401(k) Alternatives To Save for Your Retirement

A 401(k) retirement account is one of the most popular retirement options for Americans. However, only about half of American workers have access to these plans and choose to participate in them, according to recent data from the Bureau of Labor Statistics. 

Those who can’t or choose not to access a 401(k) have a variety of other retirement savings plans to choose from.

Common 401(k) Alternatives:

• Traditional and Roth IRAs each offer tax advantages and good investment options but have low contribution limits of $7,000 annually (or $8,000 if you’re 50 or older) as of 2024.
• Cash balance defined benefit plans allow employees to access professionally managed investments and can be converted into a fixed income stream, but they are not available to most workers.
• Annuities are not tied to your employer and offer protection against outliving your retirement savings by providing a fixed monthly income stream.
• Investment brokerage accounts allow you full control over your investments, though they do not offer an upfront tax deduction.

Which Retirement Savings Account Is Right For You?

Individual Retirement Accounts

The most common alternative to a 401(k) is an individual retirement account or IRA. You can purchase a traditional IRA or a Roth IRA.

When planning for retirement, you don’t have to rely on just one strategy. In fact, using multiple options can give you more flexibility and security. I had a client who only had a 401(k) and felt uneasy about it being their sole retirement plan. We worked together to diversify, continuing to max out their 401(k), opening a Roth IRA for future tax benefits, investing in a taxable account for more accessible funds, and even adding real estate for passive income.

This combination gave them confidence and a clear path forward. The lesson? You don’t have to stick to just one approach—using a variety of solutions can help you build a stronger, more flexible retirement plan.

Elaine King, MBA, CFP®, CDFA™, CFBA, ACCFounder of Family and Money Matters™

Elaine King, CFP®, founder of Family and Money Matters™, empowers families’ financial and human capital for wellbeing. She’s crafted actionable plans for 1,200+ families and 100+ enterprises. A recognized financial education advocate, creator of LATAM’s first family financial program and winner of the Best Latin Book Award. Featured in top publications and honored by Investopedia and People Magazine.

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.

IRAs Overview

• 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 ($8,000 if age 50 or older) in 2024

Roth IRA

Roth IRAs share several similarities with traditional IRAs: they have the same $7,000 annual contribution limit for 2024 and offer a variety of investment options within the account. 

With a Roth IRA, individuals forgo a tax break on contributions in exchange for tax-free withdrawals at retirement, provided they are at least age 59½ and have held the 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. 

Roth IRAs also allow you to include the account in your inheritance, helping you build generational wealth for heirs since there are no required minimum distributions.

Roth IRAs Overview

• 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 IRAs

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 Overview

• 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

SIMPLE IRAs

Employers with 100 or fewer employees can utilize a Savings Incentive Match Plan for Employees (SIMPLE) IRA, which has lower startup and operating costs than a 401(k).

Like a 401(k), both employers and employees can contribute to a SIMPLE IRA plan. However, unlike a 401(k), SIMPLE IRA contributions are mandatory for employers, even if an employee chooses not to contribute. Employers must contribute to an employee’s SIMPLE IRA either through matching contributions or non-elective contributions.

SIMPLE IRAs Overview

• Benefits
  • Tax-deferred growth
  • Employer contributes even if you do not 

• Considerations
  • Lower contribution limit than 401(k)
  • Employers cannot offer another retirement plan option

• Annual Contribution Limit: $16,000 for employees and up to 3% of the employee’s annual compensation for employers in 2024

Cash Balance Defined Benefit Plans

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. 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.

Cash Balance Overview

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

• Considerations
  • Complex and expensive to administer
  • Conservative returns often require large investments to maximize benefits
  • Participants can’t choose how their money is invested

• Annual contribution limit: Varies by age and income

Annuities

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

Deferred annuities are often used in retirement planning for growing an individual’s savings tax-deferred before turning into a stream of income when they retire. Deferred annuities come in many types, each of which accumulates value differently and carries different levels of risk.

On the other hand, immediate annuities begin paying as soon as a lump sum investment is made and usually have guaranteed lifetime payouts. These are beneficial for retired individuals who expect to live a long time and want to generate a lifetime income stream to cover their expenses in retirement.

Is An Annuity Right For You?

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Annuities Overview

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

• Considerations
  • Surrender period prevents free withdrawals for the first several years
  • Returns may not compete with direct market investment

• Annual contribution limit: None

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.

Investment Brokerage Accounts Overview

• Benefits
  • No contribution limit
  • No withdrawal restrictions

• Considerations
  • No tax benefits
  • Individual is responsible for management

• Annual contribution limit: None