Top Alternatives to a 401(k)


What Is A 401(k) and Are There Other Options?

401(k)’s are the Country’s most popular option for saving towards your retirement.  These investment accounts are sponsored by employers and very often employers will contribute to your account.  Before you go looking for alternatives to a 401(k) it is important to ask several important questions:

  • Does your employer offer a 401(k)?
  • Is there an employer match available with your job?
  • What are your retirement savings alternatives?

Unfortunately, not all employers offer 401(k)’s which means many employees are looking for alternative saving options.  However, if you are someone who works for a company that does provide a 401(k) and a provides an employer match it is important that you first take advantage of this option before looking for other methods of saving.  Employer matches typically range between 3-10%.  This means that for each percentage of your pay you contribute to a 401(k), your employer will match that amount up to their specified match contribution limit.  This means you will immediately receive a 100% return on that portion of your investment.  All employees should first take advantage of any employer match program before investing in other options.

If your employer does not offer a 401(k) or they offer one that has no match incentive, then it may be time to consider if alternative options may be a better choice.

401(k) Alternatives
401(k) Alternatives – Planning For Your Retirement

401(k) Alternative – Individual Retirement Accounts (IRAs)

By far, the most popular alternative to 401(k)’s is an Individual Retirement Account (IRA).  An IRA has many similarities with a 401(k) but, as the name suggests, it is managed by the individual and is not contingent on the existence of a work sponsored program.  When you open an IRA, you will be able to contribute to your account to a total of $6,000 per year.  This is quite a bit less than the $19,000 which can be contributed to a work sponsored 401(k).  However, most Americans do not save beyond the $6,000 yearly limit and this total is far higher than the average saved by most individuals.

After opening your IRA you will be able to invest your funds however you see fit.  Your choices will be limited to the options offered by your brokerage but most major brokers offer a huge variety of choices and comparable funds.  This helpful article about some of the most popular online broker accounts will get your started on the options available.  Deciding which funds are best for you will depend on your situation in life.  Most investment experts recommend a more aggressive approach for younger investors.  This would be a portfolio primarily comprised of ETFs and Index Funds.  As investors get closer to retirement, most experts will recommend re-balancing funds to safer investments like bonds.

Traditional IRA vs Roth IRA vs SEP IRA

There are two primary types of IRAs – Traditional and Roth.  Traditional IRA’s are tax deferred.  This means that the money you invest in to your account will be deductible from your income.  The funds are not taxed upfront but when you withdraw from your account in retirement you will be required to pay taxes on your money.  Roth IRAs are not tax deferred.  Investors will pay taxes on the money they invest but are not required to pay taxes when they withdraw from your account in retirement.  Many opinions exist as to which option is best for what type of investor.  For this reason, many individuals opt to have a Roth and Traditional option and split their investments equally between the two.

Separate from the two options above is a SEP IRA.  This is a “Simplified Employee Pension” account designed for small business owners.  This is most popular for individuals who run their own business or do freelance work under a business they own.  Similar to a Traditional IRA, SEP IRAs rely on tax deferred investments which are taxed upon withdrawal.

401(k) Alternative – Investment Account

The simplest alternative to a 401(k) is an investment account.  These accounts do not have tax benefits associated with them and are very straightforward.  You will deposit funds in to your account and invest them however you would like.  Individuals who take this route will be required to pay taxes on their capital gains.  To explain this, let’s pretend you invested $100 in to your investment account.  Several years go by and that investment is now worth $200.  If you cash out your investment, your gain of $100 and will be subject to taxation.  The initial $100 investment was already taxed when you invested it and will not be subject to additional taxation.

In some ways, this may seem like a great option because it is far more straightforward.  It is worth noting that if the funds you are investing are specifically being put aside for retirement, individuals should take advantage of the tax benefits of IRAs before investing in an investment account.  However, if you are investing in an IRA, after you exceed the tax deferral limit ($6,000), investing in an investment account is a great way to put your money in a position to earn a return.

Most experts agree that broad market index funds are the safest and simplest method of investment.  These sort of funds are made up of many individual companies and they typically follow the stock market trend of the sector they are a part of.  The simplest method to invest in index funds is to find funds that track the DOW, the S&P 500, and NASDAQ.  Look for funds that have low expense ratios (less than 0.25% is ideal).

Are There Other Retirement Investments Available?

To answer this, yes there are many other options but most other choices come with far more fees or much higher risk.  Some popular alternatives include:

  • Investment in precious metals
  • Cryptocurrency investments
  • Money Market Accounts
  • Valuable collectibles

There are many stories out there about investors who have made big money on alternative investments like crypto or comic books.  While these are somewhat legitimate investment opportunities they should be seen as “play money” investments.  Smart investors should never make these investments unless they are using funds they are comfortable with losing.  Other options like precious metals and money market accounts are much less risky than some alternatives but are also have their drawbacks.

Unlike the stock market, investments in precious metals have seen significant swings up and down.  It is true that the stock market also undergoes major swings but the longterm trend is upwards.  This is not necessarily the case with many precious metals.  Money market accounts are safe investments but provide far less return than conservatively funds in the market (index funds).

Final Thoughts On Alternatives To Your 401(k)

As mentioned at the beginning, if you are employed and your employer offers a 401(k) investment match, this needs to be the first option you use for investment.  There is absolutely no reason to look for other options if you have not first maxed out your employer match.  Beyond 401(k)’s, the most popular option is going to be an IRA.  Deciding between a Traditional and Roth IRA will be covered in future articles but there is tons of information about which choice may be best for you.  Finally, a standard investment account is going to be the next best choice once you have taken advantage of the tax benefits afforded to IRA contributions.

Let us know your favorite investment strategies in the comments below!


Please enter your comment!
Please enter your name here