRA is phased-out if your income is within a certain range. For 2023, your annual contribution limit is gradually reduced to zero if your modified AGI for the tax year is:
- $218,000 to $228,000 if your filing status is married filing jointly or surviving spouse
- $138,000 to $153,000 if your filing status is single, head of household, or married filing separately and you didn’t live with your spouse at any time during the year
- $0 to $10,000 or more if your filing status is married filing separately and you lived with your spouse at any time during the year
Distributions
Contributions to a Roth IRA can be withdrawn at any time tax free and with no penalty. However, earnings withdrawn before age 59½ are generally subject to a 10% penalty (with exceptions). The penalty might also apply if you haven’t had a Roth IRA for at least five years.
Unlike most retirement accounts, RMDs aren’t required from a Roth IRA. Withdrawals are only required after the death of the owner.
YATI Tip: You can contribute to both a traditional IRA and a Roth IRA as long as you stay within the joint contribution limit. However, if you want to focus on just one type of IRA, opt for a traditional IRA if you expect to be in a lower tax bracket in retirement and a Roth IRA if you expect to be in a higher tax bracket during retirement. That way, you’ll save on taxes when your tax rates are highest.
Related: Best Investments for Roth IRA Accounts
3. Simplified Employee Pension (SEP) IRA
Business owners and self-employed people can use a SEP IRA to save for retirement. For a business, only the business owner can put money in the separate SEP IRA accounts required for each eligible employee (although employees can make their own investment decisions).
Contributions to a SEP IRA are deductible. It’s also a tax-deferred retirement account, meaning that money in a SEP IRA isn’t subject to income tax until withdrawals are made in retirement. SEP IRAs also have higher annual contribution limits than many other types of retirement accounts.
Contribution limits
For 2023, employer contributions to a SEP IRA can’t be more than $66,000 or 25% of the employee’s compensation, whichever is lower. Catch-up contributions for workers who are at least 50 years old aren’t allowed. Employers must contribute the same percentage to all eligible employees’ retirement savings.
Distributions
Distributions from a SEP IRA can be taken at any time, but withdrawals taken before the account holder turns 59½ years old are subject to a 10% penalty, in addition to taxes.
RMDs are required once the account holder reaches age 73.
Related: SEP IRA vs. Roth IRA: What’s the Difference?
4. Savings Incentive Match Plan for Employees (SIMPLE) IRA
A SIMPLE IRA is an excellent retirement account option for employers with 100 or fewer employees. Both the employer and workers can contribute to SIMPLE IRAs. A self-employed person can also set up a SIMPLE IRA.
Employers can deduct contributions to a SIMPLE IRA, while employee contributions are excluded from gross income for the year the contribution is made. Earnings grow tax-deferred, so they’re not taxed until you begin making withdrawals in retirement.
Contribution limits
The maximum contribution an employee under aged 50 can make to a SIMPLE IRA is $15,500 for 2023. If the employer’s plan allows catch-up contributions, a worker aged 50 or older can make additional contributions in 2023 of up to $3,500 (for a total of $19,000).
If a worker also participates in another employer plan that year, his or her total salary reduction amount can’t exceed $22,500 ($30,000 for workers who are at least 50 years old).
The employer is typically required to match a worker’s contributions on a dollar-to-dollar basis up to 3% of the employee’s contribution. An employer can opt for a matching contribution of less than 3%, but that can be done no more than two out of five years and must be at least 1%. In this situation, employees must be notified of the lower match within a reasonable period prior to the 60-day election period for that calendar year.
Alternatively, instead of a match, an employer can make contributions of 2% of every eligible employee’s compensation (up to $330,000 for 2023). These contributions must be made, regardless of whether the employee makes his or her own contributions.
Distributions
No matter what your age, withdrawals from a SIMPLE IRA are taxed as income. If you make withdrawals before age 59½, you’re subject to an additional 10% penalty. The penalty jumps to 25% if you take a distribution within the first two years of participating in the plan.
RMDs are required beginning at age 73.
5. Health Savings Account (HSA)
An HSA is a wonderful supplemental retirement account with three major tax advantages. First, contributions are either tax deductible (if you open the account yourself) or excluded from your gross income (if the account is through an employer).
Second, money in an HSA grows tax free.
Third, you get tax-free withdrawals at any time if the money is used for qualified medical expenses. Once you reach age 65, you can take withdrawals out for any reason with no penalty, but the withdrawn funds are taxed as ordinary income if the money isn’t used for medical expenses.
However, not everyone can contribute to an HSA. You’re only eligible if you don’t receive Medicare, aren’t covered under any disqualifying health coverage, and aren’t claimed as a dependent on someone else’s tax return. You also must be enrolled in a high-deductible health plan.
What you’re allowed to invest in can vary based on your HSA. Some providers, such as Fidelity, allow you to invest in various asset classes, including stocks, bonds, mutual funds, and ETFs. Others have a more specific set of investment options.
Contribution limits
For 2023, you can contribute up to $3,850 to an HSA if you only have health insurance coverage for yourself. The maximum contribution is $7,750 if you have family coverage. You can contribute an additional $1,000 in “catch up” contributions if you’re at least 55 years old by the end of the year.
Distributions
You can take money out of an HSA at any time for qualified medical expenses without paying taxes. Distributions not spent on qualified costs are taxed and, if you’re not yet 65 years old, hit with a 20% penalty.
HSAs aren’t subject to RMDs.
Related: How to Use Your HSA for Retirement [Tax-Efficient Investing Tool]
6. Solo 401(k)
You can open a solo 401(k) if you’re a business owner with no employees or married to the only employee. This includes a self-employed person. A wider variety of investment options is typically available for a solo 401(k) plan than what’s offered with a “regular” 401(k) plan.
