401(k) alternatives
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In March 2020, 40% of the American workforce had no access to a 401(k) plan, and 29% of those that did have access chose not to participate[1] Trusted source
U.S. Bureau of Labor Statistics
BLS is the fact-finding agency for the U.S. government in the field of labor economics and statistics.
. If you’re a member of either group, you’ll probably need to consider some 401(k) alternatives to help you build a healthy retirement fund.

There’s a wide range of tax-advantaged accounts out there, but many of them are only viable for specific groups of people or types of expenses. Not all of them are an option for your long-term nest egg. Let’s look at some of the best options and some reasons why you might consider them.

Why Wouldn’t You Use a 401(k)?

401(k) plans have replaced pensions as America’s most popular retirement plan. They now feature heavily in retirement strategies recommended by financial advisors.

401(k) plans have advantages, but they are not perfect. They tend to have higher fees and fewer investment options than other retirement accounts. Because they’re employer-sponsored plans, they frequently have strict vesting schedules that determine how long you have to stay with a company to claim your employer’s matching contribution (if any) and your investment gains. That means that leaving a job too soon can cost you your asset growth and company match. If the terms of your employer’s 401(k) plan aren’t attractive, you may choose not to participate.

Many people simply don’t have access to a 401(k) plan. Their employer may not offer one, or they may work for themselves. Fortunately, there are plenty of 401(k) alternatives out there for people who need them.

These are some of the most popular and practical alternatives to a 401(k). Review their features and see what would work best for you!

⚠ All the following 401(k) alternatives are tax-deferred, defined contribution plans. That means that any investment returns within the account are tax-free until withdrawal, and there are restrictions on the cash that comes in and out.

401(k) Alternatives for Employees

Individual Retirement Accounts

Individual Retirement Accounts (IRAs) are like miniature 401(k) plans, and they come in both traditional and Roth versions. That means you can choose to pay taxes when you take withdrawals (traditional) or when you make contributions (Roth). You can have more than one IRA at once, so it’s within the rules to have both a traditional and a Roth account.

Benefits: IRAs offer more flexibility than 401(k)s. They’re completely independent of employment status, so there are no vesting requirements. Actively earning income is generally the only requirement to contribute. They tend to have lower fees than 401(k)s, and you have complete discretion over what you invest in. You can buy mutual funds, index funds, individual stocks, and even real estate in some cases. 

Drawbacks: IRAs have lower contribution limits than 401(k)s. You can only contribute $6,000 a year ($7,000 if you’re over 50) in total to all your IRAs combined. That limit applies to both Traditional and Roth accounts, so if you wanted to maximize both, you could only put $3,000 into each. Different providers offer very different investment options, so you’ll need to shop carefully before selecting a provider.

📘 When looking into an IRA as an alternative to a 401(k), it’s helpful to know how both of these accounts work, how they’re similar and how they are different: 401(k) vs. IRA.

401(k) Alternatives for Self-Employed Workers (Without Employees)

Solo 401(k)

Self-employed workers don’t have a boss who can offer them a 401(k), but they can start one for themselves. Even those who earn only a small income from a side hustle can qualify, as long as they have no employees of their own.

Because Solo 401(k)s are for a single person, they have lower fees than regular 401(k)s, more investment options, and no vesting schedule. In most other respects, 401(k)s function identically to the employer-sponsored version, except for their contributions.

Benefits: The most significant advantage of a Solo 401(k) is that it allows self-employed people to contribute to their accounts as both employee and employer. They can contribute their entire income up to $19,500 as an employee and 25% of their income subject to self-employment tax as an employer. The employer contribution limit is complicated, but it generally works out to about 20% of business income.

The two together must be less than $57,000, but employees over 50 can contribute an extra $6,500 for a whopping $63,500 total contribution limit.

Drawbacks: The only downside to a Solo 401(k) is the requirement that there can be only one member of the plan. Self-employed people who start their businesses and 401(k) without employees (or with their spouse) will run into issues if they ever try to hire people. If that’s something you expect to happen at any point in your business, look to the next option instead.

SEP IRAs

SEP IRA stands for Simplified Employee Pension Individual Retirement Account. It’s a defined contribution plan, just like the rest on this list, but it works a little differently than the others.

Employees can’t make contributions to their SEP IRA. Self-employed people can only contribute to their SEP IRAs through their capacity as an employer, and the limit is the same as it is for a Solo 401(k): 25% of earnings subject to self-employment tax up to $57,000 (25% of compensation for other employees of the business).

Benefits: Usually, the only reason to go with a SEP IRA over a Solo 401k as a self-employed person is to allow future employees to join the plan. If you would like to preserve the option to hire sometime down the line, it might be worth choosing the SEP IRA.

Drawbacks: SEP IRAs are useful 401(k) alternatives for self-employed people who might eventually hire employees, but they can’t compete with the tax deduction of a 401(k). If you do end up hiring, you’ll need to keep the contribution percentage equal for all employees, including yourself.

401(k) Alternatives for Small Business Owners With Employees

SIMPLE IRAs

SIMPLE (Savings Incentive Match Plan for Employees) IRAs are another 401(k) alternative for self-employed small business owners who have employees.

Employees and employers can both contribute to the plan. Employers have two options for their contributions. They can either:

  • Match the employee contributions up to 3% of their salary or $5,600.
  • Contribute 2% of the employee’s compensation, regardless of the employee’s contributions.

Employees can contribute up to $13,500 each year, and those over 50 can put in an extra $3,000.

📘 Are your retirement savings falling short? Here are some great ways to catch up: 11 Easy Money-Saving Tips for Seniors

Benefits: SIMPLE IRAs offer many of the same benefits that regular IRAs do, but they have larger contribution limits. For those choosing between a SIMPLE and SEP IRA, the primary advantage with a Simple IRA is the increased flexibility for employees. They have control of their contributions to a Simple IRA but can’t contribute at all with a SEP IRA.

Drawbacks: If there’s a disadvantage to Simple IRAs, it’s for the employers. Under a SIMPLE IRA, they have to make contributions on their employees’ behalf no matter what. Under a SEP IRA, employers can choose not to make contributions if they don’t want to in any given year.

401(k) Alternatives for Federal Employees

Thrift Savings Plans

Thrift Savings Plans (TSPs) are the equivalent of a 401(k) for employees of the federal government. They function virtually identically to 401(k) plans, and even the contribution limits are the same: $19,500 per year with an additional $6,500 for people over 50.

Benefits: While the primary benefit of a TSP is that it’s accessible to federal employees who can’t get 401(k)s, there are a few other bonuses. 401(k)s tend to have higher fees than other retirement accounts, but TSPs don’t have that issue. They even have cheaper investment options, including low-cost index funds. Finally, the federal government automatically contributes 1% of each federal employee’s salary to their TSP, but they’ll match up to 5%.

Drawbacks: Only federal employees can access TSPs, so they’re not a viable option for anyone else.

401(k) Alternatives for Non-Profits

403(b) Plans

403(b) plans are the equivalent of a 401(k) for people that work at non-profit companies. They function just like 401(k)s and TSPs, including the contribution limit and catch up bonus for contributors over age 50. 

Benefits: 403(b) plans allow employees of public schools and charities to contribute large portions of their salary to a tax-deferred retirement account. They have all the same benefits as a regular 401(k).

Drawbacks: The only downside to a 403(b) plan is that they tend to have lower employer matches than 401(k)s and TSPs. Non-profits usually don’t have as much extra cash to give their employees additional compensation.

Consider Getting Expert Help

This is a brief summary of the rules and regulations for most of these 401(k) alternatives. Many of them have complex rules that exceed the scope of this article. Make sure to study the requirements and restrictions of a plan before investing in it, especially if you want to use more than one at a time.

It’s always best practice to consult a financial expert before committing to a significant financial decision. Talk to a financial advisor or a Certified Public Accountant to find out what makes the most sense for your situation.

Have we left something out? Would you recommend other 401(k) alternatives? Share your thoughts in the comments below!

📘 Looking to save extra money for retirement? Here are some great ways to get started: Saving Money 101