Both traditional and Roth solo 401(k)s are available. With a traditional solo 401(k), contributions are deductible, and you pay tax when you withdraw money from the account. If you have a Roth solo 401(k) plan, there’s no tax deduction for contributions, but there’s generally no tax when you take the money out in retirement.
YATI TIP: Solo 401(k) plans are sometimes called one-participant 401(k) plans, individual 401(k) plans, or uni-401(k) plans.
Contribution limits
Owners of a solo 401(k) can make contributions as both an employer and an employee. There are different annual contribution limits for employer and employee contributions, though.
The employee contribution can be up to the full amount of your earned income, as long as it doesn’t exceed the annual contribution limit. For 2023, the limit is $22,500 for people under age 50, or $30,000 for people aged 50 and over.
The employer contribution can be up to 25% of your compensation.
Total contributions in 2023 can’t exceed $66,000, or $73,500 for people who are at least 50 years old.
Distributions
The treatment of distributions depends on whether you have a traditional or a Roth solo 401(k) plan.
With a traditional solo 401(k), withdrawals during retirement are taxed as regular income. If you make withdrawals before age 59½, you might also owe a 10% penalty.
RMDs from a traditional solo 401(k) account are mandatory once you reach age 73.
If you have a Roth solo 401(k) account, withdrawals are tax free if the account has been open for at least five years and you’re at least 59½ years old. However, if the account is less than five years old or you’re younger than 59½, withdrawn earnings are generally subject to income tax and a 10% penalty (no tax or penalty is due on withdrawn contributions).
RMDs from a Roth solo 401(k) account are currently required when you turn 73. However, starting in 2024, RMDs will no longer be required from Roth solo 401(k) accounts.
Related: Solo 401(k) vs. SEP IRA: What’s the Difference?
7. Cash Balance Defined Benefit Plan
Business owners can set up a cash balance defined benefit plan to save for their own retirement, and the retirement of the company’s workers. As a defined benefit plan, the amount plan participants receive during retirement is fixed.
The employees don’t have to contribute any of their own money to receive their retirement benefits under a cash balance defined benefit plan. Instead, all contributions are made by the company, and the employer also bears the investment risk with this type of plan.
Contributions are tax deductible and aren’t included in the employee’s gross income. Money in the account grows on a tax-deferred basis, so there’s no tax until the money is in the employee’s pocket during retirement.
Contribution limits
Cash balance defined benefit plans aren’t subject to traditional contribution limits. Instead, contribution limits vary depending on the employee’s age. In general, the limit increases as a worker ages.
Distributions
The employee can choose to accept retirement benefits from a cash balance defined benefit plan as a lump-sum distribution at retirement, or the funds can be rolled over into an IRA.
People who leave a company before retiring can request a distribution of the vested account balance or roll the whole account into an IRA.
Taking the lump-sum distribution means 20% will be withheld for federal income tax. Plus, a 10% early withdrawal penalty generally applies if the recipient is not yet 59½ years old.
Tax continues to be deferred if the pension funds are rolled over into an IRA.
8. Taxable Investment Accounts
Now let’s explore a few options that aren’t tax-advantage accounts—starting with taxable investment accounts.
Any adult with a Social Security number or taxpayer identification number can open a brokerage account. There’s no annual income limit.
There’s also no contribution limit. You can invest as much money as you want, meaning the amount you can save for retirement is limitless. You’re never required to take distributions, either.
Another advantage is that there’s a wide variety of investment options for taxable accounts. As with the IRA-based options discussed above, you can invest in mutual funds, ETFs, individual stocks, and much more with a taxable brokerage account.
The downside of a taxable investment account is that there are no tax advantages. The money you invest isn’t tax deductible and you have to pay taxes on earnings (including capital gains tax if capital assets are sold). For this reason, a taxable brokerage account shouldn’t be the first place you turn for a 401(k) alternative, but rather considered as an additional account after you have maxed out a tax-advantaged retirement account.
9. Real Estate
Investing in real estate can be an excellent way to save for retirement. There are many ways to invest in real estate. For instance, you’re investing in real estate when you own a home or buy rental properties. You can also invest in a real estate investment trust (REIT) or real estate ETF within a brokerage account or IRA, among other accounts. There are even real estate crowdfunding platforms that make it easy to invest in real estate.
Each type of real estate investment comes with its own set of perks and pitfalls. For example, owning rental property comes with several potential tax write-offs, but it isn’t easy to liquidate this type of investment. Meanwhile, other real estate investments are more liquid, but have fewer tax breaks.
YATI Tip: Capital gains tax generally applies to the sale of real estate. However, if property is held for more than one year, lower tax rates for long-term capital gains apply.
As the real estate market is cyclical, you might not want this as your only 401(k) alternative in case the real estate market is temporarily down when you hit retirement. Still, it can be a lucrative addition to your overall retirement savings strategy.
Related: Is Paying Cash for a Rental Property a Good Idea? What to Consider
10. Annuities
Annuities can provide a guaranteed passive income, often backed by an insurance company, which can be very useful during retirement. You pay for an annuity upfront and then get payments in return for a specified length of time or for life.
Qualified annuities are funded with “pre-tax” dollars (taxes haven’t been paid yet), while non-qualified annuities are funded with “after-tax” dollars (taxes have already been paid). Both types of annuities offer tax-deferred growth, so you don’t have to pay income taxes on earnings until you start receiving payments.
When payments are made, the entire distribution from a qualified annuity is taxed as ordinary income. However, for non-qualified annuities, you pay taxes on the interest or earnings, but not the principal (since you were already taxed on that amount).
A downside of annuities is that they can have high administrative fees. Depending on the annuity, you might also be stuck receiving an amount that doesn’t keep up with inflation.
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